BAE Systems

In this edition of our weekly video, 2N2, Rob Kellogg discusses two companies: Banco Santander, a Spanish banking company and BAE Systems, a U.K. based aerospace and defense company.

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BAE Systems is Europe’s largest defense contractor and the largest foreign player in the U.S. defense market. Despite (or perhaps “because of”) its global presence, the company remains a troubling enterprise because of its business profile and its lack of transparency with respect to its global arms dealing in the third world. These factors make this company as risky investment from a human rights perspective.

Profile

BAE’s offerings include avionics, military aircraft, armored vehicles, air-defense systems, missiles, artillery locators, communications and navigation systems, radar, ships, space systems, and aerospace electronics. The company’s fighter aircraft include the Harrier, Hawk, Tornado, and the next-generation Eurofighter Typhoon. BAE operates in the U.S. through BAE Systems, Inc. In 2006 BEA divested its 20% stake in Airbus when it sold its shares back to EADS.

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BAE Systems Announces New Ethical Standards for Business Conduct

Last Tuesday, BAE Systems announced that it has adopted all 23 recommendations from the Woolf Committee, which was established in the wake of a corruption scandal at the company.  As noted by GIW earlier this year, the committee, which was asked to examine the ethical principles and practices underlying the company’s business, identified various areas for further improvement that the Company should address in its business operations.

Dick Olver, Chairman of BAE Systems said, “This programme is of fundamental importance to how we do business now and in the future and it will derive benefits for our shareholders, employees and customers. We believe the Woolf Report provides valuable insight and observations that BAE Systems, the defence industry and all global companies can learn from.”

Commissions or Bribes? The £32M Question

Earlier this year, the Serious Frauds Office (SFO) in the U.K. interviewed several executives about their roles in the payment of commissions to sales agents going back to the 1980s. They pointed to Mike Turner, BAE CEO, as the person who authorised the payments. It is understood the SFO was concerned about a lack of documentation to show where sales commission payments of up to £32m a time actually went.

The company has maintained the commissions paid are legal, legitimate and not bribes and believes Turner is being unfairly targeted.

It has also been reported that BAE kept documents detailing the payment of commissions outside the UK in the city of Zurich. When the SFO asked BAE why they were kept there, the company responded it was because they were worried arms trade activists could seize them if they were on UK soil. The SFO had focused on arms sales in Romania, Czech Republic, South Africa, and Tanzania.

The implementation programme will be managed by a programme director and will focus on several areas:

1. Changes to and the monitoring of application of policies and procedures;
2. Revised training needs and the subsequent delivery of training programmes;
3. A programme to consult and communicate with stakeholders on the Company’s plans;
4. Communication and engagement with 97,500 employees.

The full implementation programme will be rolled out over three years. A Steering Committee, comprising senior executives globally from across the business and reporting to the Executive Committee, has been established with responsibility for providing oversight of the implementation programme. The Committee met earlier this month. In addition, six Working Groups comprising senior managers and functional experts have been established covering specific areas such as the global code of conduct and leadership in business ethics. These Working Groups will address between them all the recommendations contained in the
report said company spokespeople.

CEO Turner’s last few years at Britain’s biggest defence contractor have been blighted by the SFO probe. A leaked SFO document published by a South African newspaper last year named Turner and BAE’s former chairman Sir Dick Evans as suspects in the inquiry. The document, which was a request for assistance from the SFO to the South African authorities, said there was “reasonable cause” to believe Turner, Evans and the company were guilty of corruption. 

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In today’s Financial Times, it was announced that a long awaited report commissioned by BAE Systems is to be released by Lord Woolf. The report will call for a yearly audit of the company’s business practices in order to ensure it meets certain ethical standards.

Lord Woolf’s report, published on Tuesday, calls for a yearly independent audit of BAE’s business processes to ensure they meet the highest ethical standards. The company also has to adopt certain principles and procedures to ensure its business conduct is seen to meet the highest standards. BAE has pledged to follow the recommendations in the report, so the next time a sceptical investor asks whether the company has behaved ethically, Mr Olver will be able to point to the Woolf initiative.

While it’s too early to tell what impact if any this audit will have on the company, our experience in observing such assessments it not dissimilar to putting lipstick on a pig. At the end of the night, its still a pig.

Perhaps shareholders will notice that all of the social responsibility fluff is just that and that the company’s true measure is in its actions.

Stay tuned.

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