Speech by Dick Olver European Business Ethics Forum January 2008

31 Jan 2008

Over the next twenty minutes or so I want to give you my perspective on, and share some experiences on a subject I feel very strongly about.
I will talk about four things:

1. Why ethical business is important
2. The importance of culture in creating an ethical business
3. How leaders implement an ethical culture
4. And a bit on BAE Systems and what we are doing.

About myself

A bit on my experience:

• Chairman of BAE Systems - a global defence company
• An executive career with BP - truly global, a leader in the environment - and I would say safety as well.
• Non-Executive Board Member / Senior Independent Director of Reuters
• My current focus - addressing the reputation of BAE Systems, and addressing the challenges we face in our shift from a transatlantic to a global strategy.

Importance of Ethical Business Conduct

The first proposition I'd like to make is that ethical business is important, for a variety of reasons.

1. Firstly, it's the right thing to do.

Industry has played a role in how some of the great social changes come about. A hundred years ago in the UK in the days of family-run companies the efforts of Cadbury and Rowntree, two great philanthropists, did huge amounts for social reform through ensuring good working and living conditions. The Body Shop is a more recent example of ethical business or Innocent Fruit Smoothies. The ethical culture and regard for employees and community shown by companies such as Tata, Satyam, Starbucks and others are driven through the leadership and beliefs of their founders. These are companies that have been set up around their principles and they believe that in behaving ethically they are not only doing right by their communities and their employees, but they will establish a successful business. I think they were and are right..........and so it's the right thing to do.

2. There is no alternative

Reuters is an example of a company which sees no alternative to the stringent application of its trust principles. It's reputation for absolute integrity and freedom from bias in reporting relies on it. More generally, there is no alternative if you believe reputation is important.

3. The World expects it

Global public perceptions of what is right and wrong in business culture evolve. A global company must keep pace with this. Today companies are expected to have a position on issues that weren't considered to be within the business remit years ago. Climate change, labour practices of suppliers in faraway countries, diversity of employees. And they are expected to engage in philanthropic activities - to invest in their communities and the communities in which they have a business impact.

Many multinationals are involved in developing countries, and therefore in carrying out nation-building activities. The sheer scale of these multinationals as compared, in some cases, to the nations in which they operate, means that they can wield influence. And having that power places great responsibility on what the company does.

Thankfully the world has changing expectations, there is far less tolerance today to leaders who do not act ethically. The world expects improved performance and their expectations get more acute over time.

Unilever use a great expression to recognise their responsibilities: 'a multi-local multinational'. That applies to all of us - what we do locally across our markets adds up to how we are regarded globally. They and many other companies are increasingly recognising that they must address their local responsibilities and work with others in their industries to address wider national and international issues. 

Today, global companies must be a force for good and just as importantly must be seen as such. This is nothing more nor less than a world wide revolution in the way we do business. So the world expects it, as do NGOs, and all responsible corporations.

4. It Makes Better Business

Corporate reputation is paramount - a company loses this, and it can lose its credibility - from any or all of its stakeholders, depending on the issue. Those stakeholders include, but are certainly not limited to - customers, employees (the Company's chief ambassadors), government, shareholders and the Communities in which they operate. 

Why are there some companies that we're surprised to read bad things about in the media and others where we nod knowingly, having expected it all along? Reputation is about trust and confidence - not only that the company is complying with the law, but that the company is "doing the right thing" in the eyes of its stakeholders. Without this trust, it is impossible to sustain the business.

Reputation is hard earned and quickly lost! The hard work of many individuals over many years can be undone by a few, acting unwisely on a few occasions.

• Shareholders - don't like surprises.
• Customers - like products delivered on time, to specification and at the right price
• Employees - like a safe and pleasant working environment where they are challenged and heard
• Government - like an assurance that the Company is contributing to the economy, the jobs base, skills base.
• Communities - like a company to contribute its strength to address local issues - Satyam, for example, lends its support to address the problem of street children in its urban communities.

The application of an ethical business policy is the true test of leadership. It's been said and I'd agree that those leaders who can best embed an ethical culture are likely to be those who have proven they can drive business performance and return for the shareholder.

A number of studies have been commissioned which link ethics and financial performance, including the IBE's study that those companies who are explicit with their stakeholders about their position on ethics through a code of conduct tend to outperform those companies which don't. As codes of conduct have become the norm, further research has revealed that embedding those ethics codes through training and communication is what provides the enhanced financial performance linkage. This does not surprise me and anecdoted and personal experience bears this out.

In most global industries, including defence, a reputation for trust and integrity is a competitive advantage. Increasingly, industry and government decision-makers are required to assure themselves that their industrial partners are reliable in their performance and in their business dealings - they themselves will suffer reputational damage, if that is proven not to be the case. The Company that can demonstrate its commitment to and assurance of its ethical business behaviour will be a better trusted partner.

So - it makes better business, ethical business is important, indeed it is vital.

The need for an ethical corporate culture

In global companies, the sheer diversity of employees, the varying social and economic levels found in their markets, diverse political regimes and business practices requires a clear need for global policies, consistency of application, and a strong ethical corporate culture that can be called on by any employee, at any time, in any country almost without thinking about it.

Operating globally makes some issues much more difficult to deal with - a fixed-sum bonus of £300 to all employees after a good year has a very different impact in Vietnam than in the UK. In ethics, there are different approaches in the US (widely regarded as compliance-driven) and in the UK (sometimes seen as principle-driven). And what to do in cultures where facilitation payments at lower levels are routinely made, when your global policy prohibits it? Leave the market? Fire all employees who do it from the start? I'll say more on that later.

A legal business activity in one country may be illegal in another. A facilitation payment made by a US citizen may be illegal if carried out by a UK citizen. A corporate global ethics culture requires employees to think beyond compliance and beyond their local laws, and promotes decision-making and assurance processes which protect the entire enterprise. All this is a powerful argument to have global standards and unified global cultures to assure implementation.

It's the only way of knowing when you go to bed that all your employees (100,000 in BAE or BP, and 1,000,000 in Walmart) are going to do the right thing in every time zone, every day and night.

So the corporate culture is vital.

How leaders implement an ethical business culture

Trust and confidence, and an ethical culture is set by the leaders of the business, and must be seen, heard and understood by employees at every level. It can happen, and does.

Implementing an ethical business culture requires change. Change is not comfortable, people have to understand why it's being done and what it's going to achieve. Why do people follow the leader? They must believe in both the vision and the person. The leader has to have credibility - has to walk the talk, set the example and support the people. Dwight Eisenhower said 'Leadership is the art of getting other people to do the things you want done because they want to do it'.

1. When employees know what is important to their leaders, they follow. If the boss receives a proposal on a new business strategy, and she asks "what is the ethical framework underpinning this strategy / show me how ethical issues have been addressed", she may see a startled expression and some gulping. The first time. But I guarantee, the next time that individual or his colleagues bring her a proposal they'll be prepared to answer the question.

2. It is not enough to have the ethics department make the ethics presentation at every conference, as you all know. The line leader - emphasising in employee forums, in business reviews, in daily interactions with all levels of employees - is vital for real understanding and embedment. And your challenge is to encourage that in your organisations. Every leader should be considered an ethics leader. It cannot be delegated.

3. Global companies grow by acquisition - increasing the diversity of business cultures, if not national cultures. How is the importance of ethics communicated to those new company employees? How is their understanding to be measured?

This is all about "Tone at the Top". It's not theory, it's real, it is essential, it is necessary and nothing will really change without it. The top needs to be passionate about this!

And there needs to be reinforcement and alignment with all other company processes.

1. Business leaders are rewarded on their achievement of certain goals - how the bonuses link with their achievement of their ethics targets is something noted by the Corporate Responsibility industry watchers, and for good reason. In 2008 the highest non-financial weighting in BAE Systems is for ethics, followed by safety.
2. Good leadership in non-financial matters should be a key consideration for promotion.
3. Global standards need to be clear and understood.
4. A high standard of transparency in reporting against global standards is obligatory.
Exceptions must be reported, so work can be done to address the problem. Would you believe it if there were no exceptions in a company operating in Nigeria, India or Indonesia? Unlikely, but the key is transparency and reporting, just as it is in safety.
5. Control process must be clear and rigorous.
6. Reporting must be continuous up to the Board, through the Corporate Responsibility Committee.
7. Continuous improvement & benchmarking should be the aspiration.
8. The defence industry has a complicating factor, the need for national security and the presence of stringent official secrets acts in many countries including our own. These laws and contracts must be complied with. But they must not be used as an excuse for being non-transparent in other areas.

4.  What we are doing in BAE Systems

I believe that in areas where a company can be more open and transparent, it should be. A default culture of transparency where legally permissible, is the optimal path to ensuring public confidence. And it is important to continually assess and test where that boundary lies.

Nobody in this room is unaware that our company has a reputation issue, stemming from investigations by the SFO and DoJ.
 
We are cooperating fully with the investigation, and we are working to build up public trust, which we can only do through our actions. I am not aware of any evidence of illegality in the business dealings under investigation. But I am keenly aware that the public perception of what is appropriate business behaviour for a global company changes and evolves. And that is what I, the Board and the Executive are committed to ensuring we address.

In all of this, it is impossible for a company to stand still. It must continually assess, and continually measure itself against industry best practice, and external perceptions - this is not only to preserve or improve its reputation, but to improve its business. 

Because of this need for continuous improvement we asked Lord Woolf to lead an external effort to review our own efforts in ethical business dealings and to tell us how to be the very best in the world. Not just okay, but a world leader. This involves:

• A high-profile and thorough review
• Commitment to adhere to recommendations
• Publication of the entire report
• Publication of the Company's adherence to the recommendations
• And we hope the results will provide:

I believe an ethical business culture is a compelling proposition: not just a better return for shareholders and a happier, more involved workforce; but the satisfaction of being a real force for the greater good.

But its not easy. John Kenneth Galbraith said 'All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership'. You are all leaders in ethics - and you are continually challenging people to go further to do better - this causes anxiety, people don't like change, you have to convince them that this is something that they want to do. I have every confidence that it can be done.