Tuesday May 6, 07:00 AM
Woolf hands BAE a weapon to fend off critics
By Sylvia Pfeifer, Defence Industries Correspondent
Anti-war protests and questions over allegations of bribery have dominated annual meetings at BAE Systems (LSE: AP16.L - news) , Britain's
largest defence contractor, for the past few years. But this year, Dick Olver, BAE's chairman, will have some ammunition of his own to silence those critical investors when they meet on Wednesday: the findings of an independent inquiry by Lord Woolf, the former chief justice, into the company's conduct. 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 (LSE: BA.L - news) 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. BAE commissioned the report last June after years of criticism. Mr Olver and the rest of his management team hope it will draw a line under an issue that has dogged the company since the Al-Yamamah arms deal was signed in 1989 between the British government and Saudi Arabia. There have been persistent allegations that bribery was involved in the contract, with lurid stories of slush funds used to entertain Saudi officials and royalty. BAE has always denied any wrongdoing. The company has been the subject of investigations by the Serious Fraud Office and the US Department of Justice. In 2006, the SFO abandoned its probe into the Al-Yamamah deal, but it continues to investigate allegations of bribery against BAE in six other countries. America's Department of Justice is also investigating the company in relation to the deal. The investigations have not held back BAE's expansion into the lucrative US defence market, nor hurt its share price, which has more than quadrupled in the last six years. Privately, executives at Britain's other defence companies have always maintained that the investigations are specific to BAE and have not hampered the industry's reputation as a whole. Nevertheless, those companies with interests in Saudi Arabia have in the past expressed concerns that the SFO investigation could have an adverse effect on their business with the kingdom. In December 2006, the Defence Industries Council, a group of leading industry executives, wrote to the government outlining the threat to thousands of jobs and billions of pounds of exports. Critics of BAE will point out that Lord Woolf's report has failed to examine the allegations of corruption surrounding the Al-Yamamah deal or any other business dealings in the past. Nor will the company be able to escape any potential fall-out from the on-going investigations, notably that of the DoJ. But for Mr Olver, the report has another function: apart from helping to silence some of BAE's critics, he will hope that it will help drive a cultural revolution at the company. There has been some change. Since the late 1990s BAE has changed its commercial policy, reducing the number of external "advisers" it uses to conduct business in foreign countries. It has also introduced "ethical parameters" into its annual calculation of bonuses for executives. Mike Turner, BAE chief executive, has backed the moves and also Lord Woolf's report, but he is still very much seen as a product of the old regime. If BAE is really to leave its past behind, say some industry watchers, it needs a new broom. With Mr Turner retiring in August and the appointment of a new chief executive imminent, possibly an outsider, Mr Olver will hope the revolution has truly begun.
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