BAE’s new managing director for corporate responsibility, Raj Rajagopal, explains how he is trying to repair the weapon maker’s reputation

It is now a year since Lord Woolf, the former lord chief justice of England and Wales, issued his influential review of business conduct at BAE Systems. For many, Woolf’s report was a major disappointment as it never sought to address questions about illicit payments the company was accused of making to sweeten arms deals, especially in Saudi Arabia.

Yet the Woolf report is forcing BAE to change the way it does business. The fact BAE commissioned Woolf to do his review suggests that the company knew its ethical policies and procedures were not up to scratch. That Woolf came back with so many recommendations – including very basic ones, such as setting up a single code of conduct – shows that the company’s systems for ensuring staff and agents behaved themselves were indeed far from good enough.

One year into its three-year commitment to enact all of the Woolf report, BAE has implemented four of the report’s 23 recommendations. The entire process so far has cost the company £3m, including convening the committee that Woolf chaired.

BAE claims it is making progress towards its ethical goals, but for anti-corruption campaigners such as Transparency International UK, the rate of change at BAE is by no means fast enough.

Speaking on the launch of BAE’s latest corporate responsibility report, Making Progress, at the end of April, TI UK executive director Chandrashekhar Krishnan said: “The report is more a description of intent rather than progress. So the jury is still out on whether BAE has made significant strides towards its ambition to become a global leader on ethics.”

BAE’s managing director for corporate responsibility, Raj Rajagopal, admits: “We have come a long way but we have a longer way still to go.” His appointment in January saw BAE complete one of Woolf’s recommendations: to create a new post overseeing ethical risks and reporting directly to the board. In addition to this, BAE has created a global code of conduct, introduced a more robust system for vetting third-party agents and has had its corporate responsibility report externally assured.

Rajagopal’s job is to embed Woolf’s recommendations in the business, a process he says the company is on track to complete by 2011, as planned. BAE has broken down the report into a 268-point to-do list – a characteristic level of precision for an engineering company, jokes Rajagopal, who is an engineer himself. “We are a process-driven company. In order to make change permanent in a company like BAE Systems you have got to take an approach that’s consistent with the DNA of how we do business,” he says.

From the 268 points, BAE has identified 25 “solutions” it believes will address the problems highlighted by Woolf. The company has 60 executive staff working at least part-time on putting Woolf’s recommendations into practice. Actions range from re-writing policies, to ensure they make explicit mention of ethical risks, to training internal auditors on how to check up on standards of ethical conduct as part of routine audits.

New model

BAE wants to change its business model by cutting out the middleman in arms deals, in part at least to minimise corruption risks, Rajagopal says. Agents or intermediaries – known in the defence industry as advisers – are the conduit of many illicit payments that regulators find so hard to track down. Rajagopal says: “As a principle and a long-term goal we don’t want to have any advisers, third-parties, or intermediaries between us and the customer.” BAE has not fixed a date for eliminating agents from contract bids.

Advisers are a key part of the export model that is common in the defence industry. BAE wants to move away from this to what it calls the “home market” model, where more of its military hardware is built and sold by direct employees in countries where it is bought. That means building weapons in Saudi Arabia, not just selling them to the Saudis.

BAE believes the strategy will give it competitive advantage because of local employment and other benefits to host countries, which are also its customers. Rajagopal explains: “[In the home market model] you’re not just shipping product in and taking profit out of the region. You’re helping the region by infusing technology and educational opportunities.”

He believes this approach will reduce corruption risks because staff will be directly employed by BAE and so trained in its new code of conduct. “We have a conviction that those who have gone through code of conduct training with us, been vetted by us and are BAE staff are more likely to do the right thing,” Rajagopal explains.

Yet Rajagopal admits there will be some markets where BAE will continue to rely on advisers. The company has reformed its process for vetting agents to remove a glaring conflict of interest. Until mid-2008, prospective agents looking to sell BAE kit around the world had only to get approval from the company’s business development function – the people responsible for creating sales. Now business development teams must put a case together for using a particular adviser, which must be approved by BAE’s internal legal team and an external law firm.

Such steps are encouraging, but they cannot stop BAE being investigated on suspicion of corruption in its past dealings with agents. On the subject of the ongoing probe by UK regulators, Rajagopal says: “I think most people in the company don’t believe that any of that happened and they believe that we have been unfairly accused.” This is because the investigations have taken so long to produce evidence of any wrongdoing, he says.

Anger

Rajagopal says allegations against the company “create a certain amount of anger” among staff. He adds: “In the past it’s probably shown up with the company being reluctant to engage with the media and NGOs. I think we’re over that now and we realise we have to engage constructively. Even if there are groups who are never going to come round to our point of view, that’s not a reason not to engage with them.”

BAE employees buy into the idea of ethical business for personal reasons. Rajagopal explains: “All of us want to be part of a company that’s highly regarded. When we engage with people outside of work, in our social lives, we want to be proud of the company we work for.”

Rajagopal says the thought of paying bribes never crossed his mind when in charge of BAE’s ground systems line of business, based in the US. He says: “We can operate a very successful business without paying bribes or being corrupt … In a wired world, where everybody’s actions are transparent, I really don’t think there’s going to be a place for it.”

A bigger challenge for Rajagopal is in embedding all aspects of corporate responsibility, not just ethical conduct, throughout the business. He says: “It’s a culture change that goes beyond mere implementation of the Woolf report recommendations because it involves a change in mindset for a large number of people.”

Rajagopal anticipates the day a few years from now when he can say BAE has established a leadership position on ethical conduct. This has happened before. GE and Lockheed Martin, for example, went through the pain of corruption scandals before becoming models of ethics and compliance after they overhauled their business cultures.

The Woolf recommendations could have a similar effect on BAE, although Rajagopal is not getting ahead of himself. He says: “I don’t think this is a journey that one ever completes. This is an area where the bar is always being raised, where the expectations of external stakeholders constantly change. We’re always going to have to match up to those expectations and go one better.”

Code of conduct

BAE is rolling out its new code of conduct. The aim is for all 106,400 employees to have been trained on and to have accepted the code by the end of the year.

The code was developed with the help of the Institute of Business Ethics. An early draft was then trialled with 71 focus groups around the world. The code is being “cascaded” through the organisation, from the board down. Raj Rajagopal explains: “Employees said they wanted to hear about it from their immediate boss, not part of a big town hall meeting.”

Woolf’s recommendations

In his report published on May 6 2008, Lord Woolf said BAE should:

• aim to be a leader in standards of ethical business conduct;
• adopt the principle of openness and transparency;
• develop, publish and implement a global code of ethical business conduct;
• make ethical business conduct a standing item on the board’s agenda;
• oversee conduct through the board corporate responsibility committee (CRC);
• address ethical risk in all audit reports;
• ensure senior executives and heads of business units lead by example;
• appoint a senior executive with access to the board and CRC to ensure ethical business standards across the company;
• develop formal processes to ensure business decisions are only taken following an explicit consideration of ethical and reputational risks;
• review policies and procedures with regards to ethical risks;
• ensure that the new process for selection, appointment and management of advisers is fully integrated into the business;
• apply standards to all advisers
• continue to forbid facilitation payments worldwide;
• implement central registers (by individual country) to collect information on money spent on gifts and hospitality;
• apply standards to all business partners and contractors;
• extend ethics helpline to partners and contractors;
• check all proposed lobbying positions against values in the global code of conduct;
• be proactive about instigating internal investigations into allegations of unethical behaviour;
• treat third parties in the security division in the same way as advisers;
• create a well-resourced training programme for training every employee on the global code;
• be more proactive in dealing with stakeholders;
• be as open and transparent as possible, or explain why it can’t be; and
• commission an independent external audit of ethical business conduct in the company within three years and at regular intervals thereafter.