Legal Briefing

Preventing reputation meltdown: brand, stakeholder and media

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Technology, Media and Telecoms | 01 March 2010

When we think of reputation, particularly corporate reputation, we are really thinking about trust in an organisation. A successful company must gain the trust of its employees, suppliers, shareholders and customers to help win a commercial advantage over its competitors and protect the value of its business. Losing stakeholder trust can result in the failure of a business, as recently demonstrated by a host of high-profile corporate scandals. Enron, Xerox and Barings Bank are all examples of brands that failed their stakeholders and lost the trust of consumers. Good governance should be at the heart of any business and not just a reaction to a reputational or media crisis. It is vital to the long-term prosperity of a business and there have been several recent changes in the law aimed at improving corporate governance.

Research shows that trust is at the centre of a successful business. The Edelman Trust Barometer 2009 shows that customers are more likely to buy the products and shares of a company that they trust. Asked about a company that they distrusted, 77% of respondents to the study refused to purchase its products or services, 72% criticised it to a friend or colleague, 34% criticised it online and 17% sold their shares in the business. However, for a trusted company, 91% of those surveyed chose to buy its product or services, 76% recommended them to a friend or colleague, 55% payed a premium for its products or services, 42% complimented it online and 26% bought shares in the firm. Enthusiasm for good governance among companies has also increased following the recent changes to s172(1)(d) of the Companies Act (CA) 2006, which came into force on 1 October 2007. CA 2006 states that a director of a company must:

‘Act in a way that he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.’

Under the Bribery Bill, companies must put in place adequate procedures preventing their staff from engaging in acts of bribery and may be prosecuted for a failure to do so (see the box on p57 for a summary of the Bribery Bill). Stakeholder trust and legal compliance can only be achieved through a well-planned and robust corporate governance policy. A positive corporate reputation is achieved by making sure that an organisation:

  1. has a constructive commitment to corporate social responsibility;
  2. manages publicly available information (including the internet) and takes steps to deal with damaging information;
  3. manages the media and makes sure that action is taken to correct inaccurate stories in the press, including preventing the publication of damaging reports; and
  4. assists chief executives and other senior staff in maintaining a strong public image.

Businesses that think ahead and carefully plan how to deal with reputational risk will be best placed for avoiding meltdown. When a company does face a reputational crisis, it is essential that it conducts a governance review, including a full audit of any risks, especially those applicable to its human resources, information technology, legal and communications departments. Lawyers are increasingly being asked to provide services that minimise the chances of a reputation crisis, including audits of organisations with which clients are doing business.

BAE Systems

Five years ago, BAE Systems, the world’s second largest defence contractor, was caught in a media storm resulting from allegations of bribery involving business in Saudi Arabia. Following investigations by the Serious Fraud Office and the Ministry of Justice, BAE commissioned an independent review of its ethical conduct that sought to determine any changes needed in the company to achieve global leadership in ethical standards and help improve stakeholder trust in the organisation. Roger Wiltshire, BAE’s chief counsel UK, has shared his experiences of the committee’s report and how the business is committed to a policy of superior corporate governance relating to its business conduct and reputation. The scale of the project is extraordinary and a full case study is included in the box on p58.

Comment

Companies that have built a high level of trust are far more likely to bounce back from a reputational crisis. Investing in sound corporate governance and ethical behaviour creates a reserve of trust that makes stakeholders far more likely to forgive future mistakes.

In-house legal advisors play an important role in establishing trust in the company for which they work. A counsel working in co-ordination with communications, public relations, human resources and IT teams, as well as a board of compliance and regulation, will be well placed to identify the warning signs of a reputation crisis while there is still time to act. Such an advisor will be a valuable asset to their company and success in this role depends on combining a commercial mindset with legal prudence. For further reading please visit www.justice.gov.uk/publications/docs/draft-bribery-bill-tagged.pdf and www.justice.gov.uk/publications/draft-bribery-bill.htm.

By Jo Paton, solicitor, Schillings.E-mail: jo.paton@schillings.co.uk.

Bribery Bill

A new and consolidated criminal law of bribery is currently passing through parliament as the draft Bribery Bill. The Ministry of Justice describes the draft bill as aiming to:

‘Reform the criminal law to provide a new, modern and comprehensive scheme of bribery offences that will enable courts and prosecutors to respond more effectively to bribery at home or abroad.’

‘Bribery’ is not clearly defined but ss1-3 of the draft bill set out two examples of offering a bribe and one of receiving a bribe.

Offence of corporate liability

Section 5 of the draft bill proposes that a ‘relevant commercial organisation’ will be guilty of a criminal offence where there is proven negligent failure by a responsible person (the person at the company or partnership responsible for preventing bribes, or a senior officer of the company or partnership) to prevent a bribe being paid on behalf of company or partnership, both in the UK and abroad. In such circumstances, the company or partnership, rather than the individual offender, would be held liable and there is no limit to the amount that a business may be fined as a result.

Defence

A company or partnership will have a strong defence to allegations of bribery only where it can prove that it had adequate anti-corruption procedures in place at the time of an offence.

Practical effect

The proposed new offence emphasises the need for companies and partnerships to ensure they have sound anti-corruption procedures and policies in place. In-house legal counsels will need to manage risk by ensuring that their employers create such measures.

Current UK law

There are currently three main corruption offences in the UK.

1) Common law offence of bribery

This offence is defined as a bribe given or offered to induce a public official to fail to act in accordance with their duty (R v Whitaker [1914] 3 KB 1283).

2) Public Bodies Corrupt Practices Act 1889 (the 1889 Act) (c69) (corruption in office)

The 1889 Act makes it an offence for any person to ‘corruptly’ solicit or receive any advantage as an inducement to any officer of a public body, doing or omitting to do any matter or transaction.

3) Prevention of Corruption Act 1906 (the 1906 Act) (c34) (bribes obtained by or given to agents)

Section 1 of the 1906 Act provides that it is an offence:

‘If any agent corruptly accepts or obtains, or agrees to accept or attempts to obtain, from any person, for himself or for any other person, any gift or consideration as an inducement or reward for doing or forbearing to do, or for having… done or forborne to do, any act in relation to his principal’s affairs or business, or for showing or forbearing to show favour or disfavour to his principal’s affairs or business.’

The Anti-Terrorism, Crime and Security Act (ATCSA) 2001 extended the 1906 Act to include bribery carried out overseas, but the new statute has rarely been used to prosecute since its enactment and the effect of ATCSA 2001 remains to be seen.

CASE STUDY: BAE SYSTEMS

Challenge

Amidst ongoing media allegations, investigations on both sides of the Atlantic and the controversial end to the Serious Fraud Office investigation covering its business practices in Saudi Arabia, BAE Systems’ board commissioned the Woolf Committee in June 2007. The committee was asked to provide an independent review of the ‘ethical’ state of the company and a ‘road map’ for it to become a global leader in ethical business conduct. The committee was authorised to go anywhere and speak to anyone. The board agreed to act on all of the committee’s findings before the publication of the Woolf Report. Published in May 2008, the report covers the ethical standards to which a global company should adhere, the extent to which BAE met those standards and action that the company needed to take to achieve such standards. The review made 23 recommendations for BAE to enact to become a global corporate leader in ethical business conduct, setting out how it should ‘establish a global reputation for ethical business conduct that matches its reputation for outstanding technical competence’. It also emphasised the importance for global businesses of managing reputational risk through the adoption of high ethical standards.

Responding to the Woolf Report

BAE set itself three years to implement the Woolf Committee’s findings. It created a dedicated team that was led by a full-time programme director and was overseen by Philip Bramwell, the group’s general counsel. A steering group of senior business leaders provided strategic oversight and monitored the team’s progress. The 23 recommendations were divided across six working groups and covered future contracting, anti-corruption and compliance, governance and operation of BAE’s board and management, leadership in business ethics, external engagement, and the creation of a code of conduct. It aimed to make the recommendations part of the company’s day-to-day practices and governance.

Global code of conduct

BAE also implemented a code of conduct across the business. Recognising the importance of clear and visible leadership, the code was ‘cascaded’ from the chairman through to the board and executive committee, so that every employee was briefed by their line manager, helping to make the code relevant to an individual’s role. Every employee undertook a training programme and signed a declaration confirming that they understood and would comply with the code. By the end of 2009, more than 90,000 employees had been briefed and trained. In addition, every executive and those employees dealing with people outside the company had to undergo integrity in business dealings training, covering anti-bribery and anti-corruption, gifts and hospitality, facilitation payments, conflicts of interest, fraud, money laundering, and behaviour in negotiations. BAE established a confidential ethics helpline to provide guidance to employees and a mechanism for ‘whistleblowing’.

Impact on business practice

The Woolf Committee states that individual directors had a clear responsibility for ensuring high standards of business conduct, and that ethical conduct and reputational risk should be standing items on board agendas. Part of the company’s senior executives’ bonuses are now aligned to business conduct. The committee also said that the board must deal with these issues itself, and ensure that values, principles and standards of business conduct are established corporately and applied globally. The company appointed a managing director for corporate responsibility.

Progress

The committee highlighted a change in the organisation from a UK-headquartered exporter to a global enterprise with strong operational footprints in six home markets and said that the wider business culture needed to follow suit. BAE revised 23 corporate governance policies and created three new ones, establishing three-yearly reviews to ensure they remain up to date. Responsible trading principles, together with a new code of conduct, now underpin the way that BAE intends to do business in the future, and applies to all employees of wholly owned and majority-owned businesses.

Compliance and regulation

To support its response to the Woolf Report, BAE has developed a principles-based compliance to assess non-financial risk in everything the business does, including decisions to sell products, use suppliers, purchase capital equipment, or sell or develop land. The public will not believe that a company is well run and responsible unless it can demonstrate that this is the case. BAE is externally audited twice a year and advisor appointments are overseen by a panel chaired by independent experts.

Developing corporate culture

Eighteen months into its response to the Woolf Report, BAE has made significant progress. There is still work to do, however, despite more robust governance and a global code of conduct now being embedded in the company’s practices. BAE developed its total performance cultural model, underpinned by the three values of trust, innovation and boldness. These are the characteristics that it wants people to attribute to BAE. Enshrined in its corporate governance, this marks a clear commitment to a different way of doing business, placing customer focus and responsible behaviour on an equal footing with financial performance and programme delivery. Together with its response to the Woolf Report, BAE’s global code of conduct and responsible trading principles, backed by a rigorous compliance programme, is developing a culture of total performance. This culture will not only support the delivery of BAE’s strategy and future prosperity, but will also ensure that it manages its reputation and turns it into something of significant value to the company.