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Rolls-Royce – Crucial Lessons Learned, Time To Move On By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

Sitting at the Royal Courts of Justice and with Southwark Crown Court having handed down its written judgement late yesterday approving a Deferred Prosecution Agreement settlement that will see Rolls-Royce pay fines and penalties totalling £670 million spread over the next four years to various British, US and Brazilian investigating authorities involved in order to settle bribery and corruption claims, Sir Brian Leveson concluded that it was devastating and of the greatest gravity that the conduct of an institution should fall to be examined within the context of a criminal investigation.

These were harsh words indeed but they were words that were clearly fully justified as the four year investigation by the UK’s Serious Fraud Office (SFO), the Department of Justice (DOJ) in the US and Brazil’s Ministerio Publico Federal (MPF) into bribery and corruption allegations through which Rolls-Royce had fully cooperated was finally settled this week through a deferred prosecution agreement.

Importantly and key in my own view in respect of future confidence, clarity and extent of lessons that have clearly been learned by Rolls-Royce through this long process, I note that the judgement from Sir Brian Leveson contained the following words:

“I accept that Rolls-Royce is no longer the company that it once was; its new Board and executive team has embraced the need to make essential changes and has deliberately sought to clear out all the disreputable practices that have gone before, creating new policies, practices and cultures. It’s full cooperation and willingness to expose every potential criminal act that it uncovers and the work being done on compliance and creating that culture goes a long way to address the obvious concerns as to the past”.

The deferred prosecution agreements confirmed by the Court yesterday related to bribery and corruption allegations involving intermediaries in a number of overseas markets that the company passed to the SFO from 2012 onwards following a request from them. Deferred prosecution Agreements are voluntary agreements which result in the suspension of prosecution provided that the company fulfils certain requirements that most often include very stiff financial penalties/fines. In this case, the penalties to Rolls-Royce result in the need to pay fines totalling £671m.

Under the terms of the approved Deferred Prosecution Agreement with the SFO, Rolls-Royce will pay £497.3 million plus interest on a scheduled basis spread over a period lasting up to five years. The company will also make a payment in respect of the SFO’s costs. The Deferred Prosecution Agreement requires that the company also makes payments to the Department of Justice in the US totalling $169.9 million and to Brazil’s MPF of just under $25. 6 million. The schedule of payments anticipates that a total of £293 million will be paid out during the first year against all three agreements.

In the formal company statement that accompanied the required court judgement of the Deferred Prosecution Agreement, Rolls-Royce CEO, Warren East said that the “behaviour uncovered in the course of the investigations by the Serious Fraud Office and other authorities is completely unacceptable and we apologise unreservedly for it”. “This was” he said “unworthy of everything which Rolls-Royce stands for, and that our people, customers, investors and partners rightly expect from us” adding that “we have implemented an extensive action programme to embed ethics and compliance at our heart and transform our business culture”.

These have included:

  • Setting clear standards for the behaviours we expect of our people and those we do business with.
  • Implementing revised and new ethics and compliance policies covering areas including anti-bribery and corruption, offset, gifts and hospitality and lobbying.
  • Recruiting a senior team of ethics and compliance experts.
  • Training ethics and compliance specialists across our business and introducing an extensive training programme for employees.
  • Encouraging employees to report any concerns and creating new channels including a 24-hour Ethics Line available worldwide.
  • Reducing dramatically the number of intermediaries that we use across the world and ensuring that those advisers that we do retain meet our high ethical and compliance standards and understand exactly what is expected of them.

Importantly, Mr East confirmed that all this work “has been overseen by one of the world’s most respected authorities in this field [business ethics and compliance] Lord Gold” and who was appointed in 2013”. Lord Gold is currently producing a full report and Rolls-Royce confirmed yesterday that when completed this will then be published.

With preliminary results for FY2016 due to be published on  Rolls-Royce reports its full year 2016 results on 14 February 2017 the company said that an appropriate update on the implications of the Deferred Prosecution Agreement settlements will be provided at that time. They also said that early indications are that the Group had had a good finish to the year with both profit and, in particular, that cash was expected to be ahead of expectations.

 

To suggest anything other than that the long period of investigation by the SFO and other investigating authorities and through which it is important to emphasise that Rolls-Royce has cooperated throughout has been extremely painful for those charged with running the organisation just as it also has, from a financial perspective, been very costly. The statements made by the company and that have accompanied the Deferred Prosecution Agreement are indeed humbling and if I may say so, rightly so. They also show that Rolls-Royce has clearly learned huge lessons from what has been uncovered and that it has wasted no time in putting its house in order. Because of this and because of how the company has responded and been so open in admitting that its actions in the past were both unacceptable and unworthy, I believe that reputational damage will be minimal.

Clearly, the Deferred Prosecution Agreement settlement in regard of fines to be paid by Rolls-Royce is significant but the arrangements for payment spread over five years make this visibly manageable.

Closing the door on this regrettable chapter allows the company to move forward through the difficult process of improving profitability. That process is long and hard but I am in no doubt that Rolls-Royce now has both the people, board structure, strategy and clarity to push the recovery process forward.

The message in regard of ethical and compliance standards may have been learned the hard way at Rolls-Royce but make no mistake that it is now very fully understood.

CHW (London – 18th January 2017)

Howard Wheeldon FRAeS

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

@AirSeaRescue

 

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