On the 17th January aero-engine maker Rolls-Royce announced a settlement with the Serious Fraud Office (SFO), US Department of Justice (DoJ) and Brazilian authorities over past bribery and corruption in the company to win orders. The company will be paying £670 million plus interest over the next few years under Deferred Prosecution Agreements (DPAs) so as to avoid prosecution.
Current CEO Warren East had this to say: “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 unworthy of everything which Rolls-Royce stands for, and that our people, customers, investors and partners rightly expect from us. The past practices that have been uncovered do not reflect the manner in which Rolls-Royce does business today. We now conduct ourselves in a fundamentally different way. We have zero tolerance of business misconduct of any sort.”
The settlement was possible because of the fact that Rolls-Royce has fully co-operated with the authorities recently. However in the High Court, where the settlement was approved, Lord Justice Leveson indicated that Rolls-Royce knew about the corruption in 2010 and did not notify the SFO. It was described as “egregious criminality over decades, involving countries around the world, making truly vast corrupt payments” which apparently resulted in it making more than £258 million of illegal profits”.
In addition to these bribery problems, the company has only recently disclosed that the reported profits should really be lower because they have been claiming profits on future maintenance contracts which were probably imprudent – see a previous blog post on that issue here: https://sharesoc.wordpress.com/2016/11/16/rolls-royce-accounts-adjustments-were-they-prudent/
I suggest these questions could be good ones to put to the directors of the company at its next AGM:
- When did the Chairman (Ian Davis) and former CEO (John Rishton – left July 2015) learn about the corruption problems and why were they not reported to the SFO promptly? Or even by the previous CEO Sir John Rose who departed in March 2011?
- Is any attempt being made to reclaim bonuses paid on past profits that were bolstered by these dubious activities and the imprudent accounting from the former CEOs or other directors and management, and the costs that have now been incurred as a result?
- What has been the role of the current Chairman Ian Davis in these matters (he joined the company in 2013). Did he conceal the bribery or disclose it? The captain of a ship usually takes responsibility when it runs into an iceberg, but he is still there. Should he have resigned (although clearly the problems arose way earlier)? Note: having seen the Chairman perform at previous AGMs where I thought his and the CEO’s answers to my questions were somewhat devious, I had this to say “the Chairman seemed to think this meeting was more about a public relations exercise for small shareholders than answering real business questions with plain answers“. See the full report here. Will the next AGM be any better?
There are certainly lots of questions about these problems which have yet to be answered.
Yet another company where profits have been ramped by unethical behaviour and false accounting, executives bonused on that illusory performance, then the shareholders left to pick up the bill.
I believe that a lack of shareholder control over remuneration and appointments (executive and non-executive) is much of the problem. But it’s also cultural: Rolls-Royce shareholders are paying a big price to avoid their company being prosecuted, whereas it’s the executives who initiated, perpetrated and covered up the misconduct who should be in the dock.
Let’s hope our new Prime Minister’s focus on reining in the excesses of the rootless elite extends to ensuring that they, rather than we, bear the costs of their rent-seeking behaviour.
In the meantime, it would be great to see a shareholder committee established at Rolls-Royce and for it to take the long overdue step of replacing the long-term incentive plan (LTIP) with something that genuinely aligns executives’ and shareholders’ interests. Currently, share-based plans fail to achieve this because they offer executives only the upsides of share ownership, not the downsides. If a company’s shares soar, options vest, and the executives are in the money. If they tank, the top bosses keep their hands in their pockets, losing nothing.
In the early days of capitalism, when imperial powers such as the UK set up the first multinational companies – trading businesses intended to import and export goods to and from conquered nations – politicians, wary of the risk of fraud and theft by those appointed to run these firms, required managers to put up ‘bonds’ that would be forfeit in the case of misdeeds. Thus, while they would be handsomely rewarded for creating wealth, they knew that they and their families would be impoverished if things went the opposite way.
Maybe we should require incoming CEOs and FDs, as a minimum, to make very sizeable investments in a company’s stock on appointment, perhaps funded through loans repayable out of future salary payments? That way, failure followed by defenestration could leave them penniless, for once exposed to the destruction of value they oversaw, in the same way as the shareholders whose interests they were hired to serve.
Yes the editor of the FT suggested this morning there was unfinished business and that the executives responsible should be prosecuted. It would certainly be a good idea to establish a “shareholder committee” at this company. Perhaps the next one to tackle after RBS?