Rolls-Royce has dramatically cut the number of middlemen it uses to clinch international contracts even as it focuses on growing its global sales, the engine maker revealed in its annual report

March 5, 2014 7:39 pm

Rolls-Royce cuts out middlemen in aftermath of bribery claims

By Carola Hoyos

Rolls-Royce has dramatically cut the number of middlemen it uses to clinch international contracts even as it focuses on growing its global sales, the engine maker revealed in its annual report.

The reduction follows allegations that the company used bribery to win business in Indonesia, China and elsewhere, which prompted the Serious Fraud Office to launch a criminal investigation late last year. The US Department of Justice is also investigating the matters.

“The number of intermediaries used by our businesses has continued to fall dramatically during the year [2013],” Rolls-Royce said in its annual report. “Businesses now have greater ownership and direct responsibility for the marketing, sales and support of the Group’s products and services.”

Campaign groups say it was regrettable that Rolls-Royce only started to cull its middlemen once allegations of bribery had emerged and the company faced the risk of prosecution.

BAE Systems, a Rolls-Royce peer, significantly reduced its use of middlemen in 2007 after public allegations that it used bribery in several countries prompted a lengthy investigation by the SFO. It eventually led to a $400m fine from the US Department of Justice.

“BAE showed us what good practice is. It is disappointing that companies did not follow it. But it takes a scandal to hit it home,” says Robert Barrington, executive director of Transparency International, which gave Rolls-Royce relatively poor marks compared with peers such as BAE in its 2012 survey of how transparent defence companies are about reducing the risk of corruption.

“Fundamental is that middlemen are always high risk for bribery. If you have them, you have to be really sure you have the right ones and your relationships are impeccable,” Mr Barrington said, noting that a scandal often gave a company the courage to rid themselves of decade’s old relationships with powerful intermediaries it had come to rely on.

However, Rolls-Royce said it would be legally bound to continue to use middlemen in some countries.

The company last year appointed Lord Gold – the lawyer who oversaw BAE’s middleman cull – which the engine maker said was “clear evidence” it was serious about compliance.

Lord Gold’s recommendations so far have included simplifying the compliance rules, allowing financial rewards to be clawed back in the case of a breach and forming a compliance team that reports directly to the non-executive board member in charge of compliance.

Despite its legal challenges, the total pay packet of John Rishton, Rolls-Royce’s chief executive, increased 35 per cent to £6.2m on the back of rewards he received from a three-year incentive plan.

The company last month cut its forecasts for this year, announcing, much to investors’ surprise, that its decade of growth in underlying profits would come to a halt in 2014.