Ericsson’s leadership team on Tuesday worked to reassure shareholders regarding anti-corruption and compliance measures, related to an ongoing review into inadequate disclosures to the Department of Justice (DoJ) and allegations of misconduct in Iraq. But some felt questions remained unanswered.
Ericsson is holding its Annual General Meeting on March 29 and the call Tuesday covered an update on a previously disclosed breach of a deferred prosecution agreement (DPA), reached in 2019, with the DoJ and steps the company has taken to strengthen compliance and governance measures.
The DoJ informed Ericsson of the latest DPA breach in March and came after media reports shed light on allegations that Ericsson employees may have made payments to the ISIS terror organization to access certain transport routes in Iraq. In February Ericsson had said it performed its own investigation and in part stated it “invested significant time and resources to understand these matters. The investigation could not identify that any Ericsson employee was directly involved in financing terrorist organizations.”
In opening remarks, Ericsson’s executive team leaders and chairman of the board emphasized how seriously Ericsson is taking the matter and pointed the historical context as evidence of how far the vendor has come in strengthening its internal controls while also executing a business turnaround since CEO Börje Ekholm took the helm five years ago.
Chairman Ronnie Leten reiterated the board’s earlier statement this week of unqualified support for Ekholm, who along with CFO Carl Mellander has been named in a class action lawsuit related to the conduct in Iraq.
In 2017, Ekholm inherited “a company in crisis. Financial performance was poor, our technology leadership had been lost and the company had a history of compliance failings and inefficient controls,” Leten said. As part of committing to overhaul its oversight and controls with the DoJ agreement, Ericsson also agreed to three years of monitoring by an external third party, which started in June 2020.
“This journey is well under way and since 2017 when Börje as CEO joined us, Ericsson has significantly improved its compliance and controls and has committed to doing business with integrity. We have more to do, but we have also made real progress,” Leten said, pointing to Ericsson’s financial turnaround and meeting 2022 financial targets by 2021, while delivering record free cash flow and growing market share with technology leadership. “Börje deserves significant credit for this performance, which he has achieved while also leading ethics and compliance transformation of the entire organization.”
As reported by Reuters, proxy firm Glass Lewis had recommended shareholders to remove Ekholm from the board ahead of the AGM later this month, after coming under fire for not disclosing the Iraq corruption probe.
Because of the ongoing litigation and investigation, Ekholm said the company would be limited in what it could share about the Iraq investigation, but would share what it could at the appropriate time.
He reiterated the company is committed to cooperating with the DoJ and to investors, saying: “I am personally, and I know Scott and Ronnie and the board are, fully committed to doing what’s necessary to re-earn your trust. These are not just words, we view it as fundamental to how we operate as a company.”
Ekholm did say that the internal investigation conducted in 2019 following allegations of improper conduct included employees, vendors and suppliers in Iraq starting in 2011 to 2019.
“Our initial investigation did reveal wrongdoing and compliance shortcomings. I instructed this to be properly disclosed to the DoJ. We acted on the findings including exiting employees. We are continuing the investigation and if we find that any Ericsson employee paid ISIS, directed third parties to make payments to ISIS or failed to act ethically in any way, we will take immediate action,he said.
Ericsson has fired more than 250 employees since 2019, following violations of codes of business ethics.
The DoJ told Ericsson that its 2019 disclosure was insufficient and the failure to make subsequent disclosures breached the DPA, a matter that it’s addressing with the DoJ directly. It has also already taken remedial action regarding the situation in Iraq, Ekholm said, including exits.
Scott Dresser, Ericsson’s new chief legal officer, is leading discussions with the DoJ and a comprehensive review.
Ekholm stressed that Ericsson’s ethics and compliance program has “improved dramatically” since the events occurred and that it’s in a better position to prevent other incidences, and also to uncover and respond to misconduct when it happens.
“It is precisely because of those improvements that we were actually able to find and to address the misconduct in Iraq,” he said, adding the vendor took lessons from the Iraq investigation to enhance oversight of decisions made in conflict zones and challenging jurisdictions, where heightened scrutiny is very important to the company. He said Ericsson would continue enhancing internal controls for potential improvements, and continue to improve oversight and vesting of third-parties.
“I simply will not tolerate improper payments,” Ekholm said.
Shareholders press for answers
Later in the call, when pressed directly by shareholders about when they could expect answers on important questions, Dresser – who only stepped into the role effective Monday – said it would not be immediate.
Dresser also is getting up to speed as he spearheads a comprehensive review.
“The most important thing at the moment is that we undertake the review and engage with the DoJ,” Dresser said. “We want to do this thoroughly, so it will not be immediate, we will of course discuss it with the DoJ” and it could be “a number of months. And we will not be able to come back and report on this until we conclude with the DoJ.”
Asked about potential consequences of the DoJ breach, Dresser said it was too premature in the process and he wouldn’t comment on hypotheticals.
During the Q&A session, when voting shareholders were welcomed to ask questions, some pressed Ericsson as to why they first heard about the activities through media reports rather than the company itself disclosing the information to investors and the market.
Ericsson leadership was unable to give direct answers on the question, which was raised more than once. Dresser said the only remark he could make is that it’s “a fundamental aspect of what we’re reviewing at this point. We are committed to making sure we’ve got tight governance and we’re going to strengthen overall governance, and we will ensure we comply with our disclosure obligations to investors.”
Another investor wanted to know how they could be assured there are not still other investigations they’re unaware of that might surface. Ekholm noted that there are constantly a number of reviews happening internally with its investigations team and didn’t want investors to leave the meeting thinking it’s a small number of reports.
To that point, Ekholm said another indicator is the number of allegations: “In 2016 I believe there were less than 150, this past year it’s more than 1,000.”
“That means there are so many allegations that we need to have a process to manage those in a good way,” he said.
Dresser added that all companies of the same size receive “quite a few reports and allegations of various types” and importantly, Ericsson has disclosure obligations to the DoJ.
Ensuring the internal investigations function is robust is a top priority, he said, particularly when the company is operating in challenging regions or conflict zones, and it will continue to enhance governance and oversight of partners. More on the investor update meeting here.