GSK - The Only Way is Ethics?

Has it all gone horribly wrong for UK-based global pharmaceutical giant GSK? Profits might be rising, but there still seems to be a nasty smell about the way GSK does business.That’s bad news for GSK shareholders and stakeholders, but good news for business students. GSK has quickly become one of the very best examples of the potential costs and reputational damage that can arise when business ethics are seemingly ignored by parts of a complex multinational organisation.

The news recently has been full of examples of GSK in trouble:

In early June 2014, GSK agreed to a $105m (£63m) settlement with 44 US states and the District of Columbia over allegations it mis-promoted three drugs.

In late May 2014 the SFO (Serious Fraud Office) in the UK announced that it has "opened a criminal investigation into the commercial practices of GlaxoSmithKline and its subsidiaries".

The response from GSK was short: “GSK is committed to operating its business to the highest ethical standards and will continue to cooperate fully with the SFO”.

Just a couple of weeks earlier, a GSK official was arrested in China as part of a widespread investigation by authorities in China into alleged corrupt practices by GSK there. GSK said it took the allegations "very seriously" and would co-operate with the Chinese authorities over the matter.

Go a month further back (April 2014) and GSK is once again in the news for all the wrong reasons. A BBC Panorama investigation broadcasts allegations that GSK is facing a criminal investigation in Poland for allegedly bribing doctors

If the allegations in either Poland or China country are proved, GSK may have violated both the UK Bribery Act and the US Foreign Corrupt Practices Act. It is illegal for companies based in the US or UK to bribe government employees abroad. The potential damage to GSK is enormous.

These latest examples of alleged corrupt behaviour will be wearily familiar to long-term GSK shareholders. It is just two years since GSK was hit with the largest healthcare fraud settlement in US history. US authorities fined GSK $3bn after the firm admitted promoting two drugs for unapproved uses and failing to report safety data about a diabetes drug to the Food and Drug Administration (FDA).

Sir Andrew Witty, who became CEO of GSK in 2008, announced changes to GSK’s methods of promoting its drug portfolio in late 2013.

Will these changes be enough to address what, to some, might appear to be systematic failings in business ethics?

Part of the problem (and the challenge facing Witty) must lie in the scale and scope of GSK’s operations as a global pharmaceutical multinational. It operates in just about every developed and emerging market in the world. In many of those countries (and in particular China) the healthcare systems are highly corrupt. The risk of just a small number of employees breaking GSK’s systems of controls must be high, despite Witty claiming that the vast majority of GSK employees abide by the rules. In a recent Telegraph article Witty stated that he was "absolutely sure a massive 99.9pc of people" in GSK understood the "rules and values" of the organisation.

The standard of business ethics displayed by a firm is, to a large extent, determined by the organisational culture of the firm.

Take a look at the code of conduct that GSK provides to its employees, in which Witty states that “There is no higher priority for me as CEO of GlaxoSmithKline than the ethical conduct of our employees and our company”.

Look further down the introduction from Witty and some key points are made about the link between business ethics and GSK corporate strategy:

“There should be no company anywhere that has higher standards than GlaxoSmithKline. Our ethical conduct should be something that truly differentiates us from other companies”

“In short, conducting GSK’s business with complete honesty, fairness, openness and integrity plays a vital role in ensuring our continued growth and success and helps us achieve our global mission to improve the quality of human life by enabling people to do more, feel better and live longer”

So Witty believes that delivering on a high standard of business ethics can be a source of competitive advantage for GSK (i.e. by more ethical than its other global pharmaceutical competitors).

Which will make it even more worrying for Witty that the SFO have decided to investigate GSK. The pressure is really on him, having stated so clearly that, for GSK, the only way is ethics.