BEN GRIFFITHS: Chief executive Sir Andrew Witty hangs on as GlaxoSmithKline's woe mounts

When Sir Andrew Witty, chief executive of GlaxoSmithKline, accompanied David Cameron on a trade visit to China last December he was unsurprisingly given short shrift by the People’s Republic.

The FTSE 100 drug-maker was up to its neck in a bribery and corruption scandal, having been accused by Chinese authorities of criminal behaviour, including  paying doctors and other medical officials to prescribe its medicines using a network of travel agents to distribute the cash.

It was Witty’s first visit to China since news of the investigation broke. While the Prime Minister went into bat for GSK, the company’s boss chose to dine alone at a luxury hotel rather than attend an official banquet with the 100-strong trade delegation of business leaders and politicians.

Scandal: Glaxo has been involved in China for close to a 100 years

Scandal: Glaxo has been involved in China for close to a 100 years

For the head of a business that has been involved in China for close to a 100 years, this must have been embarrassing.

Additionally, the group’s married China division boss, Briton Mark Reilly, was caught in a covertly filmed sex tape with his Chinese secretary, in another lurid setback for the blue-chip firm.

And yet when, in July 2013, GSK announced Witty was standing down from his role as a Government adviser on business matters, the company insisted the decision was unrelated to the scandal over kickbacks in China.

Instead it argued that Witty’s role was approaching its natural conclusion and he’d stand aside at the end of the year.

Today the pressure on Witty has increased, despite clear relief among shareholders over news of a moderate £300m fine and the lack of any limits on GSK doing future business in China.

Major risks to the company and Witty’s future remain, however.  A Serious Fraud Office investigation into the ‘commercial practices’ of the company and its subsidiaries in a number of emerging markets continues, along with a US Department of Justice inquiry.

 

Similar bribery claims have also been made against the company in Iraq, Jordan, Syria, Lebanon and Poland.

GSK has pledged to thoroughly investigate all allegations that  are put to it, and most have yet to be proven.

Perhaps most importantly, however, there is the UK Bribery Act of 2010. GSK has been regarded as a test case by some analysts, being the first blue-chip company whose sales practices have come under the microscope since the Act came into force.

The Act was designed to stamp out bribery by holding to account any senior director, making them responsible for corrupt acts carried out by any worker in the businesses they head, no matter how big or small.

Ultimately the legal framework provided by the Act allows unlimited fines to be imposed, or even imprisonment for executives found guilty.

GSK’s management has sought to distance itself from the corruption in China by arguing it had all the necessary checks and balances in place to prevent such activities. It blamed rogue local executives for orchestrating the crime.
And yet the company’s statement clearly admits its guilt and culpability in illegal activities.

Four local executives have been handed suspended jail sentences, while Reilly has been given a suspended sentence and deported.

GSK’s response goes on to specify that ‘non-government personnel’ were the target of the payments. This is shorthand for doctors. Why is it important?

City legal experts believe this is a reference included with a particular nod to the US Foreign Corrupt Practices Act probe by the Department of Justice, which only applies to the bribery of  public officials.

However, legal experts have also pointed out that an attempt to say the FCPA does not apply in this case would be misplaced. Under US law, doctors too can be considered government officials.

But perhaps the more worrying fact for Glaxo’s shareholders is that Witty falls into only one of two categories.

Either he knew what was going on in China and did nothing – ruled out by Chinese investigators – or he knew nothing about what was going on in the local sales office of the group’s biggest emerging market, a division seen as a future cash cow in a country which McKinsey & Co estimates will be worth $1trillion by 2020 for global pharmaceuticals firms.

In which case he displays a lack of control.

In Witty’s own words, the entire situation in China has been ‘a deeply disappointing matter’. Investors are certain to agree.

Despite GSK’s protestations, the story is far from over and the continuing scandal is certain to raise questions about how long he can hang on.

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