Europe’s largest defence company did not pay sufficient attention to ethics in the past, which had led to serious damage to its reputation, according to its own senior executives.

The admission by the chairman and chief executive of BAE Systems came as Lord Woolf, the former chief justice of England and Wales, published a report yesterday into the company’s ethical practices.

The 150-page report makes 23 recommendations on improving ethics and avoiding corruption, which BAE has committed to implement.

The report, which cost £1.7 million to research, was commissioned last year by Dick Olver, the BAE chairman, amid lurid allegations of bribery and corruption surrounding BAE’s past arms deals — particularly the £43 billion al-Yamamah contract with Saudi Arabia.

Lord Woolf and his committee did not look into any of the historical corruption claims, which has led to accusations by anti-arms industry campaigners that the report is a whitewash.

Lord Woolf said yesterday that his task had been to provide BAE, which employs 96,000 people worldwide, with a blueprint for how to conduct its business in the future. It was not his job, Lord Woolf said, to determine the legality of past arms deals, although he admitted that a formal investigation may be needed if BAE is to ever fully clear its name.

He said: “The past cannot be resolved without some sort of investigation taking place, but the future is much more important.”

A four-year Serious Fraud Office (SFO) investigation into al-Yamamah was shut down by the Attorney-General at the end of 2006 amid concerns about its impact on national security.

The High Court found last month that the decision to end the inquiry had been unlawful, that it amounted to an “abject surrender” to pressure from a foreign government and that it should be reopened — a decision against which the Government is planning to appeal. The SFO has four other ongoing investigations into BAE’s dealings with six countries.

Symon Hill, spokesman for the Campaign Against Arms Trade, said: “It is absurd to ask a committee to report on the ethics of an arms company without even considering whether it is ethical to arm dictatorships or to engage in the arms trade at all. However, we will watch closely to see if there are any meaningful changes that come about as a result of the report.”

Many of the recommendations appear to be little more than common sense or normal practice. However, each one targets an area of ethical practice that BAE’s critics believe it has failed to uphold.

For example, Lord Woolf recommends that BAE create a central register of all gifts and hospitality given and that customers be made aware of the company’s policy regarding gifts before contracts are signed.

BAE has been accused of running a £60 million slush fund to entertain Saudi princes. Sources familiar with al-Yamamah allege that this was used by intermediaries to pay for hotels, holidays and even prostitutes.

Lord Woolf said: “There is a simple choice here: BAE can either become an ethical company that refuses to get involved in some contracts; or it does not and risks long-term reputational damage.”

Mr Olver said: “The committee’s publication of this report is an important step towards our objective of achieving benchmark standards of governance in the conduct of its day-to-day business.”

The investigating committee

— Lord Woolf was Chief Justice of England and Wales between 2000 and 2005. In 1990 he wrote the influential Strangeways report on prison reform. Lord Woolf was paid £6,000 a day for chairing the BAE ethics review

— Douglas Daft was chairman and chief executive of Coca-Cola between 2000 and 2004. He is a director of Wal-Mart, the world’s largest retailer, and of McGraw-Hill, the publisher

— Philippa Foster Back was group treasurer of Thorn EMI before becoming a director of the Institute of Business Ethics in 2001

— Sir David Walker was chairman of Morgan Stanley International from 1994 until 2005 and remains a senior adviser to the bank

Revised flight plan

— Publishing an independent external audit of ethical business conduct and the management of the company’s “reputational risk” within three years and at regular intervals thereafter. The report said: “The medium-term goal must be to achieve a level of audit of ethical and reputational risks that matches that of financial risk. In reputational terms, demonstrating externally that this has been achieved will be as significant as doing it”

— Keeping a record of aggregate spend on gifts and hospitality to individuals and each customer, by country. This should be reported annually to the BAE board’s corporate responsibility committee

— Maintaining a global policy of forbidding facilitation payments. While the report acknowledged that “it may not be possible to eliminate such payments immediately in some countries”, all such payments should be reported to the board and “the means developed to eliminate them completely over time”

— Implementing rigorous selection and due diligence procedures for the hiring of advisers, who help to negotiate contracts in various markets. These should include face-to-face interviews involving a company lawyer. The identity of such advisers should also be made available to potential customers

— Ensuring that a senior executive has responsibility for the group’s new ethical business programme

— Making all ethical business conduct policies and procedures publicly available and easily accessible

— Developing, publishing and implementing a global code of ethical business conduct. This should include the setting of specific behavioural expectations for managers and make clear that if employees face a dilemma the code will take precedence

— Ensuring that senior executives’ ethical business conduct is reflected in their performance appraisals and pay packages

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