Telefonaktiebolaget LM Ericsson (publ) (ERICB) Earnings Call Transcript & Summary

Hello and welcome, everybody, to today's briefing session for investors and financial analysts on responsible business. My name is Peter Nyquist, and I'm Head of Investor Relations at Ericsson. With me here today, I have Heather Johnson, Head of Sustainability and Responsible Business; and our Chief Compliance Officer, Jan Sprafke. You will hear from both of them as they give an update at the latest progress in their respective fields. After the presentation, there will be, as always, time for some Q&A. [Operator Instructions]. Today's briefing is also being recorded. With that said, I'm happy to leave the word to Heather. So please go ahead with your presentation, Heather.

Thank you so much, Peter. It's terrific to be here today. And I will be giving just a short update about some, I think, very good news in terms of our real connection to what I spoke about at our last responsible business briefing, which is our net zero journey. And to really help support that, we have had a very successful issuance of our inaugural green bond that was -- that happened last month. And this was a EUR 500 million green bond. And the proceeds were to finance eligible assets that we set out in our green financing framework, which was established in December of 2022. And the deal was preceded by a number of investor calls, and I'm delighted to say that really the positive momentum from that really translated into being oversubscribed 3x. So that was, I think, a great outcome. And just to also give a bit of background on the green financing framework that this was based on, as mentioned, we issued this to basically take a concrete step in embedding sustainability focus into our strategy and financial activities, and extending our leadership in energy efficiency, as we've talked about previously, is really key in terms of our portfolio priorities and of a strategic importance for our operator customers. The framework is aligned with the Green Bond Principles and green loan principles and is built on the 4 core components of the Green Bond Principles, which are use of proceeds, selection, management of proceeds and reporting. The framework is set out to enable financing within 2 categories, both of which contribute to the UN Sustainable Development goals. The first focuses on energy efficiency, and that is modernization and upgrade of existing 4G, 5G and 6G, as well as supporting technologies that lead to a reduced energy consumption and a reduced energy use of at least 35% compared to previous generations as well as renewable energy investments and related infrastructure. And this framework, CICERO Shades of Green has provided a second-party opinion to it and has given the framework a medium green rating and a governance score of excellent. And finally, just to highlight, in this case, the proceeds of the inaugural green bond will finance R&D investments related to the modernization and upgrade of existing solutions as well as supporting technologies that lead to a reduced energy consumption of a minimum of 35% versus previous generations as defined in the framework. And as such, the proceeds will finance investments that have a direct impact on reducing energy consumption in mobile networks, which is an important contributor to our overall plan and trajectory to reach net zero by 2040. And with that short update, I will now hand over to Jan. Thanks so much.

Yes. Thank you, Heather, and also a warm welcome from my side. It's good to be back here and always jointly with Heather. So today, I would like to give you an overview about our Ericsson ethics and compliance program journey from the beginning to our long-term goals and what kind of strategic priorities we have set ourselves to achieve our sustainable program. And we'll also highlight very specific examples where we believe we have built a world-class compliance program. And at the end, I will conclude to comment on the time line of the monitorship. We are still under this monitorship. But let's take a look at our journey here and this journey slide. I want to start with this slide that shows a number of the steps we have taken and are taking to continue our ethics and compliance journey beyond the monitorship and always with the aim to be best-in-class when it comes to compliance. At the start of our journey, we focused on establishing the ethics and compliance program fundamentals like a compliance office as a function and raising the awareness in the overall organization. We started off with an extensive recruitment of experienced compliance professionals into the compliance organization, growing from 20 employees to nowadays, close to 150. We also focused on raising awareness for high-risk positions, enhancing our steering documents and, of course, initiating risk assessments with a focus on high-risk markets and geographies. For us, it's also essential to early on introduce anti-bribery and corruption controls that today include approximately 120 controls, while we have 45 monitoring controls that continuously test our ethics and compliance framework if it really works in practice and prevents risks for materializing. We have also now established a fully resourced and empowered ethics and compliance organization beyond the compliance office. Today, it is made up of hundreds of highly qualified employees across all assurance functions acting in the second and in the third line of defense complemented by empowered gatekeepers and business owners in the first line. I would like to highlight that the foundation for the success of the ethics and compliance program is promoting business embeddedness. Ericsson is focused on the continued cultural transformation journey and to further strengthening the leadership engagement and business ownership. We have already, since around 2022, worked on the so-called compliance pivot I have shared in the last investor update, which emphasizes the importance of the business being responsible and owning decisions to the compliance office only acting as a trusted adviser and a subject matter expert. And as part of this pivot, culture is, of course, very essential. There has been a culture and a mindset shift for the entire organization where today, our senior leaders are fully aware of their responsibility to lead by example and work to promote a strong ethical and compliance culture throughout the company. Our leaders provide strong, explicit and visible support and commitment to our code of business ethics and compliance policies to prevent violations of anticorruption related laws and regulations. We now have -- you can really say that much greater, authentic, walking-the-talk ownership of ethics and compliance by our leaders, which is essential for an effective ethics and compliance program. The cultural transformation is driven by both global and local engagements and initiatives. That's very, very important to not forget about the local dimension here. Just to mention a few of these initiatives, we have local compliance champions who are local employees, acting as an extended arm between the compliance organization and the local business. We have ongoing sessions locally like compliance cafes in local languages because it creates great opportunities for leaders and employees connect and engage on ethics and compliance in a more informal way. Globally, of course, we have our annual mandatory training as well as our monthly Speak Up newsletter and I would like to come back to those in a few minutes in details because we believe these are really great initiatives we are running. And then we have our Ericsson on the Move internal program. That is our company-driven culture journey where ethics and compliance is fully embedded. In addition, as part of performance reviews, the behaving with integrity goal is now mandatory for all employees, requiring employees and managers to engage an integrity conversation, which focuses on reflections and key learnings, completion of mandatory trainings, formal signing of the COBE and conflict of interest certifications. Now is the time in our company that all line managers and all employees are asked to complete these integrity conversations before end of the year. As part of the described pivot earlier, the compliance office, of course, also needs to continue engagement with the leadership teams as compliance advisers and go-to people, and we have seen significant progress over the last years with a more empowered compliance organization. But as I said earlier and more importantly, is it to have line managers really to step up and take ownership for decision-making always, of course, with a risk-based approach to make them accountable and mark them multipliers for our compliance efforts. And long term, our focus is on the value we can bring as a good corporate citizen. We are fully committed to sustainable compliance and controls embedded across the functions, founded on a strong ethical corporate culture. And that will bring me to our strategic priorities we have set ourselves this year to make this sustainable and even become better and world-class. These are our cornerstones for ensuring a sustainable ethics and compliance program, and we have identified 6 strategic priorities: fit-for-purpose, collaboration, trusted adviser, accountability, simplification and digitalization. And we always want to come back and reconcile with all our efforts we are taking that we fit and match those strategic priorities whatever we do. I'll come back also shortly with more details how it looks like in practice. Our key program elements, I have shown this slide a couple of times before, but with a bit of different content, just to highlight some selected examples. And maybe we could start off from the upper left side here and come to our ethics and compliance external engagement strategy. This strategy has been one of our key pillars this year and will, of course, be in the years to come. Because in this strategy, we focus on 3 areas. The first one is to proactive external engagements influencing the industry at large. So we want to be perceived as a good corporate citizen, and we will play our role in that. We want to build Ericsson's reputation as a company with integrity, that is a positive differentiator in the market, compliance and our compliance program as a competitive advantage. As we work hard to achieve this goal, our partners and stakeholders will come to see Ericsson as a different company from the one that has been in the news since 2019. A new Ericsson with a sustained commitment to leading with integrity and driving ethical business as a good corporate citizen. The second item here is external engagements with business partners and other key stakeholders because equally important for us is to build trust and accountability with customers, business partners and other stakeholders driving sustainability and success. Because at the end of the day, in the private sector, we all can come together and drive collective action here. And then, of course, we are also engaged beyond our peers and partners with the ethics and compliance and ESG community to establish Ericsson as an innovator and sought-after leader on ethics and compliance, sharing our success story of a world-class ethics and compliance program. And that would lead me to one more pillar I would like to highlight here, and that's the ethics and compliance sustainability strategy I have alluded to. The cornerstones I have shared, but we have broken down the strategy and all these strategic priorities and very tangible, very concrete, short-term, midterm and long-term actions, and those have been approved by the executive team and by the Board just now with a very long 5 years time frame. It is clear to all of us that the ethics and compliance program is owned by the entire company. It's owned by the ET, by the executive team. It's not owned by the compliance office and I'm really happy that the Board and the ET have approved and monitor and show this accountability. The last time I have mentioned the testing framework, you can see here as one of the highlights, so I will not go through into that. But I just want to highlight probably or repeat again that our testing framework as of today, how we test on a daily basis if our ethics and compliance program in all dimension really works in practice and prevents risk is to be seen as one of the best in the industry we are running at the moment. And it's very, very important to self-identify potential deficiencies. You always run root cause analysis, and we need to ensure swift remediation because we need to adapt and evolve our program over time. There are external factors that play into this, and we always need to evolve. And with this testing framework, we are very confident to cater for this. And then on the allegation management, this is usually a topic that is always of interest. As you know, and I've shared with you before, we have a very enhanced allegation management process and, particularly, a very enhanced tool to ensure end-to-end case management from allegation to remediation, and that helps also the organization to act quickly and with high standards in all process steps. Overall, we can say the volume of allegations at the group level has steadily increased, showing a strong Speak Up Culture and a good understanding of the ethics and compliance program since 2019. We will publish our annual statistics in our annual report, as always, and we also will then, next year, tell you more about how we interpret that. But for us, our Speak Up Culture is so important that we believe these statistics underpin our great efforts in the Speak Up Culture. Giving you now a bit more concrete example and I want to highlight here our compliance trainings that we have totally redesigned. We have transformed the ways we work and not only in ethics and compliance, but across the organization, as our approach, how we run trainings, has now been adopted by various other functions and companies. So where we started, usually basic compliance training for all employees, often online, are perceived as click-through. But since 2019, we have invested significantly in transforming Ericsson mandatory training from required to desired, leveraging the unique role it plays in helping our people know better what to do and do better. Manager training uniquely reaches over 110,000 employees, and they ask for their dedicated attention and focus, which totals to a significant productivity investment demanding on equally massive culture return on investment. This investment begins for us systematically prioritizing ethics and integrity as part of Ericsson's global critical skills learning program and a focus on using purposeful, character-driven, serious storytelling with narratives and [ scenarios ] that feel real and resonate with people they can relate to and relevant for both online and in-person training. And what you can see here on the left side are pictures from one of our watch parties where we have invited all of our colleagues to attend the training together, making this as an incredible experience. We serve popcorn and it was more of a Netflix-like movie, they had to watch and at the end, answer a couple of questions to test if they have really understood the content of the training. And all these efforts have resulted in an external industry-wide recognition in the forms of various international training awards we have received. But more importantly, our cultural transformation is well evidenced by our employees embracing compliance trainings nowadays. That brings me to the next slide and the example of a Speak Up newsletter. That is another great example with our focus on speak up and, of course, listen up, driven through initiatives like this newsletter that we, since 2020, have been consistently promoting and publishing to encourage employees and external stakeholders to come forward with their concerns in corporate and investigations. We have been stressing that they should not have any fear of retaliation because everyone who raises concerns in good faith will always be protected. In this monthly global newsletter, we have changed the approach to a monthly cadence shares really anonymized cases and their outcome using an interactive feature that allow the audience to engage and learn. In this newsletter, we also celebrate gatekeepers who spoke up and did the right thing, a very important element of our strategy to also promote best practices. And after publication, oftentimes, the newsletter content is reused and amplified, for example, in local compliance cafe meetings with the local leadership, and they can all reflect and speak about that. Coming now to the next concrete example with our external engagement strategy that is already up and running. I just came off this week yesterday, I came home from Atlanta in the United States, where I was honored to participate in the United Nations conference on the convention of corruption. That's a 20-year anniversary. And usually, all the state parties are only invited, so governments, but for the very first time, also private sector companies were invited to speak about the fight of corruption and how important it is that the private sector plays also a vital role in doing so and does not leave it up only to the government. And I can clearly say this was one of the highlights of the year to be on stage, represent Ericsson and talk with the U.S. State Department and other peers in the industry to inspire people, how we can help integrity in the small and medium enterprises, in particular, in the supply chain to achieve integrity. Next example that is a very tangible example is that Ericsson has also started this year to work heavily with the OECD and other authorities globally to contribute and co-author papers to help others in the industry to learn with best practices, like I have shown to you today, Speak Up road shows, Speak Up newsletter, trainings. So that had led to a publishing of a paper shaping the values for a sustainable future that just came out last week and was published by the OECD and should inspire other peers in the industry. Yes. That brings me to my last slide, and that is basically the monitorship end game, we call it because we are now at the end of the monitorship terms. And this is the time line here. So we will receive tomorrow the final monitor report that they have reviewed Ericsson efforts this year, and we will receive the final report tomorrow. Then there might be some recommendations or time lines for adoption, whatever the monitor comes up with. And then already next year, in Spring, the monitor will certify to U.S. authorities like Ericsson that we have implemented a state-of-the-art ethics and compliance program and respective controls and officially the monitorship will end June 2. And that's it from my side for today. Happy to answer any questions. Thank you.

Thank you, Jan. And also thank you, Heather. So it is now time for the Q&A session. [Operator Instructions] So with that, operators, do we have any questions in the queue?

We have no questions at this time. Please continue.

Okay. If we don't have any questions, then I guess we'll wait for few minutes to see if there will be any questions coming up. Otherwise, we should conclude the exercise. Operators, still no questions available in the queue?

No, there are no questions in the queue.

Okay. That was crystal clear, Jan and Heather, obviously, very good. So with that, I would thank you, everyone, for participating in the update for core business sustainability and responsible business. We will be back here in the next event will be on the 23rd of January when we report our Q4 earnings. So with that, I wish you all a happy holidays as those approach. And thank you very much.