Leading Article: Good behaviour pays

BUSINESS ethics are a bit like the rules of war. Violations may bring short-term gains but usually at the price of lost credibility, damaged morale and retribution. That is what British Airways is now discovering. Lord King has greatly improved the airline's profitability and service to the public. But when passengers learn details of the dirty tricks perpetrated on Richard Branson's Virgin Atlantic, will British Airways still be able to advertise itself honestly as the world's favourite airline?

The catalogue makes nauseating reading. Employees of British Airways tried to poach passengers from Virgin, sometimes by extracting their home telephone numbers from the computer booking system. They spread damaging information about the company and other business interests of Mr Branson, withheld or impeded normal co-operation in maintenance and training, which could have affected safety, refused to honour the routine transfer of tickets, shredded incriminating documents, and so on.

Such behaviour would be barely tolerated in the back streets of the second-hand car business. In a major public corporation that in some degree represents the nation it is a disgrace. Lord King apologised yesterday to the High Court for alleging that Mr Branson invented these stories to gain publicity. Having earlier dismissed them as 'wholly without foundation', he now admits that some regrettable incidents took place which gave Mr Branson grounds for concern.

He still denies that the directors were party to a concerted campaign against Mr Branson, but Brian Basham, a public relations consultant responsible for some of the nasty work, has signed an affidavit claiming never to have acted without the knowledge or approval of the board. British Airways has now agreed to pay damages and costs amounting to several million pounds. There may be further court cases to test whether there have been violations of the 1984 Data Protection Act, Article 86 of the Treaty of Rome relating to abuses of dominant market positions, US anti-trust legislation, or other laws.

In the meantime, enough is known to draw some conclusions. Regardless of precisely who knew what or gave which orders, it is clear that the corporate culture of British Airways under Lord King was conducive to the type of behaviour described. He set out with the laudable aim of making British Airways leaner and more profitable but encouraged the competitive spirit to get out of hand until it crossed the frontier into unethical and damaging behaviour. Curiously, there was no real pressure to do so in response to Virgin, which presented very marginal competition in comparison with large foreign carriers. Why Lord King felt so threatened remains mysterious. He seems to have responded with irrational reflexes to Virgin's invasion of what he regarded as his territorial rights, particularly after he had swallowed British

Caledonian.

A certain level of ruthless cut and thrust is in the nature of competitive business. While legal limits are mostly clear, ethical ones are less so and depend partly on voluntary restraint. The United States is ahead of Britain in laying down codes of practice, and many companies set even higher standards for themselves to provide guidance for their employees and reassurance to their customers. They have discovered that building long-term confidence can be better for profits than seeking quick gains by cutting corners. There is even a charter to protect 'whistle-blowers' who report corporate dishonesty.

The same message is slowly spreading in Britain, where a few public-spirited companies have long demonstrated that ethical behaviour pays in the long run. More management schools are now setting up chairs of business ethics, and last month the Cadbury Committee brought out a report with practical structural suggestions for improving corporate governance.

A company with the prestige and public profile of British Airways should have taken the lead in setting standards of probity. Lord King has let it down very badly in this respect and should resign immediately. His designated successor, Sir Colin Marshall, remains tarnished by the war on Virgin and will therefore have to make especially strenuous efforts to set new standards and demonstrate that they are being observed. If British Airways cannot compete fairly on price and service, it deserves to lose business to Virgin.