Defense Firms’ Self-Policing Hasn’t Closed the Ethics Gap

Two years ago--amid allegations of fraud, headlines about slush funds and congressional hearings into $600 toilet seats--the nation’s largest defense contractors sought to salvage their image and stave off tighter government oversight by pledging to police their own ranks.

Forty-six defense giants signed onto a “Defense Industry Initiative,” promising to adopt codes of ethics, train their workers in ethical conduct and encourage whistle-blowing without fear of retribution.

But the companies went only so far.

Rather than give up a competitive edge in the dogged scramble for Pentagon contracts, the defense industry stopped short of agreeing to standards for its conduct in the gathering of secret or sensitive data from military customers.

All of a sudden, that omission is looking rather costly.

‘Locks on Doors’

A new procurement scandal--focused squarely on charges of an illicit traffic in market intelligence--has raised the prospect of defense executives once again lined up outside a grand jury’s door. Defense consultants, contractors and high-level Pentagon officials are suspected of illegally peddling top-secret technical and competitive data.

Emboldened by the revelations, industry critics again are calling for tough action against defense companies, new laws and stricter enforcement of the scores of existing rules designed to keep the Pentagon’s $150-billion per year in purchases above board.

And Congress is turning a skeptical eye on the whole notion of self-policing, provoked by Pentagon officials’ disclosure in the wake of the scandal that 37 of the 46 signatories to the industry initiative are under investigation in no fewer than 250 cases of contracting misconduct.

Ethics experts say defense contractors--and the public--should not have expected differently.

“I don’t think the government can feel comfortable that self-policing will work,” said Joseph H. Sherick, the Defense Department’s first inspector general, who retired in 1986. “You have to believe that human beings are human beings. That’s why we have locks on doors.”

For all the scandal that has buffeted Pentagon spending, ethics experts say defense firms have done better than companies in less visible industries in focusing their employees’ attention on the ethics of conducting business.

“There is no trade association program that comes close to the effort that has gone into the Defense Industry Initiative,” said Kirk Hanson, a lecturer at the Stanford University business school and a consultant on business ethics.

Still, analysts say the defense companies’ record stands out only in comparison to the meager commitment of most of American industry to elevating the business world’s ethical baseline.

And nowhere has corporate America done less than in setting standards for the gathering of market intelligence. In that arena, only two of the 600 corporate ethics codes collected by the Washington-based Ethics Resource Center offer clear, stern guidance, Executive Director Gary Edwards said.

The defense industry had more reason than most to regulate its conduct in collecting sensitive data. With the Reagan Administration’s insistence on heightened competition in defense procurement, top executives knew the industry was particularly susceptible to an information-peddling scandal, Edwards said.

“The very scandal we’re talking about--the gathering of competitors’ intelligence by illicit means--is something that has been a subject of discussion, and intense discussion, at the senior levels of management in at least two dozen of the defense contracting firms we’ve had discussions with in the last two or three years,” Edwards said.

Yet most of the companies failed to act on these concerns. The reason? Defense industry chiefs, like business leaders in other highly competitive fields, didn’t want to find themselves all alone on the high road, Edwards said.

May Have Blind Spot

“There’s a presumption on the part of most of the executives within the industry with whom I’ve spoken that their competitors are not going to constrain their marketing people in going after your proprietary information,” he explained. “Therefore, if you restrain your own, you’re at a significant competitive disadvantage.”

John R. Stocker, a Rockwell International vice president in El Segundo, disputes the notion that large defense contractors have failed to take a responsible stand against the misappropriation of market intelligence.

“The law makes it pretty clear that you can’t give or accept bribes, that you can’t pay or offer kickbacks or bribes, and I’d be surprised if there’s confusion in the industry on that point,” said Stocker, who sits on Rockwell’s business standards compliance committee.

Alan Yuspeh, director of the industry initiative, said, too, that it is unfair to suggest that defense executives had purposely ignored intelligence gathering in designing the ethics program. But he conceded that the initiative may have “a blind spot” in that sphere.

“Events would suggest that this is the case,” Yuspeh allowed. “This is an area where the companies need to do better.”

One firm that has taken a strict line is Hughes Aircraft. “You should not seek nor accept information from any competitor or from any customer or potential customer to which we are not legitimately entitled,” say the Los Angeles-based company’s Standards of Business Ethics and Conduct. “In addition, you are not permitted to seek or accept information which has been obtained illegally.”

Strict standards are not always easy to apply. The ethics policy at Baltimore-based Martin Marietta is worded much like Hughes’. But Winant Sidle, the company’s ethics director, concedes that the policy would allow an employee to use information he overheard a competitor discussing in a restaurant or bar.

“There just have to be some gray areas,” Sidle said.

“Gray area” or not, an information-peddling scandal is about the last thing the defense industry needed with the nation’s military buildup ebbing and the presidential election campaign virtually guaranteeing a debate over the Pentagon’s place in America’s budget priorities.

Public confidence in the industry already was at a low ebb. A national survey conducted in 1986 for a presidential commission that reviewed the procurement process found that Americans believed almost half the defense budget was lost, in equal measure, to waste and fraud--and that they blamed defense contractors for the losses. The commission, led by Hewlett-Packard Chairman David Packard, termed the finding “a striking vote of no confidence in defense contractors generally.”

Even before, some defense firms had taken well-publicized steps to burnish their images and instill a greater sense of rectitude in their employees.

Sanford N. McDonnell, then chairman of the country’s biggest defense contractor, McDonnell Douglas, revamped the firm’s code of ethics in 1983 to parallel the code of honor of the Boy Scouts of America, of which he once was national president. McDonnell, who long had made ethics a cornerstone of his mission as the firm’s top executive, required employees to attend all-day ethics seminars and gave talks around the country on the importance of business ethics.

Yet McDonnell Douglas hardly has been spared the taint of scandal.

Federal agents last month searched the St. Louis offices of five top company executives, looking for evidence in the ongoing procurement probe.

Court records in the case say the FBI is investigating whether the company made payments to then-Assistant Navy Secretary Melyvn R. Paisley, whether Paisley steered the contract for the advanced tactical aircraft to McDonnell Douglas and whether Paisley passed along secret government documents to his contacts at the firm. Paisley became a consultant to the company after he left the Pentagon last year.

Entertained Officials

Even at the time it was launched, some employees questioned the sincerity of McDonnell Douglas’ ethics campaign. John R. Betzler, who rose to be director of the company’s military aircraft group in a 21-year career, charged in a lawsuit that he was fired in 1984 for bringing evidence of unethical conduct to the attention of his superiors--including Sanford McDonnell.

An Arlington, Va., jury rejected the claim in March. But company records that became public in the legal proceedings indicated that McDonnell Douglas employees regularly entertained Pentagon officials as part of the firm’s efforts to win contracts despite the government’s ban on offering gratuities to federal employees.

The company was not disciplined for its conduct, according to Jim Reed, a McDonnell Douglas spokesman in St. Louis. A company lawyer said the meals and entertainment were common industry practice.

“Especially at the Pentagon, it was the practice of everybody in town,” the attorney said. “If you’re having lunch with somebody in the government, the check comes and they just sit there, you don’t have much choice. You pick it up.”

It was only when the military began holding companies to the letter of the anti-gratuity rules that McDonnell Douglas altered its policies to adhere to the regulations, the attorney acknowledged.

Critics of the Defense Industry Initiative say it is geared to just such issues of compliance, emphasizing the need for defense workers to follow the government’s ethics rules rather than nurturing an ethical approach to all business activities.

“Compliance-driven efforts run the risk of communicating that companies want nothing more than compliance and that they don’t have an ethical agenda at all,” Hanson said. “The Defense Industry Initiative is useful, but if it doesn’t go beyond where it is, it is only a Band-Aid, not a solution.”

In fact, some defense firms’ ethics efforts do go beyond compliance. While Rockwell International, for instance, trains its workers in the details of complying with government procurement rules, it also has required more than 44,000 employees to attend four-hour “ethics awareness” workshops that force them to weigh the ethics of specific business situations.

The idea is to instill a sense of ethics beyond the do’s and don’ts of a rule book. “It isn’t really addressing . . . individual ethics, if an individual’s ethical responses are rule-dependant,” explained Stocker, the Rockwell vice president.

To underscore the point, last year Rockwell voluntarily told the Defense Department that it had discovered evidence of a $337,000 double-billing on a $1.2-billion Air Force satellite navigation system. The company said it repaid the money, fired one manager and disciplined another.

Never Meant as Amnesty

However, Rockwell executives have claimed that the confession was turned against them when the U.S. government several months later charged the company with criminal fraud in connection with the disclosure.

The prosecution represents the first time a defense contractor has charged with violations it voluntarily disclosed under the Defense Department’s Voluntarily Disclosure Program, a cousin of the Defense Industry Initiative also spawned by the Packard Commission.

But the disclosure program, said one Defense Department official, was never intended to be “an amnesty program where you come in and all your sins are forgiven.” Instead, the department’s guidelines provide that contractors making voluntary disclosures will receive favorable consideration if they cooperate fully with the investigation.

As the Rockwell case demonstrates, the Pentagon apparently is not prepared to settle for self-policing as a substitute for disciplinary action.

Derek Vander Schaaf, the Defense Department’s deputy inspector general, noted that a whopping 80% of the Pentagon’s procurement fraud cases were generated by investigation, not voluntary disclosure by defense companies.

The realities of a competitive business environment limit the degree to which government can rely on the defense industry to monitor its own conduct, added Sen. Carl M. Levin (D-Mich.), whose government affairs subcommittee has studied Pentagon ethics regulations.

“The pressures are too much out there to ignore the standards,” he said, “for us to have a hell of a lot of confidence in self-policing.”