Latest Scandal Leads to Intense Self-Scrutiny by Defense Firms
From the start, Unisys Chairman W. Michael Blumenthal knew there was a danger that the conduct of some units of Sperry Corp., the company he was taking over two years ago, might not measure up to his exacting ethical standards.
Still, as he merged Burroughs Corp. and Sperry to form Unisys, Blumenthal was determined to make it a tenet of the new firm’s corporate culture that wrongdoing would not be swept under the rug.
To that end, the former Treasury secretary hired a one-time Watergate prosecutor to construct a tough program of internal oversight for the new firm. And the in-house policing paid off late last year, uncovering misconduct by some former Sperry employees on Long Island.
Yet as Blumenthal vacationed in June on the Portuguese shore, he still was unprepared for the news that Unisys, through the alleged misdeeds of a network of ex-Sperry employees, had been sucked into the vortex of an embarrassing, potentially costly and highly publicized federal investigation of Pentagon corruption.
“Given the complexities of the defense business, there was always a risk,” Blumenthal reflected in a recent interview. But the extent of the alleged wrongdoing left him “shaken, angry, upset and concerned,” he said. “I certainly did not know we would run into the problems that had unfolded.”
Like top executives and directors of the 15 other companies named in the far-reaching procurement probe--including such defense industry giants as Litton Industries, McDonnell Douglas, Northrop and United Technologies--Blumenthal has spent the weeks since his Iberian idyll scrutinizing his organization as he struggles to cope with another in what seems an unending stream of defense industry scandals.
Unisys has acted more forcefully than its competitors--firing workers it suspected of wrongdoing, terminating its contracts with 60 defense consultants, cutting its ties to a tiny Florida supplier deeply enmeshed in the investigation.
But throughout the defense industry, at companies that employ tens of thousands of Southern Californians, internal investigations also are under way.
Executives and outside directors are trying to avoid being surprised by further government disclosures. Lawyers are readying defenses and challenging a new onslaught of federal oversight. Auditors are tightening controls.
And defense industry leaders are struggling to find a public stance that can breathe new life into their claim that they deserve the public’s and the government’s trust even as their credibility endures a new test.
“You wonder--are we like Sisyphus?” Boeing Vice Chairman Malcolm T. Stamper asked in a recent speech in Los Angeles to an industry group, refering to the character in Greek myth who is a symbol of futility. “Eternally pushing the rock up the hill only to have it roll down again whenever it neared the top?”
Even defense companies, such as Boeing, that have not been implicated in the scandal are re-evaluating their policies and procedures in realms on which the procurement investigation seems to focus.
“You’d be not too bright if you didn’t go in and canvas everything you’re doing,” Stamper observed in an interview.
Foremost, responsibility for the hiring of consultants is under review. A number of companies are taking steps to require high-level executive approval of consulting contracts, in the wake of disclosures that the FBI is investigating whether high-paid consultants engaged in bribery and collusion to obtain sensitive market intelligence or to influence defense contract awards.
Unusual Authority
Officials of Litton, McDonnell Douglas, Teledyne, Varian Associates, Loral, Boeing and Unisys all say their use of consultants is being studied, and several firms have disclosed that they terminated the contracts of consultants named in the federal probe.
Executives at some companies have been surprised to learn that mid-level and divisional managers had authority to hire the consultants whose alleged misdeeds have come under investigation.
“They probably should have had better controls,” said Daniel M. Healy, director of the government contracting practice at the accounting firm Peat Marwick Main & Co. “Now they’re looking to develop them.”
Companies, under pressure from the Pentagon, have begun to re-examine the marketing activities--from gleaning defense budget projections to assessing rivals’ bid proposals--that help them win lucrative Defense Department contracts.
Industry and government officials are in general agreement that as the Pentagon develops new weapons, planes and electronic systems, the defense officials who will buy the products must be in constant contact with the companies that will produce them.
But the current investigation--like the indictments of GTE and ITT’s Gilfillan Division within the last three years on charges of illegally obtaining confidential procurement data--has made it clear that the margins of acceptable conduct in information collection are not universally understood.
“The information gathering which appears to be the focal point of this investigation is such a common and accepted thing that only until the past year or two has there been a perception that the government would look upon that as criminal,” said Thomas L. Patten, a Washington lawyer who represents several companies named in the federal inquiry.
Certification Asked
While industry executives have been quick to denounce as indefensible conduct of the kind described by federal investigators, they have not embraced the one concrete step proposed by Defense Secretary Frank C. Carlucci to crack down on the improper acquisition of procurement data.
Carlucci wants the 16 companies named in the investigation so far to certify in forthcoming contract competitions that all the information on which their bids are based comes from Pentagon contract officers or widely available sources. If they were later found to have won a contract using improperly obtained information, they could forfeit up to 10% of their profits.
Just three companies--Unisys is the only one to have identified itself--have agreed to the certification plan, according to the Defense Department. Publicly, many of the others will say only that they have questions about the proposal that they hope can be resolved in discussions with Pentagon officials.
But industry lawyers say Carlucci’s plan is badly flawed.
“There’s some vagueness attached to it as to what is improper information--the government doesn’t even have a consistent definition of that,” said Patten. “Second, how can you know that you don’t have it?”
Donald Fuqua, president of the Washington-based Aerospace Industries Assn., says his group, which represents about 50 of the largest defense contractors, is studying the certification proposal and hopes to meet with top Pentagon officials to develop a consensus on the broader issue of information collection.
Industry lawyers, in addition, will play a major role on a blue-ribbon task force created by the American Bar Assn. early this month that will recommend changes in laws, regulations and corporate policies on the exchange of procurement-sensitive data.
Meanwhile, employees of defense firms--and investors in defense stocks--have remained pretty much in the dark about the companies’ responses to the procurement scandal.
Last week, companies began complying with a Securities and Exchange Commission reminder to make public disclosures about the possible consequences of the scandal. But the statements tended to be vague: Most firms said too little is known about the probe to allow for specifics.
Left in the Dark
At several companies, chief executives have issued open letters to workers. McDonnell Douglas Chairman and Chief Executive John F. McDonnell, for instance, has provided some new detail about the firm’s foreign sales and consulting deals. But for the most part, the letters have consisted of promises that government allegations were being fully investigated and reminders that the companies expect employees to adhere to stringent ethical standards.
The industry, meantime, is groping for a way to sustain the drive for greater self-policing that was its response to the last major defense scandal--the inflammatory reports three years ago of time-card cheating, expense padding and exorbitantly priced spare parts.
That imbroglio prompted 46 firms to sign onto the “Defense Industry Initiative,” a pledge to train employees in business ethics, encourage reporting of violations and monitor compliance with procurement laws and ethics rules.
But the new investigation has tarnished much of the initiative’s public relations gloss. “This whole thing has cost them about a year-and-a-half worth of good will,” said Gordon Adams, director of the Defense Budget Project, a Pentagon watchdog group in Washington.
‘Doesn’t Do Enough’
Stamper, of Boeing, says the procurement scandal must be used as a club to get more defense firms to adhere to the initiative. “We’re at 46 and kind of stalled out,” he said. “I think that’s a crime. I think we need a push by the industry to enroll the whole world.”
Others want the industry to do even more. “The Defense Industry Initiative doesn’t do enough, it doesn’t cover the real issues,” said C. Stanley Dees, a Washington attorney whose firm represents several companies subpoenaed in the investigation.
“I think it needs to be replaced with a self-governance program which gives more emphasis to constant education, internal auditing and compliance reviews,” added Dees, vice chairman of the ABA’s new task force.
Mostly, though, defense firms seem to be doing as little as they can publicly in reaction to the scandal while still appearing responsible.
Los Angeles-based Teledyne, the subject of an FBI search in the investigation, has decided, for instance, against changing any policies or acting against any employees based on what is known of the probe so far.
“I have to stress that what we have here is a search warrant, and a search warrant is a long way from anything else,” said Berkley Baker, the firm’s spokesman.
Even Unisys, where Blumenthal says no holds will be barred, has managed its public response with exquisite care. “We are in the midst of a very difficult and delicate process, and we cannot pursue that process by means of press releases,” Blumenthal said.
The company’s SEC disclosure last week described the balancing act succinctly.
“Unisys is cooperating with the investigating authorities,” the firm said, “but also intends to pursue all available defenses and means to mitigate the consequences of any such investigation.”
Jim Schachter reported from Los Angeles and Douglas Jehl reported from Washington. Contributing to this story were Times staff writers Mark Arax, George Frank, Carla Lazzareschi and Robert W. Stewart in Los Angeles and Greg Johnson in San Diego.
