Excerpt
1. Introduction
“When in Rome, do as the Romans do” [1] is a saying that exists in many cultures all over the world. Although it is very old – it can be traced all the way back to the days of St. Ambrose in the fourth century – it briefly describes on of the major challenges companies face in today’s globalized economy. Should they follow a universal code of business behavior or adapt to the customs in a particular country. A classic case for this question is the Lockheed Case. In the early 1970s Lockheed had serious economic problems. Facing bankruptcy it secured a government loan of $250 million in 1970. In 1972 and 1973, briberies of the Japanese government were revealed. It turned out that the President of Lockheed, A. Carl Kotchian, authorized secret payments of $12 million to representatives of the Japanese Prime Minister, Kukeo Tanaka, to secure sales contracts in the Japanese aircraft market. As a result, both Prime Minister Tanaka and CEO Kotchian had to resign. Lockheed’s contracts in Japan were cancelled. A consequence of these incidents is the Foreign Corrupt Practices Act of 1997 that prohibits American corporations making payments to foreign governments to advance their business interests. In this paper, I will discuss certain topics related to this case and show, why Kotchian did not exhibit ethical behavior in his role as President of Lockheed.
2. Ethical Dimensions of Bribery
The opening quotation of this paper describes a view called “cultural relativism”. It states that the moral acceptability always depends on the circumstances in a certain culture [2]. So a cultural relativist would say that bribery is not wrong, unless it is considered wrong in a country. In contrast to that, “Universalism” states that objective ethical rules exist, that core universal ethical principles have to be applied, no matter in which country [2]. Bribery can be found more or less in almost all cultures. But even though it may be in some countries more common than in others, it is illegal almost everywhere, also in Japan. The Prime Minister was even forced to resign because of this back in 1973. So cultural relativism is not an appropriate excuse for Lockheed, because the law must always be seen as the ethical minimum. But why is it forbidden? The simple answer is, because it is unfair. It is unfair to competitors, because the principles of fair and open competition are violated. It is unfair to customers, because it harms their ability to choose the best product. It is also unfair to all citizens in a country, because they expect their government to act for their sake and not for bribes. The autonomy of all these groups is therefore seriously violated by bribery.
It is sometimes mentioned that bribery is basically the same as a commission and therefore not wrong. However, there are some clear differences between bribes and commissions. Commissions are standardized and their terms are valid and known to all players, whereas bribes are per definitionem secret. Unlike commissions, the nature of bribery is to give one player an advantage over its competitors. Bribes are also always paid before a deal is close, whereas commissions are usually due after the deal. These differences lead to the conclusion that bribes and commissions are very distinct things. However, because there are some similarities, the FCPA defines very clearly where payment resembling a commission is illegal. It divides bribery into three different forms. The first one is “Bribery vs. Extortion” [2], which means a payment that is forced under duress. The second one is “Bribery vs. lubrication or grease payment” [2], small amounts of money that encourage prompt performance and do not seek an unlawful advantage. The third and here relevant one is “Bribes vs. agents fees”, payments from companies to agents for help in doing business in foreign countries. If a U.S. company has reason to know that parts of this money is used to bribe local officials, the FCPA is violated. Because Lockheed’s President stated that he “knew from the beginning that this money was going to the office of the Prime Minister” [3], it is unquestionable that an unlawful case of bribery occurred, and not a commission.
3. The Lockheed Case with respect to Milton Friedman
Nobel laureate Milton Friedman is well-known for his theory of stockholder management. On the social responsibility of companies, he wrote the following:
“There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits as long as it stays within the rules of the game, which is to say, engages in free and open competition without deception or fraud.” [4]
It is important to notice that Friedman does not promote the unlimited pursuit of profits. The important words here are “the rules of the game”. There are attempts to derive a role morality for managers from this expression. An example for this is Chris Provis with his poker analogy [5]. He says business, particularly in labor negotiations, is like poker, where bluffing is not unethical but a part of the game. However, it is impossible to justify with Friedman bribery as part of the rules of the game, because Friedman defines these rules more precisely: “engaging in fair and open competition without deception or fraud”. What if not bribery undermines the principles of fair and open competition that is paramount for Friedman? Bribery reduces the completion for the best product to the competition for the highest bribe and is therefore suitable to destroy competition, as it can for example be seen in Russia right now [6].
4. The Drucker Analogy and Moral Imagination
CEO Kotchian did not try to defend the bribery with ethical reasons:
“From a purely ethical and moral standpoint I would have declined such a request.” [3]
Rather, he tried to justify it with the benefits of the resulting contracts:
“Such a cash inflow would go a long way towards helping to restore Lockheed’s fiscal health, and it would, of course, save the jobs of thousands of the firm’s employees.” [3]
This supports business guru Peter Drucker’s argument that business has been subject to unfair demands from ethicists. About the Lockheed Case he proposes an analogy:
“There was very little difference between Lockheed’s paying the Japanese and the pedestrian in New York’s Central Park handing his wallet over to a mugger. Yet no one would consider the pedestrian to have acted ‘unethically’”. [3]
This analogy, however, is flawed. First of all, he compares the life of a human being with the life of a company. That is very questionable. More importantly, he implies a situation of duress that did not exist in the Lockheed Case. A pedestrian has no other choice than giving the mugger his wallet. Kotchian wants to create the appearance that he had only two alternatives, either bribing the Japanese government or letting his company go bankrupt. He ignores that there are always more alternatives in business. There must have been possibilities to increase new revenues or to cut costs and thus save Lockheed. Werhane’s concept of Moral Imagination could be an instrument to avoid such black-and-white situations, where only the least of two evils seems available. He defines this concept as follows:
“The ability in particular circumstances to discover and evaluate possibilities not merely determined by that circumstance, or limited by its operative mental models, or merely framed by a set of rules or rule-governed concerns.” [4]
A different formulation for this would be to “think outside the box” or as [4] phrases it, “to take a step back and reevaluate a situation from another perspective. This would have been a good way to go for Lockheed. It might have helped to find different solutions to their fiscal problems, new products, new markets, a new marketing strategy or changes in operations. There are a lot of ways to bring a company back to success. Bribery is not one of them, as the example of Lockheed shows. In addition to the cancellation of all the Japanese contracts, it lost its CEO, lost a lot of image and was convicted of fraud and making false statements.
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