ARTICLE

January 2004

Corporate Self-Governance Remains an Imperative

by Lawrence P. Farrell, Jr.

The ethics-related issues that have put the defense industry on the front pages in recent weeks obviously have prompted concerns among business leaders.

As the industry prepares to deal with the long-term implications of these latest developments, it is important for NDIA to reaffirm that ethics and self-governance are imperatives in the defense sector.

Some of our National Defense readers may recall I made the same point two years ago, when I raised the issue of business ethics in light of the imminent defense buildup the nation was about to begin, in preparation for the war against terrorism.

My point then was that the expected surge in defense spending came with the potential for procurement irregularities. Many of you remember that the defense buildup of the 1980s unfortunately spawned a number of procurement scandals and investigations, most notably Operation Ill Wind.

Between 1986 and 1990, a number of companies and individuals were convicted of misconduct in dozens of defense programs. In my January 2002 editorial, I noted that we needed to remember those lessons, and make a special effort to avoid the errors of the ‘80s.

The NDIA Board of Directors had raised that very issue in our 2001 fall meeting. The board deemed it an appropriate time to reaffirm the principles of the Defense Industry Initiative (DII) on Business Ethics and Conduct, a consortium of companies created to foster a heightened standard of ethical conduct by every employee in the defense industry.

As of January 2003, 45 defense companies were signatories of the DII.

The DII is an outgrowth of the 1986 Blue Ribbon Commission on Defense Management (known as the Packard Commission), established by President Ronald Reagan. At the time, public confidence in the defense industry had been eroded by reported instances of fraud and waste. The commission concluded that the defense acquisition process, as well as the defense business environment, could be improved by placing greater emphasis on corporate self-governance. As a result of this recommendation, defense contractors voluntarily embraced and promoted the principles of this initiative.

DII promotes self-policing as a means of confirming management’s commitment to abide by ethical standards—even when they exceed legal requirements—and of discovering and correcting instances when conduct falls below these standards. It also encourages companies to share best practices in dealing with ethics and business conduct issues.

The DII signatory companies are required to adopt a written code of conduct, to implement employee orientation and training with respect to the code, to provide employees with a mechanism (such as a hotline or helpline) to surface concerns about corporate compliance with procurement laws and regulations, to adopt procedures for voluntary disclosure of violations of federal procurement laws and to participate in best-practices forums.

In the wake of the latest controversies in the industry, it is not surprising that lawmakers are calling for congressional hearings, and for increased scrutiny and oversight. NDIA believes that the defense industry can tackle the need for ethical self-governance via efforts such as the DII, without having to invent a new organization or agency.

Interestingly, an article in the December 2003 edition of Ethical Corporation Magazine notes that the defense industry has been “at the forefront” of the ethics movement. “Today, by almost any ethical measure, the defense business in the United States faces far fewer scandals than almost any other part of American business landscape—certainly fewer than the communications, financial and health industries,” writes Jon Entine, a scholar at Miami University, Ohio, and adjunct fellow with the American Enterprise Institute in Washington, D.C.

In our most recent NDIA Board of Directors and Trustees meeting, the issue of ethics took center stage. The board approved the creation of a special committee dealing exclusively with ethics. The committee will direct the association’s position regarding ethics governance. NDIA also included ethics as one of its top issues for 2004.

We expect that we will be encouraging every one of our 1,100 corporate members to sign on to the DII. (Information on how a company may join the DII is on the Web, at www.DII.org).

As we develop additional information on this initiative, we will keep you informed.

Please e-mail your comments to lfarrell@ndia.org

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