ARTICLE

March 2004

Small Companies Need Ethics Programs Too

by Richard J. Bednar

Wrongdoing may come to any organization, large or small. It may be surprising to many that the overwhelming majority of companies suspended or debarred from government contracting are smaller firms.

With the intense attention being given to responsible company governance, and with all the competitors, government auditors, inspectors, investigators and regulators watching defense contractors, the risk of trouble is high.

Most defense industry owners and managers recognize that contracting with the government involves many business risks.

They also understand that, under U.S. law, the company is criminally liable for the criminal acts of its employees done in performance of their duties.

Criminal misconduct by a single employee, even a rogue employee acting contrary to company policy, can bring the company down. Yet, some smaller businesses defer setting up an effective program to deal with these risks under the assumption that the costs of such program are prohibitively high. Nevertheless, a smaller company can set up an effective program at a modest cost and without adding to headcount.

The Defense Industry Initiative on Business Ethics and Conduct (DII)— focused on defense industry ethics and conduct programs since its inception in 1986—has developed a “tool kit” to help smaller defense contractors plan ethics and conduct program. The “tool kit” is publicly accessible at www.dii.org.

There are two essential parts of an effective company program: ethics and compliance.

Compliance means knowing and following the rules that apply to defense contracting. Given the nature and extent of the particular defense business, the company must determine what are the areas of high risk of noncompliance. For example, the compliance risks for a company selling commercial products are much different from the company manufacturing to government specifications. Fixed-price contracts present different risks than cost-reimbursement contracts, and service contracts involve risks much different than supply contracts. Subcontractors have risks different from the prime contractor. Accordingly, step one is to identify the specific risk areas for the particular business with the associated rule.

Following are more examples of “risk areas:”

Business courtesies to government officials. Unless infrequent and of minimal value the courtesy may be regarded as an illegal bribe or gratuity.

Sloppy labor charging. Charges must be strictly accurate and charged to the right contract or may result in a false invoice to the government.

Environmental protection. The Clean Air and Clean Water Acts carry heavy penalties.

Kickbacks from suppliers. Prohibit buyers and others from accepting anything of value from vendors and suppliers

Training Personnel
Once the risk areas and corresponding rules have been identified, the next step is to single out personnel whose duties are associated with the identified risk areas and to train them.

Unless the training relates specifically to the employees duties, the eyes will quickly glaze over and the attention will melt away. Classroom training may be appropriate, but “table-top” and “tail-gate” talks can be more effective for some employees. Training also may be part of regular staff meetings. Compliance training needs to be repeated as necessary. This is not a matter of “fire and forget.”

The ethics part of the program is the most important. The emphasis here is not on rules to be obeyed—a litany of “shall nots”—but rather an affirmative expression of the core values of the company that, when given visibility, should encourage ethical conduct and add real value to business operations. Customers and suppliers know which are the good companies and which are to be avoided.

Determination of these core values involves some introspection and discussion with key employees. Values may be identified by asking such questions as “How do we want to be perceived by our customers? What do we stand for? What is most important to us? What is most important to our stakeholders?”

Ethics is not a series of rules to be followed. Ethics reflect the fundamental values of the company or owner, passed down through supervisors. To be effective, the boss’ expression of these values must be sincere, must ring true. If the boss is faking it, the employees will know and will ignore what the boss is saying. The employees will judge the sincerity both by the boss’ words and by how he or she acts. If the boss says he or she believes in honesty, yet exaggerates in preparing competitive proposals, the ethics lesson is obvious.

The principal business benefit of determining and teaching all employees the company’s core ethical values is to provide conduct reference points in the organization such that, when the inevitable ethical dilemmas arise, the employee is more likely than not to make the right decision.

Once the company has identified the key compliance risks for the particular business and has determined the company’s values, there are sources of guidelines to help build an effective program. All guidelines have the following common elements:

• Establish standards of ethical conduct and compliance controls that are reasonably capable of reducing the propensity for violations of law.
• Designate a specific high-level person as responsible for promoting these standards and controls. In smaller companies, this may be “dual-hatted” without adding to headcount.
• Deny discretionary authority to persons with a propensity to cut corners or succumb to pressures. (An alert manager knows who they are: “Everyone is doing it,” “No one will know,” “This less costly way will work—the government always overspecs.”)
• Teach and coach employees to know and adhere to the standards and controls. Employees do what they believe the boss really wants.
• Monitor adherence to the standards and controls on an ongoing basis. Consider setting up an internal mechanism for receiving reports of suspected improper conduct.
• Take appropriate disciplinary action for improper conduct. Misconduct left unpunished sends the message that the compliance and ethics program is really hollow.

Sources of Information
In addition to the DII web site, guidance may be found in:

• FAR 9.406-1(a), guidance expressed in terms of “mitigating factors” for debarring officials to consider.
• DFARS Subpart 203.70, “Contractor Standards of Conduct.”
• U. S. Sentencing Guidelines Manual, chapter 8, available at http://www.ussc.gov/2002guid/tabconchapt8.html.
• Environmental Protection Agency, “Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention,” 65 Fed. Reg. 19618 (April 11, 2000).
• Memorandum from Deputy Atty. Gen. Larry Thompson to Heads of Departments and U.S. Attorneys, “Principles of Federal Prosecution of Business Organizations,” Jan. 20, 2003, available at http://www.usdoj.gov/dag/cftf/business_organizations.pfd.

Richard J. Bednar practices government contract law with the D.C. firm of Crowell & Moring LLP. A former Army debarring official, he also coordinates the programs and activities of the DII.

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