The Business of Ethics

Marion C. Blakey, President and CEO
June 6, 2013
Good morning ladies and gentlemen.

I have the daunting task this morning of talking to you about a subject that most of you, as the saying goes, have forgotten more about than I’ll ever know.  I can tell you, however, that I did learn how not to approach the subject of ethics from a line attributed to a favorite moral philosopher of mine, a reputed Marxist. As Groucho Marx famously stated when cornered about a dubious position, “Those are my principles, and if you don’t like them…well I have others.”

But seriously, I’m extremely honored to speak to you as AIA is a staunch supporter of the goals of the Defense Industry Initiative on Business Ethics and Conduct.  In fact, AIA’s own statement of values starts by affirming the need to uphold the highest ethical standards among our member companies.

With the importance of this commitment in mind, let me applaud all of you for your dedication on this issue.  Believe me your work is greatly appreciated by government and industry leaders with whom I work on a daily basis.

These are people like the members of your CEO panel, Marillyn Hewson of Lockheed Martin, Wes Bush of Northrop Grumman and Dennis Muilenburg of Boeing.  These executives know that the good name of their companies and that of their peer organizations depends upon the quality of their products and services, and their ethical behavior.

Today, I want to talk about the business of ethics.

While we normally talk about ethics in terms of what it means to do the right thing, pragmatically good ethical behavior helps company bottom lines.  From a pure financial perspective, strong ethics and compliance programs can help reduce costs in the face of strict legislation and increasingly expensive penalties –  to say nothing of protecting corporate reputations.

On this subject of corporate reputations, I’m reminded of a great story about Warren Buffet.  A while back he was dealing with the ethical problems of a company that Berkshire Hathaway had an ownership interest in.  When compelled to discuss those problems before Congress, Buffett made it clear that things would change.  “Lose money for the firm, and I will be understanding,” he said.  “Lose a shred of reputation for the firm and I will be ruthless.”  And that’s the way it should be.

As Warren Buffett knows and I hope we all know, companies with good ethics and compliance reputations are able to attract superior employees, customers, suppliers and business partners.

In this regard, I applaud the Defense Industry Initiative for developing a Supplier Code of Ethics for adoption or benchmarking by member firms.

There’s another business related ethics and compliance subject that I would like to address this morning.  I believe our companies must be profitable and ethical.  Without the ability for companies to succeed over time, it is much more difficult to sustain ethics and compliance activities.  Frankly, I’m very worried about our current budget austerity, and the inability of the administration and Congress to address the damage being done by sequestration.

To this point, AIA is surveying leaders of supply chain companies about sequestration impacts—the $500 billion in cuts to the Defense Budget on top of $487 billion in initial cuts the Pentagon is already absorbing.
While the survey results are still rolling in, the first set of responses are pretty grim.  For example, one representative company executive said his firm was experiencing “reduction in revenues, investments, employment and profitability.”

Another company leader said that due to sequestration, “I have had to lay people off and am in preparation to either close the business or put the corporation in dormancy by February 2014.”

To be certain, major contractors aren’t about going out of business, but they too are cutting all manner of business expenses, including for training sessions and travel to conferences where professionals stay current in their field.  No doubt many of your departments are directly experiencing the results of this austerity.

We’re also concerned that sequestration will hamper DOD’s compliance and audit activities, as the civilian furloughs kick in.  If DOD’s auditors are forced to take off eleven unpaid days the remainder of the fiscal year, imagine what this will mean for the backlog of cases you are dealing with.

As many of you know, AIA has led the fight against sequestration.  And by no means are we giving up this fight.   The impacts are starting to accumulate in the public’s consciousness and I believe it’s just a matter of time before public opinion decisively turns about this misguided policy.

Last Sunday, Senator Barbara Mikulski of Maryland wrote an excellent commentary in the Washington Post that I urge you to read and share with others. Senator Mikulski wrote, and I quote:  “We can continue down a path of unsustainable cuts to national defense and domestic investments necessary to our future, or we can come together, across party lines, to replace this failed policy with one that will fulfill its intended purpose: responsible, balanced deficit reduction.”

I couldn’t agree more.  We continue to seek a balanced, bipartisan solution to sequestration.  And we know that there are a growing number of legislators on both sides of the aisle who recognize sequestration as a bad policy, and who genuinely want to find a solution.

Now returning to the subject of how this budget era’s challenges affect the work of ethics compliance I want to draw to your attention to a couple related issues.

In order to meet the needs of our nation, this era’s budget challenge demands a well thought out strategy – one that balances business outcomes while maintaining our adherence to high ethical standards.  To reduce acquisition costs, the DOD has initiated Better Buying Power 2.0.

While we generally support this initiative’s goals, AIA has expressed to Under Secretary Frank Kendall our concerns that his implementation memorandum of April 24th missed key opportunities to improve the defense acquisition system, reduce costs, and produce better outcomes for our war-fighters.

For example, our industry would welcome the opportunity to work with the DOD to assess the costs and benefits of regulations and oversight.   In order to drive maximum effectiveness out of every budget dollar, our aim is to eliminate those regulations costing more to comply with than the benefit received.  Similarly, we suggest the DOD evaluate the costs and benefits of new regulations in the aggregate.  As is often the case, while individual regulations may sound good when viewed in isolation, in total they can be unduly burdensome.

Also, the implementation memo took a “one size fits all” approach to regulating small, mid-sized and large businesses.  We felt compelled to flag this for the Pentagon’s attention as the regulatory environment has to accommodate all players.

A third opportunity we’d like to see the DOD seize to maximize bang for the buck is the use of commercial off the shelf and modified off the shelf solutions.  Clearly these products and technologies can improve the affordability of defense systems.

In the current fiscal environment, DOD and industry must work together to reduce costs and eliminate unnecessary burdens.  This is not the time to create needless complexity in the system and take backward steps on acquisition reform.

We believe well-crafted acquisition reform benefits industry, DOD and the war fighter. The government’s acquisition system has been through several generations of reform.  At AIA, we intend to remain close partners with the DOD to make the newest generation of acquisition reforms strong and positive.  Our war-fighters deserve nothing less.

A final issue related to the budget crunch is our industry’s increasing reliance on international sales to help their bottom lines.  While this is a welcome development, it does bring to the fore issues of how we conduct ourselves in selling our products abroad and how export sales are regulated, including compliance with the Foreign Corrupt Practices Act.

Because export growth is vital for the sake of the industry’s health it is incumbent on all of us to ensure that we remain on the straight and narrow when it comes to foreign business practices.  It’s also important to encourage our foreign partners and competitors to do the same.

In this regard, AIA deeply appreciates the active support of the Defense Industry Initiative and many of its members for the International Forum on Business Ethical Conduct that we help administer with the AeroSpace and Defense Industries Association of Europe.

We will do our part to encourage vigilance with compliance programs, especially since Foreign Corrupt Practices Act compliance has become a priority for the Department of Justice and Securities Exchange Commission as American companies expand globally.  As we have witnessed with the recent cases of Morgan Stanley and Ralph Lauren, the government has made it clear that it will prosecute violators.
I might add, however, that the SEC has begun to recognize the importance of encouraging and rewarding strong compliance programs.  George Canellos, acting director of the SEC’s enforcement division stated at the time of the Ralph Lauren settlement that quote: “We will confer substantial and tangible benefits on companies that respond appropriately to violations and cooperate fully with the SEC.”

I expect many of you are taking advantage of the guidance issued by the DOJ and SEC last November, known as “A Resource Guide to the Foreign Corrupt Practices Act.” This guide explains many FCPA regulations and provides a compliance guide for business leaders.

We should also keep in mind that our industry’s commitment to FCPA compliance provides a strong foundation for compliance with other countries’ regulations, such as the United Kingdom’s Anti-Bribery Act.
In conclusion, our industry has a solid, hard-won reputation for delivering the best products at the best price to the U.S. war fighter and our allies to sustain and grow our battlefield edge and for maintaining the highest quality of ethical standards.  I know you are working hard to help our industry live up to its solid reputation, and I thank you for your dedication and commitment.

At AIA, we want to ensure that you have the tools you need to do your jobs well.  In this regard we will continue to work in partnership with government to make sure that we have in place needed but not overly burdensome compliance requirements.  And most certainly, we will continue to advocate for budget policies that fundamentally allow our companies the chance to succeed, and the means to put in place the mechanisms for maintaining strong ethics and compliance programs.

I thank you for your kind attention this morning and I wish you a most successful conference.