Based on your readings, describe what you consider to be the responsibility of top leadership in a large organization with respect to reaching a balance between profits and stakeholder conc

Ethics at Work Terris, Daniel

Published by Brandeis University Press

Terris, Daniel. Ethics at Work: Creating Virtue at an American Corporation. Brandeis University Press, 2013. Project MUSE. muse.jhu.edu/book/23072. https://muse.jhu.edu/.

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chapter two

Success and Scandal

L   is the size of a small city, but its reach is global. Its , employees work in nearly  facilities scat- tered around forty-five states and dozens of foreign countries. Each year in the twenty-first century, the corporation has sold more than $ bil- lion worth of airplanes, missiles, detection systems, information plat- forms, launchers, surveillance devices, and a host of services to support and maintain all of this equipment. During the  Iraq War,  Lock- heed Martin airplanes flew thousands of sorties, four different Lock- heed Martin “smart weapons” were among the , guided missiles launched during combat operations, and these were just the beginning of the corporation’s equipment and services put to use during the con- flict. In early , in the wake of the September , , terrorist attacks and the Iraq War, the corporation had a backlog of more than $ bil- lion of equipment and services on order, the vast majority of it for the Department of Defense and other agencies of the U.S. government. Although a single corporate entity (LMT on the New York Stock Ex- change), Lockheed Martin consists of more than two dozen “heritage companies”: units, divisions, and even whole corporations that have be- come part of the Lockheed Martin family through merger and acquisi- tion. It is a hulk of a company, spread liberally across the landscape, a producer of some of the world’s most sophisticated, deadly, and speedy technology.

Yet as large as its shadow looms today, the corporation’s self-image is of a much nimbler creature. The Lockheed name is associated with the first unlikely human experiments with flight in the first years of the twentieth century. Nearly a century later, the corporation still likes to think of itself as a pioneer at the cutting edge of human knowledge and exploration, a risk taker, an adventurer, a hothouse of innovation and independent thinking. A devil-may-care spirit lives, of course, in tension

with the demands and bureaucracy of a Fortune  company, a tension that has profound implications for the nature of the company culture.

The scandals that led, eventually, to the development of Lockheed’s ethics program began to take shape during the period when the com- pany was making its transition from one of dozens of scrappy builders of airplanes into a bulwark of the U.S. defense establishment. The pro- ductiveness of the company’s engineering culture depended on a hard- driving spirit of experimentation, a willingness to live outside the bound- aries of the conventional, and a confidence in eventual success even in the face of initial evidence to the contrary. That spirit of pluck—some might call it hubris—made Lockheed a success where most others failed. It also helped to create a zealousness about the company’s cause that made it easy to put the company’s best interests before fussy stan- dards of business conduct. Lockheed grew too important—and too self- important—to fail.

Taking Flight

Before the “merger of equals” with Martin Marietta, before the acquisi- tion of the mile-long hangar in Fort Worth where General Dynamics built the F- fighter planes, before biting off pieces of Loral and IBM and General Electric, even before the space and missile divisions, there was the Loughead Aircraft Manufacturing Company, established in a small warehouse in Santa Barbara, California. The company was founded by two brothers, Allan and Malcolm Loughead, who were among the le- gions of young American men tinkering with the mechanics of speed and flight. Born to a hardy mother who had survived the departure of the boys’ father by working as a journalist and a miner, the Loughead brothers grew up and made their way in California working on and sell- ing bicycles, automobiles, and anything else that moved. Flying was a natural extension of their mechanical gifts; the brothers built their first airplane in  and coaxed it into the air over San Francisco Bay on a sunny June day, where it circled over Alcatraz and Sausalito at a top speed of  miles an hour before returning safely to land.1

The fledgling company’s fortunes ebbed and flowed over the next two decades, as it took different shapes and tried to establish its niche in an emerging industry. The Loughead brothers virtually handcrafted their

 : Ethics at Work

first wooden planes in southern California, making their first sales to wealthy hobbyists, and, ironically, developing a model suitable for mili- tary use too late for deployment in World War I. Malcolm Loughead, discouraged by the company’s prospects, left to pursue a plan to develop four-wheel hydraulic brakes for automobiles, so Allan Loughead per- sisted alone. The original company failed in the mid-s, but Allan found enough new investors to begin again. The new venture needed a new name, and since investors and customers alike had stumbled on the pronunciation of the original, the entity born in  was christened the Lockheed Aircraft Company, with headquarters in what was then the sleepy Los Angeles suburb of Burbank.

The new company quickly developed its first major success—an air- craft that established the Lockheed name as a leader in the field, and brought fame and glamour—if not exactly fortune—to its founder. The plane was called the Vega, a four-passenger wooden monoplane. It was a Lockheed Vega that made the first nonstop transcontinental flight across the United States in  (it took nineteen hours). A Vega made the first exploratory flight over the Antarctic, and set speed records for flights across the country and around the world. Amelia Earhart flew a Vega from Honolulu to Oakland, and Wiley Post’s Vega set an unofficial alti- tude record of , feet. It was also in a Vega that Earhart plunged into the Pacific and Post crashed in the wilds of Alaska, taking humorist Will Rogers down with him.

Lockheed made headlines with the Vega, but then, as now, success made the company vulnerable to takeover. Having grown up as the ex- tension of one engineer’s ebullient personality, the company was acquired in  by a new and faceless entity, the Detroit Aircraft Corporation, which aspired to be a General Motors of the air. Allan Lockheed was roughly pushed aside; the company he had founded was now no more than a profitable division of a conglomerate. The division continued to turn out successful products in its Burbank warehouse, but the spirit of innovation and adventure was distinctly under siege.

As it turned out, the Great Depression liberated Lockheed, and gave birth to the company in its modern, dynamic form. The Detroit Aircraft Corporation’s vision of industry dominance plummeted along with the stock market; in the midst of the company’s woes, the Lockheed division came up for sale. In , it was purchased for $, by a young busi-

Success and Scandal : 

nessman from Newton, Massachusetts, named Robert Ellsworth Gross. Gross was neither an engineer nor a pilot, but he had an instinct for the market. For the next three decades, he presided over the reborn Lock- heed Aircraft Company and made it a leader of the industry.

In the s, the Loughead brothers had built their first model planes with the assistance of a few engineers and a few dozen mechanics. When Robert Gross officially became chairman of the new Lockheed in , the company had  employees. By , when the company had developed its successful -seat Electra model, there were nearly , employees scurrying around the Burbank operation. That tenfold growth was only the beginning, for the Lockheed Aircraft Company became one of the prime beneficiaries of the second world war. In the late s, the company became for the first time a serious provider of military aircraft. It devel- oped the P- (Lightning), a twin-engine, twin-boom metal plane that the company first sold to Britain’s Royal Air Force, which then became a mainstay of the full Allied war effort. By , even before the United States had entered the war, there were , employees in Burbank. By , when production reached its zenith, the company had swollen to , employees; production was so intensive and space so cramped that the manufacturing operations spilled outside the hangars, and planes in various stages of completion dotted the landscape. In , Lockheed de- livered more than , planes for use in the European and Asian theaters.

The war effort spurred production, and it also demanded innovation. It was not enough to build planes to transport personnel or to drop bombs; the U.S. Army Air Corps needed a jet fighter that could outfly and outperform the enemy aircraft. Responding to the need, Robert Gross set up a quasi-independent, top-secret research outfit in one cor- ner of the Burbank operation. He gave control of the operation to a bril- liant young University of Michigan graduate named Clarence Johnson, a man whom everyone knew as “Kelly.” Kelly Johnson gathered around him the best and the brightest of Lockheed’s engineering corps, and he turned them loose in a generative environment that was a peculiar com- bination of freewheeling experimentation and obsessive secrecy. In the absurdly short period of eight months, Johnson’s team produced the XP-, the Shooting Star, the first American jet fighter.

Johnson’s operation was officially called the Lockheed Advanced Re- search and Development Program, but the bureaucratic name was a mis-

 : Ethics at Work

match for the self-image of the team. The engineers thought of them- selves as living on the edge, pushing the boundaries of traditional ideas, operating in an atmosphere of raffish rebelliousness, outside the public eye and even beyond the limits of discussion with family and friends. They adopted as the informal symbol of their unit the secret distillery in the woods made famous in Al Capp’s popular “Li’l Abner.” The cutting edge of Lockheed’s aeronautics operation became known as the “Skunk Works.”

The Skunk Works became the living symbol of Lockheed’s quest for technological superiority. In the postwar years, the outfit developed a series of aircraft that made profits and headlines, most dramatically when the operation produced the U- spy plane, which (for a time) al- lowed low-risk, high-altitude flights to survey the military capacity of the Soviet Union. Equally notorious was Johnson’s hard-driving, take- no-prisoners style, which earned him the fanatical loyalty of top engi- neers, but which also alienated some key constituencies, especially among Lockheed’s customers in the U.S. Air Force and elsewhere. Zealous right- eousness and intellectual arrogance produced results for the Skunk Works and for Lockheed; these traits also became badges of pride in a company that was now asserting its place as an essential defender of the American way and global freedom.

Lockheed had scaled down its capacity once the demand of the war years was past. By  its employment level was at the prewar figure of ,. But its war success had put the company into position to become a major player in the military buildup of the Cold War era. Under the continuing leadership of Robert Gross and his brother Courtland, Lock- heed expanded not only its operations but also its mission in the s and s Outgrowing the capacity of its Burbank headquarters, Lock- heed opened a second facility for manufacturing aircraft in Marietta, Georgia, in . In Marietta, Lockheed began building the C- cargo jet, the Hercules, one of the all-time aeronautics best-sellers, still very much in use and in production (in advanced forms) in the early years of the twenty-first century. The Lockheed Missiles and Space company opened its doors in Sunnyvale, California, the same year, building on the Skunk Works model to create an array of top-secret weapons products. Profits in the space and missile division would remain steady even when other parts of the corporation were floundering.

Success and Scandal : 

Bigger companies and bigger projects brought higher stakes, and Lockheed found itself locked in fierce competition with other new giants: Boeing, Northrop, MacDonnell, and a host of other pretenders that had committed themselves to vast operations requiring a constant infusion of new contracts to stay afloat. The prodigious cost of the research and development operations made failure unusually destructive. Moreover, the increasing dependence on business from the United States and other governments made the company subject to—and sometimes a shaper of—the vagaries of domestic and international politics.

Growth created huge opportunities for Lockheed, but also made the corporation vulnerable. Even after the temporary wartime employees went home, the corporation had a larger base of operations to maintain, and an imperative for expansion on a new scale. Its chief executive officer (CEO) was now a national figure, gracing the cover of Time in , and beginning to serve as the personification of Lockheed’s iden- tity. A larger corporate entity created competition for resources and at- tention within the organization, making it tempting for executives and managers to seek an edge in business practice. A growing employee base meant more opportunities for labor problems, as the post-war boom raised worker expectations. Success made the corporation more account- able to an expanded sense of business ethics that was beginning to take hold. The combination of brashness and bigness made Lockheed a major player in American business, but it also brought the company to the brink of self-destruction.

The Grease Machine

Flying under the flag of the United Nations, American pilots dominated the skies during the Korean War at the beginning of the s. But when Kelly Johnson traveled to Korea to talk with pilots about the performance of their fighter jets, he found a sea of discontent. The U.S. pilots told him that their skills were better than their Communist counterparts, but that the North Koreans were flying a better airplane, the Soviet-made MiG-. Johnson came back home with a message for Lockheed and the Defense Department: Build us a faster, lighter, more maneuverable aircraft.

So Johnson’s team got to work, and Lockheed produced a new jet fighter with exactly these characteristics. The company invested huge

 : Ethics at Work

resources of time and money into a prototype that promised to be the follow-up to the XP-, which had been produced so rapidly during World War II. The F-, the Starfighter, made its debut in February , but there were difficulties from the start. Johnson’s design was in- genious, but it cut corners on nearly every element of the aircraft in order to maximize quickness. The design could only support a light and inadequate radar sight system; complex electronics were necessary to keep the aircraft stable, and, since pressurizing equipment had been jet- tisoned in order to save on weight, pilots had to wear uncomfortable space suits. A series of technical problems besieged the first test flights of the Starfighter; it took four years for the plane to come officially into ser- vice, and even then, the aircraft was almost immediately grounded for three months in order to fit a new engine.

Furthermore, it responded to a set of circumstances—those of the Korean War—that were already fading into the mists of time. By the mid- s, the U.S. Air Force was preoccupied with acquiring all-purpose air- craft that could take full advantage of advances in radar and other forms of technology to carry out a variety of different missions. The Starfighter was extraordinarily fast—it set a number of speed records over ,

miles per hour—but it was far from versatile. Lockheed had hoped to sell , Starfighters; the U.S. Air Force initially bought only .

Eager to recoup its investment and preserve jobs and profits, Lock- heed turned to new markets. Its engineers frantically redesigned the Starfighter to enable it to carry the up-to-date equipment, and its sales- men began offering the plane wherever they could: on the overseas mar- ket. All around the world, countries were looking to replace their aging World War II aircraft. These nations included not only America’s allies, but also its former adversaries: Japan and Germany, despite restrictions on their military, were in the market for planes that could be part of their new defensive strategy. The problem for Lockheed’s salesmen was that the plane they had to offer was neither an elegant jet fighter nor a versa- tile showcase of new military technology, but rather an awkward combi- nation of both.

Since they had difficulty persuading governments to place orders for the F- strictly on its merits, Lockheed’s overseas executives turned to “unorthodox” sales methods. In countries around the world, they found willing partners, middlemen with access to the highest reaches of govern-

Success and Scandal : 

ment, who were able to sway decisions for a price, and with access to a pool of funds that would not be tracked too closely. In the Netherlands, Lockheed acquired the friendship and the services of Prince Bernhardt, who had married into the Dutch royal family, and who accepted pay- ments through a variety of middlemen. In Japan, the company worked with a secret agent named Yoshio Kadama, a hard-line nationalist and underworld figure who had been imprisoned by the Americans for war crimes, but who emerged in the s and s as a close associate of more than one prime minister. In Indonesia, Lockheed made generous contributions to a “Widows and Orphans Fund” with close ties to higher- ups in AURI, the Indonesian Air Force. In Italy, various political parties were beneficiaries of Lockheed’s largesse. In Saudi Arabia, Lockheed did business with Adnan Khashoggi, later to become famous as one of Pres- ident Richard Nixon’s closest supporters and associates.2 In the end, Lockheed sold more than , Starfighters overseas; it managed to sell fewer than  to the U.S. Air Force.

Not all of these overseas activities were illegal, and many of them were typical of the era and the industry. There was and still is a customary practice in the defense industry of using overseas “agents” to facilitate contracts with governments. In the s and s, bribery was widely accepted as part of “the cost of doing business.”At the time, bribery over- seas was not even illegal under American law; corporations doing busi- ness in other countries were presumed to be subject to the laws (or lack of laws) in those places. The American government and the public at large turned a blind eye to undisclosed cash payments and other clan- destine deals that helped sell U.S. products. In the case of the Starfighter, the tactics worked: Lockheed eventually sold a modest number of the planes. It never became the huge hit that the company had initially hoped for, but questionable business practices helped prevent, at least, a financial disaster. With the marketing campaign for the Starfighter, Lockheed had taken a series of steps into murky terrain. These measures succeeded for the company because of secrecy, but also because the pre- vailing norms were in a state of flux.

Then the company went too far. In the s, Lockheed took another large gamble when it made a decision to enter the commercial jumbo jet market. Boeing was in the process of launching what would become one of the greatest commercial jet successes of all time, the . Lockheed

 : Ethics at Work

decided to try to keep pace by developing a plane that was slightly smaller than the , and that might therefore be more economical for the U.S. domestic market, while still attractive as an overseas flier. Late to the game, the company had fierce and direct competition from another major player, McDonnell-Douglas, which was developing the DC-. It was clear to some industry observers early on that the potential market could not support two competitors. But by this time, Lockheed had poured vast sums into the research and development of its entry, the L- TriStar. Since this was a commercial project, Lockheed had in- vested its own money, not that of the U.S. government. The corporation was going to need to sell a lot of TriStars to get it back. Intense salesman- ship produced a modest number of orders from the American airlines. TWA and American agreed to buy a few, but when the biggest U.S. car- rier, United, decided to go with the DC-, Lockheed had to concede de- feat in the U.S. market. As with the Starfighter, the company was forced to look abroad.

With Lockheed’s finances in disarray, and its global reputation on the line, the company’s vice-chairman, Carl Kotchian, took up residence in Tokyo in the fall of  in a desperate attempt to persuade the major Japanese airlines that the L- was their future. Lockheed once again engaged the services of the ultranationalist Yoshio Kadama, and soon money was changing hands, sometimes in the form of corrugated orange cardboard boxes and airline flight bags stuffed with thousands of ,- yen notes. The Japanese companies had been leaning toward the DC-; indeed, before Kotchian arrived, the largest airline, JAL, had already struck a tentative deal with McDonnell-Douglas. But Kotchian’s cash and connections helped turn the tide. After seventy days of intensive lobby- ing, involving not only the companies themselves but also the interven- tion of officials at the highest level of the Japanese government, Kotchian won a victory of sorts. He left Japan with orders for twenty-one TriStars, and he returned a hero to Lockheed’s California headquarters.

Three years later, however, it all unraveled. First Lockheed’s auditors started raising questions about large expenditures that could not be ac- counted for. (Why was the company suddenly so extraordinarily gener- ous to the widows and orphans of Indonesia?) For a time, the company’s management successfully deflected those questions, but once the stories started to reach the Securities and Exchange Commission and the U.S.

Success and Scandal : 

Congress, the spotlight began to shine into the darkest corners of Lock- heed’s business. In , the Senate Subcommittee on Multinationals, under the chairmanship of Frank Church of Idaho, began hearings on the political connections of major American corporations. The subcom- mittee’s work began as a post-Watergate investigation, focused on how American business leaders had supported Richard Nixon’s corrupt Com- mittee to Re-Elect the President (CREEP). But the defense contractors’ overseas dealings quickly came to their attention. Tom Jones, the CEO of rival Northrop, casually told the subcommittee that his company had modeled its overseas sales program on Lockheed. Senate investigators took the hint, and by the summer of , Lockheed was the center of the subcommittee’s focus and in the headlines of every American newspaper.

The Church Committee brought to light the whole tawdry network of secret deals, political favors, and outright bribery that stretched back into the s. Lockheed was not the only player in the aeronautics in- dustry to engage in these activities, nor was it the only one to receive government scrutiny. But the sheer size of the company, the scope of its international activities, and the harsh spotlight of the subcommittee combined to make Lockheed a watchword for global bribery. The inves- tigations in the United States touched off similar inquiries around the world: There were Lockheed scandals in Italy, the Netherlands, and Japan. In Japan, the investigation eventually revealed the personal in- volvement of Prime Minister Kakuei Tanaka with Carl Kotchian’s 

campaign for the TriStar. Tanaka was forced to resign in disgrace, and he was later convicted on bribery charges.

Lockheed became a byword for the shady practices of American multi- national corporations, and a major impetus for new legislation that, at long last, put the onus on American companies for their own behavior, even when operating outside of the United States. In the wake of the scandal, Lockheed’s top management, including vice-chairman Carl Kotchian and CEO Dan Haughton, were forced to resign. While taking the fall, both men were clearly somewhat baffled by the turn of events. They had been operating under a set of rules that had appeared to them to allow a certain amount of latitude at the boundaries. Kotchian, in par- ticular, steadfastly maintained his conviction that the prurient examina- tion of business practices had done more harm than good, that the shady dealings around the edges of global salesmanship were insignificant in

 : Ethics at Work

comparison to the good that was done by saving jobs and, perhaps, saving the financial viability of the corporation. Kotchian justified the bribes as the “admission to a ball game,” complained that Lockheed had been made a “scapegoat,” and compared himself to a beleaguered Richard Nixon.3

By their own light, Lockheed’s senior executives had operated within the boundaries of ethics as they understood it. Who was hurt by the payments? The competitors, of course, but what was unethical about beating out competition that was playing by the same rules? Lockheed did not have an internal ethics program in the s and s. But if it had had one, it is unlikely that global business dealings would even have been a topic for discussion. Carl Kotchian and Dan Haughton were oper- ating in an environment where senior executives were admired for “push- ing the envelope,” even if it meant transgressing ethical boundaries. It would have taken a courageous willingness to consider the fundamental aspects of Lockheed’s work—the ethics of the tangled relationships be- tween corporations and middlemen and governments—to have chal- lenged these practices from within.

The Brink of Bankruptcy

The overseas bribery scandals by themselves were enough to send Lock- heed reeling, but they were not the only major scandal that the company faced during this period of rapid economic and military expansion. On the home front, the cozy interdependence between the defense con- tractors and the U.S. government gradually came under public scrutiny, finally bursting into the headlines with the disclosure of Operation Ill- wind in the late s. Lockheed was less prominently at center stage in the overcharging and corruption investigations than it had been in the global bribery scandals. Nevertheless, the company (and many of the “heritage companies” that make up Lockheed Martin today) were em- bedded in a process of doing business with the Pentagon that was finally exposed as deeply tainted. The American taxpayer was footing the bill for long-term practices that served the interests of big defense contrac- tors and corrupt members of the Pentagon brass. The public relations costs of these scandals, even more than the bribery escapades, paved the way for the development of Lockheed’s ethics program.

Success a

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