A new look at ethics

When in doubt, don't do it. That's the overriding message General Motors Corp. conveys with its revised ethics policy circulated to GM's 697,000 employees worldwide on May 1.

Now, three months later, repercussions of the tougher new guidelines involving gifts, entertainment and other forms of gratuities continue to reverberate in the automotive community.

Although it's designed to clamp down chiefly on GM purchasing personnel and engineers who might be susceptible to largess lavished by suppliers and bidders for GM business, the new guidelines stiffen the rules across the board. Only hats, caps, pens and other items valued at under $25 are acceptable, and no booze is permitted, period.

What's more, the policy does not exempt GM's own Delphi Automotive Systems Group, by far its largest supplier. Delphi is a $27.9 billion behemoth with 69.7% of its annual volume generated from its parent. Aggressively pursuing business around the world, Delphi is not known for stinting when it comes to seeking business--and until now that included its in-house customers as well.

"It's tough; GM is our largest customer," Delphi spokeswoman Karen Cullen told The Oakland Press in mid June.

What prompted GM to bear down at this point in its 88-year history? Suppliers and outside experts queried by WAW credit the decision more to an overall tightening up of ethical standards by American business in general for legal and other reasons. And indeed, the GM policy statement reads in places like a legal brief.

Moreover, as the supplier base consolidates (see WAW cover story--July `96, p.33) the stakes become increasingly bigger. What's wrong with a modest budget for entertainment if it enhances business relationships that, who knows, might one day help win a lucrative contract?

GM admits that things had gotten out of hand among some purchasing people at its Adam Opel AG subsidiary in Germany, prompting firings and other disciplinary action. They allegedly accepted sets of tires and other major items from suppliers with whom they do business. More recently, a senior buyer at the GM Truck Group reportedly was sacked for accepting a bribe from a supplier.

One cynical executive of a major U.S.-based supplier with several years' experience in Europe says such practices are often traditional in that part of the world. "They (GM) are just going to replace one set of crooks with another set of crooks," he muses.

Others give GM credit for making it abundantly clear what's expected of its people, but question how GM can effectively police its giant empire. Among the skeptics is W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley College in Waltham, MA.

"The bar has been raised," he says of GM's move. "Corporations are very much concerned with not just obeying the law, but also with the perception the public, press and regulators have about what they are doing."

Mr. Hoffman suspects GM's action will prompt other companies to review their ethics policies. "Can you go overboard?" he asks. "Probably. Is GM's policy too Puritanical? Maybe. But given the scandals and bad press we have seen from other companies, maybe a little Puritanical is not a bad thing."

Entertainment and gift-giving in the auto industry historically have been acceptable business practices with few questions asked. The problem lies in distinguishing between unscrupulous behavior or merely a simple dinner.

And there always has been a double standard: Higher ranking officials commonly have socialized with their peers at independent supplier companies, the latter most often picking up the tab. The idea was that the automotive types couldn't be bought off by a cocktail and bowl of shrimp. Lower down the line where salaries and bonuses are more modest and where sourcing decisions often actually are made, it's argued, temptations may be more difficult to resist.

Oldtimers recall a different, anything-goes era. Walter T. Murphy, executive director-public relations at Ford Motor Co. when he retired in 1977, has these observations: "If you were top brass, it (accepting gifts et.al.) didn't make a damn bit of difference. If you were a lower-echelon person, you were liable to get a strong penalty or even get fired."

Donald N. Frey, who left Ford in 1968 as group vice president-product development, says he can't recall any strong guidelines during his Ford career, except that "Rule one was you couldn't take anything more than you could use or eat in a day."

Before that, he remembers. "At Christmastime, trucks would pull up to the docks with TV sets, boats, you name it. It got to be scandalous. It was mostly for the purchasing department."

John W. McNulty, who served as GM's vice president-public relations during the 1980s, says he wrote GM's ethics policy during the reign of Chairman Thomas A. Murphy around 1977. "It was a masterpiece," he quips.

Mr. Murphy's action may have been prompted by GM's "Motorgate" mess involving dealer warranty-claim kickbacks to GM employees (see sidebar, below). It was designed to be one rule for all," Mr. McNulty recalls. "It was like an army: we all wore the same uniform. It was easy to do because we were told what was right." John Mueller, GM's current director-corporate communications, says GM last reviewed its ethics policy "a couple of years ago, and this one is a little more strict than the last one. No one thing in particular and anything to do with this. We want to make sure we're on target and in tune with the times."

Ford and Chrysler Corp. also have strict rules today, but they are more lenient than GM's. Thus during the frenzy of parties, hospitality suites and other social outings typically sponsored by suppliers at such recent events as the Detroit Grand Prix and U.S. Open golf tournament in the Detroit suburb of Birmingham, GM executives were either scarce or paid their own way, while Ford and Chrysler folks remained very much in evidence.

And it can create some awkward situations: At the U.S. Open, a GM employee couldn't visit his son in a supplier's hospitality tent for fear he'd be spotted violating the GM code. At another supplier's luncheon during the Grand Prix, the crowd was much thinner than usual as GM employees stayed away. Even so, a few dropped in -- sans their ID badges.

"We don't feel there's a need to take as drastic a measure as (GM) did," says Thomas T. Stallkamp, Chrysler's vice president-supply and procurement. "We believe in what we're doing in supply-chain management, and sometimes, in fact, a business lunch isn't a bad idea. The days of the three-martini lunch are gone, just for health reasons if nothing else. (But) there's a lot of business done at lunch. We're not banning things exactly."

Chrysler's ethics code stresses such fundamentals as "trust" and "common sense," but that doesn't mean it's not tough. Everyone is expected to keep records, which are checked quarterly. And Chrysler enforces the rules. Robert J. Eaton, who was serving as chairman of GM-Europe when he was wooed away to Chrysler in 1991 and subsequently moved up to chairman of the No.3 automaker, says privately that his old employer may have gone too far.

Like numerous other automaker executives interviewed by WAW, Mr. Eaton thinks socializing between automakers and suppliers helps cement business relationships. But he quickly adds that Chrysler recently fired an employee it discovered was blatantly on the take.

Ford also keeps a tight rein on employees, going so far as to interrogate them extensively on ethical issues. But like Chrysler, Ford has no outright ban on entertainment underwritten by suppliers. "In our business, integrity is everything you've got," says Carlos E. Mazzorin, Ford vice president-purchasing. For a long time Ford has had a ... policy that defines what's expected of you. It says what you can and can't do. Good judgment indicates pretty well what you can do."

Still, it's worth asking whether shutting out its people from intermingling more freely with suppliers may give Ford and Chrysler an edge over GM in an era when all three are relying increasingly on suppliers for all sorts of support -- from timely shipments of high-quality parts to price concessions and technical input.

Harold R. Kutner, GM vice president for worldwide purchasing, admits that "there's no question there have been some incidents in the Opel organization," but he denies that this triggered the crackdown. GM worldwide purchasing, he says, has had a "no tolerance policy" on accepting anything of consequence from suppliers since the early '90s when a single policy was adopted for both North America and Europe.

Mr. Kutner says the vibes he's getting from GM's suppliers so far have been "extremely positive. We can still have business relationships; we can have meetings and conferences together. But we don't need entertainment as any part of the sourcing decision."

He argues that the policy also "levels the playing field" because some vendors can't afford to entertain people. "From our perspective, it's the right thing to do."

Paradoxically, Delphi and other GM operations such as those interfacing with dealers can continue to offer modest gifts, entertainment and other forms of gratuities to "those customers not having a policy prohibiting receipt of supplier-provided entertainment," the GM policy states. In those instances, the practice apparently makes good business sense. And in any case it has enormous competitive implications:

If GM can't wine and dine its customers and its competitors have no such compunctions, big bucks could be at stake.

For their part, suppliers generally find little to fault in GM's stiffer rules.

Timothy D. Leuliette, president of ITT Automotive, says ITT is not big on entertaining in the first place. "The challenge as an industry is, how do we keep friendliness and the intimacy in the exchange without opening yourself to people who take advantage? Which is why you have this crackdown. Whether our brake system or motors are better than someone else's shouldn't be determined by who bought the best dinner or who had the best tickets to the basketball game," he continues. "That's just not right. But there is some good exchange that occurs at a baseball game that doesn't happen across a table. I don't know how to balance that. Some of its is that each pays his own way. In the end, though, business has to be earned," says Mr. Leuliette, "it can't be bought."

Dennis M. Racine, ITT Automotive vice president-purchasing, is among many sources interviewed by WAW who believe the best solution might be for both parties to share costs of dinners or other types of entertainment. "If you have to stop and think about whether it goes against the policy, then don't do it."

Kenneth L. Way, chairman of Lear Corp., says he sees no problem with GM's policy. "We have always stressed being ethical, and that's not BS." says Mr. Way, "but you hope that doesn't preclude you from establishing a relationship with a customer. It has nothing to do with entertaining or any of that. People withdraw, you don't have good communications, you can't meet freely, get to know each other and talk things out. That's how you get things done.

"This business changed 20 years ago. I don't think there is any major change (as it relates to GM). I went to lunch with a guy from GM the other day. We shared the tab. So what? It doesn't bother me."

Aaron C. Ahuvia, assistant professor of marketing at the University of Michigan Graduate School of Business, perhaps sums it up best: "There has always been a loosely defined standard of when a gift becomes inappropriate -- usually when you wouldn't want other people to know you received it."

GM ethics crackdown recalls `Motorgate'

General Motors Corp., over its existence, has been virtually free of self-inflicted scandal, but 1974 was a time to forget.

Covering a mammoth tale of intrigue, murder and deception, the affair was labeled Motorgate--and it might have been just as easily tagged "East Coastgate."

Involved were Chevrolet zone offices in Lowell, MA, and New York's Long Island.

The sordid source of the story was untold dealings in fraudulent warranty claims.

It began at Gordon Butler Chevrolet, the largest dealership for GM's top-selling line in all of New England. Volume topped 3,000 a year. Mr. Butler, son and brother of dealers, was a high-living bachelor with homes in New York, Florida, France and Mexico.

On the last day in January the Chevy zone service manager in the Boston office, Frank W. Smith, visited Butler Chevrolet to check on suspected inflated warranty claims. He went to lunch with the dealership service director, George O. Edgerly, and the agency's errand boy, James Dolson. Mr. Smith's body--with a bullet in the back of the head -- was found the next morning in the Danvers River. Police investigation reached a dead end.

To GM's credit, it was the corporation that unraveled the case. A team from headquarters investigated the Gordon files and found $33,000 in phony claims. Only $1,600 could be verified.

Just three weeks after Mr. Smith's fatal escapade, errand boy Dolson turned up bleeding from a side stab wound. He blamed Mr. Edgerly and another man for his wound and reported that Mr. Edgerly fired the bullet into Mr. Smith's head. Mr. Dolson also bared the Gordon Chevrolet warranty scheme.

GM had paid for thousands of labor dollars and shipped untold hundreds of parts that were later resold by the agency. The agency franchise was cancelled and several GM employees in the Boston office were dismissed.

Mr. Edgerly was freed by a jury after a 27-year-old lawyer, F. Lee Bailey, won an acquittal.

Because some Boston GM personnel had moved to Bethpage, Long Island, a GM task force swooped down on that zone office. The search uncovered gifts from dealers to corporate employees. Some 25 were fired a few days before Christmas in 1974.

GM did not disclose details of the firings, only noting that there were "serious improprieties."

This time Mr. Edgerly was sentenced to three to five years in prison. Mr. Butler and his general manager, Theodore Kemos, were given two years in prison and fined $2,500 each.

Reporter Greg Conderacci, who covered Motorgate for the Wall Street Journal and Ward's Auto World, concluded nearly 20 years ago: "... There's little doubt that questionable activities can go on for sometime without GM discovering them."

Both as a matter of sound procurement practice and basic business integrity, we at General Motors must make our purchase decisions solely on the basis of which suppliers offer General Motors the best value for the goods and services we need. We should avoid doing anything that suggests our purchase decisions may be influenced by any irrelevant or improper consideration whether illegal, such as a kickback or bribe, or technically legal, such as personal friendship, favors, gifts or entertainment.

Consequently, it is General Motors policy that no General Motors employee accept any gift, entertainment or other gratuity from any supplier to General Motors or bidder for General Motors business, including supplier units which are part of General Motors. This policy applies to all employees whether or not they are directly involved in purchasing activities.

There may be rare circumstances where to refuse a gift conceivably could be against General Motors' legitimate business interests, particularly in those countries where gift giving is simply an expected social courtesy and is not intended to corrupt or influence a particular purchase decision. There inevitably will be gray areas or situations where the applicability of this policy may not be immediately apparent. For example, very inexpensive mementos, such as "logo" pens, cups, caps, or other similar items of nominal value, may be accepted subject to any more stringent policy which your business unit may adopt.

To help in interpreting this policy, several illustrations of its application to hypothetical fact situations are attached. In the final analysis, however, the best course is to decline any gift, entertainment or other gratuity from a supplier to General Motors. Any questionable situation should be discussed with your supervisor to determine how best to handle it. If there is a reason for you ever to accept a particular gift of any real value, it should be reported to your management and the gift always must be turned over to the Corporation for display, use or other appropriate disposition.

In the normal course of business with suppliers to Chrysler and with customers of Chrysler, questions often arise concerning the receipt of meals, entertainment, gifts, etc. The following guidelines are to be followed. If you have a situation which is questionable, review it with your supervisor or the Business Practices Office before proceeding.

Business meals as a guest of the same supplier/customer should not occur more than once a month, and overall you should not have a business meal more than once a week unless there are extenuating circumstances.

Attendance at sports events, restaurants, bars, shows, etc., as the guest of the same supplier/customer are allowable a maximum of twice a year. The hosting company representative must be present.

Each employee is required to keep and retain for a period of three years a record of all lunches, dinners, and entertainment paid for by a supplier or a customer.

The use of Chrysler suppliers or dealers to provide goods or perform work of a personal nature is strongly discouraged, even though paid for by the employee. If unavoidable (e.g., vehicle service/repair provided by a Chrysler dealer), a price representing fair market value must be paid for the goods or service, and the payment must be provable.

Travel and overnight accommodations paid for by a supplier are not allowed.

Travel in a supplier/customer plane must have the recommendation of the immediate supervisor and the prior approval of an officer and Chrysler Pentastar Aviation Inc.

Personal financial assistance of any kind provided by a supplier, other than a financial institution in the ordinary course of its business, is prohibited.

Sponsorship by a supplier of Chrysler athletic events, recreational activities or retirement parties is not allowed.

Promotional material or a gift of nominal value (not to exceed $25) may be accepted if made voluntarily and there is no reasonable likelihood it will influence your judgment or actions in performing duties for Chrysler Corp. When not accepting a gift of greater value would be discourteous, the gift must be promptly turned over to the Secretary of the Business Practices Committee. Such gifts are usually contributed by Chrysler to charitable institutions.

Colbert balanced scandal with profits

A major scandal shaking the top echelons of Chrysler Corp. came at a terrible time for the nation's third-largest automaker. Accustomed to the historical roller-coaster-type profit and loss ride, Chrysler was at the bottom of the cycle in the late '50s.

Sol Dann, a diminutive, balding Detroit attorney badgered the chairman, L.L. (Tex) Colbert, with charges of conflict of interest in supplier companies by Chrysler officers. Though Mr. Dann continually resorted to sharp insults to Mr. Colbert and his cohorts, he did score with accusations of corporate personal investments.

Mr. Dann fired away at annual meetings in 1959 and 1960 and saw the end of Mr. Colbert's reign in 1961 and the demise of the DeSoto car in late 1960.

The most shocking event was the 1960 firing of president and Colbert protege William C. Newberg after only 60 days. It was Mr. Colbert who announced that Mr. Newberg's wife, Dorothy, had earned $455,000 from firms selling parts to Chrysler. One was a producer of seat springs. Later in 1961 Mr. Colbert and the deposed Mr. Newberg met by chance in the locker room of the exclusive Bloomfield Hills County Club. Mr. Newberg floored his former boss with a solid hook to the jaw.

Mr. Dann's attacks contained far more sarcasm than substance, though he obviously was aware of great deceit in the Chrysler hierarchy. Also dismissed from the executive suite was Jack Minor, a marketing chief.

Among Mr. Dann's better jabs was this one. The attorney had been nominated in 1961 by an unhappy stockholder to serve on the board. Mr. Dann rose and declined, stating to Mr. Colbert, "I'm grateful for the nomination, but I don't feel that I know any more about building autos or running a corporation than you do, Mr. Chairman."

What probably helped Mr. Colbert at the 1961 annual meeting in Centerline, MI, was a profit of a little more than $32 million in 1960 after a $35 million loss in 1958 and a $5 million loss in 1959. Shareholders even got a 50- cent dividend in 1961.

Chrysler, as well as the rest of the industry, more or less enjoyed an overly friendly press. None of Mr. Dann's outbursts at the annual meetings of 1959 and 1960 were reported by the three Detroit dailies at the time. All had to play catchup with the Wall Street Journal and media in other cities.

In 1962, Mr. Colbert moved over to Canada to head the Chrysler operation there as chairman. He later retired nearly a decade before the normal retirement age of 65. He died in early 1996 at the age of 90.