Ethics on the Ragged Edge

CONFLICT OF INTEREST

THE most talked-about ethical problem in U.S. business is conflict of interest, in which an executive divides his loyalty between his own firm and another. The conflict may take the form of slipping some of his firm's business to a relative or profiting from owning (or owning stock in) a supplier. Last week Chrysler Corp.. which touched off the current conflict-of-interest furor by sacking President William C. Newberg for owning interests in suppliers, announced that an investigation has found its present 36 top executives in the clear. Shaken by the Chrysler case, other corporations are anxiously examining their own houses to see if they are in order. Businessmen are likely to get some unwelcome help from Congress, which plans an investigation, and the Securities and Exchange Commission, which is considering tightening up its rules requiring disclosure of such outside interests by asking for monthly instead of annual reports.

No one is certain just how widespread conflict of interest is in U.S. business because most firms prefer to keep their problems to themselves. Says a top Chicago department store executive, "There's a lot of it in all businesses. The larger the company, the easier it is to get by with it."

One big difficulty is deciding just where conflict of interest begins. Many firms permit executives to have interests in other companies so long as they openly report their involvement to the company and to the SEC, which Chrysler's Newberg did not do. Others believe that it is often in the company's best interest to have their men associated with certain other firms. Donald Power, chairman of General Telephone & Electronics Corp., is also a senior partner in a law firm that does considerable General Telephone business. General Telephone wooed him away from the law firm to become its president, thinks the arrangement is fine.

In the case of family-owned or family-controlled companies, keeping the money in the family is often top policy, since there are seldom outside stockholders who might complain. Sam Alterman, vice president of the Atlanta-based Big Apple grocery chain (50 stores), which is largely owned by him and his three brothers, finds nothing wrong with buying from another brother for his chain--when his brother meets price and quality requirements. Still other firms condone profitable outside interests as devices to spare their executives from high-bracket income taxes--one of the chief reasons for sideline interests. San Francisco Management Consultant Leland

Dake argues heatedly: "Our confiscatory tax laws are forcing people to the ragged edge of ethics. Stiff taxes have created an atmosphere in which everyone quite openly wants to skirt around the laws legally, and they don't spend too much time with the moral considerations.'' One appliance company bought a distributor company, then gave its franchise to a company set up by one of its top executives. It tacitly agreed to buy his stock back when it had risen, thanks to business from the parent company, thus enabling the executive to take his salary in capital gains.

The majority of publicly owned U.S. companies are dead set against even a hint of conflict of interest, punish it severely when they discover it.

To avoid conflicts, more and more companies are setting up rigid policing practices instead of relying on their employees' honor. North American Aviation, Convair and Douglas Aircraft all have strict written rules requiring executives to report the slightest outside involvement. Litton Industries requires its key executives to report their outside interests in writing yearly. Since the Chrysler furor broke, hundreds of companies have sent probing questionnaires to executives . and directors, are quietly investigating their purchasing and marketing practices. One Chicago businessman has private detectives make periodic checks on some 200 executives: "If I hear of one driving a Cadillac and I know his salary won't permit it, I have him checked." But if an executive is doing a crack job, there are complications. "I've got a couple of department heads I'm suspicious of now, but their departmental results are so good I keep my mouth shut."

Most businessmen are dead certain that they do not need more laws to handle conflict-of-interest problems. They find impracticable the SEC's proposed requirement of monthly reports. It would mean twelve times more paperwork and be of little value, since executives rarely get in and out of a conflict situation in a month.

Even when there is no clear-cut violation of business ethics, most businessmen believe that conflict of interest is simply bad business. They insist that it forces executives to give less than their best to their own company, needlessly exposes the company to the peril of stockholders' suits and a damaged public reputation. To avoid even the appearance of wrongdoing, many a U.S. executive could well recall an old Chinese proverb: "When passing through your neighbor's melon patch, do not stoop to tie your shoe."

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