Enforcing Ethical Business Practices by U.S. Federal

¶ … Enforcing Ethical Business Practices by U.S. Federal Contractors

Summer 2013

There have been a number of high-profile cases of corporate wrongdoing in recent years that have involved federal contractors, and these cases have created calls for improved ethical practices in the public and private sectors alike. Because there is an enormous amount of taxpayer resources involved in the federal contracting process, it is vitally important that is conducted in a transparent and ethical fashion, but opportunities for unethical practices are commonplace and tend to increase as firms gain experience and become friendly with federal contractors. In addition, other opportunities for unethical practices can present themselves simply because practitioners are unaware of the long-term implications that are involved, or because they lack formal guidance for unique ethical dilemmas. To gain some fresh insights into these issues, this paper provides a review of the relevant peer-reviewed and scholarly literature to identify the causes of unethical practices by U.S. federal contractors and what steps CEOs can take to prevent unethical practices in federal contracting. Finally, a description of robust business ethics and compliance programs and ways that CEOs can enhance their programs is followed by a summary of the research and important findings concerning these issues in the conclusion.

Review and Discussion

Causes of Unethical Practices by U.S. Federal Contractors

In some cases, unethical practices are intentional from the outset and are intended to defraud the U.S. government for unjust personal gain (Wentick, 2001). In other cases, though, unethical practices may develop, even inadvertently, over time. In these cases, federal contractors develop good working relationships with the contractors they do business with on a regular basis. According to Wentick (2001), good working relationships between federal contractors and their vendors can facilitate mission achievement, but there are some issues that federal contractors must be alert for, including the following:

If the relationship is with a federal employee who has nothing to do with the contract or the contractor employee, the only concern might be for the protection of "inside information";

If the relationship is with a federal employee who has responsibilities involving the contract or the work being performed by the contractor employee, there will be appearances of conflicts of interest that must be resolved; these appearances often disqualify the federal employee from participating in the official matters affecting the contractor;

If the relationship between the federal and contractor employee results in marriage, the financial interests of the spouse are imputed to the federal employee and any actual or apparent conflicts of interest that are created must be resolved (Wentick, 2001, p. 37).

In addition, a wide range of observers, including practitioners in the construction industry, maintain that the practice of so-called "bid shopping" used by some federal contractors is unethical, and there is growing support in Congress to outlaw this practice by federal contractors (Bid shopping ban on federal construction gains support, 2005). In this context, bid shopping is defined as "the practice of divulging, or causing to be divulged, a contractor's or subcontractor's bid or proposal or requiring a contractor or subcontractor to divulge its bid or proposal to another prospective contractor or subcontractor before the award of a contract or subcontract in order to secure a lower bid or proposal" (Bid shopping ban, 2005, p. 28).

There is evidence that even major corporations have engaged in unethical, if not immoral, business practices (Verschoor, 2002). Indeed, Green and Berry (1999) ask, "Exactly how extensive and expensive is unlawful business behavior?" And report, "The answer is that it occurs with disturbing frequency" (p. 689). A survey by U.S. News & World Report found that 115 of America's 500 largest corporations had been convicted of at least one major crime or have paid civil penalties for serious misbehavior during the preceding 10-year period; moreover, the rate of documented unethical behavior was even higher among the 25 biggest corporations (Green & Berry, 1999). Indeed, during one 4-year period, federal prosecutors in 20 different states discovered a bid-rigging conspiracy among highway contractors that resulted in 400 convictions, 141 prison sentences and more than $50 million in fines (Green & Berry, 1999). Following this series of federal indictments, the average number of companies bidding for federal highway construction projects increased from three to five (Green & Berry, 1999).

Taken together, the opportunities for unethical practices abound in the federal contracting system, but there are some steps that corporate leaders can take to help prevent their occurrence, including those discussed further below.

How CEOs Can Prevent Unethical Behaviors in Federal Contracting

Practitioners in the public and private sectors frequently encounter similar ethical dilemmas (Lynch, 2005). To address these issues, there are several statutes in place that are designed to protect the release of trade secrets, procurement information, as well as other sensitive or confidential information and classified information (Wentick, 2001). Furthermore, the Standards of Ethical Conduct also stipulate that it is illegal to use or allow the use of nonpublic information for private purposes (Wentick). There is also a The Federal Code of Ethics that binds federal employees to good judgment and ethical conduct (Lynch, 2005). Despite efforts to inculcate higher ethical standards, though, some companies still run afoul of the law or otherwise violate statutes concerning ethical conduct with federal and civilian contractors, vendors and others. In these cases, Ross and Benson (1999) advise that a two-pronged response is required. In this regard, Ross and Benson advise, "When an organization finds itself embroiled in a crisis situation, effective damage control requires that it develop effective external communication strategies to restore its public image, as well as effect necessary cultural change within the organization to preclude the recurrences of the problem" (1999, p. 346). The constituent elements of business ethics and compliance programs that can be used for this purpose are discussed further below.

Composition of Robust Business Ethics and Compliance Programs and Ways CEOs Can Enhance Their Programs

Implementing and administering a business ethics and compliance program has a number of benefits, including (a) avoidance of social, reputational, and economic risks; and (b) avoidance of civil liability as well as possible criminal penalties (Verschoor, 2005). The six constituent elements of the business ethics and compliance program framework are as follows:

1. Integrate Compliance and Ethics. The set of core values intrinsic to the company should be mirrored in its commitment to ethics and compliance as well as the design of the program and how it operates.

2. Embed Compliance and Ethics Management Processes into the Business.

3. Demonstrate Leadership. The tone at the top is critical, so senior management should consistently put the organization's values into practice and clearly communicate the program's expectations to all employees. Periodic appraisal of employee integrity and ethical behavior should be included as part of the normal performance evaluation process.