Defense Industry Initiative on Business Ethics And Conduct
1996 Annual Report to the Public and the Defense Industry

February 1997
Defense Industry Initiative, DII


Executive Summary
Background of the Defense Industry Initiative
Explanation of the DII Public Accountability Process
Report of the External Independent Body

Appendices

  1. DII Principles & Questionnaire
  2. DII Signatory Companies

 

Executive Summary

This is the tenth Annual Report to the Public and the Defense Industry for the Defense Industry Initiative on Business Ethics and Conduct (DII). The report covers the period from October 1, 1995 to September 30, 1996.

Last year saw continued efforts by DII signatories to explore ways to maintain vitality in their ethics and compliance programs and to ensure that these programs are accomplishing what is desired.

The external independent body -- the joint effort of the accounting firms of Coopers & Lybrand, L.L.P., and Deloitte & Touche, L.L.P. -- continues to compile and report the answers to the DII questionnaire. The DII Coordinator, Alan Yuspeh, has prepared the remainder of the report.

This year's report includes several parts: (1) a discussion of the background of the DII; (2) a brief description of the DII public accountability process; (3) the compilation of responses to the DII Questionnaire prepared by the external independent body of the DII; (4) the compilation of responses to the DII Ethics Director Position Survey; (5) a general description of signatory programs; and (6) several appendices including: the DII Principles, a list of the DII signatories, a list of the current members of the DII Steering Committee and Working Group, the agenda for the 1996 Best Practices Forum, the full text of the Facilitator's Discussion Manual for the DII Video Program Cases for Ethics Training II, a list of materials in the DII Information Clearinghouse, and brief summaries of new materials in the DII Information Clearinghouse.

Experts on corporate ethics have recognized the DII effort as the most ambitious ethics undertaking by any industry in the United States. It is especially gratifying to the signatory group that the DII questionnaires submitted indicate that all signatories have taken their obligations under the DII Principles seriously and have developed and implemented the types of programs required by the Principles. The DII signatories are proud of their accomplishments and believe that this report will provide the public with a clear sense of what has been achieved.

For further information, the public may access the DII's home page on the World Wide Web at http://www.dii.org.

Background of the Defense Industry Initiative

During the 1980s, public concern about the defense industry grew as investigations of major defense contractors and reports of procurement irregularities increased. In July 1985, President Reagan asked David Packard, Chairman of the Hewlett-Packard Corporation and a former Deputy Secretary of Defense, to chair a specially appointed, independent Blue Ribbon Commission on Defense Management, which came to be known as the Packard Commission. The Commission was directed to conduct a broad study of defense management, including the budget process, procurement, organization and operation, and legislative oversight, and to make recommendations for streamlining and improving defense management. In its Interim Report, dated February 28, 1986, the Packard Commission recognized the limits of federal regulation and suggested that effective self-governance might help to curb industry misconduct. The Interim Report stated:

A number of companies in the defense industry responded to the Commission's preliminary recommendations with concrete action of their own. In the late spring of 1986, representatives of 18 defense contractors met and drafted six principles that became known as the Defense Industry Initiative on Business Ethics and Conduct. These principles, which appeared in the Appendix to the Packard Commission's June 1986 final report to the President, "A Quest for Excellence," pledged the signatory companies to promote ethical business conduct through the implementation of policies, procedures, and programs in the following six areas:

The DII Principles were slightly amended on one occasion in response to the Operation Ill Wind Investigation conducted by the United States Attorney for the Eastern District of Virginia. At that time, reference was inserted into the Principles, and two questions were added to the Principles, related to marketing practices, treatment of proprietary or sensitive information, and control of consultants.

The DII Principles were intended to promote sound management practices, to ensure that companies were in compliance with complex regulations, and to restore public confidence in the defense industry. At the time the Packard Commission's final report appeared in June 1986, there were 24 signatory companies to the Defense Industry Initiative. That number has grown as of this writing to 47. It should be noted that the number of signatories is smaller than in previous years because of the high number of mergers and consolidations throughout the defense industry and not because of signatories withdrawing from DII participation. Although the number of signatory companies is small compared to the total number of firms doing business with the Department of Defense, the signatory group includes virtually all of the top 25 defense contractors. Together, the group represents nearly half of the DOD prime contract awards to the top 100 contractors.

The signatory companies established a Steering Committee of senior executives to be the policy-setting body for the DII and a Working Group to analyze policy issues and coordinate DII programmatic activity.

In addition, the position of DII Coordinator was created to administer the public accountability process, plan Best Practices Forums, arrange meetings and other programs, maintain an information clearinghouse, and conduct the day-to-day business associated with the DII. The first DII Coordinator was Rhett Dawson, who had been the Executive Director of the Packard Commission. He acted as DII Coordinator from July to December 1986. Upon Mr. Dawson's return to government service, the Steering Committee appointed Alan Yuspeh, the former General Counsel to the Senate Armed Services Committee and currently a partner with the law firm of Howrey & Simon, as the new DII Coordinator. He has served in that capacity from the beginning of 1987 to the present.

In order to promote industry-wide cooperation, to share experiences, and to discuss matters of business conduct and compliance with laws and regulations, the DII signatories agreed to convene periodic Best Practices Forums, the first of which was held October 30-31, 1986, in Washington, D.C. The Forum was attended by several hundred individuals from 50 signatory and non-signatory companies. Participants discussed codes of ethics, ethics training programs, and compliance monitoring efforts that were being undertaken by signatory firms. These issues correspond to the first four principles of the DII.

The second Best Practices Forum was held June 29-30, 1987, in Chicago and was devoted to the issue of public accountability, addressed in Principle 6 of the DII. This meeting was attended by representatives of the signatory companies and their outside accounting or law firms, and a number of non-signatory companies.

The third Best Practices Forum was held June 7-8, 1988, in Dallas. Panels addressed approaches to organizing and implementing self-governance programs and discussed ways of evaluating these programs. In addition, senior government representatives from the DOD Inspector General's Office, the Defense Procurement Fraud Unit of the Department of Justice, the Defense Contract Audit Agency, and the Air Force Systems Command shared their perceptions of the DII. The signatory companies examined the first annual public accountability report and discussed possible improvements in the reporting process.

The fourth Best Practices Forum was held May 24-25, 1989, in Chicago. Participants were encouraged to exchange their ideas about best practices. Members of the Defense Advisory Panel on Government/Industry Relations discussed their study of industry self-governance.

The fifth Best Practices Forum was held June 7-8, 1990, in Washington, D.C. Participants attended workshops focusing on ethics cases, hotlines, and high risk areas in government contracting. Panels included members of Congress and DOD officials who expressed their views and discussed the role and responsibilities of the DII. There was also a panel of three chief executive officers from DII signatory companies. Approximately fifteen DOD officials attended this forum as participants.

The sixth Best Practices Forum was held June 5-6, 1991, in Washington, D.C. In addition, for the first time, in 1991 a one day workshop was held for ethics directors and ethics officers on the day before the Best Practices Forum. The Forum included a senior management panel, a discussion of lessons learned by ethics officers from signatory companies, the demonstration of an innovative interactive video training tool, small group discussions, and a number of presentations by government officials.

The seventh Best Practices Forum was held June 4-5, 1992, in Washington, D.C. In addition to the second one day workshop for ethics directors and ethics officers, the Forum consisted of a senior management panel, workshops on corporate values in the DII context and DII programs and sentencing guidelines, small group discussions on illustrative training programs, perspectives offered by various government officials on suspension and debarment and DOD oversight, and a report on a generic version of General Electric Corporation's ethics and compliance training materials.

The eighth Best Practices Forum and the third Ethics Director Workshop were held June 3-4, 1993, in Washington, D.C. This session included a panel of general counsels, a discussion of the ethics board game created by Martin Marietta, small group discussions on various case problems, the DOD Voluntary Disclosure Program, and presentations by various government officials.

The ninth Best Practices Forum and fourth Ethics Director Workshop were held June 2-3, 1994, in Washington, D.C. The Best Practices Forum included: a panel of ethics directors and legal counsels discussing codes of conduct, new employee orientation, training, communication efforts, and internal reporting systems; small group discussions of several DII produced video vignettes posing workplace ethical issues; presentations by several government officials on the DII and the Office of Government Ethics.

The tenth Best Practices Forum and fifth Ethics Director Workshop were held June 1-2 and May 31, 1995, respectively, in Washington, D.C. The agenda for the Best Practices Forum is included as Appendix 3. The Best Practices Forum included a presentation of ethics training films, a group discussion on global issues affecting ethics programs, and a presentation by Kent Kresa, Chairman and CEO, Northrop Grumman, on the company's ethics program. The Ethics Director Workshop covered topics such as interfacing with human resources, labor unions and internal audit, as well as integrating a self-governance program, and planning individual business unit ethics meetings.

The eleventh Best Practices Forum and sixth Ethics Director Workshop were held June 6-7 and June 5, 1996, respectively, in Washington, D.C. The Best Practices Forum included a discussion of a professionally acted meeting of the business conduct committee of a fictional committee; small group discussions on the top ten lessons learned about corporate ethics, business conduct, and compliance programs during the first ten years of the DII; small group discussions on Olin's CD-ROM ethics game; a panel relating to government reaction to the DII; and a presentation about acquisition reform and ethics led by Dr. Steven Kelman, Administrator of the Office of Federal Procurement Policy. The Ethics Director Workshop included a presentation by Professor Tom Donaldson, then of the Georgetown University Business School, and now of the Wharton School of the University of Pennsylvania.

The twelfth Best Practices Forum and seventh Ethics Director Workshop will be held June 5-6 and June 4, 1997, respectively, in Washington, D.C.

As part of DII Principle 6, the signatory companies have committed themselves to public accountability. The mechanism for public accountability presently requires that each company complete an 18-point questionnaire regarding its ethics policies, procedures, and programs annually in order to demonstrate the company's compliance with DII principles.

For the reports for years 1987 through 1991, it was required that the questionnaire be submitted to an independent public accounting firm or a similar independent organization, which was to conduct an examination or review of the company's responses to the questions and attest to their accuracy. For the reports for years 1992 through 1994, the annual review process was converted to a process that required independent audits on a rotating three-year basis. From 1995 on, signatories have been permitted to provide a certification of questionnaire accuracy by an officer of the signatory. Principle 6 directs that individual company questionnaires be submitted to an external independent body, which is to prepare a public report that summarizes the responses of the signatory companies as a group.

For the reports for years 1987 through 1991, it was required that the questionnaire be submitted to an independent public accounting firm or a similar independent organization, which was to conduct an examination or review of the company's responses to the questions and attest to their accuracy. For the reports for years 1992 through 1994, the annual review process was converted to a process that required independent audits on a rotating three-year basis. From 1995 on, signatories have been permitted to provide a certification of questionnaire accuracy by an officer of the signatory. Principle 6 directs that individual company questionnaires be submitted to an external independent body, which is to prepare a public report that summarizes the responses of the signatory companies as a group.

Explanation of the DII Public Accountability Process

In the first year of the public accountability process, the Steering Committee decided that the examinations or reviews should cover programs in place during the period of July 1 through September 30, 1987, in order to give companies adequate time from the signing of the DII Principles to implement their commitments under the DII and to allow completion of the examination/review process by the end of 1987. In 1988 and subsequent years, the reporting period was the year ending September 30 or a period of at least ninety days prior to that date in the case of new signatories.

Each of the participating signatory companies completed a questionnaire concerning certain policies, procedures and programs which were to have been in place during the reporting period. The original language of Principle 6 of the DII provided that each company's independent public accountants or similar independent organization should complete the questionnaire. However, an Auditing Standards Board Task Force determined that the questionnaire process should constitute an attestation engagement. In order for the independent public accountants to conduct an attestation engagement, the companies themselves were required to complete the questionnaires and submit their responses to the accountants for an examination or review.

Accordingly, each of the participating companies was required to complete the questionnaire and to submit its responses to its independent public accountants or a similar independent organization.

The Auditing Standards Board of the American Institute of Certified Public Accountants and representatives of the DII signatory companies agreed to a framework for the examinations and reviews. The framework is embodied in the "Interpretation of Statement on Standards for Attestation Engagement, Attestation Standards: 'Defense Industry Questionnaire on Business Ethics and Conduct,'" henceforth referred to as "Interpretation." The "Interpretation" obliged each company to submit with its questionnaire responses an assertion letter stating that the company's responses were based on policies and programs in operation during the reporting period, and that the responses were appropriately presented in conformity with the criteria set forth in the DII.

Consistent with the "Interpretation," signatory companies had the option of asking their independent body to perform either an examination or a review of their questionnaire responses. The "Interpretation" specifies that "a review is substantially less scope than an examination, the objective of which is the expression of an opinion on the affirmative responses in the Questionnaire." Examiners were required to attest that a company's responses were appropriately presented in conformity with the criteria set forth in the DII Principles, including the questionnaire. Reviewers, on the other hand, were required only to attest that nothing had come to their attention during their review that caused them to believe that the company's responses to the questionnaire were not appropriately presented.

Examiners were required to obtain more evidence by talking to a broader sampling of the company's employees or examining more documentation. For example, Question 16 of the DII questionnaire asks, "Is there a program to monitor on a continuing basis adherence to the code of conduct and compliance with federal procurement laws?" The procedures for both examinations and reviews instructed the independent bodies to "determine by inquiry of company officials and/or by reading relevant documentation how the company monitors, on a continuing basis, adherence to the code and compliance with federal procurement laws." The procedures for examinations, however, further instructed examiners to "obtain additional evidential matter, for example by reading internal audit reports, of the company's monitoring of compliance with the code and federal procurement laws." Thus, a review would determine how monitoring is done, while an examination would confirm that monitoring was in fact being done.

The independent bodies conducted their examinations and reviews by visiting plant sites; by interviewing key managers; by analyzing codes of ethics, corporate policies and procedures, attendance sheets for ethics training workshops, company newsletters, logs of hotline calls, minutes of meetings of the Board of Directors, and other documentation; and, in the case of examinations, by talking to randomly selected employees. In many cases, internal audit staff assisted in this process. Each examiner or reviewer was obliged to issue an opinion on the appropriateness of the company's answers for the reporting period.

The opinions did not entail an assessment of the quality or effectiveness of a company's policies, procedures and programs, nor did they express any judgment on the part of the examiner or reviewer as to whether a company was fully in compliance with federal acquisition laws and regulations. However, as Question 18 of the former DII Questionnaire made clear, each company's public accountants or a similar independent organization was required to comment to the Board of Directors or to a committee thereof on the efficacy of the company's internal procedures for implementing the company's code of conduct.

In 1992 the DII Steering Committee instituted a major change in the public accountability process. Because most signatories had now had their questionnaires audited for five years, the Committee determined that it would be satisfactory for any signatory which had previously had a completely affirmative questionnaire reviewed or examined by an outside body to provide the certification of a corporate officer rather than an outside audit. Signatories were only required to have an independent audit every three years. In 1995, the public accountability process changed further. From 1995 to the present, it has been satisfactory to conduct internal audits and to provide officer certifications, together with certain supporting documentation.

The signatories were instructed to send their attestation letters along with the companies' DII questionnaire responses to the external independent body, whose role is to collect all the responses, to determine consistency of documentation, and to issue a report summarizing the collective responses of the companies. The external independent body was able to contact signatories to seek clarification of responses. The independent public accounting firms of Coopers & Lybrand, L.L.P., and Deloitte & Touche, L.L.P., have served as the external independent body for 1996.

Report of the External Independent Body

In November 1996, the DII Working Group agreed to conduct a survey of DII signatories regarding aspects of the position of ethics director. The report that follows summarizes the results of the survey. The report represents data collected for 38 DII signatories.1

Although the report contains many quantitative breakdowns, most ethics directors had detailed comments regarding their positions and companies, or noted that figures that they gave were approximations. Therefore, virtually all questions also contain a brief notes section that allows the reader to gain a more detailed understanding of the responses collected.

Introduction
What is the distribution of defense and non-defense?2
0-25%:
26-50%:
51-75%:
76-100%:
13
13
2
10
Does your position deal with non-defense sectors?
Yes: 34
No: 4
1. Do your responsibilities include:

-Preparation or modification of the company code of conduct?

Yes: 37 No: 1

Several "yes" respondents indicated that they shared responsibility for their codes with other company departments or officials, or were responsible for one of multiple codes.

- Preparation, modification, or review of company policies (in addition to the code of conduct)?

Yes: 36 No: 2

Several "yes" respondents indicated that their responsibilities for other policies were limited to ethics or code-related issues.

- Overseeing distribution of the code of conduct?

Yes: 33 No: 5

Several "no" respondents viewed code distribution as a human resources function.

- Ethics elements of new employee orientation?

Yes: 31 No: 7

Several "no" respondents viewed ethics elements of new employee orientation as a human resources function, although some had indirect involvement.

- Planning training requirements?

Yes: 34 No: 4

Several "no" respondents viewed planning training requirements as a human resources function, although at least one had indirect involvement.

- Planning training modules?

Yes: 33 No: 5

Several "no" respondents viewed planning training modules as a human resources function, although at least one had indirect involvement.

- Conducting training?

Yes: 33 No: 5

Several "no" respondents viewed conducting training as a human resources function, although at least one conducted some training.

- Preparing articles on ethics for corporate publications?

Yes: 34 No: 4

Not all "yes" respondents actually prepared articles. At least one suggested topics and edited articles.

- Preparing posters or other communication devices?

Yes: 34 No: 4
- Answering a Hotline (or similar mechanism)?
Yes: 28 No: 10

Several "no" respondents indicated that independent corporate ombudsmen handled hotlines at their companies.

Several "yes" respondents indicated that they did not personally answer many hotline calls but instead had an oversight role.

- Investigating Hotline calls?

Yes: 33 No: 5

Several "yes" respondents indicated occasional or indirect involvement.

- Participating in resolution of Hotline calls?

Yes: 35 No: 3

Several "no" respondents indicated potential or indirect involvement.

- Coordinating on discipline?

Yes: 33 No: 5

A number of "yes" respondents expressed reservations. For instance, some only recommended discipline. Others viewed coordinating on discipline mainly as a line management or human resources function.

- Participating in professional association activities?

Yes: 38 No: 0
- Briefing the Board of Directors or a committee of the Board?
Yes: 24 No: 4

Several "no" respondents were responsible for preparing material for their Boards.

- Coordinating plans with Internal Audit?

Yes: 32 No: 6
- Other Major Responsibilities?

Although this question generated few responses, answers included: compliance, committee work, general legal, international, plant visits, and public affairs.

2. What percentage of your time is spent on ethics and compliance matters? If less than 100%, then: "What are your other primary responsibilities?"

0-25%:
26-50%:
51-75%:
76-100%:
No Response:
17
3
2
15
1

Other primary responsibilities included: contract administration, community relations, finance, general legal, human resources, international, and security.

3. To whom do you report (position)? How does that person fit into the organization?3

General Counsel/Law Department:
Chair, CEO, or President:
CFO, COO, or Other VP:
Other:
134
185
6
3
4. Is there a corporate ethics steering committee in your company?
Yes: 32 No: 6
5. What is your connection with that committee?
Chair:
Secretary:
Member:
Non-member:
6
5
12
9

All non-members either reported to or coordinated committees.

6. Who sits on the committee (positions)?

Board Members Only:
Mainly VPs, Dep't Heads, and Higher:
Employees at Multiple Levels:
2
27
3
7. Is the committee responsible for overall policy in the area of ethics and compliance?
Yes: 31 No: 1

Several "yes" respondents expressed minor reservations and indicated that ethics and compliance are ultimately the responsibility of senior corporate management.

8. In addition, does the committee consider specific cases of misconduct and appropriate corporate responses?

Yes: 27 No: 5

Many "yes" respondents expressed significant reservations. These respondents indicated that their committees only considered serious cases of misconduct (i.e., high-dollar, corporate officers, etc.)

9. Do any staff report to you, and if so, how many and with what function?6

None:
1-3:
4+:
12
13
13

General Counsel or ethics officers who formerly served as lawyers typically had staffs of four or more.

Staff members usually performed many of the functions listed in the checklist at the beginning of the questionnaire. Specifically, respondents frequently mentioned that their staffs assisted with training and hotline answering.

10. Are there ethics officers in operating units?

Yes: 27 No: 11
11. What are the responsibilities of these individuals?

Respondents often cited the responsibilities checklist at the beginning of the questionnaire.

12. On balance, what percentage of a person's time as a division ethics officer is spent on ethics?

Repsonse Range: 5-100%

Many respondents indicated that workload varied according to unit.

Although several companies have full-time division ethics officers, most responses were 50% or less, and many responses were 25% or less.

13. What is the reporting relationship between you and these division ethics officers?

Dotted Line:
Hard Line:
Other:
19
3
5
14. To whom does the division ethics officer usually report?
Frequently: 30 Other: 47
15. How frequently do you interface with senior corporate management and on what types of matters. Would you call it frequently, occasionally, seldom?
Frequently: 30 Other: 8

Many respondents interfaced with senior management regarding training and investigations.

Several respondents indicated that although they interfaced with senior corporate management frequently, they did not do so with regard to ethics and compliance matters.

16. How long have you been in your present position?

0-2 Years:
2-5 Years:
5+ Years:
6
21
11
17. Prior to having an ethics assignment, in what function or functions did you work?
Law:
Contracts/Finance:
HR:
Other:
12
8 8
6
12

Many respondents continued to work in the same function or functions when they assumed ethics roles.

The "other" category included: communications, congressional liaison, environmental, international, marketing, and security.

18. What was your last job prior to the ethics appointment?

Many respondents were already in their present positions prior to receiving ethics responsibilities.

Most of the others had mid or senior level positions in the fields listed in question seventeen.

19. How long have you been with this company?

0-9 Years:
10-19 Years:
20+ Years:
5
21
12
20. How long have you been in the defense industry?
0-9 Years:
10-19 Years:
20+ Years:
Not Part of Industry:
2
17
179
2
21. Did you have a predecessor in your position? (full-time respondents only)10
Yes: 6 No: 9
22. What did that person do upon completion of the assignment? (full-time respondents only)
Retired: 4 With Company: 2
Notes

1. The majority of the report was prepared by Andrew D. Irwin, an associate with Howrey & Simon, under the supervision of the DII Coordinator. Several signatories were not available to participate in the telephone survey.

2. The percentages given are for defense. Virtually all respondents gave approximate figures. In several instances, figures reflect percentages for a subsidiary rather than a parent. Some percentages are in the process of changing due to restructuring and mergers.

3. As a result of dual reporting relationships, this entry contains 40 responses rather than 38.

4. Most General Counsel also held the title of Senior Vice President or Executive Vice President. 5. Several respondents reported to subsidiary or group Presidents or CEOs.

6. Secretaries and dotted line reports are not included.

7. This category includes companies in which some division ethics officers had hard line reporting relationships within their units and some did not.

8. This category encompasses a number of relatively similar procurement-related positions.

9. Although the questionnaire did not specifically refer to military experience, several respondents had significant military experience that they wanted reflected as part of their total years in the defense industry.

10. 75% or more.

 

APPENDIX 1

Defense Industry Initiative On Business Ethics And Conduct

PRINCIPLES

The defense industry companies who sign this document already have, or commit to adopt and implement, a set of principles of business ethics and conduct that acknowledge and address their corporate responsibilities under federal procurement laws and to the public. Further, they accept the responsibility to create an environment in which compliance with federal procurement laws and free, open, and timely reporting of violations become the felt responsibility of every employee in the defense industry.

In addition to adopting and adhering to this set of six principles of business ethics and conduct, we will take the leadership in making the principles a standard for the entire defense industry.

I. Principles

  1. Each company will have and adhere to a written code of business ethics and conduct.
  2. The company's code establishes the high values expected of its employees and the standard by which they must judge their own conduct and that of their organization; each company will train its employees concerning their personal responsibilities under the code.
  3. Each company will create a free and open atmosphere that allows and encourages employees to report violations of its code to the company without fear of retribution for such reporting.
  4. Each company has the obligation to self-govern by monitoring compliance with federal procurement laws and adopting procedures for voluntary disclosure of violations of federal procurement laws and corrective actions taken.
  5. Each company has a responsibility to each of the other companies in the industry to live by standards of conduct that preserve the integrity of the defense industry.
  6. Each company must have public accountability for its commitment to these principles.

II. Implementation: Supporting Programs

While all companies pledge to abide by the six principles, each company agrees that it has implemented or will implement policies and programs to meet its management needs.

Principle 1: Written Code of Business Ethics and Conduct

A company's code of business ethics and conduct should embody the values that it and its employees hold most important; it is the highest expression of a corporation's culture. For a defense contractor, the code represents the commitment of the company and its employees to work for its shareholders, and the nation.

It is important, therefore, that a defense contractor's written code explicitly address that higher commitment. It must also include a statement of the standards that govern the conduct of all employees in their relationships to the company, as well as in their dealings with customers, suppliers, and consultants. The statement also must include an explanation of the consequences of violating those standards, and a clear assignment of responsibility to operating management and others for monitoring and enforcing the standards throughout the company. Defense industry marketing activities, including the gathering of competitive information and the engagement and use of consultants (whether engaged in bid and proposal activity, marketing, research and development, engineering, or other tasks), should be explicitly addressed. There should be a description of limitations on information which employees or consultants seek or receive. Where consultants are engaged, the company's code of conduct or policies should require that the consultants are governed by, and oriented regarding, the company's code of conduct and relevant associated policies.

Principle 2: Employees' Ethical Responsibilities

A company's code of business ethics and conduct should embody the basic values and culture of a company and should become a way of life, a form of honor system, for every employee. Only if the code is embodied in some form of honor system does it become more than mere words or abstract ideals. Adherence to the code becomes a responsibility of each employee both to the company and to fellow employees. Failure to live by the code, or to report infractions, erodes the trust essential to personal accountability and an effective corporate business ethics system.

Codes of business ethics and conduct are effective only if they are fully understood by every employee. Communication and training are critical to preparing employees to meet their ethical responsibilities. Companies can use a wide variety of methods to communicate their codes and policies and to educate their employees as to how to fulfill their obligations. Whatever methods are used -- broad distribution of written codes, personnel orientation programs, group meetings, videotapes, and articles -- it is critical that they ensure total coverage.

Principle 3: Corporate Responsibility to Employees

Every company must ensure that employees have the opportunity to fulfill their responsibility to preserve the integrity of the code and their honor system. Employees should be free to report suspected violations of the code to the company without fear of retribution for such reporting.

To encourage the surfacing of problems, normal management channels should be supplemented by a confidential reporting mechanism.

It is critical that companies create and maintain an environment of openness where disclosures are accepted and expected. Employees must believe that to raise a concern or report misconduct is expected, accepted, and protected behavior, not the exception. This removes any legitimate rationale for employees to delay reporting alleged violations or for former employees to allege past offenses by former employers or associates.

To receive and investigate employee allegations of violation of the corporate code of business ethics and conduct, defense contractors can use a contract review board, an ombudsman, a corporate ethics or compliance office, or other similar mechanism.

In general, the companies accept the broadest responsibility to create an environment in which free, open, and timely reporting of any suspected violations becomes the felt responsibility of every employee.

Principle 4: Corporate Responsibility to the Government

It is the responsibility of each company to aggressively self-govern and monitor adherence to its code and to federal procurement laws. Procedures will be established by each company for voluntarily reporting to appropriate government authorities violations of federal procurement laws and corrective actions.

In the past, major importance has been placed on whether internal company monitoring has uncovered deficiencies before discovery by governmental audit. The process will be more effective if all monitoring efforts are viewed as mutually reinforcing and the measure of performance is a timely and constructive surfacing of issues.

Corporate and government audit and control mechanisms should be used to identify and correct problems. Government and industry share this responsibility and must work together cooperatively and constructively to ensure compliance with federal procurement laws and to clarify any ambiguities that exist.

Principle 5: Corporate Responsibility to the Defense Industry

Each company must understand that rigorous self-governance is the foundation of these principles of business ethics and conduct and of the public's perception of the integrity of the defense industry.

Since methods of accountability can be improved through shared experience and adaptation, companies will participate in an annual intercompany "Best Practices Forum" that will bring together operating and staff managers from across the industry to discuss ways to implement the industry's principles of accountability.

Each company's compliance with the principles will be reviewed by a Board of Directors committee comprised of outside directors.

Principle 6: Public Accountability

The mechanism for public accountability will require each company to submit annually the attached questionnaire. The results of these questionnaires will be compiled and reported to the companies and the general public. This annual review is a critical element giving force to these principles and adding integrity to this defense industry initiative as a whole. Ethical accountability, as a good-faith process, should not be affirmed behind closed doors. The defense industry is confronted with a problem of public perception -- a loss of confidence in its integrity -- that must be addressed publicly if the results are to be both real and credible, to the government and public alike.

It is in this spirit of public accountability that this initiative has been adopted and these principles have been established.

Questionnaire

  1. Does the company have a written code of ethics and business conduct?
  2. Does the company have code provisions addressing risk areas, including marketing activities?
  3. Does the code address standards that govern the conduct of employees in their dealings with suppliers, consultants, and customers?
  4. Does the company have a code provision or associated policy requiring that consultants are governed by, and oriented regarding, the company's code of conduct and relevant associated policies?
  5. Does the code assign responsibility to operating management and others for compliance with the code?
  6. Does the company have a practice of distributing the code to all employees principally involved in defense work?
  7. Are new employees provided an orientation to the code?
  8. Does the company conduct employee training programs regarding the code?
  9. Is there a corporate review board, ombudsman, corporate compliance, or ethics office or similar mechanism for employees to report suspected violations of the code to someone other than their direct supervisor, if necessary?
  10. Do company policies and practices seek to protect the confidentiality of reporting employees' identity and to prevent retribution for the proper use of the reporting mechanism?
  11. Is there an appropriate mechanism to follow-up on reports of suspected violations to determine what occurred, who was responsible, and recommended corrective and other actions?
  12. Is there an appropriate mechanism for letting employees know the result of any follow-up into their reported charges?
  13. Is there an ongoing program of communication to employees, spelling out and re-emphasizing their obligations under the code of conduct?
  14. Does the company have a procedure for voluntarily reporting violations of federal procurement laws to appropriate governmental agencies?
  15. Is implementation of the code's provisions one of the standards by which all levels of supervision are expected to be measured in their performance?
  16. Is there a program to monitor on a continuing basis adherence to the code of conduct and compliance with federal procurement laws?
  17. Does the company participate in the industry's "Best Practices Forum"?
  18. Are periodic reports on the program to achieve adherence to the DII Principles made to the company's Board of Directors or to its audit or other appropriate committee?

As modified February 1995

APPENDIX 2
DEFENSE INDUSTRY INITIATIVE SIGNATORY COMPANIES

Allfast Fastening Systems, Inc.
Alliant Techsystems, Inc.
Allied-Signal
AT&T
BDM International, Inc.
The Boeing Company
Calspan SRL Corporation
CFM International
The CNA Corporation
Computer Sciences Corporation
Day & Zimmermann Hawthorne Corporation
Day & Zimmermann, Inc.
DynCorp
ESCO Electronics Corporation
FMC Corporation
Frequency Electronics, Inc.
GDE Systems, Inc.
General Dynamics Corporation
General Electric Company
Harris Corporation
Hewlett-Packard Company
Honeywell, Inc.
Hughes Aircraft Company
IBM Corporation
ITT Defense Technology Corp.
Lockheed Martin Corporation
McDonnell Douglas Corporation
Northrop Grumman Corporation
Olin Corporation
Parker Hannifin Corporation
Primex Technologies
Raytheon Company
Rockwell International Corporation
Rohr Industries, Inc.
Science Applications International Corporation
Sundstrand Corporation
Technical Products Group (TPG)
Teledyne, Inc.
Texas Instruments Incorporated
Textron, Inc.
Thiokol Corporation
Trident Data Systems
TRW Inc.
UNISYS
United Technologies Corporation
Westinghouse Electric Corporation
Williams International

TOTAL = 51