January/February 1999

Do You Need an Ethics Officer?

"We Have Seen the Enemy And He May Be Us"

Frank Daly has steered an unusual career path. A devout Catholic, the Boston native went to seminary before going to Rome to study at the Gregorian University. He became a priest and for eight years served as an assistant pastor. For a time, he was a university chaplain. He dedicated his life to living in God"s reflection.

So how did Frank Daly end up as a corporate director at Northrop Grumman, the southern California-based defense contractor? Daly is an "ethics officer," one of a new generation of corporate managers who believe that "business ethics" need not be an oxymoron.

An ethics officer? After all, isn"t business war? Or as professor Theodore Levitt once wrote in the Harvard Business Review, "Business must fight as if it were at war. And, like a good war, it should be fought gallantly, daringly, and above all not morally."

Times have changed. The renewed focus on corporate ethics has come about as a response to the public outcry and avalanche of law suits that accompanied the business scandals of the anything-goes go-go '80s: Dennis Levine, Ivan Boesky, Charles Keating, Michael Milken, international bribery. The movement to hire ethical officers gathered steam with the extension of the Federal Sentencing Guidelines to executives in 1991-they now face the prospect of jail time as a result of wrongdoing by subordinates.

Companies have learned that ethical programs can avoid expensive litigation and keep skeletons off the front page of The Wall Street Journal-which pays off handsomely in company loyalty and burnishes a corporation's reputation. That goes right to the bottom line.

In response to embarassing disclosures such as toilet seats and hammers costing hundreds of dollars, and designed in part to ward off more government oversight, military contractors launched an initiative in the '80s to bolster legal and ethical complance. The southern California region is peppered with defense-related companies that have full-time ethics officers: Northrop Grumman, which has a plant in Oxnard; Whittaker in Simin Valley; Lockheed Martin, whose company-wide ethics office is in Westlake Village; and Litton in Woodland Hills. The former haed of the defense industry initiative was recently hired by Columbia HCA, which runs Las Robles Hospital, to clean-up its scandal-tinged operation. Other area companies with ethics officers include Southern California Edison, Avery Dennison, and Earthlink.

"The goal of an ethics officer, my goal, is not only to insure that that we are operating in legal compliance but that we bring a strong, personal sense of values to our every day experience in the workplace," says Daly. "Corporations are publicly-owned, after all. They no longer act - they no longer should act - as if they have no accountability. I think we're making some real progress."

To many, this rings of public relations fluffery. But Daly is anything but a spin artist. After leaving the priesthood, he went to work in Massachusetts' politics, first in the Dukakis administration and then as an aid to Paul Tsongas. The ethics initiatives at Northrop caught Daly's attention. He signed on as division manager of communications and public relations and was promoted to director of ethics and business conduct. Shortly thereafter, a crisis rocked the company, prompting an agonizing appraisal of its corporate culture.

Back in 1987, Northrop's Pomona, California operation was making flight data transmitters for cruise missiles and sensors to stabilize the AV-8B Harrier Jump Jet. Northrop's tests indicated that the parts functioned perfectly. But in the real world, both parts failed miserably. Operating on an anonymous tip, the FBI raided the plant, eventually charging 11 individuals and Northrop itself with 189 counts of fraud and conspiracy.

What had gone wrong?

It turns out that Pomona engineers had long recognized that the equipment used to test the missile components occasionally malfunctioned. When this happened, they substituted a printout from a prior successful test. As for the Harrier Jump Jet, the chief engineer would later confess that they had falsified vibration level tests. Pomona managers said they felt pressure to find a way to pass the units even without adequate testing equipment. They had convinced themselves that their futures and millions of company dollars were on the line.

Ironically, and unfortunately for them, they were right. The Pomona plant was subsequently shuttered, most of the managers fired, and in 1989, Northrop paid a $17 million fine.

President Kent Kresa was apoplectic. "This isn't the case of a few rotten apples," he fumed. It was a corrupted corporate culture. "I think we have to blame our own process," he said. "It could be a problem in the future if we don't stamp it out." Northrop employees at division headquarters in suburban Boston joined in the outrage at the betrayal in Pomona.

"We found errors principally of management," Air Force investigators agreed. "Not so much of employees not being concerned abut ethical conduct but the failure of the management system to open these up, bring them to light."

Part crisis manager, part corporate theologian, Daly was called upon to do nothing less than to address employee doubts about the internal ethics of the company and institute constructive, long-term solutions. He wasn't looking for legal band-aids but to overhaul the corporate culture and introduce higher standards of accountability. The challenge tapped into Daly's lifelong passion for personal responsibility.

"We aren't in the business of teaching people how to be ethical," said Daly. "We're teaching ethical people how to make a good decision when it could be difficult."

It's easy for any individual to say they would not cut corners when presented with the choice faced by the engineers in Pomona. But as with most real life dilemmas, the pressures can be overwhelming to those in the ethical crucible. They feared for their jobs and had convinced themselves that no one would be the wiser for their short-cuts. In fact, they had no place to turn - there were no clear company-wide ethical standards, no ethical hotline, and no ombudsmen to take their concerns to.

Daly helped draw up a code of ethics that was both inspirational and practical - not just bromides about "doing the right thing." With the backing of Kresa, who navigated the crisis and was later named CEO of the merged Northrop Grumman, Daly oversaw the "Northrop Leadership Inventory," which attempts to evaluate the linkage of behavior, values, and leadership conflict resolution. To help employees make tough ethical calls, the company distributes guidelines that it calls "When to Challenge" and "When to Support" Employees also can call an ethics hotline, which is both confidential and responsive. Some 30 percent of the calls allege actual wrong doing, about half OF which check out. "Mostly, the hotline offers an outlet for employees to diffuse potential crises before they lead to unethical or unlawful behavior," Daly says.

At many corporations, crisis management, ethics and brand management are now closely intertwined. Twenty years ago, says Daly, many businesses did not believe they had a duty beyond the minimum dictates of the law. "That just doesn't work today," he says. "A small number of wayward employees can sink an organization. We've learned that the hard way at Northrop Grumman. For companies to survive, they have to learn to be pro-active in the gray areas of business. That's where the tough decisions are made. That's when ethics pays off"

The Ethics Officer Association ( has more than 500 members from profit and non-profit organizations around the world.