The Playboy Panel: Business Ethics and Morality

Panelists

Herbert L. Barnet, president of one of the nation's largest corporations, the Pepsi-Cola Company, has been eying the ethics of executives ever since he began his career as counsel and legal consultant for industry 30 years ago. His vantage point in a company that franchises its product to hundreds of independent businesses across the globe gives him an unusually intimate view of the moral climate in small business as well as big.

William Benton is the blunt, ebullient owner of Encyclopaedia Britannica. A successful businessman, founder of the Benton & Bowles advertising agency, former owner and chairman of Muzak and, by his account, one of the nation's biggest individual taxpayers, his past service in politics (U.S. Senator from Connecticut), diplomacy (Assistant Secretary of State, writer on foreign affairs) and education (Assistant to the Chancellor, University of Chicago) gives him a uniquely solid basis for his candidly iconoclastic comments.

James B. Carey, a scathing critic of corruption in labor unions, used his influence as a vice president of the AFL CIO and head of its International Union of Electrical Workers to help expel James Hoffa's Teamsters from the big labor federation. But he has also spent a generation sitting across the bargaining table from many of our great corporations -- including General Electric and Westing-house -- and has developed some passionate, provocative opinions about them.

Marquis Childs, whose thrice-weekly newspaper column reaches nearly 9,000,000 readers through 125 dailies, is one of the nation's best-known commentators. He is co-author of the book Ethics in a Business Society.

Sol A. Dann, a tenacious crusader for stockholder rights, is the Detroit lawyer who first "broke" the conflict-of-interest case that rocked the Chrysler Corporation and led to a thorough managerial house cleaning. A persistent gadfly, he has also battled management in the Studebaker-Packard Corporation and other companies.

Senator Philip A. Hart, a soft-spoken Michigan Democrat, led the Senate's recent probe of industry's fraudulent packaging practices. He has also participated in its investigation of monopoly in the electrical industry, and heard testimony from some of the executives who went to jail for price-fixing.

Senator Jacob K. Javits is a Republican member of the Senate Banking and Currency Committee and of the Joint Economic Committee of Congress. As an erstwhile corporation lawyer, as author of many articles on economics and the antitrust laws, and as the former attorney general of New York, he has been an intimate observer of mores in the executive suite.

Vance Packard, author of three best-selling critiques of contemporary life -- The Hidden Persuaders, The Status Seekers and The Waste Makers -- has completed a new book due this month. The Pyramid Climbers is a study of the American executive -- what makes him go, as well as what makes him go wrong.

Roger P. Sonnabend, at 37, is president of the Hotel and Motor Hotel Divisions of the Hotel Corporation of America. He is the just-past president of the Young Presidents Organization, whose members reached the top post in companies in the over-a-million-in-volume class while still under 40 years of age. As a representative of the new breed of businessman now taking the reins of American industry, he speaks frankly and incisively about the morals of management.

[Q] Playboy: The corporate conscience -- that insubstantial something that, according to some critics, doesn't exist at all -- is currently the subject of more concern, complaint and contention than at any time in memory. Steel companies are hit by antitrust suits and accused of deceiving the President. Electrical executives serve time in jail. Steel executives defy a Senate committee's orders to turn over records. The Senate investigates profiteering in the aircraft industry and misrepresentation in packaging. The Secretary of Commerce. Mr. Hodges, a former businessman himself, appeals to industry to develop and abide by codes of ethical conduct. The Securities and Exchange Commission investigates the American Stock Exchange and its president hurriedly resigns. The heads of the Chrysler Corporation and the Prudential Life Insurance Company are accused of conflicts of interest. The Internal Revenue Service warns of a coming crackdown on expense-account cheating. Television, advertising, drugs -- one industry after another is pilloried for gulling or gouging the public. As we go to press, the stockpiling scandals and the Billie Sol Estes disclosures are headline news.

A business magazine, Modern Office Procedures, not long ago asked its readers: "Is it possible for a man to move up through the ranks of management solely by honest, decent methods?" And an overwhelming majority of its respondents chorused "No!" The Harvard Business Review, in a more comprehensive survey, found "a frank picture of wrongdoing" and a Congregational minister who organized weekly discussions of executive ethics on a commuter car, as it rolled into Manhattan, found his businessman-participants deeply troubled. One man wrote on the comment sheet he handed in after a session: "Charity, love of fellow man, forgiveness, etc., extremely difficult to maintain under heavy competitive fire."

Are we, as we have been told, living in a "genial society" in which every form of corruption is cheerfully tolerated? Have we lost our capacity for indignation? Are we "other-directed" sheep lacking any system of individual values? Are we becoming "organization men" who unquestioningly follow our corporate party lines without thought as to consequence?

Analyzing the corporate conscience, answering questions like these, is not entirely pleasant work, and not everyone volunteers for it. Last year the American Management Association had planned a meeting on business ethics but was forced to cancel it when, out of the 30 executives it asked, not one was willing to speak. You, gentlemen, are willing, or you would not be participating in this discussion. So let's begin by asking: Is the level of ethical conduct in business today worse than it was, say, a generation ago? Or does it just seem that way? Roger Sonnabend, you're a working executive, head of a big business. What do you think?

[A] Sonnabend: Despite all that has been said, I think business is more ethical today than ever before. It's more sensitive to ethical questions. The very self-examination just mentioned is evidence of it. Many of the practices that were in the gray area 15 or 20 years ago are clearly considered unethical today.

This whole concept of buyer-beware was almost a way of life at the turn of the century. It's pretty much gone now. Then a seller of goods or services was almost entitled to sell his product and get whatever he could for it, using virtually any method, feeling no true responsibility to deliver to the public a product that was all that it should be. And this sort of thing, which was, I'm sure, unethical then, but almost acceptable, is definitely not acceptable today.

The sort of practices you've just mentioned have existed for a long time. We weren't aware of them. Now we've become aware of them. Because we are aware of them, I think we're going to do something about them. That's the difference. We are more conscious of these things today, more sensitive to ethical issues. And that's good. It represents an advance.

Packard: I don't know how you can measure these things. In the chemical industry, according to one trade magazine, in one phase of the industry more than 10 percent of the contracts are based on kickbacks. I know the lithography business used to be very heavily based on kickbacks. A friend of mine finally got out of the industry because he just couldn't stand taking these guys up Fifth Avenue every day to buy suitcases and things that they happened to like, just to get contracts. I think it comes to a shading of morality. But the outright, drastic kinds of dishonesty probably have declined because the pressure is less intense today. There's been so much general prosperity in the last 20 years, I think the real bind on men to save themselves in business by unethical methods has eased up. I think the pressures have become more subtle, and more baffling.

[A] Javits: I'd say it's very much less a matter of naked bribery, chicanery, industrial spying and that sort of thing. It was almost a primitive way we had years ago. Things now have moved to a much higher level. The question today is whether massive entertainment, perquisites -- which are not crude, primitive bribes -- accomplish much bigger results in an immoral way.

Ethical issues are not just limited to these things. The whole attitude of business toward the public involves ethical considerations, and here, I think, there's definite evidence of improvement.

The abortive steel price rise illustrates the point. In the first place, when trial balloons for such a rise were initially sent up in 1961, there was such an outcry that the industry delayed its decision to raise prices for many months. This was a clear indication that the "public be damned" attitude of two or three generations ago no longer guides our major industrialists. Then, when the decision to raise prices was finally made and implemented, it was presented on the basis of need and the ultimate national good -- and when these reasons were found to be inadequate by the President and the great majority of the people, the decision was reversed.

The ethics of labor, too are being re-evaluated. No longer does the old demand for "more" serve as sole justification for crippling strikes. Wage and other questions are more and more presented in the light of productivity increases and the need for economic growth. This shows more sensitivity to the public interest.

[A] Carey: I can't agree that matters are better. Or that they're more subtle. Maybe prosperity eases the pressures and makes them more baffling. But it also means there's more wealth to plunder, and there's every evidence that it's being plundered. Two generations ago the robber barons victimized the American economy. I think today's "managerial barons" have just taken up where their predecessors left off. What was subtle or baffling about the U.S. Steel thing? The President was led to believe U.S. Steel wouldn't raise its prices if the Steel Workers moderated their contract demands. As soon as the contract was in the bag. bang! And what was ethically baffling about what the electrical companies did? They sat down and agreed to fix high prices and not compete. Their crime was called "price-fixing" or "bid-rigging." Fancy names for something that boiled down to swindling the Government, the taxpayer and the consumer out of billions of dollars through overcharges.

The Army, the Navy and the Air Force were flagrantly gypped by the electrical companies. The Atomic Energy Commission, the Tennessee Valley Authority were plundered, and countless public and private utilities were robbed blind. Electricity costs for millions of Americans had to go up because of the excessive prices G.E. and Westinghouse and the others put on their equipment.

They were moral hypocrites of the worst kind, these executives. They constantly ranted in speeches and in print about the blessings of competitive capitalism while they were secretly suppressing all competition in their own industry.

[A] Hart: Certainly, the electrical cases indicate that there were a lot of men who just didn't take the antitrust laws very seriously. There was a lot of embarrassment on the stand when these men acknowledged that they had discussed prices with competitors, but there was darn little indignation by the very people that were involved. Some argued that the law was wrong; those who violated it weren't wrong, the law was wrong.

We saw heads of units on the stand who said, yes, they had read in the paper that the man immediately under them had pled guilty to this thing. No, they had not talked to him about it because, really, that was somebody else's responsibility. Well, if it had been a trade-union hearing, if this had been a president of some local union who said, yes, I read in the paper where my business agent had his hand in the till, but no, I didn't talk to him because that's the responsibility of the international--those same people would have gone right through the roof in indignation, and, I think, rightly so. I didn't see anybody go through the roof over this one. Now this is wrong. This is a dulled moral sense.

Still, I wouldn't presume to say that it indicated that we had deteriorated in our moral reactions over a generation. It doesn't necessarily prove that the ethics of business are worse in 1962 than they were in 1922.

[A] Childs: I think it is impossible to answer this kind of question. We're trying to measure something that can't be measured. But I would tend to agree that the electrical cases argue against the theory that matters have become more subtle. They were something right out of the turn of the century, a reversion to the practices of 50 years ago. The kind of thing Theodore Roosevelt inveighed against. That was the astonishing phenomenon--the very crudity of this operation.

[A] Dann: I don't think there's any question about it. When you can have something like the Chrysler case, when the president of a company as big as Chrysler can own an interest in a supplier selling to Chrysler, that's not subtle or sophisticated corruption. It's blatant. And it's the stockholder who pays for it.

[A] Barnet: I agree the situation is far from perfect. But even with all that said, on balance, I'd have to say things are much better than they were 30 years ago when I was a lawyer and saw what went on. I think some of the rough edges have been smoothed off the old brand of ruined individualism.

It seems to me that what we are witnessing now is not at all a sudden burst of business immorality, but a snowballing interest in ethics. We had a series of Congressional hearings into corruption in the labor movement--and some employers were involved as well as labor. Then we had the TV quiz-show scandal, and since then the press stories and the publicity have all seemed to build up more and more interest, so that when another case comes along it gets blown out of proportion and it looms larger. That doesn't mean everything today is rosy. This isn't the best of all possible worlds. But the heightened public curiosity makes it seem worse today. I think if we had a chance to be transported back in history to another time, we wouldn't find things too much different in this respect. In fact, they might well be worse.

The Billie Sol Estes case now is bad. But it's peanuts compared with the kind of corruption that turned up in the Pecora hearings in the early. Thirties. There you had the directors of some of the nation's biggest and most important banks directly involved.

[A] Benton: I think things are a great deal better today. Far better. But not because men are ethically any better. Simply because business has discovered that it is good business to be better. It all depends on your definition of ethics. Businessmen today set up foundations. They give money to universities. They do all kinds of things virtually unheard of 50 years ago. And the standards are a great deal better, not merely because the individual men are better educated, or any more moral, or attend church any more frequently, or have any higher individual personal standards. But because business is smarter and better informed than it was two generations ago or a generation ago. What's more, if you're going to talk about business ethics, you've got to look at it comparatively, too. American business ethics are by far the highest in the world. Incomparably the highest. Take Latin America. There's a long quotation in my book The Voice of Latin America. from the foreign minister of Venezuela. bewailing the fact that Latin American business people don't have the ethical standards of our business people in the U.S. In Europe traditionally there have been no antitrust laws. It's traditional to conspire to gouge the public.

[Q] Playboy: Perhaps one reason we are disagreeing so sharply on the present level of ethics in business is that we differ in how we define it. When we talk about corruption or lack of ethics in business we are talking about a great many different practices. Let us attempt to narrow down what we are talking about. What are the important ethical problems in business today?

[A] Packard: I'd like to suggest that everything we do, as individuals or as executives, has ethical implications. For example, a lot of things less dramatic than criminal price-fixing pose ethical questions for the businessman. His whole relationship to the corporation, for example. To me, one big source of difficulty for the businessman today is compromising his soul on the question of living his own life, in view of all the exploitation he has to submit to. Exploitation in a new sense: submitting so having his health checked semi-annually, and having his mentality checked regularly, and being subject to assigned wherever they want to assign him all over the country.

The ethical sense comes from inner values, values we adopt and live by. But we can talk all we want about men being their own masters and setting their own goals, and following their own values, and we still have Nation's Business, published by the Chamber of Commerce, listing what companies are looking for in executives. The very first specification is what they call creative conformists. They use "creative" as a sop. What they are really looking for are conformists who can come in and play on a team and do what they are told. What does this do to the idea of individual conscience?

Price-fixing is dramatic because it's against the law. It's a pretty clear case. But what about advertising a product, for example, and exploiting all kinds of feelings of sexual inadequacy or social inadequacy in the consumer? What about the ethics of making depth studies of hypochondria, in order to know how it can be triggered to make people buy?

And what about building a short life into a product so that it will fall apart and the customer will have to buy a new one before too long? I would rate these as important unethical practices.

[A] Carey: One of the most atrocious examples of that is the common light bulb that the members of my union are employed to make. Tens of thousands, perhaps hundreds of thousands of citizens have complained that light bulbs that formerly had to be replaced only after two years or three years, now must be replaced after two, three of four months.

[A] Barnet: Sure, you have planned obsolescence in some industries. But I don't think that's unethical. I'm a Thunder-bird owner. I've been driving. Thunder-birds since they came out. Well, as soon as the new Thunderbird came out. I had to get one. I knew the old one was basically just as good. Obsolescence, in most instances, doesn't go to the functional aspects of a product. In most cases, it goes to the styling. If it weren't for planned obsolescence, most of our industries in the U.S. would die. You take the clothing industry. Where would the clothing industry be, especially women's clothing, if you didn't have new styles every year? If we didn't have planned obsolescence in cars, I think our economy, starting up with steel, would be vastly affected. And it can be argued that what you call planned obsolescence helps create variety in society--which is good. As far as ethics are concerned. I'm much more concerned over the practice of gift-giving, for example. If you're talking about a definition of ethics, gifts are one of the biggest curses in the entire business world.

But even this is changing for the better. Too often in the past people in industry would get gifts like boats, automobiles, safaris and the like. That comes perilously close to bribery. In my company we don't want anyone to give us gifts. We tell them that our employees are well-remunerated and that any gift has to be innocuous. For instance, this morning I received from Johnson Wax a small shoe-polish kit they make. I took it home to my boy. It's small, inexpensive and functional. It's a product of their own. That kind of gift cannot be considered unethical.

Today I think the big gift, the one that's intended to obligate the receiver, is going. Many businesses, including mine, instead of sending a gift, send out a card at Christmastime saying that they have made a donation to charity in your name. That's a great improvement on the kind of practices we've had.

[A] Benton: I think this whole thing is greatly exaggerated. It's not much of a problem. Enormously exaggerated. It's not good business to give or receive significant gifts and all smart businessmen know it.

[A] Dann: I can't agree with that. I feel that even if the amount of the gift is small, it opens the door to permitting a supplier firm to palm off inferior products on the corporation. I've seen this matter of gift-giving corrupt and demoralize whole purchasing departments in giant companies. It prevents proper competition among supplier companies, and it changes the whole mood and style of the purchasing operation. It's like a drop of poison in the cooking oil.

[A] Sonnabend: Can I tell you about my company? The main problem in this regard in our industry has been the outright cash payoff where the purchasing agent is offered a percentage of the orders he places. A man buys food or linens, or some other goods for the hotel chain, and he gets a "gift" or payoff for placing the order with Company A instead of Company B. I think this percentage payoff is far more rife than the automobile or television set kind of thing. I think this gift business is a far more serious problem than it seems on the surface. I consider it even more important than price-fixing.

Fifteen years ago in our industry you could hear it said: "We pay our chef moderately and our purchasing agent moderately, in light of the fact they're receiving gratuities, gifts and, in some cases, out-and-out percentages." I don't hear much of this anymore. No longer do you see chefs in the old European tradition doing the buying and operating in, shall we say, a different ethical fashion. We're beginning to see a new breed of buyer, and also fewer of the old-time buyer-beware salesmen. We're seeing a new executive emerge who wants to operate on a highly ethical basis.

Once you get a chain reaction and companies begin to insist on high ethical standards by their purchasing people, then the suppliers, the purveyors, realize that they don't have to make a payoff to get business. If they're asked for one, they can just tell the purchasing agent to go to hell.

In our company we've set a flat, firm policy of no gifts whatsoever to be accepted, no matter how inconsequential--be they at Christmastime or otherwise. This policy is stated to our people at frequent intervals, primarily in November of each year, and we write a letter to everyone who provides goods or services to us, calling attention to this policy.

When a gift comes in, we ask that it be reported regardless of its size, and we ask that it be returned -- unless it's just obviously advertising matter like calendars and things of that sort.

Our people know that it's automatic -- the employee who takes a gift will be discharged. What's happened is that not only won't they take the risk, but, more important. I think they've begun to take pride in this policy. Pride that we do take such an extreme view of a practice that is common in industry elsewhere. This has a tremendous effect on the total ethical behavior of our people in other areas, too. The effect spills over.

[Q] Playboy: The whole question of gifts has been a hot one in politics as well as in business. Mr. Goldfine's gifts to Sherman Adams created the noisiest scandal of the Eisenhower Administration. The Billie Sol Estes case involves alleged gifts to officials of the Kennedy Administration. How do you two Senators handle the gift matter? Senator Javits?

[A] Javits: If what is sent to me is of a minor character, I never rebuff a friend, because it's most insulting. But I have, for example, in some cases, gone to the trouble of returning a bottle of liquor because knowing the person who sent it, I knew that, to that person, it was a big thing; whereas if some personal friend of mine who was worth a million dollars sent me for Christmas a case of Scotch, why, I know that, to him, that's meaningless. Interestingly enough, they don't do it. My very wealthy friends will generally give quite modest gifts. It is a question of personal friendship and modesty of amount, and also my wife and I reciprocate gifts to our friends.

[Q] Playboy: Would it, then, be correct to say that you measure the gift not by its size alone, but by its size relative to the giver?

[A] Javits: Yes, but there's a real limitation on that. Suppose someone very rich sent me something that was worth $500. I'd be compelled to send it back.

[A] Hart: I have no policy on this, as such. Of course, if someone moved a piano in. I'd say, "That's wrong." But last Christmas I received only two gifts from persons other than relatives and both were attractive and inexpensive. I accepted them. I felt no implication was involved in the giving, and I certainly feel free, having accepted them, to make my own judgment on any public question. You can get sort of pompous about this. Specifically, one was a necktie. What'll I do, call in the press and say I'm turning this back because someone was trying to bribe me with a necktie? Or do I quietly return it with a note of thanks because I think this is wrong? This implies I believe he had an improper motive, and that I had to go through this ritual to prove that I'm beyond reach. This, I think, is nonsense. When it gets into something of substantial value, then that's something else again.

[A] Dann: There's one good way to police this bribery or gift-giving in the purchasing field. Why not put all purchasing agents under a high bond? They handle millions of dollars' worth of orders every year. Put them under a million-dollar bond. The insurance companies issuing the bond would scrutinize each man before issuing a bond, and that might help weed out some bad eggs. If, at the same time, manufacturers' representatives were bonded, or even licensed by the state the way door-to-door salesmen are in some states, you'd have a real check on the situation. The bond would protect the corporation against any damages arising out of violation of the commercial laws against bribery or kickbacks and the like. Some companies do bond their buyers. I think this is an excellent preventive measure.

[Q] Playboy: There's another form of gift-giving that may fit in here -- the gift of a good time. E. R. Risman, who is the manager of the Latin Quarter in New York, has been quoted as saying that "In cracking down on expense accounts, the Government is curtailing one of the fundamental things that sales are based on. Let's face it," says Mr. Risman, "people have to entertain to put buyers in a mood and to celebrate a contract. Now a salesman will have to pick his accounts and let prospects go." Is entertainment "one of the fundamental things that sales are based on"?

[A] Benton: I'd like to answer that. Your total elaborate entertainment in the U.S. probably doesn't run to $100,000,000 or $200,000,000. Key men are too smart to accept it. I'm not saying that ethics keeps them from accepting it. They're too busy. Who could entertain me so that it would make any difference how I buy paper for the Encyclopaedia Britannica? I haven't time to get on his yacht. And if I catch my buyer being entertained on anybody's yacht, he's fired. I think this whole thing is greatly overrated.

[A] Carey: Maybe so. But there's an aroma of rot about some of it. We know, for example, that some companies have even used callgirls and prostitutes to help promote sales. But I'd like to move over to another matter -- the expense-account morality. This business of padding the old "swindle sheet" and passing the cost along to Uncle Sam. It seems to me this is another manifestation of the ethical laxity of businessmen, and it costs the rest of us taxpayers money.

[A] Benton: I suspect you'll find that a little padding of the expense account is quite general in American business. I don't doubt you'd find that some of the salesmen who work for me pad a little bit. It doesn't occur to them that it's a question of being dishonest either with the company or about income-tax returns. The salesman knows that there are expenses that he can't charge the company with -- so he gets even by putting down five dollars for a lunch with the superintendent of schools instead of four dollars. Most wives in the United States pad their expense accounts a little bit in dealing with their husbands. So the husbands figure. I guess, that Encyclopaedia Britannica shouldn't be too critical of them if they do a little bit of padding." Again, it's a matter of definition of ethics. I regard this, for example, as quite different from the kind of fraudulent practices reported in The New York Times in the field of art -- where a man will buy a painting for $7000, and get the dealer who sold it to him to give it a rating of $25,000, and then give it to a museum and take a $25,000 deduction. Ethically they may seem the same thing but they're not.

[A] Hart: I think we've developed a generation of businessmen who really have forgotten that you can pay for your own lunch. The tax-deduction device has a perfectly legitimate reason and justification, but I have never understood it to include a corporate executive, who is rather adequately compensated to begin with, to charge his lunch to Uncle Sam. It's a corrosive sort of thing and the cumulative effect is very substantial in terms of tax revenue lost to the country.

[A] Barnet: Actually, the tax laws are almost an invitation to expense-account cheating. A man on a salary, even a big one, has a very hard time accumulating any money. The tax bite is so big. So companies who want to keep a good man sometimes recognize this and look the other way when he hands in a big expense sheet. It's an additional perquisite, like giving him a company-owned car to drive. The fact is there is only so much really first-rate executive talent around and no more. It's hard to land a top man, and when you do, you want to hold him.

I have even heard of cases in which a young executive comes into a department and he's unofficially told that he can add. let's say, $50 a month to his expense account and it won't be questioned. He's told that everyone else does it, and therefore it's OK. Or he's told that unless he does this the people up above are liable to cut back the budget for his department. In other words, it's done to use up a departmental allocation.

Now I think that's bad. We give some of our executives perquisites. But we don't condone padding the expense account in any way.

[A] Sonnabend: Let's be clear about this, though. When we talk about expense-account abuses we don't simply mean living expensively. We mean declaring certain expenses to be business expense, and therefore tax deductible, when in reality they are personal expenses. Or billing the boss for expenses that were personal or nonexistent.

Of course, we don't know what they do when they get back home to file their accounts, but in our hotels we see executives ask for bills and vouchers all the time. They're really trying to live according to high ethical standards, it would seem. Padding, of course, is a very easy thing to do. Easy thing to support. The temptation is very great. And a lot of the accounting is in the gray area. It has many ramifications. It's the business trip that one takes with one's wife and is then extended so that there's a short vacation. There are many variations. It even turned up with an odd O. Henryesque twist in one of our motor hotels. We had a new manager there who thought he could improve business by helping guests fiddle with their expense accounts. If they stayed there a week or two at a time, he'd refund one day to them, personally. Of course, when we discovered this, we put an immediate stop to it and fired the man.

[Q] Playboy: Was he trying to feather his own nest in doing this? Did he get kickbacks from them or share the refund?

[A] Sonnabend: No, he was trying to feather his own nest only by trying to show a high sales figure. He was trying to make his operation look good. We had another case, though, in which the man was trying to help himself at company expense. This one was fascinating. It presented us with one of the most interesting ethical dilemmas we've had. About three years ago, we entered into an agreement to operate a hotel in a South American city. As has been pointed out, many Latin American countries have ethical standards far different from our own. This hotel was built by a government agency, and we undertook to manage it, but on the distinct understanding that under no circumstances would we ever be expected to bribe, pay off or anything like that. The head of the government agency was a highly ethical individual, and because of him we were able to resist pressures brought on us by petty officials, fire inspectors, police and so forth, who wanted graft.

But the government was voted out. The new government was antagonistic and it was hard to work with them. About six months after the new government was in, we discovered that our man in charge there was providing rooms to government people on a complimentary basis. He was sending liquor to their homes. He was hiring their sons and daughters. He even provided transportation for one of them to New York.

He was doing this because he had developed personal relations with some of these people and he appeared to be angling for certain concessions from them in other businesses that he wanted to start in the country on his own.

When we discovered this, we tried to fire him. The government people said we had to keep him. The sum of it was that the government agency took away the hotel in August 1961, and we're still trying to recover our investment there.

Incidentally, late finally caught up with both the manager and the new government. The government people were booted out, and the manager has been replaced. This case is an illustration of how a man's greed led him into conflicting outside interests that eventually betrayed him.

[Q] Playboy: This raises one of the thorniest problems in the whole subject -- conflict of interest. The contemporary classic in this field was, perhaps, the Chrysler case. This began boiling over in the spring of 1959 when William Newberg was ousted as president of Chrysler, after it became public knowledge that he had owned interests in two companies that sold supplies to Chrysler. Later L. L. "Tex" Colbert was demoted from chairman of the board, after it became known that his son had been employed by one of these companies, and that his wife had owned an interest in another supplier. Since then, Chrysler has installed a new management responsible for an across-the-board cleanup, under its new chairman. George Love, and its new president, Lynn Townsend. Mr. Dann, you're a substantial stockholder in Chrysler, and you were instrumental in bringing this case to light. How serious is this matter of conflict of interest in business today?

[A] Dann: Well, it is much improved in Chrysler. But this is still a very serious matter in industry, in my opinion, because in situations like this it is the stockholder who suffers. The man who owns an interest in a supplier firm, a dealership, or in some other company doing business with his own corporation, can't give his employer undiluted allegiance. His judgment in business matters is affected by his private interests. He isn't any longer gauging things purely by whether or not they are good for his employer.

[A] Barnet: I don't think this is a terribly serious problem in public corporations. I can see in some private corporations where it might be a real conflict. I know that in our company we haven't come across it. In fact, we ourselves made a check of all our executives just to make sure that they hold no stock in any supplier. I, myself, have been asked to go on the board of directors of some big companies we did business with. Our business didn't mean a darn thing to them. Too small. But I turned them down because there might possibly be a conflict of interest, and rest assured our business with them was maybe only one tenth or one twentieth of their volume. This is something the smart executive doesn't let himself get involved in.

[Q] Playboy: In a speech in Milwaukee last winter, and in other statements, Mr. Newberg has taken the position that his outside interests did not harm Chrysler, and that, in fact, they were beneficial to the corporation because through his outside companies Chrysler was able to purchase supplies at unusually low prices. This raises the general question: Is conflict of interest necessarily bad, or are there cases in which dual allegiance can be of mutual benefit to the stockholders of both companies?

[A] Sonnabend: With all due respect, I think Mr. Newberg's argument is a rationalization. It's pretty hard to establish the case that an executive in Company A needs to have a personal interest in a supplier to have the supplier available to meet the needs of Company A. Why the individual? Why not Chrysler, itself? I'm not in favor of this sort of thing. It's wrong.

Quite apart from that, I think another test is, was there full disclosure? Was the board of Chrysler fully aware of this? Were the stockholders aware of it?

In our company -- and I will admit it's only since this case came out -- we have insisted on full disclosure of all possible conflicts of interest. We send a policy statement to all our people annually together with a questionnaire. All it asks for is full disclosure of a stock interest or any financial or family interest in any company with whom our company does business.

In all, I don't think this is too very widespread today. In general, I think where there are real conflicts, the people are damn fools to get involved.

[A] Barnet: I think you have to ask in the Chrysler case whether Mr. Newberg was just riding a tide -- whether there was a folkway that had been set up in Detroit over the course of years, that this sort of thing was all right.

[Q] Playboy: That is, in fact, what Mr. Newberg emphasized in his speech in Milwaukee, when he said: "In the automotive industry there has been an almost traditional practice of allowing executives to possess outside interests that are in seeming conflict with their official duties."

[A] Barnet: The Chrysler situation brought an awareness to a lot of public corporations.

[A] Childs: I'm afraid that a great deal of business is riddled by this practice. It comes out occasionally. Much of it doesn't come out.

[A] Benton: I think the conflict of interest issue is tremendously exaggerated. The Chrysler thing was a very bad thing. And he got caught and kicked out. A more serious one was this president of Prudential Insurance. [Carrol Shanks was president of the Prudential Insurance Company and a director of Georgia-Pacific Corporation, the nation's top plywood producer, when The Wall Street Journal revealed that he had been involved in a complex deal to sell timberland to Georgia-Pacific. Although he maintained that there was "not the slightest violation of ethics" in the transaction, he resigned his Prudential post not long afterward. -- Ed.] But there's not much of that. There's not much that seriously affects a man's business judgment. I don't even know if the president of Chrysler's business judgments were affected.

I had a conflict of interest when I went into the State Department that Joe McCarthy later hurled at me. I owned Encyclopaedia Britannica Films. The State Department had been buying these films for use in its information libraries abroad. When I went into the State Department I prohibited the purchase of those films. And the men in the Department's film area were furious, because there weren't any other such films made by anybody. McCarthy later threw it at me on the floor of the Senate. Claimed I was making money by having the State Department buy my films. And I produced the figures showing that when I went in they stopped. Many men will lean over backward with a conflict of interest. So the impact on business is very slight. The overall impact. It's understandable.

[A] Packard: Wouldn't you say that one reason for the conflict of interest problem is that, more and more, the managers of our large corporations have no proprietary interest in them? They own very little equity in the companies they work for, and consequently they feel no great stake in them.

Another factor that is creating problems is the sheer size of these companies. This creates a situation where not only is it hard to keep track of everything that is going on within the company, but also it's harder to maintain a genuine loyalty, so that, I think, it's easier for men to drift into conflict of interest situations. They think of the corporation as something big and distant like the United States Government and don't feel so intimately involved in it as you would working for a company small enough and close enough to you, so that you have a pretty clear idea of who is contributing and who isn't.

[Q] Playboy: In this connection, stock options are, of course, one way to give executives a stake in their companies. Yet the stock-option device -- which permits an executive to buy stock in his company at a fixed price and encourages him to work hard so that the price of the stock will rise -- has come under heavy fire. Do stock options contribute toward -- or work against -- high ethical standards in business today?

[A] Javits: Stock options are an excellent way to give management an incentive. I believe in them, and, in fact, I believe they ought to be extended to workers. I'm a great believer in profit participation and stock-buying opportunities for labor as well as management.

Nevertheless, it is true that stock options can run to excess. Obviously, the device is full of dangers as well as benefits. The dangers are of too much stock optioned at too low prices, over too long a period of time, without a relationship to the contribution the individual is making.

The stock option may put pressure on the ethical backbone of the executives getting them because, if they can manipulate the stock, they can, of course, make great sums of money. But it also puts considerable pressure on the interest the stockholders take in their company, because stock-option plans must be approved by the stockholders, and the day the stockholders supinely accept them will be a pretty sad day for American business.

On balance, though, realizing the dangers. I favor stock options. They contribute to better ethics, I believe.

[A] Barnet: Stock options, to my mind, are the only way you can really develop good men and keep them with you. Let me put it this way. In the average corporation, your good men come up through the ranks. They have not had an opportunity to acquire money under our present tax structure. The only way that they can develop a nest egg is through the stock option. And, if they do a better job for their company, and increase the value of the stock, then they have this little piece of the business for themselves. In other words, today the only way you can make real money is on capital gains, let's face it. Not on salary.

Let's go one step further. When a man reaches the $50,000 level, he has reached a stage in his career where further increases don't mean too darn much. Now, in the business world today, one of the biggest cries is for good manpower. So someone else comes along and makes him an offer, and you lose a good man because he hasn't got an interest in the business. Now you take the same man, he's making $50,000 a year, and he's got an option of 1000 shares of stock, and he works two years, and he sees this stock build up, and someone comes along with an offer, and he sees that he can make a hell of a lot on these 4000 shares by working hard: he's not going to accept that offer from somebody else, and this is what happens.

[A] Carey: I'm sorry, but I think we're fostering a popular myth here. Just how much does a manager have to be paid? Madison Avenue has done a good job of spreading the notion that, since the "managerial revolution," the income of management has been modest by comparison with the pelf that was stowed away by the tycoons of the past -- the Jay Goulds, the Rockefellers and the Vanderbilts. I say this is a fairy tale.

Take Cordiner of G.E. He's chairman now, he was president a little while back. If you believe the G.E. public relations boys, Cordiner's remuneration is $222,500 a year. That seems like a modest enough reward for a man who heads the largest electrical manufacturing company in the world and the fourth largest industrial firm in the U.S. But along with fees, bonuses and stock-options, Cordiner is taking home far more than that.

According to Senator Kefauver, Cordiner could have sold the G.E. stock he bought under stock options as of April 1959 and would have netted approximately $2,000,000 after taxes. Netted, mind you! The stockholders are supposed to approve plans like these. But, in practice, the stockholders know just about as much about their corporations as the management tells them, and the board rubber-stamps whatever the management wants. The stockholders get a proxy statement that tells them Cordiner earns $222,500, and possibly the retired G.E. workers and the widows and orphans are supposed to shed a scattering of tears for Cordiner because the G.E. publicity, while never mentioning the $2,000,000, relates sorrowfully that, after Federal income taxes, Cordiner's $222,500 would be reduced to $69,700. If Jay Gould and Commodore Vanderbilt were looking down -- or up -- from wherever they are, they'd probably be saying. "Great balls of fire, what we couldn't do with the capital gains tax and stock options today."

Good work deserves to be rewarded. But when a man gets paid this way for heading a corporation that gets into the biggest criminal conspiracy in antitrust history, I think we have a right to wonder how much incentive is necessary. I think there's a point at which it becomes obscene.

[Q] Playboy: If you feel this way about individual remuneration, how do you feel about profits? The Senate hearings into the drug industry, the recent aircraft hearings conducted by Senator McClellan, the steel hullabaloo, all hinged, ultimately, on the question of profits -- how much and to whom. In our exploration of unethical practices, in this process of defining bad ethics by induction, as it were, could we take a moment to ask how, under our system of profit-motivated enterprise, profits and ethics relate to each other?

[A] Carey: I would say categorically that beyond a certain point profits become profiteering. They become a tax levied on the consumer. For example, there's been a vicious practice of overcharging the U.S. Government, especially in materials essential to national defense.

Recently, the U.S. Tax Court ruled that Boeing Aircraft, one of our biggest defense contractors, had been guilty of -- and I quote -- "Unconscionable exploitation of the United States" by soaking the Government $13,000,000 in excess profits. Right now there are 22 cases involving more than $125,000,000 in which the Government has accused airplane manufacturers of profiteering.

We pay for all that in our taxes. And then, of course, you have the case of the drugs that were marked up by as much as 2000 percent, as we found in the Kefauver hearings. Talk about ethics here is man's inhumanity to man at its worst. And right on down the line this story can be repeated. In Baltimore the Federal Government has charged several milk producers with rigging the price on milk they distributed to school kids. If a company can make a profit in excess of what is fair, shouldn't it return that to the consumer in the form of lower prices?

[A] Barnet: Well, I think a distinction has to be drawn between companies that deal with the essentials of life, and others. Eventually, I think there may have to be certain classes of goods that would fall into the line of what we consider public utilities today, whereby a certain rate of return is allowed. I think, basically, oil may come under this. I think pharmaceuticals definitely should. This is all part of health and welfare. But I think there's a clear line of delineation between necessary products like these and what I would categorize as luxury or semiluxury products.

We may have to broaden our conception of what public utilities are. But I don't think that profits in the rest of industry should be regulated.

And bear in mind, even when we talk about that terrific profit on certain drugs, what was the basic investment in them? How much do Merck and Pfizer and companies like that have to spend on research and tooling before they get one dollar of return?

[A] Benton: I never go into a company unless I hope to earn 100 percent on my money. Now some people would think that that is unethical.

[Q] Playboy: Is it?

[A] Benton: No, under no circumstances. My standards on the profit motive applied to my businesses are very high. If I don't get a high return on anything I touch, I fold it up. One consequence is that when my personal taxes are added to the taxes of the companies I own, this makes me one of the biggest personal taxpayers in the world.

[A] Childs: I am astonished! . . .

[Q] Playboy: Is this high a profit immoral?

[A] Sonnabend: I don't think so. It's difficult to measure, but obviously, in some fields, a profit of this sort is not at all unreasonable. Profit has to be related to risk. If Mr. Benton is making money at the expense of the public, in terms of overcharging for goods and services where the reward is not for special ingenuity or for taking a high risk, then I would say it's probably taking advantage of the public. But on the other hand, if you invest in a Broadway play, or you go out to drill an oil well, the odds are so heavily against you that society can attract capital to these fields only by providing a high margin of profit. Of course, this sort of thing isn't likely to exist long in our society because, ordinarily, profit like that would attract capital and competition. In which case you have to be terribly good to maintain your position. Judging from Encyclopaedia Britannica, I'd say Mr. Benton is terribly good.

[Q] Playboy: But this is premised on pure competition. This is Adam Smith's "invisible hand" regulating the market automatically for the good of all. There are those today who contend that Mr. Smith's "invisible hand" is in a sling, that the workings of the market are disrupted by restrictive pricing practices like those charged in the electrical industry hearings.

[A] Childs: That's why I would have to say that, of all the unethical practices we have been discussing, the worst crime against the free enterprise system is monopoly pricing, either by crude methods, such as in the electrical industry, or by more subtle methods that in some industries go undetected. Take the steel case.

A corporation has the right to raise its prices, despite what the President apparently understood as an implied promise not to. But as to any practical considerations, it was fantastically wrong. If there were real competition in the field, then you could say, all right, U.S. Steel has made a foolish error and has priced itself out of the market. But when you find that within 36 hours all the major companies were going along, then you realize there is no competition in the industry. That's the real trouble. It was perfectly obvious that this was another example of the -- to put it carefully -- of the unanimity of the steel industry, of the fact that there is no competition in the steel industry. When it developed there might be, when two of the companies felt that, perhaps, they would not be compelled to make this price rise, then United States Steel yielded. So this gives the show away.

[Q] Playboy: Economists call this sort of thing "price leadership" and more recently the phrase "administered pricing" has come into currency, meaning that for special reasons an industry is exempt from the normal pressures of a free market and is able to set its prices almost in the face of them. Much concern has been expressed over this, because the antitrust laws, when they were written, did not foresee this process as a possibility. The law makes it a crime to conspire to fix prices. It doesn't make it a crime independently to follow the industry leader's price. How widespread is this sort of thing?

[A] Barnet: My knowledge of price-fixing is fairly limited from a business point of view. In our industry, you have to realize, when we're talking about price-fixing, we're talking about the suppliers who sell to us, not ourselves. How does one draw the line between price-fixing and mere price leadership? Take the glass industry. Owens-Illinois is going to set the price. They control 60 to 70 percent of the productive capacity of the United States and, in effect, this is price leadership. They don't have to sit down with the others. If Owens says the price is going to be such and such, the others are going to follow suit. The same way with cartons; Atlanta Paper controls maybe 60 to 70 percent of carton manufacture.

As long as you have productive capacity in the hands of only a few organizations, it's going to be that way. It's inevitable. That's what led to your steel cartels and things like that.

But if you restrict them, you have to ask, are you restricting leadership in building business? Where are you going to draw the line? Are you going to say, "General Motors, you can only do so many dollars' worth of business a year"? It's a question of capturing the market through normal expansion. Are you going to tell a salesman, "Look, you're a great fellow, but only call on so many accounts, because you're producing too much business"?

[A] Packard: Where you have these great conglomerations of highly diversified industrial giants spreading over many companies, and cases where the entire industry is dominated, say, 90 percent by four companies -- and there are dozens of industries like that -- it's not very realistic to assume that they won't get together on price.

You are really getting a form of private socialism, where these companies are coming almost to be public utilities -- and we don't think anything of public utilities' setting prices, the Government sets them for them -- so that I think we're moving toward a position where it's going to be more and more difficult to head off price-fixing.

[A] Sonnabend: I think we have to take a real hard look at our antitrust legislation. I don't think we can any longer say that bigness, in itself, is bad, as our antitrust legislation often attempts to do. Because in this space age, in competition with a strong monolithic power, we're lucky to have certain big institutions. I think, too, that the antitrust laws say to many companies that they must compete well, but not too well. They must keep prices competitive -- as low as possible -- but not when this threatens to put a competitor out of business. This is a contradiction that many companies have a hard time reconciling. Nevertheless, as long as this is the law, there's no excuse for price-fixing and it should be done away with completely.

[A] Benton: Price-fixing is very serious. We ought to get the Justice Department to enforce the antitrust laws even more strongly. I'd decorate our jails with price-fixers or other monopolistic conspirators. A big factor in the strength of American economy -- in contrast to that of many other countries, as the Common Market in Europe is now discovering -- is the antitrust laws. And one grave reason for the weakness of the British economy is that it has lacked antitrust laws. It's good business, as well as good ethics, to greatly strengthen our enforcement of the Sherman and Clayton Acts.

[Q] Playboy: What responsibility does the top man have for the actions of his subordinates?

[A] Carey: Obviously, an executive has to be responsible for the conduct of his subordinates. I'm the president of a union. If something goes wrong. I have to take responsibility.

[A] Dann: Of course, the top man has to be responsible. If he's not, who is?

[A] Childs: I think this was one of the tragic fallacies of the whole G.E. situation, that the top man disclaimed knowledge of these practices. Well now, if he didn't know, that leaves him in a pretty vulnerable position. He didn't know this was going on -- something that has been so enormously costly to his corporation? After all, these suits filed against G.E. run into the hundreds of millions of dollars, to say nothing of the fines and the discredit brought upon the corporation.

[A] Javits: Well, I think there you get into a legal concept that is a very good guide in this matter. The law says you are charged with knowledge when you know or when you should have known. It cannot be shirked on the ground that they did not know, if they should have known, as responsible men.

[A] Barnet: I take full responsibility for any general policy that I lay down. I don't think any chief executive can slough off what's happening underneath. I think it's up to him. And if a man underneath makes a mistake, it's the chief executive's mistake, and he's got to either stand up for the man or get rid of the man. In either case, it's still his responsibility. You can't bury your eyes as to what's happening underneath. I've seen too much in corporations.

[A] Packard: I've talked to a good many people about this General Electric thing, and I can't get an answer on whether Cordiner knew or not. One of the men said that by the time he was in training in the company -- within a year after joining the company -- by watching, he'd figured out that prices were being fixed. Yet Cordiner started at the bottom and worked his way to the top. He must have been extraordinarily stupid, if he didn't suspect there were shenanigans going on.

On the other hand, I've talked to social scientists who have studied corporate structure, and they say that the communications system in corporations, at the top, is so complicated today, and there's so much effort to protect the top people from disagreeable news, that it didn't surprise them at all that he would claim that he didn't know.

[A] Sonnabend: This is a dilemma, because you've got to say that every superior is responsible not only for his own behavior but for the behavior of the people under him.

From a corporate, legalistic point of view, there's no question in my mind that this is the case, but from a practical point of view. I would say that you've got to assume that it's shared. You've got to take adequate safeguards, and you've got to create an environment that is conducive to high ethical conduct. If we had this situation in my company, I would say to myself that, while I might not be directly responsible for the actions of the individual. I am certainly responsible for creating an environment within the company that would prevent a person from acting this way. And it has got to come from the top.

[A] Benton: If the subordinates are conspiring with other companies to fix prices, and the top man knows it, he ought to go to jail with them, even if he wasn't there doing the deals. But suppose he doesn't know it? A man isn't an accomplice to a murder if he wasn't there and doesn't know it was planned. It is, indeed, the responsibility of the chief executive to seek to know. But he can't always know. All he can do is try.

The Encyclopaedia Britannica today is a bigger corporation than the General Foods Corporation was when Chet Bowles and I started in business in 1929 and General Foods was our client. How could I possibly know everything that's going on at Encyclopaedia Britannica? We've just been up before the FTC in a painfully embarrassing case to me because some of our salesmen -- a handful of the 2000 men working on commission -- have been a little careless with the truth in selling our books. We have had to keep a blacklist. We fire such men. We try to train our men properly. We try to police them. But human nature being what it is, there's a good chance that from time to time we'll catch some one of those 2000 salesmen not telling the whole truth in selling our books. And we'll have to do some more weeding out. Sitting as chairman of the board. I can merely seek to know. I set up the standards. I make the effort. Like the husband dealing with his wife, again I make the effort to know what she's doing with the money. These questions in our discussion are too black and white. Much of life is gray. Many of these things are shadings.

[A] Hart: Certainly the community has a right to expect that top management will ride herd on the practices and attitudes of the personnel in the company. Now in the case of the electrical business. I disagree with some of the things that have been said. Over the years they had periodically gotten out instruction sheets that cautioned their employees to adhere to the antitrust laws. Notwithstanding these instructions, some of the personnel, and it was a pretty top level, ignored the instructions. Now should the top man be indicted on the basis of that? No, Only if you are convinced that the instruction sheets were pure window dressing. I know that there are those who feel that that's exactly what they were. I don't. I cannot believe that a man in the position of Mr. Cordiner would want anything other than meticulous observance of the law on the part of his employees, because, quite aside from the moral implications, the business is too big to run the risk of cutting a corner and being caught. But we have a right to insist of top management that they effectively police their people. Effectively police. And it shouldn't take periodic Congressional hearings to remind them that unless they effectively police, these practices develop.

[A] Carey: How can top management police the situation, when it is, itself, so deeply involved? These conspiracies went right to the highest levels. And the proof is that afterward the overwhelming majority of the 44 guilty executives hastened directly back to their former posts. In just a few seconds, they swapped their prison stripes for gray flannels. What happened? Less than one year after the convictions and prison sentences, on January 10, 1962, the Justice Department announced that 10 electrical manufacturing corporations and nine of their executives had been indicted for price-fixing again! Among those indicted was the Allen-Bradley Company, which was fined $10,000 in the previous conspiracy case and whose president had declared than violations of the antitrust laws were "the only way a business can be run."

Twenty days later, on January 30, 1962, the Washington Daily News reported that once again Westinghouse, the second largest of the original group of conspirators, had been indicted for criminal violation of the antitrust laws. Quoting the newspaper, "The indictment charges that Westinghouse officials continued to conspire to fix resale prices and to boycott distributors who refused to agree to the rigged price scale."

Notice that word "continued." In other words, even after two of its top executives went to the hoosegow, and the company was forced to pay $375,000 in fines -- even after this, there was no break in the company's conspiracy.

If this is the case, what kind of ethical standard does that set for the individual American executive?

[Q] Playboy: There seems to be general agreement that top management in a company has a heavy obligation to keep its house in order. What about the responsibility of the subordinate executive? In these cases, we have found individual executives apparently carrying out orders to do things that were illegal or unethical. What should the individual executive do when he finds himself asked to do something that is unethical? This gets back again to the question raised by Mr. Packard -- the matter of living one's own life -- doesn't it?

[A] Javits: This involves the central issue in the Eichmann case, and in similar issues of tremendous war crimes. What do you do if you're ordered to do something wrong and you might get shot if you don't? Well, it seems to me that in international morality it is now held that, even if you're occupying that kind of job in which you might get shot for not carrying out orders, you still don't do it. The individual is not covered by the fact that he's been ordered to do it. The executive is not going to get shot, but the principle applies. You either resign and denounce them, or you denounce them then and there and fight them. Even when, as a practical matter, you may be fired for taking this position, your ethical responsibility is to run that risk.

[A] Dann: Of course, the executive's first responsibility is to his conscience. If his superior instructs him to do something wrong, it is his responsibility to go up the management line and report it. Naturally, this may be difficult, if the superior is involved. It puts him in a delicate spot. He may even risk losing his job. But that's the ethical responsibility, and if he cannot get satisfaction within management, then it is his responsibility to go to the board. The board represents the stockholder, and it is to the stockholder that, in the final analysis, he owes his allegiance.

The board has the clear, inescapable responsibility for seeing to it that its managers run its company cleanly. Unfortunately, many boards don't carry out this responsibility, and if the executive did carry his information up the line, chances are he'd be ignored or even fired for it. That's my experience with boards. They pay attention to the management, and anybody who doesn't conform to the "party line" or who questions the president gets short shrift from them.

[A] Hart: When reasonable, responsible sources report to a board member that a practice is going on in the company that raises ethical or legal questions, it's the obligation of the board to take all reasonable steps to run the story down. Is it true or is it false? If the report is false, then the board has protected the stockholder by determining that. If it's true, the board must take appropriate action.

[A] Sonnabend: I can't see where a board that meets once a month or twice a month, no matter how long they meet, can really get inside a company. They can see the company through the eyes of the president: they can see the company through the eyes of, maybe, some of the top executives. But they can't really get inside the company.

They have a tremendous legal stake, but from a practical point of view there isn't a heck of a lot they can do. In theory, they're supposed to have more control over the company than anyone else, but just as the stockholder really doesn't have much control over the company, neither do they.

As a matter of fact, there's even a limit to the actual control that a president has in a very large company or a well diversified one.

[A] Benton: Many of your real ethical problems are never talked about. The boards of too many of our big corporations are loaded with the company's lawyers, with its insurance brokers, with stooges that are working for the management. Not bona fide owners. The stockholders all too often are not represented. They are disenfranchised.

[A] Dann: Here we come to the very root of the whole problem of ethics in business, I think. Sure, the executive is responsible to his superior, then to his board. But today the board has ceased to do the job it was supposed to do. It doesn't direct the corporation. It doesn't supervise the management. It's all too often a rubber stamp, a dummy, that simply approves anything the management wants. It doesn't protect the stockholder. Many companies have passed out of the control of the real owners, the stockholders, and into the control of the managers, who milk it dry for their own benefit. Many of these executives own a hundred shares, or a nominal amount, just enough to hold office, which is contrary to the whole ownership idea. Now a tenant is not particularly interested in preserving and protecting the property of a landlord who is far removed from the property.

Theoretically, the executive in management is working for the stockholder and for the stockholder's best interest. But management has become a power in its own right, and very often, where there is a conflict between the interest of the company and the individual interest of a manager, the company gets second best.

[Q] Playboy: We have been talking about the individual's responsibility to the company and the board's responsibility to the stockholders. Everyone agrees that management must fulfill its obligation to the stockholders of the corporation. But does management also have an obligation to anyone else -- to the consumer, the employee, or society at large?

Take the matter of automation. Let's assume a corporation must automate in order to operate profitably. But automation may throw many of its workers out of their jobs.

If the executive's sole responsibility is to make a profit for the stockholders, his course of action is clear. But, if management also owes a responsibility to workers and to the community, the individual manager is torn in several directions. What happens then? Does the company have any responsibility to its workers when it decides to automate?

[A] Benton: That is not solely an ethical question. Now society has a big responsibility to these people, and we've got to get the training programs and national programs to take care of them. Now, however, having said that. I, personally, as an employer, also feel very responsible for them.

[A] Sonnabend: It's my belief that the executive has to weigh his responsibility to all these groups, one against the other. The time is past when a man could say, "My first and primary concern is to my stockholders." I don't think this is true. Now, in any given situation. I think it's a matter of weighing the various alternatives, in terms of a business' many publics.

I think you have to ask yourself a number of questions. First, you have to examine who is hurt by any decision that you make, as well as who is benefited. You also have to ask yourself. "What happens if everybody behaves this way?" I point this out because very often you can come across a situation in business where to do something, let's say even such a blatant thing as a bribe, doesn't seem to hurt anybody. There's still this other test: "What happens if everybody behaves this way?"

One practical dilemma that I was involved with, indirectly, came back at the time when my father was president and chairman of the board of Botany Woolen Mills. The family had a rather substantial interest in Botany. Botany had a sizable loss. The plant continued to lose money. It became rather obvious that the plant needed to close down for the benefit of the stockholders. But from the point of view of the town of Passaic, New Jersey, it was highly questionable as to whether their closing down was in the best interests of the town.

It took a great deal of soul-searching, extending over a period of quite some time, before, in consultation with the union and the town officials, it was concluded that, perhaps, closing down, while in the immediate worst interests of the employees and the town, might possibly be, in the long run, best for the town.

Of course, you ask yourself when you arrive at such a decision, whether you're just rationalizing difficult ethical problems. The decision was made to close down: it did turn out, before too long, that there was fuller employment in the old mill facilities after they were remodeled and occupied by a lot of small companies than there had been by Botany. So that very often it's necessary in our free society, in our free enterprise society, to make a decision of this sort which may, conditionally, seem to be ethically improper, but which in the long run is all right.

[A] Childs: I think the corporation owes an obligation to other sections of the community. I agree. It owes an obligation, yes, of course, to its stockholders, but it owes an obligation to its employees, too. It owes an obligation to the buyers of its product, and, in the larger sense, it owes an obligation to the community.

[A] Dann: Well, the executive's primary duty is to the stockholders. But also, as that corporation is a part of our whole economic system. I think he can find a way to discharge both his obligation to the stockholders as well as to the community, just as a child loves both his father and mother. There's no conflict between the two. I can't but believe he will always be serving the community if he honestly, but honestly, serves the stockholders. No executive serves the stockholders by stealing either for them or from them. Eventually it catches up with the corporation and the stockholders will eventually lose.

[Q] Playboy: Although disagreement has been expressed about the quantity and character of corruption in business, none of you gentlemen would seem to disagree that the level of ethical practice in business today could stand improvement. How can that improvement be brought about? What steps can be taken to encourage a higher level of ethical awareness and conduct? The Secretary of Commerce, shortly after taking office, set up a 26-man Business Ethics Advisory Council, composed of businessmen, educators, clergymen and journalists to, in his words, "see in what ways we might help the business community find ethical solutions to its increasingly complex problems." The council issued a "Call to Action" in which it urged the creation of codes of ethical practice by individual businesses and by whole industries. How useful, in your opinion, can such codes be?

[A] Hart: I think that they would be useful. One of the dilemmas is that there is uncertainty as to what is and isn't right. Now you can say, "Why should anybody be uncertain about a moral question?" Well, there are fewer moral absolutes in this world than we like to think. A code, for example, can be very helpful to a firm engaged in packaging the kind of stuff that goes in the supermarkets. Our committee investigated misrepresentation and fraudulent packaging. If, by code, it was established that in the upper right-hand corner in a particular size type, and in a particular contrasting color, in a prescribed understandable unit, you would identify the contents of a package, then everybody in that segment of the merchandising business would know exactly what was expected. That would definitely be helpful to that industry.

[A] Javits: I'll tell you why I believe in codes. They give you a standard to which to repair. Many people want to do the right thing. The overwhelming majority of people want to do the right thing, the fair thing, and often they're puzzled by what it is. And if society, or some of its segments, adopt a standard, they're willing to adhere to that standard. But they often question "What is it?" "What is the standard?" That's why I so strongly recommend a code.

[A] Barnet: Well, a code of ethics depends upon the individuals who make up the code. A code of ethics is going to depend upon how the individuals enforce it. The experience has been that these things are workable until mavericks develop, and once one firm breaks the line, then your code is finished. You have to depend upon not only the intent but the integrity of everybody who is going to be a part of the code.

In good measure it's a matter of individual morality. This can be strengthened by the climate in the company of course. For example, if top management can maintain close personal ties with their key men, if they can avoid the feeling of a caste system with echelon piled on echelon and everyone sticking to his own stratum, they can build the kind of loyalty to the company that breeds good individual ethics and compliance with the code.

[A] Childs: Well, I am rather skeptical about this having any real effect. I don't know, it may. It would have to be tried, probably, but I am very doubtful.

[A] Packard: I think it's pretty well accepted that the advertising codes are not particularly effective and the broadcasters' codes are not particularly effective. The broadcasters' code specifies that they not broadcast hemorrhoid commercials. But when this came through, dozens of stations kept right on doing it, and preferred losing their code to losing the dough. So that unless you can make the code stick, and have penalties involved, and a respected group at the head that has powers to really inflict moral censure of a serious nature on the offenders. I don't think you're going to go very far.

The weakness of the code is that it attempts to legislate morality without in any significant way changing the underlying environment. The growth of bigness and the weakening of individual loyalty to the organization, the intensity of competitive pressures, the general abundance and affluence, all these things are not changed by a code. The temptations are not removed. Therefore the code can only work by strong enforcement. And it is unlikely you'll get this in any code that requires the industry to police itself.

[A] Sonnabend: The thing that disturbs me about codes is that very often they consist of platitudes, and they don't really help you solve the ethical problems that you face in business. I also have a feeling that sometimes the people who formulate the codes get much more out of them than anybody who reads them. There's a real therapeutic value in wrestling with what goes into a code. I think that, to the extent that a code is really supported by management, really believed in by top management, that it, perhaps, is a starting point. But to rely on a code to regulate ethical conduct is folly.

[A] Dann: I think codes are a good thing, but they are very limited. I think that the right way to attack this problem is by giving the corporations back to their stockholders.

Today stockholders who show up at their shareholders' meetings are treated as intruders, almost. Under our present system, stockholders have no more real freedom of choice in selecting directors than those persons voting in Fascist or Communist countries.

And they don't get any help from the Securities and Exchange Commission. The SEC was originally designed to protect the stockholder. But instead of acting like a police department, it's been behaving like a filing cabinet, except in certain isolated instances. It ought to provide for more democratic balloting in corporations. And there ought to be cumulative voting in corporations.

[Under cumulative voting each stockholder's voting strength is determined by multiplying his number of shares by the number of positions to be filled. Thus, if a 20-man board is being chosen, the holder of 100 shares would get 2000 votes, and he could concentrate these behind a single candidate of his choice. The system makes it easier for organized dissenters to gain representation on corporate boards. -- Ed.]

This would give the stockholders a better chance to oust a corrupt management or to place a few good watchdogs on the board. As it is now, the cards are stacked in the favor of management, and the stockholder is at the mercy of the corporation, and as long as the board and the management know that stockholders are at their mercy, they will follow, unfortunately, that part of human nature that leads them to take advantage.

[A] Barnet: I agree about the SEC. On Wall Street, too, there've been a lot of insider dealings that the SEC should have jumped on right away, not after the fact.

But I have to disagree sharply about cumulative voting. You cannot run a corporation with a divided board, and cumulative voting can be very destructive. I'm opposed to it because through cumulative voting the moron element can get into business. I've had some experience in which several people banded together to bullet their votes, and there was hoodlum money involved. They got their man on the board and through him raised hell. Finally, hoodlums began to get some of the business of the company. Cumulative voting opened the door to that because they needed only one eleventh of the votes to put a man on the board.

You've always got the opportunity to bring a stockholder's derivative action if you want to stop the management.

[In a derivative action, an individual stockholder may sue the management of a company in the name of the corporation itself, and on behalf of all stockholders similarly affected. -- Ed.]

But, despite the fact that I disagree, I must add that I think it's healthy for industry to have people like Mr. Dann around. Keeps management on their toes.

[A] Sonnabend: I do believe in cumulative voting, because it does just that, too. There are risks in it, of course, but it's a more democratic method, and it's good for the company in the long run. We have it, and we think it's a good system.

But I'd like to suggest some other approaches to improving the ethics of corporations. We have our independent outside auditor, required by the SEC, of course, and under the rules of the Exchange. They come in and make a financial audit of the company. I see no reason why a similar company, an auditing firm or a management firm, can't come in and make a general management audit -- an ethical audit, as it were. Taking a look at what are the policies relative to suppliers, to customers, and what is the company's policy relative to supplementary benefits to executives, and a whole lot of other things, too. The results of this audit should be made available not only to the management, and the board, but to the stockholders. I think this kind of periodic review by an independent firm could be helpful.

[A] Packard: I would like to suggest that constant discussion of this ethical problem will, by itself, be a big help. Even if nothing is concretely resolved or no new orders are issued, you get an awareness. It becomes another dimension in the daily activities of people in business. Certainly the advertising business is undergoing quite a change now simply because it is so preoccupied with all the criticism it has received, and I think you are seeing an improvement in the quality of much of our advertising.

But beyond this, I think that what is needed also is the development of management into a profession, in itself, distinct from individual companies. Members could belong to a national association having its own code and standards of behavior, just as doctors and lawyers do, and the manager should be subject to censure if he violates the standards. We are moving in the direction of the professionalization of management. Management is becoming more of a skill in itself. It's simple enough for a man today to move from a zinc company to a finance company to a perfume company, because many of the actual management functions are the same in all of them, especially if they happen to be diversified companies.

I would say that with the growth of giant organizations in this country, the growth of the billion-dollar club, you're getting these companies that really amount to public institutions anyhow. The people working for them are more and more working for public institutions, in that, as we said, they have great public responsibilities. So I think that you might have a more rational situation if the ultimate obligation of the executive were to a professional association that regulates the standards of ethical conduct. I'm not talking about a union, of course, but a professional association. Such associations are far from perfect, but upon issues that are important, I think the AMA, for example, or the architects, the scientific associations, do exert a strong influence.

If executives are going to work for these large organizations, we will continue to have a lot of ethical problems, and a lot of nonsense and conformity, unless we evolve to a situation in which the corporations become truly public institutions in outlook and the men working for them get a new concept of what their responsibilities are.

[Q] Playboy: Thank you, gentlemen. The liveliness and the tone of our conversation make it plain that a good deal of earnest examination has gone into the convictions expressed. We could not agree on whether or not business ethics are worse today than in the past. We could not agree on how much importance to attach to each of the kinds of unethical behavior we discussed. We differed on the usefulness of some of the proposals made for improving the ethical climate in business. About all that we have agreed upon is that the problem is a real one, and that the executive cannot evade blame for an unethical act by arguing that he was following orders.

Perhaps our lack of consensus is understandable in terms of our discussion of corporate responsibility. Until the responsibilities of the corporation to the community -- if any -- are clearly delineated, it is impossible to define the responsibilities assumed by its executives. If an executive must weigh the varying demands of the employee, the customer and the community, along with those of the stockholders, he should clearly understand the priorities assigned to these demands. He must then weigh his own interests. But here, too, in acting upon them, the executive today has few clearly defined guidelines to follow. For when purely personal ethics and morality fail him -- or conflict with his business obligations and loyalties -- his quandaries may well assume proportions as huge as the business complex of which he is a part.

If this conversation has been worthwhile, it is not so much in providing such guidelines as in illuminating the complexity of the problem. It has also, we may hope, contributed to that ethical awareness or sensitivity that Mr. Sonnabend first mentioned and Mr. Packard referred to most recently.