Lockheed Martin Adapts to Meet New Pentagon Rules on Conflict of InterestJuly 08, 2010

 

In a move to avoid conflict of interest, Lockheed Martin recently announced it is reshaping the company by divesting from two units.

The decision comes on the heels of rules the Pentagon recently drafted to minimize potential conflicts of interest for its contractors. A conflict can occur, for example, when the same company is to hired build and maintain a system and it is also separately hired to evaluate the work performed by that system, according to an article in The Washington Post.

The Post reported that Lockheed would divest most of its Enterprise Integration Group (EIG) and Pacific Architects and Engineers (PAE), two units within its information systems and global services business. EIG provides systems engineering and integration services.

"Increasingly, the work that has been done in EIG has fallen under this general discussion area of a potential conflict of interest," Lockheed chief executive Robert J. Stevens told the Post. "We just simply respect the fact that the government wants to raise the standard here."

Eric W. Orts, Wharton professor of legal studies and business ethics, notes that Lockheed should be commended for taking this step from an ethical perspective, even if the motivation is also legally and economically rational.

"First, I believe that divesting or spinning off divisions of operations that may create a conflict of interest—especially when faced with a potential for new regulations—is quite pragmatic," he says. "Second, it would be nice to see similar regulations take effect in the world of financial services, where conflicts of interest have been rife—and regulation still seems to lag behind the reality of significant conflicts of interest."

Orts noted that financial institutions confront conflict of interest issues when a bank trades on their own account against the interests of their clients. "The defense context is different, of course, because a company like Lockheed has one major client—the U.S. government," says Orts. "And in these circumstances, it is especially important to avoid potential allegations of conflicts of interest in the procurement process."

Thomas Donaldson, also a Wharton professor of legal studies and business ethics, says the government deserves credit for attempting to block conflicts of interest within its contracting and consulting efforts. "The credit here appears to flow to the government, not Lockheed, since Lockheed's own announcement explains the decision to divest by citing the recent strengthening of government standards."

The potential for conflict is real and in recent years the government has increasingly asked consultants to help it draft new rules. Those same consultants can game the process to help themselves, according to Donaldson. As an example, he cites how for many years the firm Science Applications International advised the Nuclear Regulatory Commission about drafting rules for nuclear recycling, and at the same time the firm was a contractor on a recycling project. A federal jury in 2008 found that the company had knowingly concealed information about its business interests that would compromise its consulting work.

"It's hard to know how deep this problem goes. Some say very deep. This may be the tip of the iceberg," Donaldson points out.