On Thursday, June 8, 2006, Northrop Grumman Chairman and CEO Ronald D. Sugar addressed the Defense Industry Initiative’s Best Practices Forum on the subject: “Ethics and Industry: National Security and the Defense Industry Initiative.” Below are his remarks.

Ethics and Industry: National Security and the Defense Industry Initiative

Good morning and welcome to the Best Practices Forum for 2006. I’m happy to be with you this morning to kick off this important event. Before I begin my remarks, let me give you a news update. As some of you may have heard, early this morning coalition troops in Iraq managed to kill Abu Musab al-Zarqawi. President Bush and Prime Minister Blair have already given statements.

There will no doubt be more details forthcoming as the day continues, but it appears that his death was the result of a combined operation involving careful intelligence, cooperation between Iraqi and American troops, special operations forces, and a precision air strike. I’m sure I speak for all of us when I say “well done” to our forces in Iraq.

Their accomplishment also underscores the importance of what our industry does. This forum is important because ethics are more critical to our industry than to any other industry in America. I’ll have more to say about that in a minute. But first I would like to thank the DII [Defense Industry Initiative] working group for their hard work getting this year’s forum off the ground. The Chair of that group is Patti Ellis. Thanks, Patti. The group has done a first-class job. And also, thanks to Dick Bednar, our DII Coordinator, for another year of excellent administration.

Dick has been very busy since the last forum. He takes his duties seriously because within our industry ethics is indeed a serious topic. It’s no secret that there are legions of cynics quick to believe the worst about industry in general and the defense industry in particular. Dick’s effective administration of the DII helps to overcome that cynicism.

This year marks the initiative’s twentieth anniversary and we are here to re-dedicate ourselves to its underlying principles and to celebrate its accomplishments as our industry’s strong moral compass.

It is a compass that our industry did not have twenty years ago. In fact, DII was conceived within a maelstrom of scandals, allegations and improprieties that spawned the Packard Commission study. In 1986, that commission reported that the American public had a lack of confidence in our industry. It concluded that defense companies could benefit from a greater emphasis on corporate self-governance. Soon thereafter, the CEOs [Chief Executive Officers] of that time got together to draft the principles that would become the Defense Industry Initiative.

DII has three objectives:

  1. to nurture and promote a code of ethical conduct throughout the defense industry;
  2. to promote self-governance;
  3. and to share best practices in ethics and business conduct issues.

If viewed as a mere checklist, these objectives have limited utility. But if embraced as a part of a corporation’s culture, they hold tremendous power. This is because absorbing a body of ethics does more than restrict bad behavior; it also empowers good behavior.

The need for an ethical culture is critical to our industry. In fact, I contend that no industry is more dependent on its code of ethics than the defense industry is on the DII. This is because our industry is unlike any others, in three very important ways.

First, the stakes of what we do are much higher than those of most non-defense sectors. The products we build are critical to the national defense. As such, standards and practices that might be fine for non-defense industries are often inadequate for ours. Let me give you an example.

As we entered World War II, America did not have a dedicated defense industry. As happened in past wars, it was assumed that civilian industry would be temporarily bent to the task of manufacturing military products. But what might have worked during the First World War did not work during the second. Defense technology had grown much more complex, aircraft in particular. Ford Motor Company built the enormous Willow Run plant south of Detroit to build B-24 bombers. But they made the mistake of simply transferring some of their time-tested auto manufacturing techniques and standards to warplane construction. The results were dismal for the first aircraft made there, and tragic for some of the air crews who flew them. America’s early tank production had similar problems for similar reasons.

The lesson is that defense production is no longer interchangeable with civilian industry. During his 1961 farewell address to the nation, President Eisenhower warned us of the challenges of the “military industrial complex.” But he also said, “Until the latest of our world conflicts, the United States had no armaments industry. American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense.” Eisenhower then went on to characterize the development of a permanent defense industry as “imperative.”

Eisenhower understood that our industry requires a higher standard of manufacturing, management, leadership, and yes, ethics. In our line of work, these standards can mean life or death. The young men and women who put on the uniform every day and go into harm’s way on our behalf expect and deserve our very best efforts, which brings me to the second reason why our industry is unique – the ethical standards of those we equip and support.

Let me tell you a story that illustrates the kind of people we exist to serve. If you ever read Mark Bowden’s book, “Black Hawk Down,” you’ll be familiar with this account. It is a story about the attempted arrest of a Somalian warlord. But more than that, it is an object lesson in the ethos of the American warrior. I won’t recount the entire story but let me tell just one part of it.

On the afternoon of October third, 1993, a unit of U.S. Army Rangers found itself cut off, surrounded, outnumbered and fighting for their lives in the hot and dusty streets of Mogadishu. The unit’s vehicles were ordered to return to base with the wounded while the rest of the unit tried to hold out until help could arrive. Fighting their way through one ambush after another the convoy finally lurched through the gates of their base camp. Virtually every tire had been shot out. Every vehicle was riddled with bullet holes. Some vehicles – dead altogether – were pushed along by those still running. Blood dripped from just about every chassis.

What happened next, however, was astonishing. The call went out for volunteers to man a relief convoy that would charge back into the gauntlet to re-join those still holding out. Virtually every soldier on that base – army supply clerks, air force radio operators, mechanics, even those few unwounded who had just arrived – scrambled to find a weapon…any weapon…before the relief column left without them. They feared letting their buddies down more than they feared death itself. For Americans like them, notions of honor, duty and responsibility are neither quaint nor theoretical. They are, instead, matters of life and death. America’s warfighters are idealists, and those idealists are our customers. We cannot retain their confidence in us unless our diligence approaches theirs.

This brings me to the third reason our industry is so dependent on ethics…our partnership with our nation’s government.

President Bush once pointed out that “All investment is an act of faith. And faith is earned by integrity. In the long run,” he went on, “there is no capitalism without conscience, and there is no wealth without character." This is especially true for the defense industry because, unlike other industries, our corporate futures brighten or darken in proportion to the faith placed in us by our government.

Most Americans are surprised to learn that our industry is not the economic juggernaut they perceive it to be. By just about any measure – profit margin, capitalization, total revenue, number of employees – we are smaller than energy or automobile production, retail, pharmaceuticals, even entertainment. And our customer base is miniscule by comparison. But because of who that customer base is, our industry has a very low tolerance for scandal. Between your companies and mine, the Pentagon, the voters, and Capitol Hill, our industry is truly a system of systems. If the taxpayers turn their backs on us, their elected representatives will too. And our stockholders will soon follow.

It is hard to overstate the importance of the Defense Industry Initiative – our moral compass for two decades now. Far from window dressing, the DII has real ballast to it. Each DII signatory pledges to uphold six fundamental principles:

  • They must adhere to written codes of conduct;
  • They must train employees in those codes;
  • They must encourage the internal reporting of code violations;
  • They must practice self-governance;
  • They must share “best practices” with other firms, and participate in annual “Best Practices Forum” such as that which has brought us together this morning;
  • And they must be accountable to the public.

The DII is a comprehensive package. And that is one reason for its success. It has enjoyed a steady growth. There were 32 original signatories 20 years ago. I am proud of the fact that four of them were Northrop Grumman heritage companies. By the start of 2005 that number had grown to 60. And today the number is 70. We owe a debt of gratitude to the Aerospace Industries Association for their effective promotion of the DII. Dick Bednar has also provided yeoman’s service. He is a regular on the speaker’s circuit, and last year he testified before the Defense Science Board. But if imitation is the sincerest form of flattery, then perhaps the strongest endorsement of the initiative comes from the health care industry. That industry is setting up an ethics initiative of its own, modeled in part on the DII.

Creating a culture of ethics is not difficult, but it does take time, discipline and commitment. It starts with vision based on values, then training. At Northrop Grumman, for example, we communicate the importance of ethics to everyone from the members of our Board of Directors to all our employees. And we keep doing so throughout everyone’s career. All of our vice presidents participate in a four hour course on the subject as part of our week-long leadership training. And I make integrity one of my annual corporate priorities ensuring that every Northrop Grumman employee understands that integrity is everyone’s business. This year Northrop Grumman is participating in the DII business ethics survey in order to evaluate our ethical culture and focus our future efforts.

The communication must be both ways, however. We all maintain hot lines, help lines and tip lines. We call ours the Open Line to emphasize that it is open to anyone with a question, comment or piece of information. We strive for an environment of trust where employees feel comfortable raising issues or concerns to their supervisors, management, the ethics office or even me. I get many interesting e-mails during the course of a year and every one is treated as important.

Mere compliance is not enough. The creation of an ethical culture requires policies that encourage the reporting of ethical, legal, procedural, and policy violations. We provide quarterly and annual ethics reports for our board. And I felt this issue warrants vice president level attention. The person I elevated to Vice President for Ethics is Sandra Evers-Manly. I meet with her regularly and she has regular, direct access to our Board of Directors. She briefed the Air Force last year and the Navy this year on our DII efforts.

There is still work for all of us to do. Perhaps most importantly, through the leadership of the Aerospace Industries Association, I and my fellow defense CEOs are promoting an international counterpart to the DII with our key industry partners in Europe, the U.K., Japan and elsewhere. Doing so is not only right; it is in our industry’s best interests. Establishing a common standard of ethics will help level the playing field for all, and will help diffuse the perennial calls for protectionism from some quarters. It will also help smooth the road toward export control reform and the reform of ITAR. In short, an international standard of ethics will go a long way toward inspiring defense cooperation among our allies and industry partners.

Wouldn’t our lot be easier if we made simpler, more mundane products? Yes. But what we make are the tools and systems with which our warfighters – our customers – keep the peace and defend the nation. Personally, I would not be anywhere else. There is no higher calling than the defense of a free nation by those in uniform. In a free nation that calling is the highest expression of selflessness and idealism. And it is a privilege and an honor to be a part of the industry that supports those who answer it. But it is also a heavy responsibility. We must be more than mere manufacturers. Just as our warfighters live by a code of ethics, so must we. We cannot break faith with them. Nor can we break faith with our fellow citizens, on whose behalf they risk their lives, or with the representatives those citizens elect, and to whom we must rightly justify ourselves.

The Defense Industry Initiative is here to help us do what we need to do. For twenty years it has strengthened and tempered each link of an amazing chain to the great benefit of this nation and to the ideals that define her. I wish DII another twenty years of success, and I wish you all a very successful forum.