CASE 2-3: Starnes-Brenner Machine Tool Company: To Bribe or Not to Bribe?
The Starnes-Brenner Machine Tool Company of Iowa City, Iowa, has a small one-man sales offi ce headed by Frank Rothe in Latino, a major Latin American country. Frank has been in Latino for about 10 years and is retiring this year; his replacement is Bill Hunsaker, one of Starnes-BrennerΓ’ΒΒs top salespeople. Both will be in Latino for about eight months, during which time Frank will show Bill the ropes, introduce him to their principal customers, and, in general, prepare him to take over. Frank has been very successful as a foreign representative in spite of his unique style and, at times, complete refusal to follow company policy when it doesnΓ’ΒΒt suit him. The company hasnΓ’ΒΒt really done much about his method of operation, though from time to time he has angered some top company people. As President Jack McCaughey, who retired a couple of years ago, once remarked to a vice president who was complaining about Frank, Γ’ΒΒIf heΓ’ΒΒs making moneyΓ’ΒΒand he is (more than any of the other foreign offi ces)Γ’ΒΒthen leave the guy alone.Γ’ΒΒ When McCaughey retired, the new chief immediately instituted organizational changes that gave more emphasis to the overseas operations, moving the company toward a truly worldwide operation into which a loner like Frank would probably not fi t. In fact, one of the key reasons for selecting Bill as FrankΓ’ΒΒs replacement, besides BillΓ’ΒΒs record as a top salesperson, is BillΓ’ΒΒs capacity to be an organization man. He understands the need for coordination among operations and will cooperate with the home offi ce so that the Latino offi ce can be expanded and brought into the mainstream. The company knows there is much to be learned from Frank, and BillΓ’ΒΒs job is to learn everything possible. The company certainly doesnΓ’ΒΒt want to continue some of FrankΓ’ΒΒs practices, but much of his knowledge is vital for continued, smooth operation. Today, Starnes-BrennerΓ’ΒΒs foreign sales account for about 25 percent of the companyΓ’ΒΒs total profi ts, compared with about 5 percent only 10 years ago. The company is actually changing character, from being principally an exporter, without any real concern for continuous foreign market representation, to having worldwide operations, where the foreign divisions are part of the total effort rather than a stepchild operation. In fact, Latino is one of the last operational divisions to be assimilated into the new organization. Rather than try to change Frank, the company has been waiting for him to retire before making any signifi cant adjustments in its Latino operations. Bill Hunsaker is 36 years old, with a wife and three children; he is a very good salesperson and administrator, though he has had no foreign experience. He has the reputation of being fair, honest, and a straight shooter. Some back at the home offi ce see his assignment as part of a grooming job for a top position, perhaps eventually the presidency. The Hunsakers are now settled in their new home after having been in Latino for about two weeks. Today is BillΓ’ΒΒs fi rst day on the job. When Bill arrived at the offi ce, Frank was on his way to a local factory to inspect some Starnes-Brenner machines that had to have some adjustments made before being acceptable to the Latino. government agency buying them. Bill joined Frank for the plant visit. Later, after the visit, we join the two at lunch. Bill, tasting some chili, remarks, Γ’ΒΒBoy! This certainly isnΓ’ΒΒt like the chili we have in America.Γ’ΒΒ Γ’ΒΒNo, it isnΓ’ΒΒt, and thereΓ’ΒΒs another difference, too. The Latinos are Americans and nothing angers a Latino more than to have a Γ’ΒΒGringoΓ’ΒΒ refer to the United States as America as if to say that Latino isnΓ’ΒΒt part of America also. The Latinos rightly consider their country as part of America (take a look at the map), and people from the United States are North Americans at best. So, for future reference, refer to home either as the United States, States, or North America, but, for gosh sakes, not just America. Not to change the subject, Bill, but could you see that any change had been made in those S-27s from the standard model?Γ’ΒΒ Γ’ΒΒNo, they looked like the standard. Was there something out of whack when they arrived?Γ’ΒΒ Γ’ΒΒNo, I couldnΓ’ΒΒt see any problemΓ’ΒΒI suspect this is the best piece of sophisticated bribe taking IΓ’ΒΒve come across yet. Most of the time the Latinos are more Γ’ΒΒhonestΓ’ΒΒ about their mordidas than this.Γ’ΒΒ Γ’ΒΒWhatΓ’ΒΒs a mordida ?Γ’ΒΒ Bill asks. Γ’ΒΒYou know, kumshaw , dash , bustarella , mordida ; they are all the same: a little grease to expedite the action. Mordida is the local word for a slight offering or, if you prefer, bribe,Γ’ΒΒ says Frank. Bill quizzically responds, Γ’ΒΒDo we pay bribes to get sales?Γ’ΒΒ Γ’ΒΒOh, it depends on the situation, but itΓ’ΒΒs certainly something you have to be prepared to deal with.Γ’ΒΒ Boy, what a greenhorn, Frank thinks to himself, as he continues, Γ’ΒΒHereΓ’ΒΒs the story. When the S-27s arrived last January, we began uncrating them and right away the jefe engineer (a government offi cial)Γ’ΒΒ jefe , thatΓ’ΒΒs the head man in chargeΓ’ΒΒbegan extra-careful examination and declared there was a vital defect in the machines; he claimed the machinery would be dangerous and thus unacceptable if it wasnΓ’ΒΒt corrected. I looked it over but couldnΓ’ΒΒt see anything wrong, so I agreed to have our staff engineer check all the machines and correct any fl aws that might exist. Well, the jefe said there wasnΓ’ΒΒt enough time to wait for an engineer to come from the States, that the machines could be adjusted locally, and we could pay him and he would make all the necessary arrangements. So, what do you do? No adjustment his way and there would be an order canceled; and, maybe there was something out of line, those things have been known to happen. But for the life of me, I canΓ’ΒΒt see that anything had been done since the machines were supposedly fi xed. So, letΓ’ΒΒs face it, we just paid a bribe, and a pretty darn big bribe at thatΓ’ΒΒabout $1,200 per machine. What makes it so aggravating is that thatΓ’ΒΒs the second one IΓ’ΒΒve had to pay on this shipment.Γ’ΒΒ Γ’ΒΒThe second?Γ’ΒΒ asks Bill. Γ’ΒΒYeah, at the border, when we were transferring the machines to Latino trucks, it was hot and they were moving slow as molasses. It took them over an hour to transfer one machine to a Latino truck and we had ten others to go. It seemed that every time I spoke to the dock boss about speeding things up, they just got slower. Finally, out of desperation, I slipped him a fi stful of pesos. and, sure enough, in the next three hours they had the whole thing loaded. Just one of the local customs of doing business. Generally, though, it comes at the lower level where wages donΓ’ΒΒt cover living expenses too well.Γ’ΒΒ There is a pause, and Bill asks, Γ’ΒΒWhat does that do to our profi ts?Γ’ΒΒ Γ’ΒΒRuns them down, of course, but I look at it as just one of the many costs of doing businessΓ’ΒΒI do my best not to pay, but when I have to, I do.Γ’ΒΒ Hesitantly, Bill replies, Γ’ΒΒI donΓ’ΒΒt like it, Frank. WeΓ’ΒΒve got good products, theyΓ’ΒΒre priced right, we give good service, and keep plenty of spare parts in the country, so why should we have to pay bribes? ItΓ’ΒΒs just no way to do business. YouΓ’ΒΒve already had to pay two bribes on one shipment; if you keep it up, the wordΓ’ΒΒs going to get around and youΓ’ΒΒll be paying at every level. Then all the profi t goes out the windowΓ’ΒΒyou know, once you start, where do you stop? Besides that, where do we stand legally? The Foreign Bribery Act makes paying bribes like youΓ’ΒΒve just paid illegal. IΓ’ΒΒd say the best policy is to never start: You might lose a few sales, but let it be known that there are no bribes; we sell the best, service the best at fair prices, and thatΓ’ΒΒs all.Γ’ΒΒ Γ’ΒΒYou mean the Foreign Corrupt Practices Act, donΓ’ΒΒt you?Γ’ΒΒ Frank asks, and continues, in an IΓ’ΒΒm-not-really-so-out-of-touch tone of voice, Γ’ΒΒHavenΓ’ΒΒt some of the provisions of the Foreign Corrupt Practices Act been softened somewhat?Γ’ΒΒ Γ’ΒΒYes, youΓ’ΒΒre right, the provisions on paying a mordida or grease have been softened, but paying the government offi cial is still illegal, softening or not,Γ’ΒΒ replies Bill. Oh boy! Frank thinks to himself as he replies, Γ’ΒΒLook, what I did was just peanuts as far as the Foreign Corrupt Practices Act goes. The people we pay off are small, and, granted we give good service, but weΓ’ΒΒve only been doing it for the last year or so. Before that I never knew when I was going to have equipment to sell. In fact, we only had products when there were surpluses stateside. I had to pay the right people to get sales, and besides, youΓ’ΒΒre not back in the States any longer. Things are just done different here. You follow that policy and I guarantee that youΓ’ΒΒll have fewer sales because our competitors from Germany, Italy, and Japan will pay. Look, Bill, everybody does it here; itΓ’ΒΒs a way of life, and the costs are generally refl ected in the markup and overhead. There is even a code of behavior involved. WeΓ’ΒΒre not actually encouraging it to spread, just perpetuating an accepted way of doing business.Γ’ΒΒ Patiently and slightly condescendingly, Bill replies, Γ’ΒΒI know, Frank, but wrong is wrong and we want to operate differently now. We hope to set up an operation here on a continuous basis; we plan to operate in Latino just like we do in the United States. Really expand our operation and make a long-range market commitment, grow with the country! And one of the fi rst things we must avoid is unethical . . .Γ’ΒΒ Frank interrupts, Γ’ΒΒBut really, is it unethical? Everybody does it, the Latinos even pay mordidas to other Latinos; itΓ’ΒΒs a fact of lifeΓ’ΒΒ is it really unethical? I think that the circumstances that exist in a country justify and dictate the behavior. Remember, man, Γ’ΒΒWhen in Rome, do as the Romans do.Γ’ΒΒΓ’ΒΒ Almost shouting, Bill blurts out, Γ’ΒΒI canΓ’ΒΒt buy that. We know that our management practices and relationships are our strongest point. Really, all we have to differentiate us from the rest of our competition, Latino and others, is that we are better managed and, as far as IΓ’ΒΒm concerned, graft and other unethical behavior have got to be cut out to create a healthy industry. In the long run, it should strengthen our position. We canΓ’ΒΒt build our future on illegal and unethical practices.Γ’ΒΒ Frank angrily replies, Γ’ΒΒLook, itΓ’ΒΒs done in the States all the time. What about the big dinners, drinks, and all the other hanky-panky that goes on? Not to mention PACsΓ’ΒΒ [Political Action Committee] payments to congressmen, and all those high speaking fees certain congressmen get from special interests. How many congressmen have gone to jail or lost reelection on those kinds of things? What is that, if it isnΓ’ΒΒt mordida the North American way? The only difference is that instead of cash only, in the United States we pay in merchandise and cash.Γ’ΒΒ Γ’ΒΒThatΓ’ΒΒs really not the same and you know it. Besides, we certainly get a lot of business transacted during those dinners even if we are paying the bill.Γ’ΒΒ Γ’ΒΒBull. The only difference is that here bribes go on in the open; they donΓ’ΒΒt hide it or dress it in foolish ritual that fools no one. It goes on in the United States and everyone denies the existence of it. ThatΓ’ΒΒs all the differenceΓ’ΒΒin the United States weΓ’ΒΒre just more hypocritical about it all.Γ’ΒΒ Γ’ΒΒLook,Γ’ΒΒ Frank continues, almost shouting, Γ’ΒΒwe are getting off on the wrong foot and weΓ’ΒΒve got eight months to work together. Just keep your eyes and mind open and letΓ’ΒΒs talk about it again in a couple of months when youΓ’ΒΒve seen how the whole country operates; perhaps then you wonΓ’ΒΒt be so quick to judge it absolutely wrong.Γ’ΒΒ Frank, lowering his voice, says thoughtfully, Γ’ΒΒI know itΓ’ΒΒs hard to take; probably the most disturbing problem in underdeveloped countries is the matter of graft. And, frankly, we donΓ’ΒΒt do much advance preparation so we can deal fi rmly with it. It bothered me at fi rst; but then I fi gured it makes its economic contribution, too, since the payoff is as much a part of the economic process as a payroll. WhatΓ’ΒΒs our real economic role, anyway, besides making a profi t, of course? Are we developers of wealth, helping to push the country to greater economic growth, or are we missionaries? Or should we be both? I really donΓ’ΒΒt know, but I donΓ’ΒΒt think we can be both simultaneously, and my feeling is that, as the company prospers, as higher salaries are paid, and better standards of living are reached, weΓ’ΒΒll see better ethics. Until then, weΓ’ΒΒve got to operate or leave, and if you are going to win the opposition over, youΓ’ΒΒd better join them and change them from within, not fi ght them.Γ’ΒΒ Before Bill could reply, a Latino friend of FrankΓ’ΒΒs joined them, and they changed the topic of conversation.
QUESTIONS
1. Is what Frank did ethical? By whose ethicsΓ’ΒΒthose of Latino or the United States?
2. Are FrankΓ’ΒΒs two different payments legal under the Foreign Corrupt Practices Act as amended by the Omnibus Trade and Competitiveness Act of 1988?
3. Identify the types of payments made in the case; that is, are they lubrication, extortion, or subornation?
4. Frank seemed to imply that there is a similarity between what he was doing and what happens in the United States. Is there any difference? Explain.
5. Are there any legal differences between the money paid to the dockworkers and the money paid the jefe (government offi cial)? Any ethical differences?
6. FrankΓ’ΒΒs attitude seems to imply that a foreigner must comply with all local customs, but some would say that one of the contributions made by U.S. fi rms is to change local ways of doing business. Who is right?
7. Should FrankΓ’ΒΒs behavior have been any different had this not been a government contract?
8. If Frank shouldnΓ’ΒΒt have paid the bribe, what should he have done, and what might have been the consequences?
9. What are the company interests in this problem?
10. Explain how this may be a good example of the SRC (selfreference criterion) at work.
11. Do you think Bill will make the grade in Latino? Why or why not? What will it take?
12. How can an overseas manager be prepared to face this problem?
