Ethics Case
Halliburton Plc. & Washington Inc.: The Power of Politics in Corporate Business Success
As a general rule, correcting market failures is best left to the government. Businesses cannot be trusted to get it right, partly because they lack the wherewithal to frame intelligent policy in these areas.[i]
Free-market economist Adam Smith (1723-1790) states that if self-interested people are left alone to seek their own economic advantage, the result, unintended by any one of them, will be greater advantage for all. He maintains that government interference is not necessary to protect the general welfare.[ii]
MBA 8111 Business, Government, and Society
Introduction Governments have become the black box for corporate business success around the world. This paper will discuss the close relationship between business and government, using Halliburton as main examples throughout the case. Halliburton has often been perceived negatively by the public and has become a favorite target by Democrats for critics about conflicts of interest, undue corporate influence, hidden motives, accounting fraud, bribery, bilking the government, tax evasion, and trading with rogue nations.[iii] Its name has become synonymous with political cronyism.[iv] The current U.S. Vice-President Dick Cheney, who previously held the CEO of Halliburton from 1995 to 2000, is criticized to facilitate the government contracts to be available to the company even though he has persistently said that he has severed all business ties with the company. Even though there needs to be fine line between a corporation’s business and the government’s business, in reality, both business and government need to work together to achieve the common goal of their common stakeholder: the community at large. The main challenge is to establish that fine line that constructively and positively affect the community and the world’s citizens.
Company’s Background Erle Palmer Halliburton established Halliburton Oil Well Cementing Company in 1920. Four years later, the company expanded and changed its name to Halliburton Corporation. Today, it is one of the world's largest providers of products and services to the oil and gas industries. Halliburton currently employs more than 100,000 people in more than 120 countries working in two business units: Halliburton’s Energy Services Group and Kellogg Brown & Root (KBR) Engineering and Construction. Halliburton’s Energy Services Group consists of four business segments in drilling and formation evaluation, fluids, production optimization, landmark and other energy services. Halliburton’s engineering and construction subsidiary, KBR, provides state-of-the-art engineering, procurement, construction, and technology capabilities through its Energy & Chemicals division and civil infrastructure capabilities through its Government & Infrastructure division. In the early days, Halliburton’s success was attributed to its thorough patenting of all new processes and devices, which left oil companies at that time unable to have oil wells cemented without using Halliburton’s services. Today, the company adds value through the entire lifecycle of oil and gas reservoirs and provides and integrates products and services, starting with exploration and development, moving through production, operations, maintenance, conversion, and refining, to infrastructure and abandonment.[v] Halliburton is now a leader in securing government services contracts, particularly on the recent military-related contracts in Iraq, serving on the spot as a defense industry contractor or providing capital construction.
Government Links In late 1995, the current U.S. Vice-President Dick Cheney was named chairman, CEO and president of Halliburton. By that time, he had previously served as the U.S. Secretary of Defense under former president George H.W. Bush administration. In 1998, the merger between Halliburton and Dresser Industries, created the new Halliburton as the world's largest oil services firm. The new company with revenues in excess of $16 billion was then restructured and led by the previous Dresser's chairman and CEO, William E. Bradford as chairman and Dick Cheney as CEO. Several members of the current Board of Directors at Halliburton have previously worked for the U.S. government. For instance, Lawrence S. Eagleburger has held a variety of positions in the government under former president George H.W. Bush administration and Ray L. Hunt was appointed by President George W. Bush to the President's Foreign Intelligence Board in October 2001.[vi] To this date, Halliburton has received contracted projects that have been financed by $6 billion in government aid packages since 1992. This government aid that has led to Halliburton contracts includes $2.71 billion from the US export-import bank, $1.11 billion from the World Bank, $611 million from the Overseas Private Investment Corporation (OPIC) and $1.56 billion from other government sources. This figures account for only a small fraction of Halliburton’s total worldwide loan packages.[vii] Halliburton has been enjoying a good couple of years. Since September 11, 2001, the Bush administration has awarded the world’s second-largest oil-services company at least $2.2 billion in defense-related business, mostly to support military operations overseas. The firm also receives generous federal subsidies for some of its most lucrative pipeline projects.[viii]
It is Halliburton’s ties to the US Administration and key government commissions that have essentially guaranteed the company’s smooth flow of large contracts. In December of 2001, Halliburton successfully secured a 10-year deal known as the Logistics Civil Augmentation Program (LOGCAP) from the Pentagon. According to the corporate watch, a UK-based small independent not-for-profit research and publishing group which undertake research on the social and environmental impact of large corporations, “the contract basically means that the federal government has an open-ended mandate and budget to send Brown and Root anywhere in the world to run military operations at a profit.”[ix]
Game & the Rules of the Game Businesses involve in a complex economic system, which is similar to a game, where the game participants are competing to get ahead within some established constraints: the rules of the game. While the rules that restrict game participants are mostly static and determined ahead of time, in the business world, the rules of the game may be changed overtime. In a democracy, individual constituents as well as various interest groups try to influence the writing of the rules in their favor. Thus part of the game itself involves the efforts to modify the rules of the game.[x]
Business entities recognize the need to modify the rules of the game such that they can be benefited. Halliburton, for example, has repeatedly attempted to influence government decisions through lobbying group efforts, cash donations, federal campaign contributions, as well as representatives in key government commissions. Halliburton, for example, is currently a member of the following lobbying groups: US Coalition of Service Industries, American Petroleum Institute, and US Council for International Business. The company’s directors are also involved in several influential government commissions, such as: Trilateral Commission, the Council on Foreign Relations, the Center for Strategic and International Studies, and Influencing Education. Although all of the above efforts are considered legal in the United States, citizens are skeptical on the influence that could negatively affect government’s decisions concerning the community at large. Most public citizens in fact believe that “there is nothing wrong with many of the techniques used by the PR industry – lobbying, grassroots organizing, using the news media to put ideas before the public.”[xi] Otherwise, such practice would have been banned. One of the remarks that Kofi Annan, the current Secretary-General of the United Nations, mentioned in the 50th anniversary of MIT Sloan School of Management captures the constructive spirit of the lobbying practice that “corporations and their leaders can influence policies of governments and steer decision-making in the right direction.”[xii]
Business & Government The relationships between business and government can be divided on two extreme views. The first view looks at government as the best regulatory organization to protect public interests. Such view sees the role of the government and its leaders is to write, approve, and interpret the rules of the game. The proper guardians of the public interest are governments, which are accountable to all citizens. It is the job of elected politicians to set goals for regulators, to deal with externalities, to mediate among different interests, to attend to the demands of social justice, to provide public goods and collect the taxes to pay for them, to establish collective priorities where that is necessary and appropriate, and to organize resources accordingly.[xiii]
When government is viewed solely as the best regulatory organization to protect public interests, one would view that corporations essentially cannot be trusted. In the Halliburton’s case, for instance, the recent investigations by both the Department of Justice and the SEC disclosed that the company may have bribed Nigerian officials to secure favorable tax treatment for a liquefied-natural-gas facility.[xiv] This kind of case and other related cases shows correcting market failures is best left to the government. Industry regulators and government officials have continuously working on new regulations and enhancing the current legislations. The government is expected to write the law that regulates businesses and to enforce orderly business conduct based on that law and regulations. The government’s obligation is to the public and it is expected to be neutral in accommodating the concerns of all its citizens. On the other hand, there is another view that deems government interference to be unnecessary as business activities itself will ultimately protect public interests. This view was first championed by free-market economist Adam Smith who believes that the result of any business activities will be greater advantage for all. In essence, he proclaimed that capitalism and free enterprise society will self-regulate businesses without ignoring everyone’s economic justice and therefore all citizens will be benefited.[xv] Unfortunately, corporations today sometimes get away with gains made at somebody else’s expense. Check and balances has often failed. Even though such negative outcome may not be in Adam Smith’s vision of a free enterprise society, it is certainly the reality of the current problems of any business settings. The need for ombudspersons, agency employees whose job is to ensure the agency is operating as it should be, is greater than ever. In the military, Pentagon’s own Defense Contract Audit Agency is a good example. The agency recently found that the leading US contractor in Iraq, Halliburton subsidiary KBR, overcharged Iraq occupation authorities by $108 million for a task order to deliver fuel.[xvi] Unfortunately, ombudsperson such as Pentagon’s Defense Contract Audit Agency does not do any good if its findings are abandoned. In KBR overcharging case, the Pentagon eventually permitted KBR to black out almost all negative references to the company in that audit findings.[xvii] It is therefore, the issue of ethical business activities should be the main concern of all corporations and individual citizens should not solely rely on public and private watchdog groups in ensuring the fiduciary duty of and trusts given to these corporations.
Corporate Governance: A Method to Self Regulate Businesses A written and constantly adhered-to corporate code of ethics is one way management can demonstrate its full commitment to ethics-bound business activities. In the case of Halliburton, its Ethical Business Practices states that “directors and employees must practice fair dealing, honesty and integrity in every aspect of dealing with other company employees, the public, the business community, shareholders, customers, suppliers, competitors and government authorities.”[xviii] Halliburton’s statement shows that the company recognizes all stakeholders in its business objectives. In actuality, however, the company’s business conducts and corporate governance in practice may not reflect its own statement of ethical business practices. Good corporate governance is definitely more than just published ethical statements and code of ethics. In the business world, fundamentals like trust, integrity, and responsibility matter. Business decisions not only concern and affect investors, but they also have effects on the environments and ordinary people who could either lose their job securities, accumulated life savings, pension funds, or even lose all three. The purpose of business is to generate wealth and it is the management role to plan, organize, and control this generated wealth and distribute them in equitable manner to the best interests of the community at large. From the ethical business points of view, all corporate leaders today have the responsibility that goes beyond simply making profits. Corporate group leaders and management officers serve at the pleasure and for the benefit of all stakeholders, which include shareowners, customers, employees, etc., and not the other way around. With the current decline in public trust; leadership is not going to come from the government or other oversight and watch-dog organizations. As Carly Fiorina, the former chairman and chief executive officer of Hewlett-Packard, stated clearly on the 50th anniversary of MIT Sloan School of Management, “True leadership must come from Corporate America itself.”[xix]
Corporation’s Business & Government’s Business A view that looks at government as the best regulatory institution for business activities and another view that solely looks at corporate governance as self-regulatory means of achieving economic justice could become conflicting ideas. There is definitely a difference between public and private interests and there should be a line that separate government’s business and private for-profit businesses. It is assumed, however, that the government will always work on behalf of the public citizens and for the public interests, when in reality that may not be true. In 2001, for example, the current US government under Bush administration quietly repealed contractors’ accountability standard passed earlier by the Clinton administration. The contractors’ accountability standard is stated under Federal Acquisition Regulation (FAR) standards, which explicitly states the “integrity and business ethics” that prospective bidders for federal contracts are required to meet.[xx] “Even without the Cheney conflicts of interest, serious doubts remain about whether a company with a record like Halliburton’s should even be eligible to receive government contracts in the first place. This, after all, is a company that has been accused of cost overruns, tax avoidance, and cooking the books and has a history of doing business in countries like Iraq, Iran and Libya.”[xxi]
For example, the number of Halliburton subsidiaries in offshore tax havens under Cheney’s tenure as the company’s CEO increased from 9 to 44. Such offshore tax sheltering by corporations and wealthy individuals in aggregate has cost IRS and the public $70 billion a year, which is almost enough to cover the $75 billion President Bush has asked congress to cover the first six months of the Iraq war.[xxii] In addition to Halliburton’s manipulation of US tax policy, the company has also been “milking” a loophole in the US embargo against Iran. While Halliburton insists that its activities in Iran are entirely legal, some in Congress have made claims that the Houston oil services giant is operating on the very boundaries of legality of US law. [xxiii] Manipulating US tax and foreign policy are not the only strategies that Halliburton have been involved in securing profits. Other methods involving business with the government and bidding on contracts financed by US-dominated bilateral and multilateral aid agencies have also proven successful.[xxiv]
Case Summary The issue being discussed in this paper is the topic that concerns all public citizens, politicians, as well as corporations in business communities. A view that solely looks at government as the best regulatory institution for business activities may have to seek further self-governance help from corporations, and vice versa. Both businesses and government exist to continually improve society. The question remains whether the two entities should be independently run that business people should be prohibited in running for governmental positions and elected government officials should be banned from doing business after their finished terms. It is the question of social science that involves ethical decisions in the part of business, government, and society in general.
Questions
1. What are corporation obligations to its shareholders? What are its obligations to other stakeholders and to society in general? 2. Are there any inherent conflicts from these obligations? 3. Do fulfilling social obligations somehow fulfill long-term goals of a company? 4. Concerning the government, should elected government officials be banned from doing business after their finished terms? 5. Concerning businesses, should business people be prohibited in running for a government office even after they have proven to have closed all ties with his or her company? 6. Are there any problems with the business concept of securing corporation’s competitive advantages which include close partnering with the government? 7. Do lobbying activities to influence legislators or public officials for or against a specific cause do any good to the public? 8. Should federal campaign contributions and lobbying practices be legally banned? 9. What special responsibilities do American corporations have in the global community? 10. It is fair to solely let corporate executives make final ethical decisions on behalf of the community?
Notes
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[i] “Profit and the Public Good” Economist, 22 January 2005, 374-8410
[ii] Newton, L. H. & M. M. Ford, “The Classic Dialogue: Is Capitalism the Best Route to Human Happiness?” Taking Sides: Clashing Views on Controversial Issues in Business Ethics and Society, 8th Ed., 2004: 2
[iii] France, M. “What Cheney Did at Halliburton” Business Week Online, 26 October 2004
[iv] Callahan, S. “Marketers Address War Concerns, Successes” B to B, 10 November 2003, 88-12: 1
[v] Halliburton Corporate Website “About Halliburton,” Retrieved February 20, 2005: http://www.halliburton.com/about/index.jsp
[vi] Company Profiles “Halliburton Plc.: Influence & Lobbying,” Corporate Watch Online Retrieved February 7, 2005: http://www.corporatewatch.org.uk/profiles/haliburton/haliburton3.htm
[vii] Earth Rights International “Halliburton's Destructive Engagement,” Retrived February 20, 2005: http://www.earthrights.org/halliburton/hallintro.shtml
[viii] Scherer M., “The World according to Halliburton” Retrieved February 20, 2005: http://motherjones.com/news/featurex/2003/28/we_455_01.html
[ix] Company Profiles, Corporate Watch Online
[x] Colley, Jr., J.L., J.L. Doyle, G.W. Logan, W. Stettinius. “Capitalism, Free Enterprise, and the Corporation” Corporate Governance, 2003: 7
[xi] Rampton, S. & J. Stauber, “The Third Man” Trust Us, We’re Experts!, 2001: 28
[xii] Annan, K. “Corporate Citizenship in a Global Society” Management: Inventing and Delivering Its Future, 2003:21
[xiii] “The Ethics of Business” Economist, 22 January 2005, 374-8410: 20
[xiv] Katz, D., “The Bribery Gap” CFO, January 2005, 21-1: 59
[xv] Newton, 2
[xvi] Hirsh, M. & B. Dehghanpisheh, Babak, “Following the Money” Newsweek, 4 April 2005, 145-14: 34
[xvii] Hirsh, 34
[xviii] Halliburton Corporate Website “Ethical Business Practices,” Retrieved February 20, 2005: http://www.halliburton.com/about/ethical_business.jsp
[xix] Fiorina, C. “Restoring Trust: Corporate Responsibility and the CEO” Management: Inventing and Delivering Its Future, 2003:28
[xx] Cray, C. “The Government’s Business” Multinational Monitor, 25, 5/6: 15
[xxi] Drutman L. & C. Cray, “Halliburton, Dick Cheney, and Wartime Spoils” Citizen Works Online Retrieved February 20, 2005: http://www.citizenworks.org/corp/halliburton.php
[xxii] Drutman, Citizen Works Online
[xxiii] Walt, V., “Halliburton’s Tehran Hideaway” Fortune (Europe), 7 February 2005, 151-2: 13
[xxiv] Company Profiles “Halliburton Plc.,” Source Watch Online Retrieved February 7, 2005: http://www.sourcewatch.org/
