In July 1976, Kukeo Tanaka, former prime minister of Japan, was arrested on charges of taking bribes (US$1.8 million) from Lockheed Aircraft Company to secure the purchase of several Lockheed jets. Tanaka's secretary and several other government officials were arrested with him. The Japanese public reacted with angry demands for a complete disclosure of Tanaka's dealings. By the end of the year, they had ousted Tanaka's successor, Takeo Miki, who was widely believed to have been trying to conceal Tanaka's actions.

In Holland that same year, Prince Bernhard, husband of Queen Juliana, resigned from 300 positions he held in government, military, and private organizations. The reason: he was alleged to have accepted US$1.1million in bribes from Lockheed in connection with the sale of 138 F-104 Starfighter jets.

In Italy, Giovani Leone, president in 1970, and Aldo Moro and Mariano Rumor, both prime ministers, were accused of accepting bribes from Lockheed in connection with the purchase of US$100million worth of aircraft in the later 1960s. All were excluded from government.

Scandinavia, South Africa, Turkey, Greece, and Nigeria were also among the 15 countries in which Lockheed admitted to having handed out payments and at least US$202million in commissions since 1970.

Lockheed Aircraft's involvement in the Japanese bribes were revealed to have begun in 1985 when Lockheed and Grumman Aircraft (also an American firm) were competing for a Japanese Air Force jet aircraft contract. According to the testimony of Mr. William Findley, a partner in Arthur Young & Co. (auditors for Lockheed), in 1958 Lockheed engaged the services of Yoshio Kodama, an ultra right-wing war criminal and reputed underworld figure with strong political ties to officials in the ruling Liberal Democratic Party. With Kodama's help, Lockheed secured the government contract. Seventeen years later, it was revealed that the CIA had been informed at the time (by an American embassy employee) that Lockheed had made several bribes while negotiating the contract.

In 1972, Lockheed again hired Kodama as a consultant to help secure the sale of its aircraft in Japan. Lockheed was desperate to sell planes to any major Japanese airline because it was scrambling to recover from a series of financial disasters. Cost overruns on a government contract had pushed Lockheed to the brink of bankruptcy in 1970. Only through a controversial emergency government loan guarantee of US$250million in 1971 did the company narrowly avert disaster. Mr. A. Carl Kotchian, president of Lockheed from 1967 to 1975, was especially anxious to make the sales because the company had been unable to get as many contracts in other parts of the world as it had wanted.

"This bleak situation all but dictated a strong push for sales in the biggest untapped market left Japan. This push, if successful, might well bring in revenues upwards of US$400million. Such a cash inflow would go a long way towards helping to restore Lockheed's fiscal health, and it would, of course, save the jobs of thousands of the firm's employees" [statement of Carl Kotchian]

Kodama eventually succeeded in engineering a contract for Lockheed with All-Nippon Airways, even beating out McDonnell Douglas, which was actively competing with Lockheed for the same sales. To ensure the sale, Kodama asked for and received from Lockheed about US$9million during the period from 1972 to 1975. Much of the money allegedly went to then prime minister, Kukeo Tanaka, and other government officials, who were supposed to intercede with All-Nippon Airlines on behalf of Lockheed.

According to Mr. Carl Kotchian, "I knew from the beginning that this money was going to the office of the prime minister". He was, however, persuaded that, by paying the money, he was sure to get the contract from All-Nippon Airways. The negotiations eventually netted over US$1.3billion in contracts for Lockheed.

In addition to Kodama, Lockheed had also been advised by Toshiharu Okubo, an official of the private trading company, Marubeni, which acted as Lockheed's official representative. Mr. A. Carl Kotchian, later defended the payments, which he saw as one of many "Japanese business practices" that he had accepted on the advice of his local consultants. The payments, the company was convinced, were in keeping with local "business practices".

"Further, as I've noted, such disbursements did not violate American laws. I should also like to stress that my decision to make such payments stemmed from my judgement that the (contracts) would provide Lockheed workers with jobs and thus impact the benefit of their dependents, their communities, and stockholders of the corporation. I should like to emphasize that the payments to the so-called "high Japanese government officials" were all requested by Okubo and were not brought up from my side. When he told me 'five hundred million yen is necessary for such sales', from a purely ethical and moral standpoint I would have declined such a request. However, in that case, I would most certainly have sacrificed commercial success ... [If] Lockheed had not remained competitive by the rules of the game as then played, we would not have sold [our planes] ... I knew that if we wanted our product to have a chance to win on its own merits, we had to follow the functioning system". [Statement of A. Carl Kotchian]

In August 1975, investigations by the U.S government led Lockheed to admit it had made US$22million in secret payoffs. Subsequent Senate investigations in February 1976 made Lockheed's involvement with Japanese government officials public. Japan subsequently cancelled their billion-dollar contract with Lockheed.

In June 1979, Lockheed pleaded guilty to concealing the Japanese bribes from the government by falsely writing them off "marketing costs". The Internal Revenue Codes states, in part, "No deduction shall be allowed ... for any payment made, directly or indirectly, to an official or employee of any government ... if the payment constitutes an illegal bribe or kickback".

Lockheed was not charged specifically with bribery because the U.S. law forbidding bribery was not enacted until 1987. Lockheed pleaded guilty to four counts of fraud and four counts of making false statements to the government. Mr. Kotchian was not charged, but under pressure from the board of directors, he was forced to resign from Lockheed. In Japan, Kodama was arrested along with Tanaka.

Question 1: What arethe ethical issues in this case study?

Question 2:In your judgement, did Mr. A. Carl Kotchian act rightly from a moral point of view? Was he, in the end, treated fairly?

Question 3. In its October 27, 1980 issue, Business Week argued that every corporation has a corporate culture that is, "values that set a pattern for its employees' activities, opinions, and actions that are instilled in succeeding generation of employees". Describe if you can, the corporate culture of Lockheed and relate that culture to Mr. Kotchian's actions(5 marks).Describe some strategies for changing the company's culture so that it makes foreign bribe payments less likely?