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Gifts from a Supplier

Added06/15/1992

Author(s) Michael Pritchard
Authoring Institution Center for the Study of Ethics in Society at Western Michigan University
Contributor(s) Michael Pritchard
Notes Case study originally published in “Teaching Engineering Ethics: A Case Study Approach” by Michael Pritchard. Center for the Study of Ethics in Society, Western Michigan University, 1992.
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Authoring Institution (obsolete) Center for the Study of Ethics in Society, Western Michigan University
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Year 1992
Publisher National Academy of Engineering, Online Ethics Center
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  • Posted 9 years and 8 months ago

    Henry West's Commentary on "Gifts from a Supplier"

    I



    Larry Newman's offer looks like a benefit for both Scott
    Bennett and Larry's uncle. Scott needs a place to stay at a
    moderate price; Larry's uncle needs to rent his condo. It looks
    like a mutually beneficial arrangement. In asking Larry to see
    if the condo is available, Scott does not put himself under any
    greater obligation to buy from Larry's company than he has
    already done by playing golf with him, does he? Is there any
    reason for him to refuse the offer?



    II



    When Larry tells Scott that the condo is available for $ 100
    a week, Scott might well feel that he is getting into something
    more than a business transaction, for the going rate for condos
    in vacation areas is several times that. The cheapest motel
    room would cost more than that. But Larry reassures him that
    his uncle isn't interested in renting to strangers at the
    market rate. After all, although he is getting it through
    Larry's recommendation of Scott as a reliable renter, it is
    Larry's uncle's condo, not Larry's or Larry's company's. And it
    is a bargain, not a free gift.



    When the vice president issues the new policy statement, two
    questions arise. First, is Scott accepting an incentive from a
    vendor? And, second, if he is, isn't he still obligated to go
    through with the rental since he has agreed to do so and he
    agreed to do so before the new policy was stated? Scott could
    easily claim that he has not accepted an incentive from a
    vendor. Larry has done Scott a favor, but he has done it as an
    individual acquaintance in the golf league, not as a
    representative of his firm. Does this make any difference? If
    the company that Larry represents is not paying for anything,
    does that mean that it does not classify as an incentive? If
    this is not an incentive, what could count as one, given by the
    representative but not the company? If Larry had gotten the
    condo for him for free, would that have been an incentive? If
    Larry had said something about remembering him the next time he
    called as a sales representative, would that have made it an
    incentive?



    From the description of the case, it sounds as if Scott
    Bennett and Larry Newman are only golf and business
    acquaintances, not close friends. If they were close friends,
    accepting a favor would be different; but it could still
    involve delicate ethical issues when company policy prohibits
    accepting incentives from vendors. Supposing that Scott does
    interpret the favor as an incentive, what should he do? Since
    the vice president's is a "new" policy statement, Scott might
    feel that it does not apply to an agreement made before the
    statement came out. Would that be true? Should Scott have known
    without such a statement that he should not accept incentives
    from vendors? Having agreed to take the condo, Scott is under
    some obligation to Larry's uncle. Larry's uncle is now counting
    on him to occupy the condo and to pay the rent. He could get in
    touch with the uncle and explain the situation, offering to pay
    the rent but not occupy the condo or offering to pay a full
    market price for it so that it does not count as an incentive.
    Would one of those be an appropriate way out?



    Suppose Larry's uncle says that he has no connection to
    Larry's company, and if Scott doesn't take the condo at that
    price, he wants to find someone else who will. He is looking
    for someone to occupy the place so that it won't be burglarized
    and to merely cover his costs, not to make money. So he would
    still like for Scott to take it. In fact, Scott's telephone
    call convinces him more than ever that Scott is a responsible
    person who could be relied upon to take care of the place.
    Should that ease Scott's qualms about it being an incentive, so
    that he could now take it with a clear conscience?



    If it isn't clear whether accepting the condo is an
    incentive, what should Scott do? One possibility is to go to
    his superior to get clarification. But then he puts his
    superior on the spot. Isn't Scott capable of making a
    responsible decision on his own? What would his superior know
    that Scott doesn't know? The superior is likely to be extra
    conservative and not want to get himself into trouble, and he
    may feel that whatever decision he makes will set a precedent.
    It might be better to go ahead with the use of the condo this
    time, since Scott would be in a difficult situation if he were
    told that it is prohibited, and learn that he should avoid
    ambiguous favors in the future. Why do you think that Upscale
    is stating a policy against incentives from vendors? Can't its
    buyers be trusted to do what is best for the company, rather
    than buy an inferior product or one at a higher price because
    of a favor? If they can't be trusted not to be corrupted by
    incentives, can they be trusted not to play favorites with
    their golf friends? Should Upscale have a policy against
    socializing with vendors? Politicians are often offered
    contributions from interest groups who have something to gain
    from legislation that the politician must vote on. Should they
    refuse the contributions? If they don't accept contributions
    from someone, they can't finance their campaigns. Is there any
    difference between the situation of public officials and
    private officials in accepting favors?

  • Posted 9 years and 8 months ago

    Wade L. Robison's Commentary on "Gifts from a Supplier"

    I



    The question is raised of what Scott should say because of a
    potential conflict of interest. Presumably a vendor is
    competing against other vendors for sales, and if Larry does
    Scott a favor, then he may well presume, and he may be correct
    in presuming, that Scott will feel that he is under some
    obligation to return the favor in some way when bids are made
    to Upscale. One might see how there could be a problem in this
    way.



    Suppose that Larry and another vendor both put in a bid for
    parts, and that the bids are essentially the same--same
    material, same costs--so that no objective observer could
    choose between the two and would even think, if he or she did
    not know that the two bids came from different vendors, that
    they are the same bid: they are at least interchangeable. How
    is Scott to choose between the two? If the two bids are
    identical, then he has no objective way of making a choice. He
    can draw straws or flip a coin, decide, that is, in some way
    that makes the choice undetermined by any additional feature of
    either vendor. But if Larry has done Scott a favor, and Scott
    does feel an obligation to do a favor in return, what better
    chance will he have? He will not be harming the company in
    giving Larry the bid because the company will be equally served
    by Larry or the other vendor getting the bid. And the other
    vendor cannot complain that he or she had a better bid that was
    turned down for favoritism.



    But what he will have done is harm the other vendor by
    making the choice between the two vendors on some basis other
    than chance. The choice will be determined by some additional
    feature of one of the vendors, namely, that Larry plays in the
    same golf league as Scott and so saw him so he could make an
    offer to him of his uncle's condo and that he did make such an
    offer. If the other vendor does not ever see Scott socially,
    then Larry has an advantage in bidding that the other vendor
    does not have, namely, being able to do Scott favors that Scott
    feels that he has to return. So the question is what Scott
    should do if Larry offers to check out the condo for Scott.
    There seems to be no harm in Larry checking with his uncle to
    see if the condo is available and how much the rental will
    be--provided that Scott tells him up front that he is not able,
    because of his position, to return the favor in any way in
    making decisions about what bids to accept or not.



    II



    A crucial assumption underlying the position just
    articulated is that the only favor Larry is doing is letting
    Scott know about his uncle's condo. If Larry fixes it so that
    the rent is cheaper than normal, then that would be a different
    situation. For then Larry would be effectively putting money
    into Scott's pocket, and the presumption any objective observer
    would make is that Scott's decisions could well be less than
    objective regarding which bids to accept.



    That is, even if Scott's decisions were perfectly proper,
    even given what Larry has done, if he gets a condo for him more
    cheaply, they will not necessarily be perceived as perfectly
    objective by any other vendor. Scott will have lost the trust
    vendors have a right to impose in him that his decisions be
    determined by the bids made rather than the favors offered and
    accepted. So when Larry tells Scott that the condo is $100 a
    week, Scott should tell him that he cannot accept the
    offer--even if, as Larry says, his uncle just wants someone to
    help a bit with taxes and operating expenses. He should ask
    what the usual rate is when Larry's uncle rents: what does he
    charge those who are not recommended to him by his nephew? And
    he could check, as presumably he has checked, on what the
    normal cost of renting a condo is in that season where he wants
    to go. Presumably the cost of the latter is more than $100 per
    week, and under that circumstance, Scott ought not to accept
    the offer even if Larry's uncle normally does rent to those
    Larry recommends at such a low rate. For other vendors would
    still perceive the offer as a favor. And if Larry's uncle did
    usually rent the condo for more, the case is even clearer.



    So, under the principles so far articulated, Scott would not
    accept the offer. Were he to do so and begin making plans for
    his vacation, he would be in difficulty should Upscale announce
    a new policy that says, among other things, that accepting
    incentives from vendors is strictly prohibited. He could argue
    that he made the decision to accept the favor before the new
    policy was announced, that it is now too late to refuse without
    insulting the vendor, which presumably the company would not
    want, and without causing him great problems, since he would
    now have to get another place to stay at the last minute. Or he
    could argue that he did not, strictly speaking, accept an
    incentive from Larry since he has no intention of having
    Larry's offer make any difference at all to what he will do in
    any event regarding bids. After all the policy presumably
    prohibits employees from accepting something from vendors that
    would be an incentive to provide preferential treatment, and
    Scott does not intend to treat Larry preferentially.



    But the difficulty is that he is likely to be perceived as
    treating Larry preferentially and that it is no doubt the
    perception as much as the reality that the company wants to
    avoid. After all, if it allows gifts and disallows only those
    that bias the judgment of those accepting bids, it will be in
    the terrible position of having to make complex judgments about
    who accepted what for what.



    These are always difficult judgments to make, and they are
    time-consuming and expensive: no company ought to want to put
    itself in a position where it has to make such determinations.
    So the new policy is undoubtedly intended to preclude any gift
    or favor that might be perceived as an incentive. Scott could
    no doubt make a case to the Vice President that what he is
    doing is not an appropriate object of concern--not that much of
    a favor and initiated before the policy went into effect--and
    he might try, as a last course, to talk to the Vice President
    to see if he can go in any case. That gives him one more course
    of action, and if the Vice President says that it is acceptable
    to go, then he can go--though he, and the Vice President and
    the company, will have to live with the perception of others
    that Scott's decisions may be biassed by such a favor. But if
    Scott asks the Vice President, any decision will be on the Vice
    President's head, not on his, and if the Vice President says it
    is acceptable to go, then he may.

  • Posted 9 years and 8 months ago

    Michael Rabins' Commentary on "Gifts from a Supplier"

    The issue of conflict of interest, real or apparent, is of
    continuing concern to most companies who must deal with vendors and
    must try to avoid even just the appearance of wrong-doing. If it
    becomes general knowledge that Company X only buys from vendors who
    pay a hefty personal kickback to the company's purchasing agent,
    then that will chill the process of competitive bidding and the
    resulting honest economies for the company. One company has what it
    calls the New York Times front page test. The question is, if you
    are in doubt about whether to accept a proffered gift or
    consideration, how will it look to other vendors and others in your
    company if your actions are written up in detail on the front page
    of the New York Times? Clearly what Scott Bennett of the Upscale
    Company should or should not do must be based on well publicized
    Upscale Company policy.



    This comes out in part II of this case where, after Scott has
    accepted the low cost condo rental offer from Larry Newman, the
    sales representative who does business with Upscale, an Upscale
    vice-president, sends out the new policy statement that says, in
    part, "Accepting incentives from vendors is strictly prohibited."
    Hopefully the new policy says a good deal more than that, because
    despite first impressions that might indicate that Scott should
    cancel his trip immediately, there are many other considerations
    that must be taken into account. Let's start with the word
    'incentive'. Is a plastic ball point pen with Larry Newman's name
    on it an incentive? What if it's a gold-plated pen? What if it's
    solid gold? So for starters, the new company policy has erred by
    not putting some threshold level on the incentive. Some companies
    put an upper bound of $25 on any acceptable gift. Others flat out
    say, "No gifts at all." What if the proffered incentive is a free
    lunch? Does that mean that you can only order food and drink such
    that the bill (with tax and tip) is less than $25? Some large
    companies and the federal government (since Watergate) escape this
    problem by forbidding acceptance of any free meals. Even then the
    problem continues to grow. How do you define "vendor"? What if
    Larry Newman is a sales representative to Upscale for an industrial
    chemical supply company and Scott Bennett's engineering
    responsibility is only to specify and purchase electrical parts. Is
    Larry truly a "vendor" in this situation, or perhaps just a golfing
    buddy of Scott's.



    The answer to this question has to include the consideration of
    whether Scott knows the Upscale engineer responsible for specifying
    and purchasing chemicals, and more important, whether he has any
    significant influence over those purchasing decisions. Even if he
    does, the book is not yet closed, because the question has to be
    raised whether there are any significant chemical purchases to be
    made in the near future, or alternatively perhaps a large 5 year
    chemical purchase agreement has been signed before Larry and Scott
    teed off together in their fateful foursome. Even beyond all of the
    above considerations the waters still remain muddy. Some companies
    encourage their employees to socialize with their vendors (in a
    balanced fashion) so that there is a close personal relationship
    between the vendor and the purchasing agent. The argument goes that
    knowing the vendor and his product in a thorough fashion, and being
    on a first name basis with the vendor will enable the purchasing
    agent to get treatment for his company in emergency situations that
    might not be otherwise available.



    Certainly the reality and appearance of kickbacks has to be
    avoided, but even then many companies are truly delighted when
    their purchasing agents spend a weekend fishing, hunting or golfing
    with the vendors they are doing business with. From the perspective
    of the company, in one sense, they are getting free overtime effort
    from their purchasing agent that will translate into improved
    productivity or profitability. Finally if two company presidents
    who are negotiating a contract between their companies go off on a
    fishing boat together (that one of them owns) to conclude their
    negotiations, is that truly different from Scott and Larry, way
    down on the company roster, playing golf together?



    The company policy must not depend upon rank or salary in the
    company. When all is said and done, it comes back to the issues of
    appearances and intent. If the proffered incentive is meant as a
    bribe and clearly appears to be such, then it must be avoided.
    Scott might have to discuss with his Upscale vice-president if the
    new policy applies to his circumstances.


  • Posted 9 years and 8 months ago

    Carl O. Hilgarth's Commentary on "Gifts from a Supplier"

    I



    Beware of any lurking sales representatives, especially when you
    encounter them outside of normal business related matters. They
    seem to belong to many of the clubs and sports leagues, chapters or
    sections of professional societies, or social organizations as
    their customers. They sponsor attendance prizes and hospitality
    suites at professional events. They offer to buy you lunch. They
    offer tickets for sports events and free passes to trade shows.
    Many send gifts at holidays, leave you coffee mugs, baseball caps,
    ties, etc. Their spouses try to establish social relationships with
    your spouse. They're always looking for an opening. It goes on and
    on.



    After 25 years as an engineer with purchasing authority, I've
    become very cautious in my encounters with sales representatives
    outside of normal business. Larry Newman fits my paradigm, and I
    must assume that he is in the golf league for business as much as
    for leisure reasons. That Scott mentioned his upcoming vacation in
    Florida is natural conversation. That Larry offered to check the
    availability of his uncle's condo for Scott at a quite moderate
    rental cost is too much of a coincidence. If I'm in Scott's
    position, I'll decline the offer even though it's presented in a
    friendly, offhand manner by explaining to Larry that I don't want
    do anything that has the potential to cloud the objectivity of our
    supplier relationship or provide any cause to raise any question
    regarding a potential conflict of interest.



    II



    Well, the offer was too good for Scott to decline. So he
    accepted it and began planning his vacation. Now Scott's company
    sends out a new policy that says among other things: "Accepting
    incentives from vendors is strictly prohibited." I'll bet that
    Scott's first reaction will be that since the use of the condo was
    offered outside of the business relationship, it does not count as
    an incentive. But what does the company define as an incentive?
    Usually it is anything having a value of $25 or more. Does the
    rental cost price break fall into this category? Perhaps.



    If I were Scott, I wouldn't want to find out the hard way. So at
    this point I would tell Larry that due to the new company policy,
    my stay at the condo could be construed as an incentive, explaining
    that I don't want do anything that has the potential to cloud the
    objectivity of our supplier relationship or provide any cause to
    raise any question regarding a potential conflict of interest. With
    the loosely worded policy that doesn't define incentives, it's
    important to avoid even any appearance of impropriety. Make it your
    own rule not to accept anything from a vendor that costs more than
    $25 on the open market.


  • Posted 9 years and 8 months ago

    C.E. Harris's Commentary on "Gifts from a Supplier"

    Scott's problem could be analyzed in either of two ways. First,
    it could be analyzed as a conflict between his own self-interest
    and the company's welfare. Second, it could be analyzed as a
    "line-drawing" problem. That is, it could be analyzed as a problem
    of determining whether the offer from Larry, the sales
    representative, constitutes a bribe. We all agree that bribes are
    wrong, so the question, according to this second mode of analysis,
    is whether Scott's acceptance of Larry's offer is a bribe- or close
    enough to a bribe to be morally impermissible.



    In this case the second mode of analysis seems to have the
    potential of giving more insight into Scott's problem. In terms of
    a conflict between mere self-interest and the legitimate claims of
    the company, most of us would probably say that the company's
    claims should have priority. The real issue in this case is whether
    in fact there is such a conflict, and this issue hinges on whether
    accepting Larry's offer amounts to accepting a bribe. If it does,
    then Scott's obligations to the company should prohibit his
    accepting Larry's offer. In order to determine whether Larry's
    offer should be considered a bribe, it is helpful to consider a
    standard case of a bribe. Suppose that Larry, who is not one of
    Scott's regular vendors, offers Scott a $10,000 check if he will
    specify Larry's products.



    Suppose, further, that Larry's products are both inferior in
    quality and more expensive, relative to alternative products. If
    Scott accepts the money and specifies Larry's products, he is
    accepting a bribe. This might be considered a standard or paradigm
    case of a bribe. Few would question the judgment that Scott's
    accepting this offer would be wrong. Bribes are wrong for a number
    of reasons. First, they corrupt the capitalist system, because
    competition would ordinarily lead to a person's buying the product
    that provides the most desirable combination of price and quality.
    Second, bribery harms the stockholders of Scott's company, because
    they are not getting the best product for the price. Third, bribery
    is unfair to the other vendors who do not offer a bribe. Fourth,
    bribery tends to corrupt both those who offer bribes and those who
    accept them. It promotes dishonesty, cynicism about human nature,
    distrust of others, and a purely economic view of human
    relationships.



    Larry's offer to let Scott use his uncle's condo for a minimum
    fee is not a paradigm case of a bribe. The amount of money involved
    is probably relatively small, though not insignificant.
    Furthermore, the offer of a low-rent condo is not made in exchange
    for any specific promise to purchase particular products.
    Nevertheless, there are two important similarities to the standard
    case of a bribe.



    First, there is the problem of appearances. It would "look bad"
    if it were generally known thatScott stayed at a the condo of a
    vendor's uncle for such a ridiculously low rent. Most people would
    suspect, probably rightly, that Scott gave his uncle a check for
    the difference between the usual rent and Scott's payment. Second,
    it is reasonable to believe that Scott would feel some obligation
    to specify Larry's products or at least give them special
    consideration. Many would argue that these similarities with a
    standard case of a bribe are sufficient to warrant a judgment that
    Scott should not take the offer. The directive of Scott's vice
    president raises the issue of Larry's offer in an interesting way.
    The directive prohibits accepting "incentives." Is Scott's offer an
    "incentive" if not an outright bribe? There are certainly important
    analogies between a true bribe and Larry's offer, although there
    are also differences. Perhaps, the term "incentive" is the proper
    word to designate Larry's offer. If so, accepting the offer is
    contrary to company policy.


  • Posted 10 years and 1 month ago

    W. Gale Cutler's Commentary on "Gifts from a Supplier"

    Accepting incentives from vendors is a road which sooner or later will lead an engineer, a purchasing agent, etc. into trouble. Even though many such incentives are offered in the spirit of building good will, the vendor who offers major incentives does so to build a "sense of obligation" in the recipient. In the absence of a company policy about incentive gifts, the safe rule is to accept only a gift of token value from a vendor and to be strict about your definition of a token. A necktie at Christmas, a dinner after a working sales conference with a vendor, a package of golf balls inscribed with the vendor's logo probably can be accepted as tokens. A round of golf at the Country Club, tickets to a major football game, free use of a condo in Florida (or even use at a reduced price) cannot be considered token gifts and should be politely refused when offered. The intended recipient need only say, "Thank you, company policy does not permit me to accept your gift," or, in the absence of company policy say, "My personal policy is to decline such a generous gift." A company should have a policy on incentive gifts to take pressure off its employees. This company policy should be published for all employees and company management should enforce it promptly and fairly. The following appropriate statements have been extracted from policies of major companies:


    Raytheon:
    "When you negotiate with suppliers, you must base all prices, terms, conditions and agreements on sound business judgment. If you fail to do so, you can get fired. You must show no favoritism or preference to anyone at the expense of the company. You must do no one any favors. NOR CAN YOU ACCEPT ANY FAVORS. Gifts, free services, discounts on personal purchases- these are also wrong, whether they are for you or for anyone else in your family or household. So are trips, entertainment or special considerations of any kind. You must decline favors and return gifts. Do it pleasantly and diplomatically, but firmly."
    Martin Marietta:
    "Employees may accept meals, refreshments, or entertainment of nominal value in connection with business discussions. A common sense determination should dictate what one would consider lavish, extravagant or frequent. Employees are not permitted to accept gifts from individuals, firms or representatives of firms who have or seek to have business relationships with Martin Marietta. Employees should report to the Ethics Office any instance in which they are offered money, gifts, or anything else of value by a supplier or prospective supplier."
    Air Products:
    "It is contrary to Company policy for employees to accept or furnish gifts, favors, or entertainment of a size or nature which might influence or raise doubts as to the impartiality of the recipient." A company that has a policy of offering generous incentive gifts (with apparently "no strings attached") may believe it is not doing anything wrong, but almost inevitably the offering company does expect to maintain or increase its business by doing so. Ideally, a company's product, quality and price should speak for themselves and not require the support of incentive gifts to those making buying recommendations and decisions. In this case, Scott should refuse the first offer of condo rental at "moderate cost" and certainly, with Upscale's policy in effect, must let Larry know he cannot- because of his adherence to company policy- accept the offer Larry has made. The guidelines for use with the fundamental canons of ethics of the Accreditation Board for Engineering and Technology (ABET) recommend a hard line on gratuities: "Engineers shall not solicit nor accept gratuities, directly or indirectly, from contractors, their agents, or other parties dealing with their clients or employers in connection with work for which they are responsible." Most employers consider this position excessive and only ban gratuities which have more than a "nominal value." "Other people do it" is not a valid reason for accepting a gift! Two questions you may want to ponder further:


    1. What is the difference between "an incentive gift" and a bribe?

    2. Should companies have an ethics statement about giving gifts as well as receiving gifts?


Cite this page: "Gifts from a Supplier" Online Ethics Center for Engineering 6/15/1992 OEC Accessed: Saturday, April 30, 2016 <www.onlineethics.org/Resources/csaindex/condo.aspx>