A case in which one company has a surprisingly close relationship to a sub-contracting company, and the boundaries between the two may be compromised.
Author(s): Simil L. Raghavan, Ph.D.
You are a lead engineer with the Lesak structural design firm and have been working with this company for some time. Bill is the owner of Lesak and has successfully operated the business for over twenty years. You respect Bill and hope to move up in the company as your relationship grows.
In order to improve access to government contracts Lesak often uses subcontractors from minority-owned firms. Most large public works projects include monies set aside specifically for employment of such companies, and applicants must satisfy the requirement to employ them in order to compete effectively. Recently, Bill has strongly encouraged you and others in your company to rely heavily upon the services of the MBE Design Group, a minority-owned firm which has done only minor work for you in the past. Although a typical procedure would be to offer up sub-contracting jobs for competing bids, if a company is willing to do the work for a reasonable price, you can save considerable time and energy by just offering them the job directly. Bill insists that MBE is more than willing to work within your budget constraints. Upon contacting MBE you realize that your boss’ 22-year-old daughter Myrna is the firm’s vice president. Myrna states that she purchased partial ownership in the company using a loan from her father.
Over the next year and a half MBE continues to provide services for Lesak. They do adequate work, and Bill is very proud of his daughter’s initiative and involvement in the company. You notice that several of the MBE employees have worked directly for Lesak in the past. You have doubts about Myrna’s managerial and business skills but feel that the company president and majority-owner, Howard (an African American who ran the company alone for 5 years before taking Myrna as his partner), is a skilled manager and engineer. No significant issues arise, and so you continue to request MBE for many of Lesak’s minority business contracts. When Howard dies suddenly of a heart attack, he is quickly replaced as president by his widow Eileen. Eileen is a full-time professor at a local university with little business or engineering background. You suspect that her appointment as president is merely a front to keep the company’s “minority” and “independent” status and feel that she is unqualified for the position.
This case is based on publicly accessible information regarding actual events that occurred in Rhode Island. You can see this newspaper article for more information.
Posted 8 years and 11 months ago
Author(s): Tim Lohrentz
I believe that Myrna’s part ownership in the firm does present a “conflict of interest” in hiring MBE Design Group. This reaches a level of public scrutiny because public tax dollars are being used to fund some of the contracts that MBE is used on. In addition, MBE is being used to fulfill Lesak’s requirement to have minority-owned sub-contractors. In this setting, MBE should be required to bid on any potential subcontracts, both for ethical and public transparency reasons.
I do not think that Eileen’s taking over the Presidency of the firm should be questioned on its face. The question of succession is a serious one at many minority owned firms. Obviously she is majority owner but it is not clear if she is acting as the CEO. If so, there is no reason to question her role. If she is a good CEO she will surround herself with people who know business and who know engineering. She could be very successful and maintain the minority status of the firm in a successful way.
The problems in the relationship between Lesak and MBE pre-date Eileen. Obviously it is not healthy for MBE to have 85% of its work coming from Lesak. However, it is better to give Eileen at least a year in her new position before addressing this since it requires some major changes to the firm’s business plan and this should only be done from a position of strength – when the firm has completed its transition to new leadership.
It would be the responsibility of senior leadership at Lesak, such as the lead engineer, to question the appropriateness of the Lesak – MBE relationship for a variety of reasons. How this questioning occurs really depends on the corporate structure and environment at Lesak.”
Author(s): Daryl E. Chubin, Ph.D.
For pedagogical purposes I would consider this case two cases, separating it after question 3 (perhaps into a and b). While one builds on the other, the second introduces new issues that complicate understanding. I would also make clear at the outset that this is about ethics, not law. While the whiff of nepotism permeates the case, human judgment is at issue. Law and propriety don’t always coincide. Others will have to decide whether laws have been violated.
Based on what appears in the opening two paragraphs, I would say that:
In all, this does not pass the smell test—while it may be legal.
The information in the paragraph preceding the other question is more damning, especially if one reads the newspaper article on which it is based. An overarching point to make in the paragraph is that minority set-asides require evidence of company capability, i.e., that low bid alone should not carry the day. My response to the questions, then, are:
This is a provocative case, and therefore, well-suited for teaching and learning.
Author(s) Arthur E. Schwartz, CAE
Regardless of one’s view on minority set asides, there are certainly well-established and recognized public policy reasons for set-asides and so the fact that a company participates in such programs is not an ethics issue per se. Generally a government contractor may not hire a minority business enterprise unless the enterprise meets certain threshold requirements and standards in order to qualify under government contracting regulations.
Having said that, under the facts, an outright conflict of interest seems to have developed. While Myrna was apparently not an original employee or owner of MBE, her recent purchase of the company stock with a loan from her father Bill, combined with Bill’s recent strong encouragement to heavily rely on the services of MBE suggests that Bill is motivated at least partially to assist his daughter’s company. In addition to nepotism, Bill also helped to finance his daughter’s stake in MBE, and so Bill also has a direct financial interest in seeing that MBE is successful – to benefit his daughter and also to assure that the loan he made to his daughter is repaid. His actions may undermine his client’s (the federal government) interests in obtaining the most qualified engineering services at a fair and reasonable price and could also ultimately undermine the long-term interests of Lesak, a company in which he serves as an officer. So Bill has a conflict of interest as an officer of Lesak and his interest as the father and creditor of Myrna, an officer of MBE, a firm with which Lesak is engaged in ongoing business. These issues could also easily raise legal questions under federal contracting rules and procedures. Therefore, the lead engineer should have a candid discussion with Bill and explain his concerns – ethics, reputation, legal liability, etc. - and the potential impact and consequences these issues could have on Bill, the company, Myrna and MBE.
Regarding Howard’s passing and being replaced by his widow Eileen, while it is not unusual today for engineering companies to be headed by non-engineers under corporate practice rules, these non-engineers generally have extensive experience in the business of engineering or in business generally. Eileen’s ascension certainly raises a red flag and the lead engineer has an obligation to carefully investigate this issue. The lead engineer should recommend that key Lesak employees meet with Eileen and others at MBE as soon as possible to better understand MBE’s plans going forward (e.g., is Eileen a temporary replacement, will Eileen have knowledgeable engineering, business, financial, legal, risk management, etc., advisors to guide her immediately and in the future, etc?). If the lead engineer is not convinced that MBE has plans to put into place a knowledgeable and experienced person or a team of individuals to lead MBE, the lead engineer should immediately advise Bill. Lead engineer should explain to Bill that Lesak’s failure to use the services of a firm that does not have a qualified and experienced management team could easily expose Lesak to contractual liability, damage its reputation and its ability to serve as a prime government contractor.
In the event that lead engineer’s concerns are not adequately addressed, lead engineer may need to consider exploring alternative employment options or risk damage to his professional reputation.