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Frequent kickbacks

All the companies I worked for in my 33-year career produced written ethics policies, and employees had to sign a statement saying that they had read them, and would adhere to them. The policies always included a statement that employees were not allowed to accept any gifts of more than nominal value from vendors. Indeed, over my years in industry, I had occasionally seen ads from vendors stating, "Buy $300,000 worth of electronic components from us, and we'll give you a color television." That is, they were openly bribing company purchasing agents to buy from them (with the company's money), in order to receive a TV set (for the purchasing agent personally).

The conflict of interest is obvious: the purchasing agent might be able to buy the same components from another vendor for $280,000, but he or she could be tempted to go for the TV. This could be looked at as stealing $20,000 from the company. In fact it's almost worse than that: the purchasing agent is stealing $20,000 from the company for a personal gain (the TV set) worth only a few hundred dollars. At any company I've ever worked at, a purchasing agent accepting such a gift from a vendor would be summarily fired.

On the other hand, the purchasing agent might be entirely ethical. The company offering the TV might happen to be the best and the cheapest vendor to buy the components from. Having made a purchasing decision in the best interest of the company, suppose the purchasing agent then accepts the gift of a TV, even though the offer of that gift did not influence his choice of vendor. I submit that he would still be fired! Why? Because he violated the ethics policy. And the ethics policy is in place because without it, the purchasing agent would be tempted to not buy with the best interest of the company at heart (and might even be subtly influenced without realizing it).

Thus, it's important here to clearly separate the issue of whether or not the ethics policy has been violated from the separate issue of whether or not there has actually been an ethical violation.

Once, after being given one of these ethics policies to sign, I pointed out that the policy obviously forbade us from accepting so-called "frequent-flyer miles", which were without doubt personal gifts from vendors (the airlines) that were of more than nominal value. Airline frequent-flyer programs had been around for quite a while, despite creating an obvious conflict of interest. If I'm recalling correctly, some companies (such as IBM) tried to fight them early on, but lost the battle. I know that Raytheon fought them, initially forcing employees to assign their miles to the company (until the airlines made this impossible).

I suggested two alternatives:

1. Take a really principled stand, and forbid employees from accepting frequent-flyer miles. Clearly, quite a few employees, including management and sales and marketing personnel (who did most of the business travel), would be upset by that.

2. Add a clause to the ethics policy, stating something like, "Because frequent-flyer programs are now pervasive, and because we could not compete for employees in certain positions if we did not allow our employees to accept frequent-flyer miles, the acceptance of frequent-flyer miles is an exception to the prohibition against accepting gifts of more than nominal value from vendors."

To my astonishment, the response was to take the position that frequent-flyer programs in no way violated the ethics policy. In fairness, I should add that I'm not aware of anyone else in any company I worked for pointing out this conflict. The other employees apparently all agreed to the ethics policy, and then went on accepting frequent-flyer miles as usual. After all, everyone knew that the companies didn't consider frequent-flyer mile to violate the policy, and in fact, frequent-flyer miles had been accepted for so long that most people didn't give them a second thought.

In 1985, the financial advisor Andrew Tobias wrote an article Note 1 which, in an early paragraph, describes an American Airlines DC-10 "packed to overflowing with passengers paying the $336 one-way coach fare from New York to Dallas, while not 200 yards away sat a half-empty Braniff 727 offering the same trip for $109". He goes on to call frequent-flyer programs "the greatest stroke of marketing genius of the decade", saying:

"It is the genius that packed the American flight at three times the fare and left Braniff coughing in its exhaust. (It's not so much that folks consciously paid an extra $227 each way to get their 1388 AAdvantage miles. It's that they didn't want to know about alternatives. Shop around to save their employers a few hundred bucks? Uh - my other phone's ringing.)"

Braniff is now out of business entirely. So are frequent-flyer programs a harmless perk for weary business travelers? I'd say no. Rather, the frequent-flyer programs destroyed the smaller airlines, and we all pay for those "free" miles in our fares. The airlines pay a lot of money for the frequent-flyer programs. The airlines use them because they work.

At Kronos, the last company I worked for (for almost 25 years), the management was highly ethical, and made an effort to be sure that employee flight selections were not influenced by frequent-flyer programs. Employees had to order flights through the company's travel department, which was instructed to find the lowest-priced reasonable alternative (they would not simply book any flight that the employee suggested).

Still, that they had to do this was an implicit recognition of the fact that frequent-flyer programs tempt employees to put their own interest ahead of that of the company. And on at least one occasion, I was aware of an employee who, when he put in a travel request, put restrictions on when he was able to leave and return - restrictions he developed by looking at the flight schedules - to ensure being booked on the airline on which he was accumulating frequent-flyer miles.

An ethical atmosphere pervaded Kronos from the top down. I believe the company even gave up some business in Latin America because they refused to pay bribes to local politicians. But considering the success that frequent-flyer programs had industry-wide, I can't believe that there were no employees at Kronos able to "game the system" in order to accumulate miles. Why do companies spend so much time honing their sales commission systems? Because they know perfectly well that there are always some salespeople who are more interested in maximizing their commissions than in what's best for the company.

The industry-wide ability to deny that frequent-flyer miles are nothing more than "kickbacks", and that accepting them violates ethics policies, brought home to me that even honest, ethical, highly intelligent people can manage to rationalize absolutely anything, if they have a mind to do so. I recommend a book called Why People Believe Weird Things: Pseudoscience, Superstition, and Other Confusions of Our Time, by Michael Shermer (ISBN-10: 0805070893).

This entry was provoked by a column called "The business of business ethics", written by Gordon Marino, a professor of philosophy at St. Olaf College, and printed in the Boston Globe on April 11, 2009. However, the Globe archives are now available only to subscribers, or for a fee.

#0106   *CAREER   *KRONOS

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© 2010 Lawrence J. Krakauer   Click here to send me e-mail.
Originally posted November 23, 2011

Footnotes (click [return to text] to go back to the footnote link)

Note 1:   "Dollars in the Sky", Playboy, March, 1985, pp. 131-134. The article can be seen in the iPLAYBOY archives, March 1985 issue (registration required).   [return to text]