Markkula Center of Applied Ethics

Mr. Smith Goes to Washington

In desperate need of a tax break for his company, a CEO contemplates a questionable campaign contribution.

By Leon Panetta
Response By Paul Locatelli, S.J.

John Smith, CEO of Dynamic Inc., is faced with a terrible political dilemma.

His corporation desperately needs a federal tax break that would allow him to write off a significant debt burden, which is undermining cash flow and access to new capital. Without the targeted tax break, the business is likely to go under.

Congressman Bill Bridge, chair of the House Ways and Means Committee, is powerful enough to include the needed tax break in a large tax bill going through his committee. Bridge, however, is an infamous right wing conservative, who represents the political opposite of everything Smith believes in as a lifelong liberal Democrat.

Fortunately, Bridge is not familiar with Smith's political beliefs. The Washington lobbyist for Smith's corporation has met with Bridge, and they agreed that Bridge would include the needed tax break on the condition that Smith donate $100,000 to the Bridge campaign fund.

Such a political contribution is beyond anything Smith has ever done and would certainly attract press attention in the next Bridge campaign fund report. Nevertheless, no other member of either party can deliver on the tax break except Bridge.

Tom Tully, the Democratic congressman representing Smith, has heard of the Bridge deal. Because both parties are locked in a struggle for control of the House, Tully tells Smith that such a large contribution could jeopardize Democratic hopes in November to beat Bridge, and he threatens to publicly reveal the agreed-upon political buy-off. Instead, Tully, a junior member of the Agriculture Committee, proposes that if Smith will just wait until he and the Democrats control the House, he will personally deliver Smith's tax break in the next Congress.

If Smith raises the money for Bridge, he saves his corporation but risks his reputation and beliefs, and becomes a target for legal and political investigations. If he refuses, the chances are good his business will fail, with the loss of 600 jobs.

Welcome to Washington, Mr. Smith!

Leon Panetta, former White House chief of staff, presented this case for the Ethics Roundtable for Executives.

Response

Responding to the case was Paul Locatelli, S.J., president of Santa Clara University, who made his remarks in the context of the Center's "Framework for Ethical Decision Making" (available on the Web at www.scu.edu/ethics/ practicing/decision/framework.html).

Even before we get to the ethics of this case, the transaction Smith is contemplating is illegal. Whenever there is a quid pro quo link between a campaign contribution and a specific political action that is financially beneficial to the contributor, the solicitation and the donation constitute criminal behavior.

Whether Smith has to hold his nose on account of Bridge's reactionary politics is irrelevant. Essentially, he is being blackmailed for a contribution. His gift would appear on Bridge's campaign finance disclosure statement and would be easily linked to the tax break, proving an embarrassment to Smith, as well as deserved grounds for indictment and conviction.

But the law in this case is the "floor" for decision making; ethics is the "ceiling." What are the ethical issues at stake here? Determining the stakeholders in the case is critical to this analysis. Of course, Smith himself is one stakeholder, but his own interests do not absolve him from responsibility‹both fiscal and ethical‹for the poor management decisions that have gotten his company into its current difficulties. He cannot ethically save his own skin through bribery.

Certainly, shareholders also have a stake in the decision, and Smith is right to consider them. But it may already be too late to serve shareholder interests, as both the previous poor management and the revelation of a campaign contribution to Bridge could adversely impact stock prices.

Smith also has responsibility to his employees, who will undoubtedly be hurt if his business goes under. In this case, however, responsibility to the workers is outweighed by a greater obligation to the public. We might think of this in terms of the common good of the entire community, not merely the rights of individuals or groups of individuals.

Members of the public in their role as taxpayers are left out of Smith's consideration though ultimately they will have to pay the bill for the tax break he is seeking. What moral obligation do taxpayers have to bail out his company? Unless it produces some goods or services that are necessary to the national interest, the company has no particular claim on public monies. At least if there is to be a bail-out à la Chrysler, such an action should be publicly debated, not slipped secretively into a large tax bill.

In addition, Smith has an obligation to the public to obey the laws of the land. Would he be willing to have anyone faced with his dilemma take the action he is contemplating? Probably not. That would lead to chaos and the unraveling of the rule of law (or the lack of what we delicately call "transparency" when these deals happen in the developing world).

This deal clearly flunks the "sniff test": It would be hard for Smith to explain to his mother or someone else he respected. Shame is not the best motivation for ethical behavior, but it is at least a blinking red light at an intersection we know we shouldn't cross.

Fall 1999

Cases Menu | Decision Making | Message Board


New Materials

Center News