Gulf Leads Toward a Cleanup

Big business in America has been hurt in past months by recession and inflation, but no wound has been more grievous than the revelations that it has used its money to influence public officials at home and abroad. One scandal has surfaced after another with deplorable regularity, as major corporations have been found making illegal political contributions and payoffs. The predictable results are a serious erosion of public confidence in, and a sharpening cynicism about, the motives of businessmen. To make matters even worse, the penalties imposed on guilty companies have been almost ridiculous--fines so small that they do little to instill confidence in the whole process of law enforcement. Last week saw a climax of sorts when the directors of Gulf Oil Corp.--one of the companies most deeply involved in illegal political-influence buying--took matters into their own hands and fired Chairman Bob R. Dorsey, 63, and two other top executives while demoting a third.

Did this drastic action signal a change in corporate ethics? Perhaps --but it comes too late. Last week too there were new revelations of yet more scandals in the offing. Burroughs Corp.

(1975 revenues: $1.7 billion) discovered suspicious "unauthorized withdrawals of funds from a foreign subsidiary." The implication is that the money might have been passed out in bribes to win more sales of Burroughs business machines. Then the Securities and Exchange Commission announced that it is investigating 30 large corporations, each of which is suspected of having made illegal campaign contributions to 54 politicians in the U.S. or overseas. That is in addition to the nine companies against which the SEC has already sought civil injunctions and 15 others that cooperated with the commission by probing their own affairs.

The conclusion of Gulfs case shines almost brightly in such a context. The huge company (1974 sales: $16.5 billion) last year admitted that it had paid $12.3 million to politicians in the U.S. and elsewhere, most of it from a secret slush fund (TIME, Dec. 8). In response, Gulfs board convened for a marathon session that in many ways had elements of a two-act courtroom drama. Act I opened on a Monday afternoon. Twelve of the 14 directors gathered in the walnut-paneled board room on the 31st floor in Gulfs headquarters tower in Pittsburgh.

(Bob Dorsey and his predecessor as chairman, retired E.D. Brockett, were not present.) With only a break for dinner, they listened to John J. McCloy, former World Bank chief. Though he had no direct connection with Gulf, he had been chosen by the directors to head a company self-investigation ordered by the SEC. Helping him were Gulf Directors Nathan W. Pearson, a key financial adviser to the Mellon family (owners of about 20% of Gulfs stock), and Beverley Matthews, a Toronto lawyer. The three formed a special review committee and produced a 298-page report. Slowly, cogently, McCloy reviewed the evidence for the directors.

Boy Scouts. The trouble, McCloy found, started in 1959, when Gulfs then chief executive officer W.K. Whiteford decided that his company needed more "political muscle." To get it, he ordered that a covert fund be set up. In 1960 the Bahamas Exploration Co. Ltd. in Nassau was transformed from an insignificant subsidiary into a firm that could "launder" Gulfs money and pass it along to politicians. Whiteford insisted that the fund be kept secret from the Mellon family and from the executives that he called the "Boy Scouts"--E.D. Brockett and Bob R. Dorsey. To the directors at last week's meeting, the key question was whether Boy Scout Dorsey had had knowledge of the fund.

In testimony before the McCloy committee, Dorsey maintained that he did not know of the fund or of the activities of its chief operative, Claude C. Wild Jr., Gulfs lobbyist in Washington.

Only in July 1973, Dorsey said, was he informed that the Watergate Special Prosecution Force had discovered an illegal contribution of $100,000 from Gulf to the 1972 Nixon campaign. He soon learned, too, of donations to two Democrats: $15,000 to Arkansas Representative Wilbur Mills and $10,000 to Washington Senator Henry M. Jackson. (They gave back the money when Gulf told them that it came from corporate instead of personal funds.)

After that, Dorsey instructed his employees to cooperate with further investigations of the slush fund. Unpleasant facts spilled out in an ugly torrent. According to the McCloy report, Gulf had slipped money to a host of prominent politicians over the years, starting with Lyndon Baines Johnson, who received $50,000 in 1961 when he was Vice President. Other alleged recipients included Oklahoma Senator Fred Harris, now a candidate for the Democratic presidential nomination; Senate Republican Leader Hugh Scott of Pennsylvania; New Mexico Republican Senator Edwin Mechem, now a federal judge; and Indiana Republican Representative Richard Roudebush, now chief of the Veterans Administration. Dorsey maintains that he was told about such U.S. contributions long after the fact.

Tricky Question. Abroad, he was better informed. In fact, Dorsey himself in 1966 and 1971 ordered payments totaling about $4 million to politicians in South Korea, where Gulf has sizable operations. The question of whether to pay was tricky, because the line was so fine between bribery on Gulfs part and extortion by the Koreans. Dorsey described for the McCloy committee a meeting with South Korean Politician S.K. Kim: "He dived straight into the matter and told me that we were doing exceedingly well out there, and that basically our continued prosperity depended on our coming up with a $10 million political contribution to the party." (Dorsey bargained him down.)

Meanwhile, the company disbursed roughly $4 million to influential figures in Italy, Sweden, Canada and Turkey. In Bolivia, Gulf reluctantly bought a helicopter for the late dictator, General Rene Barrientos. Some of these gifts were legal in their countries; others were decidedly illegal.

Weighing the evidence, McCloy's committee decided that there was "no basis" on which to conclude that Dorsey knew about all of Gulf s unlawful political contributions. But the report added that Dorsey "perhaps chose to shut his eyes to what was going on. Had he been more alert to the problem, he was in a ready position to inquire about and put an end to it." To cover all this material took seven hours. The directors adjourned.

Act II started at 9 a.m. Tuesday in the board room. This time the directors had to make a decision, so all brought their lawyers to advise them. The directors knew that the Pittsburgh business community believed overwhelmingly that top management would have to go, if only as a symbolic act. On the other hand, they also valued Dorsey highly as a gifted executive, and knew that he had vowed not to quit. Nonetheless, a group of three directors closely identified with the Mellon interests wanted, as one family source put it, "to clear the air as quickly as possible."

Still, the other voting board members, three of whom were company executives, were determined not to be rushed into taking action. Among the possibilities examined were some suggested by Dorsey himself or his lawyers to hold on to his job. One was the naming of a vice chairman who would wield effective power as chief executive. Another was the establishment of a troika of leaders, including Dorsey, to share power. Both suggestions were rejected.

Finally, after 16 hours of deliberation, the board announced its decision at 1:15 Wednesday morning: Dorsey's resignation was requested, received and accepted--effective ten hours and 45 minutes later. Dorsey and E.D. Brockett were allowed to complete their terms as directors but will have to give up their seats in April. The resignations of William L. Henry, president of the Gulf Oil Real Estate Development Co., and Fred Deering, senior vice president, also were accepted. Herbert C. Manning, vice president and secretary, lost his job as a Gulf officer, but will be assigned to new duties. New corporate rules and procedures were put into effect to highlight all political contributions--and to define accountability for them.

That left one item on the agenda --picking the next Gulf chairman--and the choice was also revealed at 1:15 a.m.

Gulfs new chief is Jerry McAfee, 59, the president of Gulf Oil Canada Ltd.

(1974 sales: $1.5 billion). He is a brilliant administrator who has been an oilman for his entire career. Born and educated in Texas, he received a graduate degree in chemical engineering from M.I.T. in 1940 and joined Gulf in 1945.

He became a senior vice president in 1964, and in 1969 took over the Canadian subsidiary. There he gained a reputation as a skillful negotiator in a battle to work out a more favorable tax policy with the provincial and federal governments. What apparently clinched the job for him was his distance from Pittsburgh and the scandal. True, he was mentioned in the McCloy report in connection with $1.3 million in contributions to Canadian politicians--but those gifts were completely legal.

Wrist Slaps. What effect Gulfs example may have on other scandal-scarred companies is problematic. So far, most chief executives involved in the spreading scandals of the past few years have got off lightly. Among company officers who have admitted making illegal political contributions, for example, Russell DeYoung stepped down as Goodyear's chairman but still serves on one of the company's most important committees at an undisclosed salary. A few top bosses have paid slap-on-the-wrist fines: $1,000 each to Braniff Chairman Harding Lawrence, Carnation Co.

Chairman H. Everett Olson and Ashland Oil Chairman Orin Atkins. Minnesota Mining and Manufacturing Chairman Harry Heltzer retired, but is voluntarily doing special projects for the company. The majority of chief executives of scandal-tainted companies are still actively running their firms. Thomas V. Jones has resigned as chairman of Northrop Corp. but remains president and chief executive; the board is looking for a new president, but Jones has vowed a fight to stay in power.

The light penalties bear little relation to the corporate misdeeds, which are anything but trivial. The scandals began to surface in 1972, when Columnist Jack Anderson printed what purported to be a memo from an International Telephone & Telegraph lobbyist hinting that in return for a pledge to help defray the costs of the 1972 Republican National Convention, the Justice Department might drop a demand that ITT divest itself of Hartford Fire Insurance Co.* The pledge was made and ITT was allowed to keep Hartford, but Watergate Special Prosecutor Leon Jaworski later reported that he found no evidence that ITT officials had acted illegally. The case, however, set the Watergate prosecutors to looking into the whole subject of corporate political payments--and the deeper they and the SEC investigated, the more startling a pattern of widespread payoffs they found. According to a study by the Library of Congress, payments at home and abroad disclosed by 25 companies in 1975 add up to more than $250 million. By contrast, the Teapot Dome scandal that rocked the White House in the 1920s involved about $400,000 in bribes. The names of the corporations involved in the 1970s scandals read like a blue-blood list of American industry. Among them: American Airlines, Exxon, Lockheed, Mobil.

Iranian Princes. Not all the payments have been illegal. Contributions of corporate funds to domestic politicians, which at least 18 companies have admitted making, flatly violate U.S. law.

Overseas, the situation is murkier. Corporate political contributions are legal under certain circumstances in many foreign countries. Outright bribery of a foreign official does not violate U.S. law; it may be against the laws of foreign countries, but in many of those countries the law is laxly enforced, to say the least. Moreover, many businessmen feel that as a practical matter, bribes must be passed to get any business done.

In any case, some of the biggest payments have been made overseas. United Brands admitted paying a $1.25 million bribe to a Honduran official in order to win a reduction in export taxes on bananas; its confession helped precipitate a coup that overthrew the Honduran government. Exxon has admitted giving more than $40 million to political parties in Italy, some of it in return for specific benefits. Northrop has owned up to payments that may total $30 million since 1971, including six-figure payments to Iranian and Saudi Arabian princes. Lockheed has acknowledged at least $22 million in foreign payments, and has been fighting a long battle with the SEC to keep from being forced to disclose who got them. Such disclosure, it says, would hurt its business in the countries involved.

At home, there have been enough apolitical scandals to further intensify public suspicion of business ethics. The now defunct Equity Funding Corp., issuing some $2 billion in fake life insurance policies, defrauded investors of millions of dollars. In a series of cases, federal officials have turned up evidence of bribery of Government-licensed inspectors by grain shippers to certify that export cargoes met cleanliness standards when they did not. Last summer even Good Humor Corp. was indicted in New York on 244 counts charging adulteration of ice cream and falsification of records.

Falsified Books. The political payments, however, have attracted by far the most attention--justifiably because they point to an interweaving of Big Government and big business that creates a climate conducive to corruption.

Major corporations bump into Government at every turn--in airline route cases, tax cases, merger cases--and politicians are constantly trying to drum up campaign contributions, a situation that the new campaign financing law will alleviate but not eliminate. The opportunity for deals, often unspoken, at the expense of the public interest is a sore temptation on both sides.

Corporate officials have their reasons for yielding: they do have an obligation to try to keep politicians at home and abroad from damaging their companies. But there is no excuse for knowingly breaking the law, as many executives did in sanctioning payment of stockholders' money to domestic politicians. And whatever the legal status of payments to politicians abroad, several companies systematically falsified their books to hide those payments--a deception of their own stockholders.

What can be done to clean up? The action of Gulfs board last week strikes several hopeful notes. It demonstrates that companies are coming to understand that however light the legal penalties for illicit contributions, they exact a stiff price in public opinion. It shows that "outside" directors--those who are not company officers--realize that they can be held accountable by stockholders for keeping management up to high ethical standards.

Most of all, the Gulf example serves to emphasize anew that chief executives must be held rigorously to account for a company's behavior. The knowledge that at least one corporate head has been ousted as a result of scandal, even though his own degree of knowledge of the misdeeds could not be proved, should provide a healthy prod to other top executives. As the McCloy committee report put it, the critical element in a company's moral health is not the formal rules and procedures it may adopt, but "the tone and purpose given to the company by its top management."

* Earlier, ITT had offered up to $1 million to help the Government prevent the election of Marxist Salvador Allende as President of Chile, but was not taken upon it.

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