Lockheed: Corporation or Political Actor?

On August 20, 1972, A.C. Kotchian, president of the Lockheed Corporation checked into a suite on the tenth floor of the Hotel Okura in Tokyo and set in train the events which were to lead to the biggest scandal in the post-war history of Japan; his own dismissal along with that of Daniel Haughton, chairman of the board of Lockheed; and the most profound reconsideration in the United States of corporate morality, power and influence since the Teapot Dome scandal of the early 1920's. But the Lockheed affair, as it unfolded on a worldwide stage, is more than a corporate immorality play. It is a disturbing illustration of the extent to which basic assumptions about the American economy and international politics have become outmoded.

What I want to discuss with you today are some of the implications for American foreign policy of the Lockheed story which have not been generally commented on.

Kotchian's Mission

When Mr. Kotchian arrived in Japan on that August day in 1972, his mission was nothing less than to save the Lockheed Corporation from impending bankruptcy. The company was then, and is now, the largest defense contractor in the United States. (Corporate sales in 1975 amounted to an estimated $3.5 billion.) But in the late 1960's, Lockheed's management had made a major decision to diversify its business and compete with Boeing and McDonnell-Douglas in the manufacture and sale of commercial airliners. Lockheed had thus developed the L-1011 Tristan wide-bodied jumbo jet, but the program had misfired. Bankrolled by major U.S. banks to the tune of $650 million, the Tristar program threatened to drag the company into bankruptcy. By 1971, only a $250 million U.S. government guarantee of private bank loans enabled the company to survive. Lockheed's own projections showed that the company had to sell 300 of the jumbo jetliners in order for the program to break even. By 1972, however, the wide-bodied airline market appeared to be saturated; competition was fierce. Not only were the $250 million U.S. guaranteed loans in jeopardy, but another $400 million of unguaranteed loans from private banks were at serious risk.

The domestic U.S. market could not furnish the solution. The financial viability of the Tristar program ultimately depended upon Lockheed's success in selling the plan abroad. Furthermore, the success of the overseas sales effort increasingly appeared to depend upon Japan. For if the major Japanese international carrier, All Nippon Airlines, could be persuaded to purchase the Tristar, it would not only be a major sale--21 planes were sold in all for nearly $400 million--but it would be a prestige sale, placing the Tristar on a par with Boeing's 747 and McDonnell-Douglas's DC 10. As seen by the Lockheed management, Japan was not a market which they could afford to lose.

In effect, then, the solvency of the leading American defense contractor rested upon its ability to accomplish a sale in the international market of civilian aircraft. The Lockheed case dramatically illustrates the fact that critical elements of the American economy have outgrown the geographical confines of the United States. The aerospace industry can no longer be economically defined in terms of the American market. Its sales effort, to succeed, must be international in scope; in Lockheed's case, its 60,000 jobs, $650 million in private bank financing, $250 million in U.S. government backed guarantees, all seemingly hinged upon the success or failure of selling the Tristar to the Japanese.

The issue, then, for the United States is not whether it should be, or wishes to be, part of this world market. Rather, it is the terms upon which we are to participate in it. What we have failed to realize is that those terms are today defined, to a very large degree, by the corporations seeking sales abroad.

Lockheed as Political Actor

What precisely did Mr. Kotchian do when he set up his command post in the Okura Hotel? In a remarkable five-part interview in the Asahai Evening News, he outlined the Lockheed sales campaign in detail. The crux of the problem for Lockheed was to persuade All Nippon Airlines to postpone a decision to buy the McDonnell-Douglas DC 10 and then arrange for All Nippon to buy the Lockheed Tristar, instead. In order to accomplish this objective, Kotchian undertook to penetrate the very top level of Japanese political decision making. He enlisted the aid of Lockheed's secret agent in Japan, Yoshio Kodama, a leader of the ultra-right wing nationalist faction of Japanese politics, a man with close ties to conservative elements of the Japanese ruling party, an unsavory figure who had served three years in Sugamo prison at the end of World War II as a suspected class A war criminal, an individual with known ties to the Japanese underworld. For his services in promoting the Tristar sale, as well as for other services rendered, Kodoma received from Lockheed approximately $7 million. The disposition of these funds as of this date is not yet known.

According to Kotchian's sworn testimony before the Multinational Subcommittee, Lockheed also dispatched $2 million through other channels to Japanese government officials in order to ensure that the "right" decisions were made. In effect, Lockheed, in pursuing its commercial interests, had become a nefarious political actor in Japan. It had secretly retained Kodoma as its sales agent, a leader of that political faction in Japan which the United States government had regarded, since the close of World War II, as inimical to our national interests. And, in making pay-offs to various politicians in the Japanese government, the company contributed to the corruption and subversion of the ruling party, on which the United States heavily relied. To say that Lockheed was merely promoting the sale of its product and did not consciously intend any mischief, is like saying that a man who lets a bull loose in a china shop simply intends for it to browse, not to break any china!

The lesson of the Lockheed case, then, is that an American multinational corporation can become a political actor abroad whose immediate interests may be antithetical to the foreign policy objectives of the United States. Nor is Lockheed an isolated case. In the course of our three-year investigation, we found the ITT Corporation attempting to subvert the electoral processes of Chile; the Gulf Oil Corporation making $4 million in illegal political contributions to General Park's party in Korea; and in Italy, a concerted plan by the major oil companies for multi-million dollar payments to Italian political parties in direct return for legislative favors. We can no longer pretend that what these corporations do abroad is strictly their own business of little interest or concern to the government of the United States.

I do not ignore that some of these corporations, as in the case of ITT in Chile, acted with the encouragement of government agencies, like the CIA. But more often, as in the cases of Japan, Korea and Italy, the subcommittee has been told by the responsible U.S. government officials that they had no knowledge of the political payments, bribes or questionable commission fees disclosed by the subcommittee. It could be that these are disingenuous denials designed to conceal the background role of our own government in such gross misconduct. But I think it is more likely that the disclaimers reflect the traditional attitude of our diplomats that commercial activities abroad of American-owned corporations are simply none of their business. Such an attitude betrays a failure to understand that multinational corporations often are crucial actors in the international political sphere, whose activities may determine and define U.S. national interests to a degree comparable to the actions of our own government.

The most recent evidence of this tendency is to be found in the subcommittee's investigation of the arms trade in the Persian Gulf. Here, it was clearly demonstrated, in the case of Grumman's sale of F-14 fighter planes to Iran, that long before the U.S. government made any decision to permit the sale abroad of this advanced aircraft to a foreign government, Grumman had effectively promoted its sale at the highest levels of the Iranian government. Confronted with the insistent demands of the Shah for the F-14, the U.S. government's "decision" to allow the sale was, in reality, a mere ratification of a deal already concluded--for all practical purposes--between the manufacturer and the customer government, a deal much too far advanced to be called off without the most serious repercussions. In these circumstances, one must ask who is effectively determining national policy, the corporate salesmen or the U.S. government?

Traditional diffidence where private business is concerned may account for the tardy recognition by our diplomats of this new reality in international politics. If they persist in viewing the commercial solicitations of our largest corporations as irrelevant to their work, they will discover too late that important decisions involving our national interests have effectively been taken from their hands.

The Subcommittee Investigation

But it is not only the diplomatic establishment which has to change traditional attitudes. The Lockheed scandal presented dilemmas for the Congress as well. The Senate Subcommittee, which I chaired, was charged with investigating the global role of multinational corporations and its impact on our foreign policy. Lockheed's misconduct, if revealed, might severely strain relations with Japan. Yet, Lockheed's pay-offs, and those of Northrop, Exxon, Gulf and others, convinced the subcommittee that legislation was essential if the wrongs we discovered were to be effectively inhibited. In order to provide a basis and secure the necessary support for legislation, the subcommittee concluded, in the Lockheed case, as with Gulf, Northrop and Exxon, that public hearings were mandatory.

But it was also apparent that disclosure of such widespread bribery abroad could disrupt many a government--including such frontline allies as Japan, the Netherlands and Italy, as well as certain key governments in the Middle East. We had to reconcile the need for obtaining public and congressional support for corrective legislation with a recognition that the foreign government potentially involved must be treated with fairness and restraint.

In the Japanese case, Lockheed's intention to pay Japanese officials in order to advance the sale of the Tristar was clear from the sworn testimony and documentary record in the subcommittee's possession. But because of the absence of incontrovertible proof that payments had actually been received by the intended officials, the subcommittee had to proceed with caution. Special procedures were devised.

From the beginning of the inquiry, the subcommittee had adopted the view that maximum public disclosure would be the rule, but that it would not reveal the names of foreign government officials accused of receiving the money. However, the identity of the country in which the payments were made would be disclosed. If the foreign government wished to pursue the matter, the subcommittee stood willing to cooperate. But, since a congressional committee should not deal directly with a foreign government, we decided to transmit requested documents and testimony through the Department of State.

In the Lockheed case, the subcommittee specifically informed then-Under Secretary Robert Ingersoll, a former U.S. Ambassador to Japan, that it intended to reveal in public hearings the identity of Kodama, Lockheed's secret agent in Japan, as well as the fact that certain unnamed Japanese officials were alleged to have received payments. Ingersoll stated that the Department of State had no objection to these disclosures and did not wish to be heard on the subject.

The subcommittee proceeded with public hearings on February 4 and 6; Mr. Kotchian testified to payments by Lockheed to Kodama and Japanese government officials, as well as payments intended for high government officials in the Netherlands and Italy. In line with its policy, the subcommittee did not make public the names of the intended recipients. But, on the request of Japan and the other governments involved, the evidence in the subcommittee's possession was transferred to the State Department which used as its agent in negotiating with the foreign governments the Department of Justice.

The results, I suggest, have been salutary. Reacting to the disclosures in the Lockheed hearings, Congress passed a Foreign Military Sales Bill, which incorporated provisions Senator Percy and I authored, requiring public disclosure of all commissions, fees and other payments to foreign agents engaged in promoting the sale of arms. In addition, the Senate passed a bill sponsored by Senator Proxmire, making the payment of a bribe abroad a crime under U.S. law. Although Congress adjourned before the House had an opportunity to consider the bill, it seems certain of passage in the next session.

Moreover, the New York Stock Exchange has proposed a requirement that listed companies have audit committees composed of outside directors to review, among other matters, questionable overseas payments, a proposal which the Wall Street Journal, in an astonishing editorial, implied was Marxist when Senators Pearson, Clark and I first proposed it.

In the Japanese case, fears were expressed that disclosure of Lockheed's misconduct in that country would endanger its internal political stability and longstanding friendship with the United States. But this paternalistic view underestimated the vitality of Japanese democracy. As the well-known columnist Joseph Kraft wrote recently:

When Lockheed surfaced there was a school at the State Department that sought to suppress, or at least muffle, the scandal. The belief was that Japan could not take an exportation of American morality without falling back into the bad old ways.

In fact, nothing of the sort has occurred. The Japanese have handled the prosecution in a careful way. Newspapers and T.V. have done their stuff as guardians of the national morality. The public opionion polls show that ordinary people support the governments' effort to get at the truth. There have even been moves toward writing a new campaign finance law.

Let me close with a final reflection upon the Lockheed affair. What I have tried to describe to you is the way in which the Lockheed case illustrates a web of entanglement: a major U.S. defense contractor seeks its financial salvation in sales abroad; it penetrates and corrupts the internal politics of major allies of the United States; our own government admits that this fraudulent and corrosive behavior has taken place outside its knowledge and control; and, when a congressional committee proposes to expose the sordid facts and legislate to prevent their repetition, we are told that to do so would endanger the security of the United States.

The Lockheed case was, indeed, a sensation, more so in Japan and Western Europe than in the United States. We do live in an interdependent world. But that is no reason to tread lightly in cleaning up the corrupt practices of multinational corporations. There is every indication that instead of incurring the animosity of other peoples, our investigation, disclosure and enactment of remedial legislation engendered admiration abroad. Japan, the Netherlands and others opened their own investigations based upon the initial disclosures of our subcommittee. The results have not been destructive, but regenerative, for nothing saps the confidence of people in their government more than the conviction that official corruption is a way of life, never to be revealed or remedied.

The Lockheed case tells us that the international community is far more durable and mature than some would have us believe and that America does best when it follows its own best instincts.

Sen. Frank Church [D-Idaho], chairman of the Senate subcommittee on multinational corporations, spoke to a group of corporate executives and Harvard faculty from these prepared remarks.