1986: Lessons of ethics, foreign competition for US business

IF 1986 was anything for American business, it was a year of surprises. There were big-league jolts like the Ivan Boesky-insider trading debacle on Wall Street, the oil price nosedive, and the passage of a new federal tax bill. But there were also milder, even humorous, situations that few would have predicted.

At the outset of the 1986, for instance, there weren't many who thought restless corporate raider Carl Icahn would ever settle down long enough to actually run troubled Trans World Airlines - much less push and pull it to a profitable third quarter.

And one of the year's less well-reported events was a ceasefire in the great ``pasta war'' between Italy and the United States. US tariffs on Italian pasta had caused the European Community to hike duties on US-grown lemons and walnuts last year. American citrus growers were relieved in August when the federal government rolled back tariffs on Italy's chief culinary delicacy.

But lighter moments were frequently outweighed by bombshells dropping onto the business scene - many of them heightening public concern that American companies care more about revenues than ethics or safety. Ethics becomes central issue

In January the space shuttle Challenger exploded, and allegations arose that the National Aeronautics and Space Administration and contractor Morton-Thiokol had developed a dubious rocket booster design and then allowed it to fly - even though a safer design could have been built at a somewhat higher cost.

In the same vein, the General Accounting Office reported in May that deregulation had made it impossible for the Federal Aviation Administration to ``say with assurance'' that aircraft maintenance regulations were being followed by the burgeoning airline industry.

Both the FAA and airlines still maintain that deregulation and the spate of mergers this year haven't eroded safety. Ironically, the GAO's finding followed millions of dollars in FAA fines against several major airlines for thousands of violations of FAA maintenance rules.

Pollsters and experts on business ethics say such incidents, combined with teapot tempests like the Ivan Boesky insider-trading stock scandal, have degraded already low public confidence in big business. Since self-interest and monetary gain so often seem to drive business decisions, the public is increasingly scrutinizing the motives of top management.

``We've had a culture in the last few years that glorifies the individual getting rich,'' says Allan Cohen, professor of management at Babson College in Wellesley, Mass. ``Investment banking, Boesky, and the rest says to people that `I should be looking for mine.' It's an attitude that has become more and more prevalent; whereas, we used to have `a penny saved is a penny earned.'''

Business ethics experts say values set at the top of the corporation communicate themselves rapidly throughout the corporate structure, helping to determine how a company and individuals within it react to the stress of increasing competition.

Ethics this year have become intertwined with the perception that American business is rapidly losing its ability to compete - even on its home turf - the North American market. Corporate ability to change

Loss of competitive ability in the United States isn't a surprise. Experts have warned about it for years. But what isn't as obvious is that both the ethics and competition issues are connected, which observers say has much to do with management's ability, or inability, to deal with rapid change.

``The mean time between surprises is decreasing,'' Mr. Cohen says.

That means crucial problems must be solved in shorter time, and the responses to the new complexities factored in corporate-wide. The global market, new technology, regulatory change, he says, all demand that management evolve companies ``fast on their feet.''

Among fast-breaking developments last year, for instance, was London's ``Big Bang'' in October. It ushered in wide-ranging deregulation of the British financial market. Along with economically ascendent Tokyo, London now challenges New York's dominance of finance.

On the manufacturing scene, auto industry and electronics analysts say that every country in the world that can possibly prepare an auto or a computer chip for export is aiming at the US market.

This year has seen the South Korean Hyundai Excel zoom to success with 145,000 sold. Yugoslavia's Yugo automobile didn't win rave reviews for quality, but has found a niche on the low end. Even Malaysia has announced it will sell its heavily subsidized Proton Saga to Americans. Meanwhile, General Motors reported huge third quarter losses because of heavy incentives it had to put on its cars to get them to sell. Corporate battleships take hits

Amid the onslaught from overseas, some unkind surprises have popped up for the nation's largest and arguably best-managed businesses. Seemingly invulnerable, International Business Machines and General Motors have been the most visibly affected.

In a rare occurrence, IBM for the second year in a row has announced quarter after quarter of lower profits. The year's earnings are expected to be significantly lower than last year. At the same time, however, Digital Equipment Corporation and a number of other computermakers have posted hefty profits.

Big Blue blamed a weak global economy and soft sales in Europe. Its vaunted PC has lost market share after being cloned and re-cloned. Its primary revenue source, mainframes, haven't sold well. Thus, the computer giant has taken to cost cutting, reassigning personnel, accepting early retirements, and closing factories to cut excess capacity.

But even with all that intense self-scrutiny, IBM profits are looking weak through the end of 1987, analysts say. They believe IBM, by reason of economic forces, has simply become a victim of its own size - and its management's inability to foresee what kind of computer systems customers would need most. GM's loses money - and Perot

Losing touch with customers hasn't been just IBM's problem. This year saw General Motors, the world's largest carmaker, reveal its vulnerability to competition by posting large losses in the third quarter.

GM has tended to blame cheap imports and soft overall demand for its problems. Yet, much-smaller Ford and Chrysler have lowered costs, pared operations, and come out with radical new designs. Both companies are showing strong earnings.

While sitting on GM's board of directors, fiery entrepreneur H.Ross Perot made things hotter for GM for a time by publicly criticizing GM's mangement style. He blasted the heated parking garages enjoyed by upper management and the million dollar bonuses for the top brass when factories were being closed and workers layed off. He claimed GM management had lost touch with customers and workers.

Mr. Perot's public criticisms finally hit home. GM chairman Roger Smith got the company to buy back Perot's stock for more than $700 million, as well as getting Perot to agree in writing to quit criticizing, and to quit GM's board. But some observers argue GM is the poorer for having lost Perot.

``You don't get change without people who are impatient,'' says one industry observer. ``It's a wonderful symbol, a metaphor for how hard it is for people at the top of an organization to deal with anything out of the ordinary.'' Merger craze and short-term focus

Are corporations going to succeed in restructuring themselves to be ``fast on their feet'' and respond well to change? Not unless more attention is paid to long-term viability and less to quarter-to-quarter earnings, some experts say.

The merger and acquisition craze - finishing up its third ebullient year (only slightly dampened by the Boesky case) - is serving to focus management inward instead of toward the future, analysts say.

``I hope American management takes a longer-term look and fights the [corporate] raiders,'' says Ryota Hamamoto, president of New York-based Sumitomo Chemical America, a subsidiary of a multibillion dollar Japanese parent establishing a toehold in the US.

From Mr. Hamamoto's perspective, US managers have become so preoccupied with quarterly earnings reports and the takeover threats that long-term planning has been sacrificed. The merger craze, fueled by junk-bond financing, has gotten out of hand, he says.

``American shareholders are so impatient,'' Hamamoto says. ``This is why US managers take such a short-term view. There need to be big dollars for research work and technical breakthroughs or a company cannot compete in the long run.''

Case in point: On Nov. 20, corporate raider James Goldsmith dropped his bid for Goodyear Tire and Rubber Co. of Akron, Ohio, when the company paid him $618 million to buy back his shares and those of other stockholders to keep the company independent.

The cost to Goodyear was $2 billion in debt, thousands of jobs, and the sale of several divisions it had hoped would help it in the long run to diversify out of the stagnant tire business. Bottom line: Goodyear is stuck now in a no-growth business with a mountain of debt.

Sir James and finance experts contend that corporate raiders serve a useful purpose by keeping management on its toes cutting costs and raising earnings. Some analysts say Goodyear had a hefty layer of middle-management fat.

Congress is examining hostile takeovers and junk bond financing to see if legislation should restrict them. A warning shot for managment

In a year that has seen unions on the retreat in virtually all sectors of business, there are precious few examples showing management understands how to deal with labor to increase productivity. But examples abound that show competitive ability is enhanced not so much by adding industrial robots but by gaining cooperation and respect from employees.

The Japanese have mastered the art of employee relations and have shown companies like GM how to do it. And for all its present faults, GM is responding, albeit slowly, analysts say. The basic problem is the human need ``to count'' and contribute to whatever job is being done - not merely to be paid to do a boring job.

New United Motor Manufacturing Inc. (NUMMI) is a joint venture between General Motors and Toyota. One professor of business managment has called NUMMI the ``most profound warning for American management.''

The lesson is this: Just a few years ago GM turned its obsolete and inefficient Fremont, Calif., auto factory over to Toyota after shutting it down in 1982. At the time, GM management and its unions were at loggerheads. Productivity was low and absenteeism rife.

Since Toyota has been running it, Fremont has become easily the most efficient in the General Motors chain. The Japanese didn't haul in industrial robots and a lot of high-tech gear. They did, however, make moves to instill pride in factory workers by (among many things) encouraging them to offer ideas on ways to make a better product. The Japanese managers also did away with executive perks in an effort to foster the feeling of equality between assembly line workers and managers.

Still, the question remains: Will American managers learn the lessons they need fast enough?

``We continue to underestimate the challenge,'' says Leslie E. Grayson, professor of international business economics at the Colgate Darden graduate school of business at the University of Virginia.

``If you administered truth serum to a group of young MBAs and asked them whether the east Asian countries will be major players in the North American markets - they'd still say `no'....

``We Americans have a long way to go. We learn during crises and during wars. We don't learn real easily.''