Minority Contracts in Engineering

I believe that Myrna’s part ownership in the firm does present a “conflict of interest” in hiring MBE Design Group. This reaches a level of public scrutiny because public tax dollars are being used to fund some of the contracts that MBE is used on. In addition, MBE is being used to fulfill Lesak’s requirement to have minority-owned sub-contractors. In this setting, MBE should be required to bid on any potential subcontracts, both for ethical and public transparency reasons.

I do not think that Eileen’s taking over the Presidency of the firm should be questioned on its face. The question of succession is a serious one at many minority owned firms. Obviously she is majority owner but it is not clear if she is acting as the CEO. If so, there is no reason to question her role. If she is a good CEO she will surround herself with people who know business and who know engineering. She could be very successful and maintain the minority status of the firm in a successful way.

The problems in the relationship between Lesak and MBE pre-date Eileen. Obviously it is not healthy for MBE to have 85% of its work coming from Lesak. However, it is better to give Eileen at least a year in her new position before addressing this since it requires some major changes to the firm’s business plan and this should only be done from a position of strength – when the firm has completed its transition to new leadership.

It would be the responsibility of senior leadership at Lesak, such as the lead engineer, to question the appropriateness of the Lesak – MBE relationship for a variety of reasons. How this questioning occurs really depends on the corporate structure and environment at Lesak.”

For pedagogical purposes I would consider this case two cases, separating it after question 3 (perhaps into a and b). While one builds on the other, the second introduces new issues that complicate understanding. I would also make clear at the outset that this is about ethics, not law. While the whiff of nepotism permeates the case, human judgment is at issue. Law and propriety don’t always coincide. Others will have to decide whether laws have been violated.

Based on what appears in the opening two paragraphs, I would say that:

1. there is a conflict of interest between Lesak and the subcontracted company;
2. in this case, it is unethical not to open the job for competitive bid; and
3. the lead engineer at Lesak should admit his error and recommend to the owner (his boss) that a competitive bidding process should have been used to award this subcontract.

In all, this does not pass the smell test — while it may be legal.

The information in the paragraph preceding the other question is more damning, especially if one reads the newspaper article on which it is based. An overarching point to make in the paragraph is that minority set-asides require evidence of company capability, i.e., that low bid alone should not carry the day. My response to the questions, then, are:

4. to whom should questions about the new appointment be directed?
5. Eileen’s appointment reinforces the perception (and reality?) that Lesak and MBE are not independent companies. The latter is functioning like a protected subsidiary of the former (e.g., family tie, shared employees). 
6. If 85% of MBE’s contracts come from a single source, then withdrawal of that source would test the ability of MBE to survive. Would 40% dependence on a single source make a difference? Hard to tell. 
7. The relationship does not seem to satisfy “appropriate standards of professional or business ethics,” but the state context matters here. Some states, I suspect, are more vigilant about interpreting and enforcing the federal standard (the difference between theory and practice). One would think there would be a trial period for the minority-owned company to demonstrate capability and viability, i.e., independence to perform as a subcontractor for a variety of contracting companies.

This is a provocative case, and therefore, well-suited for teaching and learning. 

Regardless of one’s view on minority set asides, there are certainly well-established and recognized public policy reasons for set-asides and so the fact that a company participates in such programs is not an ethics issue per se. Generally a government contractor may not hire a minority business enterprise unless the enterprise meets certain threshold requirements and standards in order to qualify under government contracting regulations. 

Having said that, under the facts, an outright conflict of interest seems to have developed. While Myrna was apparently not an original employee or  owner of MBE, her recent purchase of the company stock with a loan from her father Bill, combined with Bill’s recent strong encouragement to heavily rely on the services of MBE suggests that Bill is motivated at least partially to assist his daughter’s company. In addition to nepotism, Bill also helped to finance his daughter’s stake in MBE, and so Bill also has a direct financial interest in seeing that MBE is successful – to benefit his daughter and also to assure that the loan he made to his daughter is repaid. His actions may undermine his client’s (the federal government) interests in obtaining the most qualified engineering services at a fair and reasonable price and could also ultimately undermine the long-term interests of Lesak, a company in which he serves as an officer.  So Bill has a conflict of interest as an officer of Lesak and his interest as the father and creditor of Myrna, an officer of MBE, a firm with which Lesak is engaged in ongoing business. These issues could also easily raise legal questions under federal contracting rules and procedures. Therefore, the lead engineer should have a candid discussion with Bill and explain his concerns – ethics, reputation, legal liability, etc. - and the potential impact and consequences these issues could have on Bill, the company, Myrna and MBE.

Regarding Howard’s passing and being replaced by his widow Eileen, while it is not unusual today for engineering companies to be headed by non-engineers under corporate practice rules, these non-engineers generally have extensive experience in the business of engineering or in business generally. Eileen’s ascension certainly raises a red flag and the lead engineer has an obligation to carefully investigate this issue. The lead engineer should recommend that key Lesak employees meet with Eileen and others at MBE as soon as possible to better understand MBE’s plans going forward (e.g., is Eileen a temporary replacement, will Eileen have knowledgeable engineering, business, financial, legal, risk management, etc., advisors to guide her immediately and in the future, etc?). If the lead engineer is not convinced that MBE has plans to put into place a knowledgeable and experienced person or a team of individuals to lead MBE, the lead engineer should immediately advise Bill. Lead engineer should explain to Bill that Lesak’s failure to use the services of a firm that does not have a qualified and experienced management team could easily expose Lesak to contractual liability, damage its reputation and its ability to serve as a prime government contractor.

In the event that lead engineer’s concerns are not adequately addressed, lead engineer may need to consider exploring alternative employment options or risk damage to his professional reputation.