National Semiconductor's Microchips BUSINESS ETHICS: CONCEPTS AND CASES by Manuel Velasquez.

On June 3, 1980 the computers in the North American Aerospace Defense Command bunker deep underground Cheyenne Mountain in Colorado sounded an alarm: Two missiles had just been launched from Soviet nuclear submarines and were heading toward the United States. Strategic Air Command officers monitoring the terminals immediately notified their superiors. The alert was passed on and waiting B-52 bombers carrying nuclear warheads were prepared for takeoff. Eighteen seconds later tensions increased in the underground bunker when the terminals indicated that the number of Soviet missiles had increased from 2 to 22. Then the number increased to 222, then 2,222, then 22,222, and kept increasing regularly in increments of 2. By the time the computers were reporting over 2 million incoming missiles, the officers knew they had a computer malfunction.1 After calling off the B-52 alert, NORAD inspectors worked around the clock for three days until they tracked down the malfunction to a single defective semiconductor "chip" in a portion of the computer that converts incoming information into messages for transmission. Semiconductor chips are minute bits of silicon no bigger than a soapflake on which microscopic electronic circuits are etched. Miniaturization has allowed manufacturers to pack millions of connected transistors and other components onto the tiny chips so that a single chip can contain the equivalent of a computer that formerly had to be housed in several large rooms. Such semiconductor chips are found in virtually all electronic components in use today, both by the military and by civilians. They constitute the heart of every computer and calculator and are used in satellite communications, missile guidance systems, radar systems on airplanes, video games, the space shuttle, and in a variety of industrial applications. There is a sharp distinction, however, between the semiconductors manufactured for commercial applications (such as video games and home computers) and those produced for highly sensitive military purposes (such as the U.S. nuclear warning and weapons systems or in satellite communications). Semiconductors made for sensitive purposes are required by the government to undergo a lengthy, costly, and rigorous period of testing to ensure that each one will work perfectly, while commercial-grade semiconductors undergo much shorter and less rigorous tests. The higher-grade military chips must be examined under microscopes for the most minute cracks or nicks; they are alternately frozen in refrigerators and then baked in ovens at 125 degrees centigrade for hundreds of hours; they are whirled in centrifuges and immersed in various gases and liquids to test for leaks; and they are periodically run through a variety of electrical trials to gauge how well they are standing

up to each test. At each step in this testing process, moreover, the government requires workers to fill out lengthy forms testifying that all tests were carried out as mandated by the Department of Defense and that the chips met all the standards set by the Department of Defense. Lower-grade commercial semiconductors are not required to meet such rigorous standards. Whereas commercial chips, for example, are baked in a "burn-in" oven test for only forty-eight hours, the higher-grade military chips may have to undergo a "burn-in" test of 240 hours at much higher temperatures. As a result, only 30 to 60 percent of the commercial chips are rejected, while the rejection rate for the higher-grade chips is 60 to 75 percent.2 Because of the sensitive nature of the uses to which high-grade semiconductor chips are put, the government has naturally been concerned that all tests be properly carried out on the chips manufacturers supply. At various times the government has in fact removed certain manufacturers of computer chips from the Defense Electronics Supply Center's list of firms allowed to sell to the military (see Table 1.1) because it felt that tests were not properly conducted. As Table 1.1 indicates, however, manufacturers have been suspended only for short periods of time. The reason is simple. Only a relatively small number of firms can manufacture the semiconductor chips that the military must have. Without the chips many Defense Department projects would come to a standstill: A lot of people depend on those parts. That's always a consideration on our part--we try to get them back on [the Qualified Products List] as quickly as possible. Some of these [semiconductor] companies are the only suppliers of these products. So [to suspend them for more than a few months] is a very tough decision. (Statement of Steven Stromp, spokesman for the Defense Electronics Supply Center)3 Penalties for failing to test semiconductors fully were thus relatively mild, consisting for the most part of nothing more than temporary removal from the Qualified Products List. On March 6, 1984, however, criminal charges were brought against National Semiconductor Corporation, for "routinely" skipping burn-in tests "in order to speed production and speed delivery" of the chips and "lying to the government in a three-year scheme involving thousands of improperly tested computer parts sold to military contractors.4 National Semiconductor, located in the "Silicon Valley" of Santa Clara, California, pleaded guilty to seventeen counts of mail fraud and twenty-three counts of making false statements to the government and agreed to pay $1.75 million in civil and criminal penalties because of its failure to adequately test some 26 million chips from 1978 to 1981 and for falsifying test reports. Investigators working on the case said that the improperly tested chips were now in use in a wide range of

aerospace and military equipment and their locations were virtually impossible to track down: These devices are on our ships and planes scattered throughout the world. We could not find a reliable and effective method to make a determination where they are. . . . The system is too complex. . . . I find it pretty scary. . . . In a worst-case scenario, there could be some harmful effects. (Statement of government investigator)5 Founded in Connecticut in 1959, National began operations manufacturing transistors. Described as an initially "genteel" company that kept losing money, National's style changed abruptly when Charles E. Sporck took over as president and chief executive officer in 1967.6 Before coming to National, Sporck had been a highly successful manager at Fairchild, where he was one of the first to use the technique of shipping companyproduced components to Asia to be assembled by cheap labor. Described by journalists as "aggressive," "decisive," "hard-charging," "tough," and "blunt," Sporck brought an aggressive, informal, entrepreneurial style to the fledging company.7 In seventeen years he transformed National from a $7 million per year maker of transistors operating out of Connecticut with 600 employees, into a $1.6 billion per year manufacturer of integrated semiconductor chips headquartered in California's booming "Silicon Valley" and commanding a worldwide labor force of 40,000.8 National's expansion, however, was not entirely smooth. Disaster struck the company in 1977 when competition from Japan, combined with strikes, technical problems, and poor controls, resulted in losses in its consumer products division that cut earnings almost in half. About the same time there developed a steady exodus of talented and "fiercely autonomous" managers who abandoned the company in frustration because they did not see eye-to-eye with Sporck's autocratic style. Insiders reported that several top managers did not like Sporck's "tablepounding" at meetings, nor the extent to which he got involved in everyday pricing decisions and kept control of production and marketing decisions.9 Bad luck struck again in February 1982 when the government briefly removed National from its Qualified Products List for the sale of high-grade microchips on the grounds that National had not followed proper testing procedures. Matters worsened toward the end of 1982 when a nationwide recession hit the semiconductor industry particularly hard, leading to several quarters of losses and declining earnings through early 1983. By 1984, however, the country was coming out of the recession and orders for semiconductors began to boom once again. Soon National had recovered from its setbacks and was once again enjoying record profits. Then, in March 1984, National was indicted on the charges of failing to properly test its high-grade military microchips and of lying to the government about these improper procedures. The company was accused of falsifying records to cover its failure to complete burn-in tests

that should have involved running electricity through the chips while they were baked in ovens for 160 hours. The company conceded that it had frequently cut the test periods to forty-eight hours. The systematic omission of required tests and the falsification of records allegedly took place only during 1979 and 1981 when the chips were in such high demand that there were intense pressures to take shortcuts as the company fell farther and farther behind in its attempts to meet contract schedules. During this period, according to San Jose newspaper reporters: Management-level officials at National approved the formation of a 10- to 12-member employee team that worked full time for periods up to 10 weeks fabricating testing-verification documents [to be] reviewed by Defense Department inspectors. . . . A [National] supervisor . . . said two National officials who were her bosses once directly approved her unit's falsification of testing records. She also said she and her colleagues at National had used the identities of employees who already had left the firm to backdate and fabricate testing-verification documents for government inspectors from 1979 to 1981. (Statement of San Jose Mercury News reporters David Willman and David Sylvester)10 According to employees who had been working for National at the time, the alleged falsification of records was well known within the company: I'd say that over 100 employees had to know. To say that dozens participated would be a very conservative estimate . . . Just about everybody in production control knew about it who had been there for six months . . . I would borrow my gals' [identification] stamps [and] tell them, "You don't know I'm using your stamp." Yeah, we did make it up. There was a lot of documentation I personally dummied up. . . . When I realized how deeply things were being falsified, I just couldn't believe it. . . . I asked, "How did things get the way they were?" Nobody seemed to be able to give me a good answer. . . . [But] I had a lot of confidence in the reliability of the parts. I never thought we were selling bad chips to anyone. (Statements of anonymous former employee)11 The employees involved claimed they were told to gather whatever testing information was available and, when none was available, to simply make up dates and times and write them into the record books that would be turned over to the government when the chips were delivered. However, not everyone went along. Officials in the National plant in Singapore refused to falsify their records. National employees in the United States were allegedly told to go over the Singapore records and alter them before submitting them to the government. According to insiders any cheating on tests and the falsification of records were due to pressures to meet contract deadlines and to save money. Omitting the costly tests is estimated to have saved National several

million dollars. In addition several company officials, including president of the company Charles Sporck, maintained that other companies were also cheating and that the microchips were all reliable anyway and did not need more than the forty-eight hours of tests they were given. Not everyone agreed with this sanguine view. Government investigators pointed out that cheating on semiconductor tests increases the risks of a military disaster since defective chips could affect the operations of our nuclear warning and weapons systems. Said one government agent, "We're talking about national security and we're talking about lives. . . . You could have a missile that would end up in Cleveland instead of the intended target."12 Although the corporation was indicted on criminal charges, no criminal charges were brought against any individuals in the company. According to U.S. attorney Joseph Russoniello, "The fact that persons in lower-level functions may have failed to report" the testing shortcuts, was not significant enough to merit prosecution.13 Criminal prosecution would have been merited only if officials at the level of company president or the board of directors were known to have participated. Moreover, officials of the company refused to provide the names of any individuals involved in the alleged cheating and falsification. Three months after the indictment, however, the Department of Defense announced that it was not satisfied with the fact that only the corporation as a whole was held responsible for the fraud.14 On May 30, 1984, the Department notified National Semiconductor that it was undertaking steps to bar National from all future military contracts because of the company's refusal to name the individuals involved in the fraud. The Department of Defense's own investigation had uncovered the names of seven individuals that it alleged to have been among those involved in the fraud, and these individuals were also notified that they would be barred from all future government work. The position of the Department of Defense was that it had to have some assurance that the individual perpetrators of the fraud were no longer in positions within the company where they might repeat the same testing short-cuts and falsification of documents. According to Karl Kabeisman, counsel for the Department of Defense, the Department had to know the individuals responsible for the fraud and where those people were in order to determine whether National could now serve as a reliable supplier. "My concern," said Kabeisman, "is simply that a corporation acts only through its employees and officers."15 National Semiconductor, however, vigorously contested these claims and held that responsibility for the fraud should be attributed to the corporation as a whole and not to any particular individuals in the corporation. In a public statement, company president Charles Sporck made the point quite clear:

We totally disagree with the [Defense Department's] proposal. We have repeatedly stated that we accept responsibility as a company and we steadfastly continue to stand by that statement. (Statement of Charles Sporck)16 Linda Baker, an official company spokesperson, repeated the same sentiments in a public statement avowing that the company would not divulge the name of any individual involved in the fraud and that the company as a whole would stand behind any individual accused by the government. She said, "We will see [our people] are not harmed. Any National employee will be supported by the company. We feel it's a company responsibility, a matter of ethics."17