mittee's stated suggestion that the relationship between individuals in industry and the Department of Defense may have led to program mismanagement, cost overruns and similar problems. I can speak for Northrop only, of course, and here I think this has clearly not been our experience because our experience has been that we have met our contractual commitments and as I have said earlier our relationships have helped us to understand the problems of the Defense so that we can bend every effort to solve those problems. For years we have shared the committee's concern with the spiraling cost of weapons systems and cost overruns. Northrop has dedicated itself to using advanced technology to simplify and thus reduce costs. We have made it a basic tenet of our company to understand and solve the customer's operational problems, not to create through the design an additional one. Equally, it is management policy to make only those commitments that we can meet and then meet those commitments that we have made. We think this is a fundamental business precept that should be followed in defense as in any other business.

One result of our dedication to these two principles has been our family of trainer and fighter aircraft. They are higher in performance than their predecessors and considerably lower in cost. Over the last 15 years, 2,700 have been built; every one on time, within contract costs, and met or exceeded performance guarantee. The committee will recognize, I'm sure, that the company's record in this respect is uncommon and maybe unique.

Mr. Chairman, that concludes my prepared statement. I hope that I have been able to contribute to an understanding of the issues with which the committee is concerned. I would be pleased to answer any questions you may have to the best of my knowledge and ability.

Thank you for your courtesy and attention.

[The prepared statement of Mr. Jones follows:]

STATEMENT OF THOMAS V. JONES, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NORTHROP CORPORATION

My name is Thomas V. Jones. I am President and Chief Executive Officer of the Northrop Corporation.

I am here in response to your request for a perspective on relationships between government contractors and federal officials. I believe that the hearings by your committee can be constructive, and I hope that I can add to the committee's understanding of the relationships between members of the defense industry and the Department of Defense.

Obviously, I cannot speak for the defense industry as a whole, but I certainly can give you the views and perspectives of Northrop on some of the considerations with which you will wish to be concerned.

It is in the clear interest of the nation to preclude and avoid conflicts of interest. We favor clearly defined rules for competition among contractors seeking to meet the requirements established by the Department of Defense. "Arms length" dealings between manufacturer and and user during the evaluation and selection process leading to eventual procurement must be maintained.

I can state with certainty that Northrop, as a contractor confident of its capability and performance record, strongly supports this approach to the selection and procurement process.

I am sure that I would be joined by my competitors in the defense industry in my belief that these procedures and standards, governing the selection and procurement process, are vital.

There is, however, a clear and necessary distinction between governmentindustry relationships during the procurement phase and those that are required during the conceptual phase, and again, during the service life of the product in the field.

The evaluation and source selection process must be conducted in an environment that is sterile and aloof; by contrast, the conceptual phase that begins many years before demands close communication, knowledge, and understanding. There is, therefore, an important distinction between the close relationships necessary for the concept and utilization of a weapon system and the distant relationships that must be maintained with those responsible for the evaluation and selection of a particular weapon system.

In order for the defense industry to support the national security interests of the United States effectively, it is necessary to understand what those interests are and what they will be 10 to 15 years in the future. We need to know the Defense Department's concerns about the operational use of the aircraft and other systems that are in service today so that we can improve upon them, or correct them, and assure that new systems will be more effective and more economical in the future. Years before the competitive procurement cycle begins, we have to understand the Defense Department's problems of operational reliability, of maintenance, of operating costs, of projected manpower availability.

The Defense Department officials responsible for assuring that efficient and effective weapons systems will be available, if and when they are needed, do benefit from an understanding of the capabilities and limitations of the defense industry and the technology we have at hand, or that we can anticipate with confidence for the future.

This does not usually involve discussions of specific hardware, but rather consideration of ideas and concepts. These require a free flow of communications-formal and informal-at all levels and across the whole range of disciplines that must be taken into account before we can even begin to design a weapon system.

With this in mind, we can focus on the specific questions of corporate policies pertaining to the potential for conflicts of interest.

Our corporate policies are intended to conform to the restrictions set forth in the regulations which apply to the standards of conduct and conflict of interest of government employees. It is our policy to observe these rules and to implement whatever procedures are necessary to assure that these policies are carried out. Over the years there have been continuing changes. in attitudes and interpretations, and from time to time new regulations. We are continually examining our corporate policies to assure that they reflect and conform to these new circumstances.

Northrop's policy with respect to hiring men and women is to obtain the services of the most competent and most qualified individuals possible. Military officers alone possess actual operating experience with weapon systems that is unique and is unavailable elsewhere. We employ these people because they have experience in understanding the extremely complex organizational, administrative and operational problems of the Defense Department, and can relate the capabilities and limitations of our Company to developing solutions to those problems. It is obvious that this experience is of great value. To design and produce effective systems that meet a wide variety of operational roles and needs for our armed services requires men of broad operational experience. We must also have men who have knowledge of the problems of field maintenance anywhere in the world, the complexities of supply and logistics support, the needs of preparation and training, the requirements of reliability, and effective methods to assure force readiness. This knowledge best comes from those who have actual experience at all levels in the field and who can translate this experience in a manner that will permit us to provide a product that will be effective, reliable and at the lowest possible cost. This represents a competence and an understanding derived from individual experience that I believe is valuable to our national defense when properly utilized.

It is our corporate policy to conform to the laws and regulations governing potential conflicts of interest, and our procedures are designed to preclude violations by any Northrop employee. It is essential to examine on a caseby-case basis whether the job to be performed by an individual would involve

a conflict of interest. With this stipulation satisfied, I know that former military officers and government officials contribute significantly to the effectiveness and quality of our products. This is in the national interest.

I know it is the Committee's objective in these hearings to seek ways to provide the greatest national security for the defense budget expended upon it. To achieve this, I believe it is important that we place in proper perspective the very important relationship between individuals in the defense industry and those in the Department of Defense.

Mr. Chairman, that concludes my prepared statement. I hope that I have been able to contribute to an understanding of the issues with which the Committee is concerned. I would be pleased to answer any questions you may have to the best of my knowledge and ability.

Thank you for your courtesy and attention.

Senator PROXMIRE. Thank you, Mr. Jones.

Mr. Jones, what facilities do you have for entertaining guests, your corporation, other than your Eastern Shore hunting lodge? Mr. JONES. We own no facilities. We leased the Eastern Shore facility.

Senator PROXMIRE. What other facilities do you lease?

Mr. JONES. I understand we lease a small house in Augusta during the Masters several years.

Senator PROXMIRE. For the Masters Golf Tournament?

Mr. JONES. Yes.

Senator PROXMIRE. That is the only other one?

Mr. JONES. Yes, to my knowledge and belief.

Senator PROXMIRE. Have you entertained Government officials at that Augusta, Ga., lodge?

Mr. JONES. I understand that there may have been several, yes.

Senator PROXMIRE. Do you have records of who the people were who were entertained?

Mr. JONES. I do not have them.

Senator PROXMIRE. Does your company have records?

Mr. JONES. I'm not certain whether we do or don't in Augusta. Senator PROXMIRE. Will you try to determine whether or not you have records and give us the information you may have as to who was there and when and for how long?

Mr. JONES. I will do my best to provide that.
[Information submitted by Mr. Jones follows:]

List of Department of Defense or NASA officials entertained at recent Master's Tournaments, plus expenses associated with such entertainment.

During each year from 1971 through 1975, Northrop rented a house in Augusta, Georgia for the last three days of the Masters Golf Tournement.

The cost of the Masters Tournament activities to Northrop averaged approximately $1200 per year, including rentals, transportation between the house and the Angusta National course, and the purchase price of food.

While no records of guests at the Masters facility were maintained, the following list of DOD officials who stayed at the facility was informally developed: Maj. General John Giraudo.

Maj. General Homer Hansen.

Brig. Gen. John Pesch.

Maj. General Max Steel.

Col. Peter Berrian.

Lt. Col. Chester Garolli.

No NASA personnel were guests.

Senator PROXMIRE. And at what cost?

Now you say those are the two facilities you have, the Eastern Shore and the Augusta, Ga.

Mr. JONES. Leased.

Senator PROXMIRE. You don't own any?

Mr. JONES. No, we own none.

Senator PROXMIRE. Those are the only two you lease and the only two you use; is that right?

Mr. JONES. Yes.

Senator PROXMIRE. Who suggested arranging for entertainment of Government officials at hunting lodges and when was the suggestion made?

Mr. JONES. I couldn't pinpoint that. It must have been 8 or 10 years ago.

Senator PROXMIRE. Were you one of the top officials in the company at that time?

Mr. JONES. Yes. I was president and chairman.

Senator PROXMIRE. Did you have a voice in that decision?

Mr. JONES. I believe it was made underneath me, but I was made aware of it and I concurred.

Senator PROXMIRE. You concurred in it without specifically taking part in it; is that right?

Mr. JONES. Right. Yes.

Senator PROXMIRE. Were you aware at the time you agreed to this that this entertainment might place Government officials in a position of violating department regulations?

Mr. JONES. No.

Senator PROXMIRE. Did the DOD ever contact any official of your company before these matters came to light to remind you of the provisions of standards of conduct regulations and to ask you not to entertain Government officials?

Mr. JONES. Not to my knowledge.

Senator PROXMIRE. Wouldn't you have known that if that had been the case?

Mr. JONES. Possibly.

Senator PROXMIRE. I'm sure you have a good communications system in your company and you wouldn't permit a subordinate to make a decision that would compromise a Government official. Mr. JONES. That's right.

Senator PROXMIRE. So you would have been informed?

Mr. JONES. I think I would have been; yes.

Senator PROMIRE. You think if you had been informed, that such a reminder might have helped you to avoid some of the problems that your company is facing today?

Mr. JONES. Certainly.

Senator PROXMIRE. Now I realize that you don't run your company as a charitable organization, as I said to the previous witness, and that little is done without some business purpose in mind and that is how things should be. You're a businessman and must always keep your shareholders' interests in mind. Therefore, I would be interested to know what the company's expectations were as to the benefits that would accrue to hosting Government officials at hunting lodges. Was there an implied effort to place

Government officials in a position where they felt they might owe the company a little favor?

Mr. JONES. No; no way. Our belief in open and informa communication was such that we felt this was not essential-it was not even important, but it was a small thing that could move in the direction of bringing our people in closer, informal communication with the people and the customer that understood the problems of the DOD so that we could understand better how to solve them.

Senator PROXMIRE. Well, if it's not important you spent money on it?

Mr. JONES. Yes.

Senator PROXMIRE. And you spent something that might be ever more important, the time of your executives there meeting with the Government officials, hunting with them, but you don't think that was an important decision or an important effect?

Mr. JONES. That's right.

Senator PROXMIRE. Well, shouldn't you cut your costs by just eliminating that?

Mr. JONES. No. We felt it was useful. I wouldn't say it was important and certainly wasn't critical because I think

Senator PROXMIRE. Go ahead. I beg your pardon. It wasn' critical. Was there any effort while on these hunting trips to discuss company production problems or future service needs, or simila business arrangements?

Mr. JONES. Not to my knowledge.

Senator PROXMIRE. So I take it these occasions could be mor accurately characterized from your point of view as relatively harm less efforts to get to know people a little better in an informa setting and possibly building up goodwill for the company in the process. Is that about right?

Mr. JONES. Yes.

Senator PROXMIRE. Anything in addition to that?

Mr. JONES. No, other than opening up lines of communication for frank discussion.

Senator PROXMIRE. Now, in your opening statement, you attemp to distinguish the source selection phase from the conceptual of operational phases, and say that close relations are important during the one, but that arm's-length relations are necessary during the other. I don't see how this is really possible, since it is so ofter the same individuals who are involved in both the conceptua and source selection operations.

Mr. JONES. Mr. Chairman, I don't believe that is the case usually The conceptual phase involves many disciplines and many times it' really listening to users-what are your problems, why aren' your systems effective, what is causing cost increases; but the sourc selection phase is a very, very circumscribed, defined phase and the rules concerning that are rigid and properly so, and I think during contract negotiations, during the life of the program, those peopl that actually make the decisions on costs and so on continue tha arm's length adversary relationship.

Senator PROXMIRE. Take that arm's-length adversary relationship then. You say: "Arm's length dealings between manufacturer and