This Ethics presentation was given jointly by Bill Higgs and Steve Knowles as a web cast to an audience of 60 members

of the Southern Gas Association on October 20, 2005. Viewers received professional engineering credits for attending the SGA broadcast, which was facilitated by CTN, the broadcasting arm of SGA. This presentation included several survey questions about different ethical situations, and respondents were able to cast votes with their opinions. Weve included the results of those questions. Most of the case studies are actual situations that Mustang has encountered through the years.

Ethics and Trust Drive Business Bill Higgs and Steve Knowles Mustang SGA/CTN Web Conference October 20, 2005 (Title Slide Up) Good morning. For the next two hours we are going to be speaking about the broad topic of ethics and trust in business. (Maxwells Book Cover) The subject of ethics and trust apply to virtually any business. Author John Maxwell wrote a classic book entitled There Is No Such Thing as Business Ethics. It is an interesting title and thought and causes you to do a double-take. Maxwells point is ethics are ethics no matter the situation business, home, sports or personal. Because of the depth of the subject matter and the various routes a discussion about ethics can take, we are going to try to make a portion of the presentation interactive, proposing a variety of cases and real life business situations that have ethical implications. We will canvass you for your opinions through CTNs electronic survey and then share our thoughts with you through electronic or voice Q&A discussion. That means there is no sleeping on your end. (Horse) Since we play a role in several segments of the energy business, we think it is important to set the stage with a little background on who Mustang is, our industry, our clients and some of our basic philosophies. From time to time throughout the presentation, we will also share some insights as to how Mustang addresses ethical issues. (ENR logo) Mustang is one of the nations largest pure engineering design firms, ranked #33 in that category of the Top 500 Firms by the leading industry trade journal, Engineering News-Record. We have been in business since 1987 and, during that 18 years, the company has grown from three co-founders, of which one of your facilitators, Bill Higgs, is one, to a dynamic firm with more than 2000 Mustangers.

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(Segments Come Flying in One by One) When we began, we were almost exclusively focused on serving the offshore oil and gas industry. Our beginnings were auspicious, since, as some of you might remember, 1987 was not the best time to be pursuing offshore oil & gas clients. Through the years, we have grown into other segments, both energy and non-energyrelated. We first expanded into pipeline services, then into process plants engineering. We added capabilities in automation and control and then ventured into industrial markets such as agrichemicals, pharmaceuticals and general industry. Most recently, with opportunities abounding as a result of high energy prices, we formed a group to address the midstream segment, most notably liquefied natural gas and other gas monetization projects. During this period of dramatic growth, we have stayed true to our traditions and underlying philosophies. The company may change, but our values dont. We approach each of our projects knowing that our reputation is continually on the line every single day. (Vision Statement) With that in mind, we strive to make heroes of all the various parties involved in the project -- our vendors, partners, clients and Mustangers. We do that by creating value through end results that are delivered on time, under budget, and with no surprises. Without that approach, we could not have elicited the trust that has brought repeat work from devoted clients, and that is necessary to sustain growth and success in any business. (People Oriented Project Driven) We know that we are accountable for every decision we make and every action that we take. By making ethical, trustworthy decisions, we never have to spend time looking over our shoulder. Rather, we can focus all of our energy on providing our clients with the best project possible. From our inception, our basic motto has been people oriented project driven. Adhering to ethics and building trust allows us to concentrate fully on that approach. Lets turn to the topic at hand. What exactly do we mean by ethics and ethical behavior? <<Trivia>> Q. What fast - food restaurant is closed on Sunday so that its employees can respect their religious beliefs? A. Chic-fil-A. PS. Chic-fil-A reportedly makes as much revenue in six days as its competitors do in seven (I have read this in several different places).

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(Dictionary Page with Ethics Defined) The dictionary defines ethics as a principle of right or good conduct and a system of moral principles or values. It expands to include the rules or standards that govern conduct of members within a certain industry or profession. While we speak of it in business terms, it is really what governs how we live our lives through an understanding of what is right or wrong. The subject certainly gets a lot of focus from the media. Just about every day, the news reports on an investigation into wrongdoings by corporate executives, politicians, athletes, students and others. (Newspaper Headlines) Just within the past few months we have been made aware of headlines that point to the taking of illegal substances by professional ball players, the indictment of executives from Tyco, Enron and other public companies and the investigation into the behavior of a top political figure. (Tightrope Ethical Vs. Legal Graphic) In virtually every case, those being charged have pleaded not guilty or have gotten recall amnesia. They, like many others who operate in the same way, seem to walk a tightrope between what is ethical and what is illegal. How far can you push the limit; can loopholes be found before a matter is unethical. (Old Press Photos) The subject of ethics is not new. And, it is hard to say that poor ethical behavior is any more prevalent today than in years past. We remember the Nixon Watergate era, the Spiro Agnew situation; illegal betting on sports contests and numerous other instances within business environments. The topic of ethics has gotten enough attention, though, that as a possible preventative measure, legislation has been enacted in the form of laws such as Sarbanes-Oxley, requiring increased transparency and disclosure of financial methods. It is strong medicine, much needed to reduce unethical behavior. (Martha in Prison Garb) As a further deterrent, the penalties imposed can be stiff. As seen in the Tyco, WorldCom and Martha Stewart decisions, large monetary penalties and/or long jail time stints are becoming the norm. Over the long term, we will have to wait to see if either legislation or penalties have the effect for which they are intended. (Globe) The distrust of companies and the ethical problems in business are not restricted to the U.S. In Japan, Europe, Asia and South America many organizations have been caught up in questionable activities that have brought

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a focus on executives by their investors, employees and governmental regulatory agencies. What are some causes of this societal breach of ethics? What has caused this situation? (Church) Is it a lack of adherence to Christian or other religious values? After all, attendance in mainstream churches has been continuing to drop dramatically for the past decade or so. (Family) Does the fault rest on the family? With two parents working in a majority of households, it raises the possibility that there is insufficient guidance at home. Or, maybe it is because the nuclear family is becoming dispersed so multigenerational influences are lost. (Education Classroom) How about the education system? Have they abdicated their responsibilities and lowered their standards, encouraging cheating or relaxing the rules? This possibility could apply not only to public schools but also to private schools and universities. (Andy Griffith & Beaver vs. Bevis and Simpsons) What about the entertainment industry? There is certainly a lack of values taught in many of the sitcoms, and the Ozzie and Harriet or Leave it to Beaver values are being replaced by The Simpsons, Bevis and Butthead or King of the Hill. Movie ratings often dont correspond to the content on the screen. Content is most often meant more to entertain than to impart positive values. (Wall Street) Can we blame Wall Street for a lack of ethics? In public corporations, and even in non-public companies, there can be intense pressure to meet forecasts or short term-goals set up by stock analyst expectations. Pressure for making that happen can, sometimes, be beyond the capabilities of any CEO. (Gladiators Fighting) Or, what about companies like the ones in which we work. Do they stress advancement by pitting employees against each other in a kind of survival of the fittest competition? Or do they practice a win at all costs philosophy, focusing on maximizing profits above all else?

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<<Trivia>> Q. What domestic diva walked out of prison onto the set of a new TV show created for her? A. Martha Stewart PS. The show is an 'apprentice-type' show - does this send a message of some sort? An interesting point is that, with all the focus on negativity and the implications of ethically-challenged companies, there is very little exposure or notoriety given to positive examples. The best companies and executives running them often get overlooked by the news people who focus on the negative, and, sensational examples of ethical breakdowns. Which of the following would you think has the biggest negative influence on developing ethical behavior? [voting results from the webcast] Religion [0/52] Family [6/52] Education [0/52] Entertainment [31/52] Business and the market [15/52] The fact is that any or all of the above influences can contribute to a system that rewards people for the wrong reasons and encourages greed, short cuts, competitiveness and illegality. (Sayings That Are Being Used For Rationalization) There are easy ways to rationalize an unethical environment or to gravitate toward making questionable decisions. You have undoubtedly heard the expressions before, like thats the way we have always done it. Or everybody else does it that way. How about it isnt that big a thing, nobody will get hurt or as long as it gets us the business. These excuses are all around us as we go about our daily work. The road down this slippery slope of questionable ethics is subtle and often can start as a youth. I use the term incrementalism to describe the pitfall. (Building Blocks That Stack And Fall) While most of us would not consciously do anything bad, by relaxing our values, changes to our behavior can creep in small increments, often unnoticed. Temptations of many kindsdrugs, sex, power, lying can alter our values. Sometimes, it only takes a single situation, where we try to cut a corner or deviate from the norm like slipping into multiple movies on one ticket that the incremental poor judgment takes over. It can then escalate, little by little, from there.

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(Bible School Class) When you think about it, though, being ethical really should not be all that complicated. One of our major clients said it best when he stated that everything you need to learn about ethical behavior right and wrong, can be found in vacation bible school. That, at least, is a pretty good foundation. Lets look at some examples of situations involving ethical dilemmas that might occur in our own environment. Well describe the cases, give you a chance to vote on a solution, and then allow time for discussion of a solution or some alternatives. (Case 1 Just Compensation) Case #1 An engineer left Jones Inc. To take a new position at Wayne Company. A project for which the engineer was responsible for at Jones was completed, yet the engineer had not signed and sealed the construction documents before leaving the employ of Wayne Co. His ex-boss at Jones asked the engineer to sign/seal the drawings. The engineer refused to sign/seal the documents unless he was paid an additional fee. Was it ethical for the engineer to refuse to sign/seal the drawings? [voting results from the webcast] Yes [8/49] No [41/49] Was it ethical for the ex-boss to ask the engineer to sign/seal the drawings? Yes [37/49 No [13/49] If additional work was required by the engineer would it be ethical for him to ask for additional compensation? Yes [53/54] No [1/54] In this case, if the work had been completed while the engineer was employed for Jones inc., he is obligated to complete the project by signing and sealing the documents without warranting any additional compensation. If, however, there is additional work involved in completing the assignment, Jones should be prepared to pay a fair rate for the engineers doing so. (Case 2 Appropriate Client Entertainment) Case # 2 Fargo Co., an oilfield service provider, has a suite with season tickets to the Houston Astros baseball games. Company executives regularly invite clients and their spouses to attend games and be entertained there with food and beverages.

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Is it ethical for an operating company client to accept these invitations and the gratis entertainment? Yes [44/52] No [8/52] If the same vendor offered to send the client and his spouse on an all expense paid trip to the World Series in another city is it ethical for the client to accept? Yes [3/51] No [48/51] Either by being offered the invitation or by accepting, is there any obligation on the part of the client to consider the vendor for a future project? Yes [9/53] No [44/53] At Mustang, we recognize clients, vendor and business partners as project team members. As such, we include them in some company-sponsored events and entertain at public events. There is value in building and keeping relationships with all potential parties of present and future projects. The names of all of these attendees are kept for scrutiny by our own internal auditors. We draw the line at providing gifts, trips or anything else that is clearly out of line. At the same time, Mustangers have the same restrictions on them not to accept anything other than local entertainment and are cautioned never to place themselves in any position that could compromise their integrity. As an example of completely unethical behavior, I once met someone at a ballgame who had been given four tickets by a vendor. He could only use two of the tickets himself, but rather than turn the rest back to be used by another client, this client sold the extra tickets to a ticket broker and pocketed the money. (Case 3 Being Honest With The Client) Case #3 A company lands a large project, requiring a major portion of its existing manpower. Shortly thereafter, they get another contract offered to them. They want the business but will have to do some major juggling and staging to handle the work. With the industry enjoying a upturn, they will have a hard time staffing up to do the job on time and do it right. Does the company take the work with the idea that, once it is in-house, they can continue to seek the proper staffing and try to finesse both projects simultaneously? Yes [17/44] No [27/44]

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Often times, too, decisions to seek short term gains can overshadow more prudent thinking directed at building trust and lasting relationships. The case describes a classic example that occurred at Mustang when , about five or six years ago, we were awarded a huge contract to design the topsides on what was then the biggest and deepest platform in the Gulf of Mexico. It stretches us real thin. Shortly thereafter, the same client came to us with a similar contract. We could have tried to work both of these giant projects simultaneously, but the outcome would have been delayed and shoddy work. Rather than trying to finesse for the short haul, we were openly honest with the client and said that we were just too understaffed to do the second project to the level that they expected and, equally important, to the level of quality that we assure all of our clients. As it turned out, the client knew our situation and was testing us to see how we would react. Based on the position we took, they knew that they could trust us implicitly and have continued to award us steady work to this day. On another project, we knew we could handle most of the project except one portion that was four months down the road, but that would be an impossibility for us. Rather than get started and then, four months later make excuses for why we couldnt handle a portion, we turned down the contract and informed the client as to why. As we see it, if we get in trouble, we put the client in trouble, and we never want to put them in that position (Case 4 Bid Package Preparation) Case # 4 Company C is putting together a cost estimate on a project and requires significant information from a vendor of a specific piece of equipment in order to complete the estimate . This information gathering request requires several days work to fulfill. Once it has the package prepared, should the company require the vendor to bid on the project? Yes [21/46] No [25/46] Should the company pay for the information gathering services, giving them the option of excluding the vendor from the bidding? Yes [35/45] No [10/45] Many of our clients, for whom we are developing cost estimates, are requiring us to pay contractors or vendors for this type of input so that there will be no obligation to put them on the bid list. That way the service becomes a stand alone and may, or may not, lead to an opportunity to bid.

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(Case 5 Vendor Favoritism) Case #5 In bidding a project, Barker Company went out to three vendors in order to comply with their clients policy. Barker heavily favored a vendor, Jackson Company, above all the others because of their past work. In evaluating submitted bids, all the vendors were all extremely close, so Barker alerted the client that they had chosen Jackson for the work, not mentioning that their bid had been slightly higher than the others. Should Barker have accepted the low bid, regardless of the bidder, knowing that all the contractors were, indeed, qualified? Yes [19/50] No [31/50] Should Barker have advised the client that they recommended Jackson for the work, even though their quote was slightly higher, because their past performance and working relationship with barker might have a positive influence on project success? Yes [46/47] No [1/47] There are several areas where bidding ethics can be breached. Any company would want to be awarded a project on a no-bid basis, knowing that they would perform ethically and honestly. When required to bid, however, there is an obligation of trust on the part of the company requesting the bid, knowing that the effort requires time and effort. It is also highly unethical to withhold any information from any of the bidders or show favoritism in providing key information that could influence the bid. (Case 6 Use of Proprietary Information) Case # 6 A contractor was unsuccessful in being awarded a project by a company. In their bid, however, the contractor provided some unique ideas that could provide added value to the project. Should the company take the ideas provided by the unsuccessful contractor and share them with the winning contractor? Yes [8/46] No [38/46] [relay Bills story about vendor favoritism when Mustang bid with a unique solution that the client gave to the favorite vendor along with the project] (Case 7 Non-Compliance with Specifications) Case # 7 Murphy Companys bid requirement specifies that all components of a production manifold skid are to be U.S. Manufactured and fabricated. James Inc., the vendor, realizes that three non-critical parts on a single valve control

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package are non-U.S. Made when assembling the skid package. With it being a fasttrack project, there is no time to rectify the problem and still make delivery as scheduled. Since the parts are non-critical and delivery is obviously important, should James Inc. make the shipment without informing Murphy? Yes [0/46] No [46/46] Specifications are there for a purpose. If, as in this case, a dilemma exists between on-time delivery and strict adherence to specifications, the vendor is obligated to acknowledge their findings about the three components and offer reasonable alternatives. Those choices could include delaying the shipment until the correct parts can be secured, shipping the manifolds and retrofitting the correct parts in the field, or perhaps getting a warranty from the manufacturer of the installed parts. Honesty in complying with the customers specifications will, most likely, have a positive impact on a future business relationship. (Case 8 Safety vs. Productivity) Case # 8 A welding supervisor in peters inc. Notices that several workers are having apparent respiratory problems working in a confined environment. When he informs his superior about the situation, the boss states that the company is in full OSHA compliance. When the supervisor digs more, he determines that there is a minute reference to this situation in the OSHA regs that could indicate a problem, but when he again brings it to his boss attention he is again rebuffed. Should he confront his boss with the regulation and suggest that they go to a higher level within the company? Yes [47/48] No [1/48] Should he go around his boss and get further clarification from OSHA? Yes [25/50] No [25/50] One of managements primary ethical obligations is to the safety and health of its workforce. It appears as if there is an obstructionist in the picture. This can happen when a manager or person in authority has: (A) Little regard for the employees (B) Doesnt want to rock the boat (C) Is afraid for the security of his own position

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(HSE collage) At Mustang, as with most responsible companies, a formal health, safety and environmental (HSE) department is devoted to providing a safe environment for employees, clients demand it and it makes good business sense. Poor judgments on worker safety can put companies out of business permanently. We make certain that everyone receives the proper training before going to the job site and that the workplace is safe. A companywide emphasis is required. Obstructionism is not tolerated. In this case, the supervisor should pursue the case with his superior and make him understand the potential consequences of putting employees in an unhealthy situation. <<Trivia>> Q. What company made the Crooked E famous? A. Everyone knows this one. PS. Employees of this company grabbed all the goodies they could knowing they would be a collector's item. (Ethical Decisions Building Slide) What makes handling ethical decisions so hard? It is not always the case. Some things are obviously black and white. As with the cases we just discussed, though, often times there is incomplete information, multiple inputs and points of view, power issues, and unclear responsibilities. (Your Choices) The bottom line is that ethical decisions are the result of choices that we make as individuals. The moral judgments we make are the result of our own character and our value system. Life is a series of decisions. Kenneth Andrews of the Harvard Business School wrote that there were three qualities that individuals need to possess in order to make these decisions. (Competence) The first is that the person must have the competence, or capability, to recognize ethical issues and to be able to think through the consequences of the alternatives. If the companys leadership has become immune to good ethical practices because of their own individual character flaws or relaxed company policies, there will be problems. This quality of competence also suggests that this high standard is the same and should be practiced both privately and professionally. (Self-Confidence) The second attribute is a degree of self confidence to solicit different points of view and then make a decision that is correct.

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This again has to do with character and fortitude to seek the advice of other competent people in the organization rather that acting unilaterally. It also provides the ability to make unpopular decisions when necessary. (Willingness) Lastly, is the willingness to make a decision even though all the questions have not been answered and everything is not known. In the world of business, there are unknowns and partial information that make decisionmaking a very real challenge. What are some ways to keep unethical behavior in business from perpetuating itself? It often starts with a strong definition of corporate culture and philosophy, ingrained into every employee as part of the hiring or indoctrination process. (Boy Scout Logo and Laws) An obvious, yet non-business, example is the Boy Scout law. It enumerates a value set that is understood by all would-be participants before they join and has been part of a tradition that is globally recognized and followed consistently. There are few, if any, gray areas so behavior problems are minimized. (Top Down Build) Ethics has to be a top-down function, practiced and supported by the companys leadership, beginning with the most senior executives. A company code of ethics is important to have, but it needs to be supported by demonstrated behavior and decision-making practices set by the CEO and senior management team. Their behavior needs to be visible and set the example for everyone in the organization. (Two Pie Charts) If leadership breaks down, company anarchy creeps in, with rules becoming meaningless. An example is cited in a recent Wall Street Journal article that points to a survey conducted by a labor management consulting firm. The findings showed that of those surveyed, more than 35% abused sick leave policies by calling in sick when they were not and a similar percentage of employees keeping quiet when they observe misconduct of a co-worker. This points to a lack of leadership or a weak culture in a great many organizations. (Young Guns Logo) At Mustang, we instituted a program called Young Guns, now in its 5th year. Its stated purpose is to quickly indoctrinate young technical graduates, with virtually no experience in the culture or traditions of the company. Not only do they receive exposure to the technologies used by the company, but they get much more. Using mentors from our senior management team, the young guns are exposed to several positive character traits that will aid them in their

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career at Mustang and direct them wherever they go in the future. (Young Guns Photos) The very first trait of the seven major ones learned is to model integrity. The key values learned within that trait include trustworthiness, honesty and integrity. When practiced, these become strengths, not only for the young gun, but an added benefit for the entire company as well. (Young Guns at Xmas) The Young Guns also come out of the program with 30 core competencies that provide guidance and a values set that is critical for their development in business and in life. They not only learn how to do for themselves, but receive awareness of problems in the community and learn how to serve others through team involvement with local charities. (Full Throttle Logo and Photos) Another deterrent to unethical behavior can come from a companys philosophy of promoting teamwork. At Mustang, we strongly promote that concept with a major effort toward teambuilding. We call it full throttle, and it involves the entire company, if not only adds energy to the business development effort, but keeps everyone involved in maintaining the company spirit. Our (NSPE logo and rules page) feeling is that this approach should reach everyone in the entire organization from the senior management team to the young engineers and the multitude of support functions. As opposed to many systems that tend to isolate employees, the full throttle approach lets the traditions and philosophies permeate throughout the company and keep all Mustangers included. Another positive influence can be the reliance on professional organizations whose formal code of ethics or rules of practice stipulate acceptable conduct for all members. In Mustangs case, we adhere to the fundamental canons of the National Society of Professional Engineers, or NSPE. The stated rules encompass the actions needing to be practiced in order to promote the ethical practice of engineering. <<Trivia>> Q. What was the original name of the Houston baseball team that went on to become the Houston Astros? A. Colt-45s. PS. By Thursday they will either be headed to World Series or in final game of NL playoffs that night.

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To sum up, business writer Scott Clark, whose column appears in major business journals, proposed a set of ten commandments that he attributed, in part, to a book with the apt title of ethics: easier said than done. They are personal traits and practices that have to be part of an individuals own value system in order for them to demonstrate ethical behavior on and off the job. The ten are: (Ten Commandments Tablets with Laws Building from 1-10) 1. Be honest that incorporates your own truthfulness but also allows for zero tolerance of stealing, lying or any such behavior from your own employees. 2. Have integrity always be principled and act upon your own convictions. Do not practice a philosophy of the end justifies the means. This commandment also requires, when necessary, that you stand up and admit that you were wrong. 3. Keep your word the days of the making a deal with a handshake might be beyond us, but keeping promises and fulfilling commitments can produce lasting business relationships. Stay away from the temptation to rationalize noncompliance or provide excuses for breaking a commitment. 4. Be faithful to employees, family, friends and business associates. Avoid any undue influences or conflicts of interest that might influence your ability to make independent decisions. 5. Be fair practice equal treatment toward everyone and be willing to change your opinion or stance. 6. Be caring share, give of yourself and serve others. Wherever possible, avoid situations that will harm others. 7. Show respect demonstrate a respect for the dignity of others. Show them courtesy and be careful not to embarrass, demean or minimize others accomplishments. 8. Be responsible obey the laws and demonstrate a social consciousness. When in a leadership role, allow others to be part of the decision-making process, and refrain from unnecessary secrecy or withholding of information. This behavior, however, doesnt negate the justification in challenging unjust laws or rules.

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9. Pursue excellence strive to be as competent as possible in all that you do. Never strive for mediocrity, but rather always be prepared and diligent in all of your activities, performing tasks to the best of your ability and encouraging your colleagues to do the same. 10. Be accountable accept responsibility for decisions, for your actions and for foreseeable consequences. If you are in a leadership role, it is important to lead by example, setting the tone for the entire organization. As you know, the buck, indeed, often stops with you. These commandments help define character. By following them, ethics problems can be minimized for you and your colleagues. (Questions ???) We would be happy to use the rest of our time for additional questions or comments. In our discussion we might have opened up more questions than answers. Hopefully, if that is the case, you will delve into the subject much more fully than we could have possibly done today. If you have additional questions or comments, Bill and I would be happy to answer them off-line via email. Our emails are on the screen for your information. Thanks for your participation today, and have a great day.

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