March 7 (Bloomberg) -- Boeing Co. ousted Chief Executive Officer Harry Stonecipher for having an affair with an employee, 15 months after he returned from retirement to lead the No. 2 U.S. defense contractor's recovery from a purchasing scandal.

Chief Financial Officer James Bell will replace Stonecipher, 68, on an interim basis. Chairman Lewis Platt, who ordered a review after receiving an anonymous tip 10 days ago, said on a conference call today that ``poor conduct and judgment'' by Stonecipher ``would impair his ability to lead.''

Stonecipher required employees to sign a code of conduct designed to restore Boeing's reputation after the illegal hiring of a U.S. Air Force weapons chief led to the downfall of his predecessor, Philip Condit. His efforts helped lift Boeing's shares 54 percent, and the company on March 4 won reinstatement as a contractor for Air Force space-rocket launches.

``These are unfortunate circumstances given the positive momentum of the past few weeks with resolving issues with the Air Force and good news on the business,'' said JB Groh, an analyst in Portland, Oregon, at D.A. Davidson & Co., who has a ``neutral'' rating on the stock.

Shares of Chicago-based Boeing fell 8 cents to $58.30 at 4:15 p.m. in New York Stock Exchange composite trading. They've risen 36 percent in the past year.

Boeing spokesman John Dern declined to identify the other executive, other than saying she didn't report directly to Stonecipher. She remains with Boeing. Stonecipher is married, with two children and two grandchildren, according to the company's Web site.

Code of Conduct

The employee who informed Platt of the consensual relationship, which began in January, learned of it through correspondences, Platt said. Under the code of conduct, employees must report suspected violations, and express concerns regarding compliance with the policy and related procedures, according to the Web site.

``The Boeing board should be congratulated,'' said Richard Koppes, an attorney at Jones, Day in San Francisco. ``They are setting a precedent and demonstrating how good corporate governance works.''

Platt will assume an expanded role in his capacity as non- executive chairman. Stonecipher will leave the company's board. Bell, 56, has been with Boeing for 32 years and will continue his duties as CFO and was named president. Bell won't be considered as a candidate.

McDonnell Douglas

Stonecipher worked for 27 years at General Electric Co., rising to lead the company's aircraft-engine unit. He later headed aircraft-parts maker Sundstrand Corp., and in 1994 became the first non-family member to lead McDonnell Douglas.

He joined Boeing after its 1997 purchase of McDonnell Douglas Corp., where he was president and CEO. The acquisition of McDonnell Douglas was Condit's entry into the defense contracting business, making Boeing the second-largest supplier to the military after Lockheed.

Stonecipher retired as vice chairman of Boeing in June 2002. He owned 187,000 shares of Boeing as of March. He was paid a salary and bonus of $200,000 in 2003, when he was named president and chief executive in December.

Financial misconduct has been a more common reason as of late for the ouster of executives at companies such as WorldCom Inc. and Adelphia Communications Corp. William Agee's relationship with subordinate Mary Cunningham, while he ran Bendix Corp., spurred a media spectacle in 1980. Agee and Cunningham later married.

`Global Settlement'

Bell became chief financial officer after Michael Sears stepped down in November 2003 amid allegations he sought to hire former Air Force weapons chief Darleen Druyun as they negotiated a $23 billion contract for up to 100 refueling aircraft tankers. Sears was sentenced to four months in prison on Feb. 18 for deceiving the government. Druyun is serving nine months in jail.

The company was suspended in July 2003 from receiving new rocket launch contracts because the Air Force said Boeing improperly obtained documents from Lockheed Martin Corp. that helped Boeing win a 1998 contract for a booster rocket program.

The Justice Department is reviewing a ``global settlement'' with Boeing to settle a number of outstanding cases, including the rocket document theft, Acting Air Force Secretary Peter Teets said March 4.

``I don't think this will be viewed that negatively,'' said Paul Nisbet, an analyst with Newport, Rhode Island-based JSA Research Inc. ``If anything, it may prove they're going overboard on ethics.''

Candidates

Alan Mulally, head of commercial airplanes, and James Albaugh, head of Boeing's defense business, are the most likely internal candidates for the CEO position, said George Shapiro, an aerospace analyst in New York at Citigroup, who has a ``sell'' recommendation on Boeing. 3M Co. Chief Executive James McNerney, who serves on Boeing's board, is also a candidate, he said.

``We want someone with a track record,'' Platt said in an interview. ``Not someone that's on training wheels. And industry experience is a always a plus.''

Platt said because a search had already been started, naming a replacement might be done within six to nine months.

Whoever is named chief executive faces changes in U.S. defense spending that may eliminate the aircraft tanker program and increased competition from Airbus SAS, which surpassed Boeing as the world's largest maker of commercial aircraft in 2003.

Boeing has relied more on its defense work, which includes F- 18 fighters and C-17 cargo planes, with demand for commercial aircraft down since 2001. Military sales were more than half of 2004's total revenue of $52.5 billion.

Commercial plane deliveries will grow as much as 20 percent in 2006, Boeing said last month. Stonecipher and other top executives have been making personal sales calls in India and the Middle East, Platt said today.

To contact the reporter on this story: James Gunsalus in New York at jgunsalus@bloomberg.net.

Last Updated: March 7, 2005 20:33 EST