Can Boeing Get Out of Its "Ethical Cloud"?

With CEO Philip Condit out, it's up to his successor Harry Stonecipher to clear the dirty air surrounding the giant plane maker

By Stanley Holmes

The unexpected resignation of Boeing chairman and CEO Philip M. Condit on Dec. 1 follows a year of turbulence at the world's largest aerospace company. The final straw for Condit, 62, may have been the previous week's ouster of two senior Boeing (BA ) officials for an alleged ethics lapse.

Condit's resignation creates several daunting challenges for his immediate successor -- Harry C. Stonecipher, former Boeing president and chief operating officer. Stonecipher, 67, who retired last year and remained as a board member, immediately assumes the post of CEO and president of a company that has more than $54 billion in annual revenues.

In his first press conference as top gun, Stonecipher seemed to say all the right things by pledging to answer any and all questions, including those swirling around a highly criticized air-tanker deal with the federal government. The blunt-talking, no-nonsense leader will have to be true to his word and get Boeing soaring again.


  Clearly, Stonecipher has his work cut out. Condit's resignation is tied to Boeing's persistent reluctance to disclose all the particulars of a controversial plan to lease Boeing 767 tankers to the Air Force. The plan was blasted for the secrecy in which the contract was negotiated and for the fact that leasing would be much more expensive for the federal government than an outright purchase (see BW, 7/7/03, "Inside Boeing's Sweet Deal").

Condit's departure comes a week after Boeing CFO Michael Sears resigned. The company cited unethical conduct, saying he negotiated the hiring of an Air Force missile-defense expert while she was still working for the Pentagon and had direct influence over Boeing's bid to secure the tanker contract. Sears has denied any wrongdoing.

"It's very surprising for a company such as Boeing to have not one but two apparent ethical breaches in less than six months," says Steven Ryan, a Washington (D.C.) attorney who represents contractors seeking work with the federal government. In July, the Pentagon had punished Boeing for stealing trade secrets from rival Lockheed Martin (LMT ) to help win rocket-launch contracts. The punishment adds up to $1 billion in lost business, and the Pentagon has indefinitely banned Boeing from bidding on military satellite-launching contracts.


  "Condit's resignation is a reflection of the seriousness of the problem," says Ryan. And the situation suggests that something isn't right inside Boeing's culture -- something that Stonecipher had helped change when he was president and will now be responsible and accountable for coming clean.

"Everything the former leadership at Boeing did is surrounded by an ethical cloud of controversy and needs to be reviewed to ensure that it is in the best interest of the taxpayer and war-fighter," says Steve Ellis, vice-president for Taxpayers for Common Sense. With Condit out, the board apparently chose the tough-talking Stonecipher because he's well regarded on Wall Street and because he knows the ways of the Pentagon. With the mandatory retirement set at 65 for Boeing execs, Stonecipher received a special exemption to return.

In the press conference, the new CEO said he considered his appointment permanent and added that succession planning, while important, would fall low on his priority list. He said his primary task is to strengthen Boeing's tarnished reputation with customers, employees, and investors. "We have the right strategy," Stonecipher said. "The task before us is to execute."


  Yet many inside Boeing have said Stonecipher's past success has come more at the expense of laid-off workers than it has at executing strategic visions. And Stonecipher will have to focus hard on the misfires that got Boeing in trouble with the Pentagon and Lockheed Martin. Defense contractors know all about the so-called revolving-door rules that govern hiring discussions between a government employee and a defense contractor. The rules are clear.

How Boeing got itself and its top execs tangled up in such a mess has yet to be fully explained. The stock, at just over $38, barely moved on the news of Condit's departure. And it has moved mostly higher this year from an all-time low of just over $24 hit back in March. Still, analysts say, the stock should be much higher, and Stonecipher has a long way to go to regain the trust of angry and skeptical investors, public-interest groups, and the U.S. government.

Holmes covers Boeing for BusinessWeek in Seattle

Edited by Beth Belton

Before it's here, it's on the Bloomberg Terminal.