Boeing: Caught In Its Own Turbulence

A scandal could cost the defense contractor critical Pentagon business

In his book, which had been set for publication in March, Michael M. Sears outlines nine rules for better management. Rule No. 5 of Soaring Through Turbulence: "Protect your secrets." Too bad Sears couldn't follow his own advice. On Nov. 24, Boeing Co. removed him as chief financial officer, saying he had behaved unethically. Sears's alleged misdeed: negotiating to hire Air Force procurement officer Darleen A. Druyun while she was in a position to influence the outcome of a Defense Dept. contract to buy Boeing 767 tankers. Druyun, hired by Boeing last January after leaving the Air Force in November, also lost her job. Sears and Druyun were also accused of trying to cover their tracks. Neither could be reached for comment. Said CEO Philip M. Condit: "Boeing must and will live by the highest standards of ethical conduct."

By firing his CFO, Condit moved to deflect mounting criticism in Washington over the methods Boeing has used to win lucrative defense contracts. At the same time, Condit grabbed a golden opportunity to get rid of a key rival. In recent years, Sears and Condit had been engaged in a power struggle, say company insiders. The hard-charging former McDonnell-Douglas exec was angling to become chief operating officer and eventually CEO. Says a Boeing insider: "Condit is happy to get rid of Sears because he has been nipping at [Condit's] heels."

But Condit's problems are far from over. The Sears scandal may fuel congressional demands for further investigations into Boeing's practices, say some analysts. Ultimately, that could cost Boeing badly needed government business. At the same time, Sears's ouster may not signal the end of Condit's vulnerability. Condit has not only presided over several ethical lapses since taking the reins in 1996 but also earned Wall Street's ire for weak financial performance and the steady loss of share to rival Airbus. Asks Richard Turgeon, fund manager for Victory Capital Management, which owns about two million Boeing shares: "At what point does the board say enough is enough and find somebody more in tune with the shareholders, the employees, and the airlines?"

There are signs that Boeing's relationship with Congress and the Pentagon could worsen before it gets better. Senator John McCain (R-Ariz.), a critic of the 767 tanker deal, is asking Defense Secretary Donald H. Rumsfeld to delay the launch of the program pending the outcome of an ongoing Pentagon investigation.


Moreover, congress probably will use the new allegations of misconduct to probe deeper into the tanker deal. Legislators also may want to know whether other Boeing execs were aware of the meetings. Says Cai von Rumohr, a veteran aerospace analyst for SG Cowen Securities Corp.: "That could create a potential Boeinggate of negative publicity."

Boeing won't necessarily be barred from bidding on government contracts -- or lose the tanker deal. But at the least, the company has squandered gobs of goodwill with Congress. Following the September 11 attacks, a majority in Congress seemed prepared to give the tanker deal the green light as a way to help Boeing ride out the financial crisis in the airline industry. Boeing, say analysts, may receive a colder reception the next time it goes before Congress with hat in hand.

A fresh focus on Boeing's ethics could also invite more scrutiny of Condit's performance. The 62-year-old CEO faces plenty of challenges. He must revive Boeing's fortunes in the commercial-plane business with the launch of the 7e7 airliner while keeping development costs below $8 billion. He must fix the manufacturing and quality-control problems plaguing the commercial space division. And with defense revenues exceeding commercial-plane revenues for the first time, Condit has to reassure the U.S. government that it can trust Boeing as a business partner. Notes one Wall Street analyst: "We have a number of issues here that go beyond Mike Sears."

Firing his CFO may buy Condit some time. But it hasn't erased questions about his troubled tenure. If anything, the episode may turn up the heat.

By Stanley Holmes in Seattle

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