Why Boeing's Culture Breeds Turmoil

The sacking of Stonecipher won't fix a company marked by excess and infighting

It was at the "Palm Springs Fling," Boeing's annual executive retreat held two months ago, that CEO Harry Stonecipher, 68, initiated the relationship with Boeing exec Debra Peabody that would lead to his shocking ouster announced on Mar. 6. The conference epitomized much that is still wrong within Boeing, insiders say. Attendees describe heavy drinking and late-night revelries. It was an atmosphere at odds with the professionalism Stonecipher had tried to project after taking over the CEO spot in 2003 when Philip M. Condit resigned amid a string of scandals. Stonecipher could not be reached for comment.

From the outside, Stonecipher appeared to have made progress in returning Boeing to the straight and narrow. The aerospace giant's two most important units, Boeing Commercial Airplane and Integrated Defense Systems, had become solidly profitable. Just days before Stonecipher's resignation, the U.S. Air Force lifted a 20-month ban that prevented Boeing from bidding on rocket contracts. The company had been excluded after low-level managers admitted in 2003 to using internal Lockheed documents to shape Boeing's bids. With the February sentencing of Michael Sears, the former chief financial officer, on charges of illegal employment negotiations, Boeing was even putting its most serious scandal behind it. Indeed, its stock had regained altitude, rising to almost $60 from under $40 over the past year.

AN OBLIVIOUS BOARD

Boeing's board, led by Chairman Lewis Platt, presented the ouster as evidence of a company so committed to ethical purity that under current circumstances it wouldn't tolerate even a consensual sexual relationship between the CEO and a female exec. Insiders tell another story. They describe an ongoing culture of unrestrained excess that dates back to the Condit years. The lack of restraint also led to rampant political infighting among senior managers. As Stonecipher's tenure -- never envisioned as lasting more than a few years -- wore on, the battles among those angling to succeed him intensified. The board, meanwhile, seemed oblivious to the turmoil. Board members declined to comment for this story, but Platt told reporters and analysts in a phone conference announcing Stonecipher's resignation: "We are committed to strong ethical leadership, and we have fought hard to restore our reputation."

Executive-suite shenanigans and infighting are hardly unknown in Corporate America, but the degree to which they pervade Boeing is rare. For a company that must negotiate with governments and take responsibility for the safety of the flying public as well as sensitive military contracts, the distractions are particularly troubling.

Just days before the Stonecipher announcement, Boeing was awash in rumors that a major shakeup was imminent. A long-planned board meeting the previous weekend ran an extra day and a half, and executives scheduled to present to the board were told at the last minute to stay home. It was a distraction that Boeing, still negotiating hard-to-repair relationships at the Pentagon, didn't need. The all-important commercial division was embroiled in a cutthroat competition to win back the dominant share of the airline business from Europe's Airbus.

In the midst of this turmoil, commercial division head Alan R. Mulally held court at a party in Kirkland, Wash., attended by 100 managers and employees three days before the Stonecipher bombshell. According to several attendees, Mulally talked openly about who would replace Stonecipher, calling it a two-horse race between himself and James McNerney, who is the CEO of 3M (MMM ), a Boeing director, and a former top General Electric Co. (GE ) exec. These same people quote Mulally as saying: "It's now down to the GE guy or me. It's a fight to the death, and if it's him, I'm outta here." Mulally denies making the comment. McNerney has declined to comment on whether he is a candidate for Stonecipher's job.

Mulally wasn't the only exec plotting his ascent in recent years. In fact, one of his most serious rivals may have taken his machinations to such an extreme that they led him to unlawful conduct. Former CFO Michael Sears was sentenced to four months in prison in February for his role in the illegal job negotiations with Air Force procurement officer Darleen Druyun. Insiders say the controversy was part of his attempt to amass a power base at his rivals' expense.

In 2002, Druyun, an Air Force procurement czar looking to move to the private sector, was possibly the most sought-after executive-to-be in the aerospace industry. With her understanding of the Pentagon procurement process and her contacts, Boeing, and most of its rivals, tried hard to land her. James F. Albaugh, a front-runner in the Boeing CEO race and head of Boeing's Integrated Defense Systems, talked with her at least once under the assumption that she had recused herself from contract negotiations with Boeing, but he came up dry. It was only when Sears went back for one last try that Boeing had a deal, according to e-mail released as part of the criminal investigation of Sears and Druyun. That coup gave Sears a huge advantage over both Albaugh and Mulally. It also had the potential to expand his power base by making Druyun an ally. Sears previously declined to comment through an attorney and could not be reached for this story.

It took a lot more than persuasive skills to sign up Druyun. The clincher: Sears promised her a top job even though she was still negotiating contracts with Boeing.

Sears found other ways to advance his cause. In the summer of 2003 he waged all-out war with then-CEO Condit. Sears, according to several senior Boeing executives, took over all public-relations responsibilities and controlled access to the media and investors, an unusual role for a CFO. "It was clear to everybody [that] Sears was anxious to be the successor to Phil to the point that it got pretty disgusting," said a Boeing board member earlier this year. "You got tired of him acting like the heir apparent." Sears also took control of Boeing's famed in-house leadership center in St. Louis, according to several executives with knowledge of the matter. Banished from the sessions were Albaugh and Mulally. With almost every exec of any clout passing through the school, it gave Sears a huge profile throughout Boeing's far-flung empire.

Sears's stock rose in the summer of 2003. While he was still in charge of PR, there were leaks to the media implying that Albaugh withheld information about a $1.2 billion charge. Albaugh seemed to blame Sears. According to an internal Boeing memo written at the time, Albaugh said the "efforts to cast the write-down as the result of me withholding information -- surprising world headquarters -- is not supported by facts." He went on to write: "If Mike is intent on discrediting me, he does a disservice not only to me but to the company."

The back-stabbing was widespread among the top brass. "It was everybody in the suite gunning for Phil's job," said a former senior Boeing executive with direct knowledge of the situation. "It was pretty destructive."

An unhealthy focus on internal politics wasn't Boeing's only culture problem. In March, 2004, Boeing agreed to pay $70 million to settle a sprawling class action alleging widespread sexual discrimination. Sexual misconduct by executives was a frequent topic of conversation among employees. As BusinessWeek reported in December, 2003, Condit settled at least one wrongful termination lawsuit brought by a female employee with whom he had a relationship. Boeing has consistently opposed BusinessWeek's attempts to unseal documents dealing with these and other charges.

One of Stonecipher's top goals when he was brought out of retirement as CEO was to put ethics front and center. He created an internal governance office that reported to him and required every employee to sign an ethics statement. "Without integrity you cannot conduct business successfully," he wrote in the June, 2004, issue of Boeing's in-house magazine. "Firing people who lack integrity is good business." Words to live by.

By Stanley Holmes in Seattle

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