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Get Four
|  | MARCH 8, 2005
By Stanley Holmes What Boeing Needs to Fly Right With hints that more bad news may be coming, it's time for the aerospace giant to make a complete break from the past. Here's how How's this for a bumpy ride? On Friday, Mar. 4, Boeing (BA ) seemed to be soaring once more. The aerospace giant's stock was up 6% for the week, closing a mere 36 cents off its 52-week high of $58.74. Its defense business was going strong, despite the many ethical scandals involving Boeing in the news of late, and its commercial airplane business showed new promise. Topping the week was the Air Force's announcement that the military was lifting a 20-month ethics-related suspension on Boeing's ability to bid on lucrative government rocket launches. Then another bombshell struck. On Monday, Mar. 6, CEO Harry Stonecipher abruptly resigned under board pressure for having an affair with a female Boeing executive. Investors weren't spooked -- Boeing shares dropped just eight cents. Still, it seems for each of Boeing's steps forward in trying to remove the tarnish from its reputation, it takes two steps back. BOLD MOVES. This saga is far from over. Several internal and external probes are under way that could produce still more unflattering surprises for the nation's No. 2 defense contractor. Boeing hasn't identified the female executive, nor has it taken any action against her. Can Boeing regain its credibility and keep itself stable during these gusts of cultural and internal corporate instability? Yes, but it'll have to make some bold moves -- and fast. The shocking departure earns Stonecipher the dubious honor of being the second CEO to leave Boeing in disgrace in just 15 months. He succeeded Philip M. Condit, who resigned under pressure on Dec. 1, 2003, after becoming entangled in his own personal affairs with female employees and emerging defense contracting scandals. While Condit wasn't directly implicated in defense-related ethical violations, the scandals did send two senior Boeing executives to jail. Ex-CFO Michael Sears was sentenced to four months in federal prison in February for his role in trying to hire former Air Force procurement officer Darleen Druyun while she was still ruling on Boeing contracts, including the potential 767 refueling tanker deal. She was sentenced to nine months in prison. TOEING THE LINE. Stonecipher, known for his no-nonsense style, was supposed to restore the clean gleam to Boeing's reputation. Wall Street adored his bottom-line philosophy and operational acumen. Many had credited the 68-year-old aerospace veteran for working hard to rebuild the venerable company's credibility among such vocal critics as Senator John McCain (R-Ariz.). Ironically, Stonecipher himself was an outspoken advocate and defender of Boeing's code of ethics, requiring his more than 200,000 employees to take day-long ethics classes. Now, Boeing attorneys must be scurrying throughout the company to determine if any other senior executives could run afoul of the same ethics code that ultimately led to Stonecipher's ouster. That code decrees that Boeing employees will not engage in any conduct or activity that might raise questions as to the company's honesty, impartiality, or integrity. However, if Boeing executives and investors were looking to Chairman Lewis Platt for clear answers, they must have come away confused and disappointed. Platt told reporters that the apparently consensual relationship between the CEO and the female executive wasn't the sole reason for Stonecipher's dismissal. "It's not the fact he was having an affair -- that is not a violation of our code of conduct," Platt said, adding that, as more information came to light, the board discovered "some issues of poor judgment" that he said would affect Stonecipher's leadership. Platt declined to be more specific. With the possibility of more unflattering surprises on the way, what should Boeing do? Here are some suggestions: Go outside for new leadership -- now. Stonecipher, 68, was scheduled to retire in a year anyway. More important, a capable outside leader could finally unify Boeing's warring cultures and cauterize the festering ethical messes that have shadowed Boeing's otherwise commendable mergers with McDonnell-Douglas, Rockwell, and Hughes Space & Communications. Potential successors include Boeing board member and 3M (MMM ) Chairman and CEO James McNerney, former Motorola (MOT ) President and Boeing board member Michael Zafirovski, and GE (GE ) Aircraft Engines CEO David Calhoun. Complete the housecleaning. Boeing says it has been cooperating with outside investigators looking into its role in various defense-related scandals while conducting its own internal scrubbing of its senior execs. If company lawyers discover any more unflattering, unethical, or illegal practices, they should immediately disclose them -- and clean house. This is a time for clear, decisive action. Full cooperation is essential. Leave the good alone. The board and senior executives would be wise to steer clear of any meddling in the defense or commercial airplane businesses. Investors clearly like what they see. Revenues for Boeing's Integrated Defense Systems grew 11% in 2004, to $30 billion, and are expected to increase to $32.5 billion in 2005 as operating margins hover near 10%. Boeing Commercial operating margins are expected climb from 5.5% in 2005 to 6.5% in 2006. Revenue could grow to $28 billion, up from $24 billion in 2005, according to some analysts' estimates. Such numbers explain in part why Stonecipher's affair caused barely a ripple on Wall Street. Integrated Defense Systems Chief James Albaugh and Commerical Airplane CEO Alan Mulally each have run their respective businesses admirably during difficult times. They should continue to have a free hand. Albaugh and Mulally have been mentioned as potential successors to Stonecipher. But unfortunately for them, Boeing's continued string of ethical misdeeds at the highest levels now may prove a hindrance. That's unfair. But clearly, Boeing needs a dramatic break from its past to truly take off again. And that has to start right at the top.  Holmes is a correspondent in BusinessWeek's Seattle bureau Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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