CEO's Departure Underscores Boeing's Fall
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CEO's Departure Underscores Boeing's Fall

In this case, the problem is not financial chicanery but “a long series of mistakes, manipulations, and controversies in manufacturing, accounting, acquisitions and strategy that went unchallenged and unchecked by Boeing’s board of directors.”

Paul Holmes

Of all the companies embroiled in corporate scandal over the past few years, none had fallen so far so fast as Boeing.

Enron was big, but no one really understood what it did—until it collapsed, when they understood it all too well. Global Crossing burned brightly but briefly. Tyco was a big faceless conglomerate that avoided the public spotlight. But Boeing is one of the biggest names in American business, its 747 brand almost as familiar around the globe as Coca-Cola. A decade ago, Boeing was one of the 10 most admired corporations in America, according to Fortune’s annual rankings.

But now the aircraft manufacturer is making headlines for a different reason. In this case, the problem is not financial chicanery but what Business Week referred to as “chicanery… a long series of mistakes, manipulations, and controversies in manufacturing, accounting, acquisitions and strategy that went unchallenged and unchecked by Boeing’s board of directors.”

The accusations include the theft of documents from a competitor, the offer of a job to a Pentagon official while she was reviewing a major contract with the company, and suspicious dealings with an investment fund owned by Pentagon advisor Richard Pearle. And the crisis that had been simmering for a month came to a boil last week with the resignation of chairman and chief executive Phil Condit, who conceded “the controversies and distractions of the past year were obscuring the great accomplishments of this great company.”

Now the challenge of restoring Boeing’s credibility falls to Harry Stonecipher, the retired CEO of McDonnell Douglas, which was acquired by Boeing in the mid 90s.

According to Leslie Gaines-Ross, chief knowledge officer at Burson-Marsteller and author of CEO Capital, a study of the role chief executive’s play in corporate reputation, Stonecipher “will need to move quickly to establish his and the company’s priorities, get his executive team in place, communicate openly and regularly with the board, and, as Stonecipher himself publicly stated, repair relationships with the U. S. government. 

“He needs to be crystal clear about values and expectations—and look for symbolic actions that will reinforce his commitment to the highest ethical standards. Internal communications will be key—and that includes listening to his employees and asking for their help in restoring Boeing’s reputation.”

Employees may be reluctant at first. Stonecipher has some credibility problems of his own with Boeing’s Puget Sound employees, who blame him for the relocation of the corporate headquarters from Seattle to Chicago and for the breakdown in labor relations that led to a strike by engineers and technical workers in 2001. There is also resentment over his declaration that Boeing would no longer consider its employees as “family,” but rather as team members.

According to Charles Bofferding, executive director of the Society of Professional Engineering Employees in Aerospace, “a bunch of people are wary of Harry.” With Stonecipher, he says, “everything has been about the business case, and nothing has been about respect for the employees. Harry has got to find a way to motivate the work force.”

But his appointment drew praise from investors, government officials and military analysts, who say Boeing badly needed to reassure its largest customer, the U.S. government, that it would halt the rash of improprieties in its Integrated Defense Systems division.

The Air Force, for example, issued a statement calling Stonecipher “an experienced business leader” with a “stellar reputation as an executive with high standards for performance and impeccable integrity.” And both financial and aviation industry analysts welcomed the departure of Condit and the arrival of a new leader.

“Boeing’s reputation is in the toilet, but the departure of [former chief financial officer Michael] Sears and Condit lifts that cloud,” said Loren Thompson, chief operations officer of the Lexington Institute, a think tank in Arlington, Va. “Harry Stonecipher is a known commodity. He’s a bottom-line guy who knows the company inside and out. I think this is much better news than most people believe it to be.”

But that bottom-line orientation may be an obstacle to restoring credibility. Stonecipher is known inside the company for his job cutting and his short-term focus. Restoring credibility is likely to require a long-term investment in the company’s relationships with its key stakeholders—relationships that some say eroded after the move to Chicago.

To understand how far Boeing has fallen, it’s important to understand the history of the company, and the values that underpinned its operations from its earliest days.

“Boeing as a defense contractor is subject to even greater public and private scrutiny than most,” says Keith Burton, worldwide director of corporate and employee communications at Golin/Harris, which helped with the effort to attract Boeing to Chicago. “Its corporate history and legacy are steeped in the need for propriety, ethics and integrity.

“If you were to travel to Seattle and make a stop at the Museum of Flight, established by Boeing at the airfield near its corporate headquarters campus, you would find a wonderful wooden building, painted in its original red, that housed The Boeing Company at its inception. In this building is the original office of founder William Boeing. It’s a simple office that speaks to his style and approach.

“Here was a man who turned to building furniture in the fledgling days of the company to keep it healthy and its employees on the payroll while pursuing its goal to be a leader in aviation. He was at the controls of a Boeing plane in 1919 when the mail service between Vancouver and Seattle was initiated—the first of what has become a long series of U.S. government contracts. Bill Boeing’s legacy was building a company known for its corporate culture and its ethics. All who have followed in his footsteps have been committed to these values.”

But since Condit took the helm of the company in April of 1996, the company has been a magnet for controversy.

In 1997, Boeing lost control of its commercial airplane plants, trying to produce a record number of planes. The company was forced to stop two production lines so workers could catch up, a move that cost the company $2.6 billion and created the first annual loss in half a century. Last year, the company, without admitting guilt, paid $92.5 million to settle shareholder lawsuits claiming it had misled investors over the mess.

Another lawsuit, alleging that the company knowingly underpaid female employees and denied them promotion, is scheduled to come to trial in April of next year. The suit was brought by 38 women who represent a cross-section of the company’s employees.

At the same time, Boeing has been facing increasing competitive pressure from European rival Airbus, which spent $13 billion on the development of a massive new passenger jet, the A380, while Boeing was focusing its energies on the defense sector. Today, Airbus holds a huge lead over Boeing in commercial orders: in 2002 and 2003, the company commanded nearly 60 percent of the global market—the dominant share that Boeing enjoyed less than a decade ago.

But it’s the company’s shady dealings in Washington that are most troubling.

In July, the Pentagon sanctioned the company after it was found to possess documents from rival Lockheed Martin that helped it win large rocket contracts. Some senior executives reportedly knew as far back as June 1999 that employees on its Delta rocket team had Lockheed documents in their possession. But the company returned just seven pages at the time and then began delivering the rest piecemeal over the last four years with more than a dozen boxes showing up at Lockheed attorneys’ offices this year. That led to a ban precluding the company from bidding on military satellite business, and the Pentagon switched $1 billion of future business to Lockheed.

The Justice Department, the Senate Armed Services Committee and two investigative branches of the Defense Department are reviewing allegations that Boeing acted improperly, and possibly criminally, to secure at least two multibillion-dollar military aerospace contracts in recent years, and Lockheed Martin has filed a lawsuit.

Meanwhile, controversy swirls around a deal to sell 100 refueling tankers to the Air Force. There are suggestions that a Pentagon official may have alerted Boeing to a lower bid by Airbus after Boeing CFO Michael Sears offered her a job. That order has been suspended temporarily and “Boeing could lose the tanker deal,” according to Michael O’Hanlon, a defense expert at the Brookings Institution. “That could be only the first of its problems if it’s seen as a company that doesn’t play by the rules.”

Finally, there are questions about whether Richard Perle, a prominent Pentagon adviser, lobbied on behalf of Boeing’s controversial tanker bid just months after the aerospace company made a $20m investment in the venture capital fund he runs. In August, Perle co-authored an op-ed article in The Wall Street Journal arguing in favor of the deal. He did not disclose Boeing’s investment in his Trireme Partners investment fund.

Boeing was slow to respond to the initial charges, some critics say. According to one senior public relations exec: “When the reported conflicts of interest came to light and the firings followed, Boeing should immediately have moved to full disclosure to show that its management team acted quickly, decisively and in the interest of protecting its close relationships and integrity.” Instead, “the company has labored with its communication. The public communication has appeared labored and deliberative.”

John Ashford, a prominent Washington public affairs counselor and chairman of The Hawthorn Group, agrees. “Once the violations were apparent they could have mounted a more aggressive investigation; promoted, internally and externally, both the investigation and a ‘zero tolerance’ culture; and brought the customers actively into solving the problem.”

Instead, he says, the company “failed to—immediately—find all the truth, tell all the truth, accept responsibility and apologize, visibly take punitive and corrective action, and mount a pro-active campaign.  They let this become an excuse for getting rid of a lackluster CEO.” In other words, the company violated most of the rules of effective crisis management.

Like most crises, this one appears to have its roots in a collapse of values—and many observers hold Condit personally responsible.

“Under Condit, engineering skills and ethics seemed to lose sway over senior management,” says the Lexington Institute’s Thompson. “Condit booked a huge amount of business by allowing his subordinates to play business close to the edge.” Boeing continues to insist that there’s no evidence linking Condit to any of the improprieties, but that’s unlikely to let the former CEO off the hook.

“Given the intense focus on corporate governance today, every CEO is more acutely aware of the need to operate with the highest standards of excellence and ethics,” says a senior corporate public relations counselor. “This scrutiny is even more intense and politicized with defense contractors, particularly those of the size and stature of Boeing.”

Stonecipher made it clear that his first focus would be on rebuilding the company’s relationship with its largest customer.

“Satisfying the suspension authority is very high on my list and to restore our credibility with that huge customer called the U.S. government,” he says. “We have some huge contracts waiting around in the wings that we would like to bring to fruition.” He added that he would like to meet face-to-face with key players in Washington in a “matter of days and weeks, it won’t be months,” to reassure them that Boeing plans to fix its problems.

That announcement drew praise from PR observers.

“Once the succession decisions were made, the company appears to have faced up to the issue and communicated unequivocally about it,” says Pat Ford, who chair’s Burson-Marsteller’s corporate practice. “Harry Stonecipher made himself available to key audiences, showing leadership. His experience and reputation in the industry clearly sends reassurance to the governmental and private sector customers as well as the financial community.

“Without knowing how much of the story is still unknown, the Board and the CEO seem to have taken strong steps to send the message that this situation would not be tolerated at any level.”

Internal communication is likely to be an even bigger challenge, however.

“I believe employees will be deeply affected,” says a senior Chicago area PR executive. “As we see it publicly, Boeing has been whipsawed by the economy, competition and critical events of the past several years. The company has undergone transformation, downsizings and other changes that clearly have eroded trust. These changes and the potential for other developments surely will create more apprehension, for the security of jobs that could be lost because of further change or disruption.

“And employees will be concerned for how Boeing’s reputation will affected—and how they may be faced with defending it with people who’ve always trusted the company.”

To address all its stakeholders, the company should “quickly create a 100-day communications plan,” says Golin’s Burton. “Root it deeply in the issues and values of the Boeing culture. Build and re-build bridges among key constituencies who now may be divided in their interests and support of Boeing. Get to employees quickly. Mobilize third parties. Use the Board of Directors with skill and precision to support these efforts.”

The challenge is likely to be made more difficult by the fact that company’s move to Chicago cut its ties to some powerful allied constituencies.

“Boeing is a company that has been deeply affected by change in recent years,” says one senior public relations executive familiar with the company. “How much has its move to Chicago eroded historic ties to organized labor in the State of Washington and related communities of interest? How much has its decisions to outsource the production of parts and components to other suppliers divided its supporters?

“How much have its efforts to downsize in Washington, California, Missouri and other places created hardships and, therefore, hard feelings among those who have now become critics and adversaries? How much has its actions in pursuing contracts created adversaries—among competitors, elected officials whose congressional and senatorial districts are affected by the above when Boeing wins and others lose, therefore seeing jobs, dollars and other benefits lost in their quest to win these very contracts.

“Ultimately, those decisions set up tensions and erodes trust. And they make a company like Boeing a much bigger target for a hard fall.”

Having said all that, most Washington insiders believe the company’s most immediate concerns can be addressed. The tanker order is likely to go through eventually, because the Bush administration will not want to give such a massive order to a non-American supplier, and Boeing is the only U.S. company that can meet the government’s demands.

Getting the business back on track will solve many of the company’s other problems.

Says Bruce Rubin, an independent crisis communications counselor, “I think the longer view here is what is it Boeing needs to do in order to get back on the track of being the dominant aircraft manufacturer, and being perceived as it once was: the world leader. The board thought that a change of leadership was needed to do this, and they did it.

“The key stakeholders will be assuaged—not all, but mostly—by an up tick in business. As for the restoration of trust, I think what the new CEO can do is focus on business.”

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