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US: Boeing's CEO Steps Down Amid Scandal

by Peter PaeLos Angeles Times
December 2nd, 2003

Boeing Co. Chairman and Chief Executive Philip M. Condit unexpectedly resigned Monday, as the world's largest aerospace company moved quickly to restore an image sullied by scandal.

Although Boeing asserted that Condit hadn't been forced out, its board of directors made clear that it was comfortable with his decision, saying that a "new structure for the leadership ... was needed to restore the company's reputation."

Boeing's former president, Harry C. Stonecipher, 67, was brought out of retirement and named chief executive. Stonecipher headed McDonnell Douglas Corp. before it was acquired by Boeing.

Many of Chicago-based Boeing's military programs are located in Southern California, with major facilities scattered from Palmdale to Irvine. The company is the largest private employer in the Southland, with about 36,000 workers.

Condit's resignation came as the Pentagon stepped up an investigation into allegations that Boeing's then-chief financial officer, Michael Sears, began recruiting a top Defense Department procurement official to join the company at the same time it was bidding on an $18-billion contract for aerial refueling tankers. Boeing eventually hired the Pentagon official, Darleen Druyun.

Last week, Boeing fired Sears and Druyun, citing breach of company policy. Sears has denied the allegations.

Late Monday, the Pentagon announced that it might delay the deal to lease and buy 100 Boeing air tankers until defense officials thoroughly investigated the circumstances surrounding the awarding of the contract. Boeing has denied wrongdoing in the hard-fought competition for the tanker pact.

Beyond the controversy over the air tankers, Boeing has seen its reputation tarnished by a Pentagon inquiry that found two Boeing employees had illicitly obtained proprietary documents from its rival, Lockheed Martin Corp., to win a lucrative rocket-launching contract.

As punishment, the Air Force in July took away about $1 billion of rocket work from Boeing and indefinitely suspended the company from seeking rocket contracts.

Condit "created a culture where this type of activity was routine," said Steve Ellis, vice president of programs for Taxpayers for Common Sense, a watchdog group that has been critical of Boeing's tanker deal. While Condit might have not been directly responsible, Ellis said, the executive "oversaw a career's worth of scandals in just one year."

"By accepting the hasty resignation," Ellis added, the Boeing board "is finally admitting that ... the company has to change the way it does business."

Condit, 62, was a soft-spoken executive who preferred sweaters to jackets and who often talked to his mother about the company's stock performance. Boeing has been his only employer. He joined the company in 1965 as an aerodynamics engineer and rose through the ranks, becoming CEO in 1996 and chairman the following year.

The allegations of misconduct have come as Boeing's once-dominant commercial passenger-jet business has continued to shrink amid one of the worst travel slumps in decades.

In October, Boeing said it would stop making the 757 aircraft, citing lack of demand. And this year -- for the first time -- European rival Airbus is expected to deliver more airplanes than Boeing.

"The company has had more than its share of disappointments over the course of the last year and a half," said Wolfgang Demisch, a longtime aerospace analyst.

Boeing watchers give Condit mixed grades for his seven-year tenure as CEO.

He is credited with aggressively expanding Boeing's defense operations to take up the slack from falling passenger-jet sales, reshaping the aerospace industry in the process.

Boeing acquired Rockwell International's aerospace and defense units in 1996, McDonnell Douglas in 1997 and the satellite-making division of Hughes Electronics in 2000. Along the way, Boeing established itself as the nation's second-largest defense contractor, just behind Lockheed Martin.

This year, Boeing's revenue from Pentagon contracts will surpass its commercial plane sales: about $27 billion versus $22 billion.

Yet in recent months, the scandals have made the Pentagon wary of dealing with the company -- threatening Boeing's continued growth as a defense contractor.

"It was time for Condit to go," said Loren Thompson, chief operating officer for the Lexington Institute, an Arlington, Va., defense think thank. "It's unfortunate because the company will benefit from the business he built, and will benefit for years to come."

Condit, in an interview Monday, said the allegations against Sears were "a critical factor" in his decision to resign -- a move that he insisted was "entirely voluntary."

"I ultimately concluded it was the best decision for the good of the company," Condit said. "The controversies and distractions of the past year were obscuring the great accomplishments and performance of this company."

Stonecipher said Condit's offer to resign had come as a "total shock" to the board. Condit made the offer to step down about a week and a half ago, and the company's 10 directors, after deliberating on telephone conference calls, agreed to accept the resignation on Thanksgiving Day.

"This was not a question of the board coming to Phil and saying it's time," Stonecipher said.

Analysts said Stonecipher's ascension could be a boon for Southern California as he concentrates on further bolstering the company's defense business. In the 1990s, Stonecipher was credited with turning around scandal-ridden McDonnell Douglas by focusing on sales to the Pentagon. He said Monday that one of his main tasks will be to fix Boeing's reputation within the Defense Department, including getting the rocket suspension lifted.

"I know the business quite well," Stonecipher said. "That's where I'll spend a lot of time."

Yet Stonecipher also made clear that he's not abandoning the commercial jet market. Specifically, he said he is "a proponent" of Boeing's proposed 7E7 jetliner, which analysts see as a crucial step to slowing Airbus' rise. "We are ... looking forward to going forward with the airplane," he said.

On Monday, Boeing also named board member Lewis E. Platt, the former CEO of Hewlett-Packard Co., as a nonexecutive chairman.

****

Boeing chronology:

August 2001: Boeing Co. moves its headquarters from Seattle, where it has been for 85 years, to Chicago in a bid to shed its traditional image as "just" a builder of planes.

Fall 2001: After the Sept. 11 terrorist attacks and a sudden downturn in airline traffic, Boeing lays off 30,000 workers and closes production lines.

2002: The company pays $98 million to settle a lawsuit alleging that top officials deliberately withheld information from shareholders about the sorry state of Boeing's production lines in 1997 until after its acquisition of McDonnell Douglas Corp. is approved.

June 2003: Defense contractor Lockheed Martin Corp. sues Boeing and three former Boeing employees, alleging that its archrival stole proprietary documents and used them to win a multibillion-dollar military rocket contract.

July 2003: The Air Force withholds $1 billion in rocket launching contracts from Boeing and bars it from that business after determining that the company had illegally acquired thousands of pages of proprietary documents belonging to Lockheed Martin. It is the stiffest punishment imposed on any major military contractor in decades.

August 2003: Boeing plans to lay off 1,440 employees amid the commercial aviation industry's prolonged downturn.

September 2003: Boeing begins disciplinary actions against as many as six management employees in its space launch division as it scrambles to reestablish its ability to bid on lucrative government satellite launch contracts.

Oct. 16, 2003: Struggling to sell commercial aircraft amid a severe industry downturn, Boeing says it will stop making the 757 jetliner, which helped bring nonstop, coast-to-coast travel to many regional airports.

Oct. 29, 2003: Boeing reports a 31% decline in third-quarter profit as its flagging commercial aviation business swamped gains in defense contracting.

Nov. 24, 2003: Boeing fires its chief financial officer, Michael M. Sears, and Darleen A. Druyun, a Boeing senior vice president and ex-Air Force deputy procurement officer, the same day President Bush signs a defense authorization bill giving the Air Force authority to lease 20 and buy 80 Boeing air tankers. An internal Boeing investigation found that Sears approached Druyun about joining the company while she oversaw hundreds of Boeing contracts for the Air Force. The recruitment violated company policy.

Nov. 25, 2003: Defense Secretary Donald H. Rumsfeld said his senior staff would conduct a fresh review of the Air Force tanker deal.

Dec. 1, 2003: Phil Condit resigns as chief executive. Harry Stonecipher, 67, becomes CEO.

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Compiled by Times Librarian Vicki Gallay





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