In late November 2003, Boeing Company fired its top financial executive for unethical conduct, saying he negotiated the hiring of a missile defense expert while she worked for the U.S. government and was in a position to influence Boeing’s contracts. The former Air Force official, Darleen Druyun, was dismissed - together with CFO Mike Sears – 10 months after she was hired as vice president and deputy general manager of Boeing’s Missile Defense Systems unit.
Mr. Sears, who is 56, had held top positions in each of Boeings top businesses, commercial aircraft and defense, before being named to the financial post 31/2 years ago. He had been considered a top candidate to succeed 62 year old Phil Condit as CEO. Boeing’s board voted unanimously to dismiss Mr. Sears for his unethical behavior. Boeing said that he violated company policy by communicating with Ms. Druyun to discuss her potential employment while she was still negotiating contracts with Boeing on behalf of the Pentagon. The company said that it had “compelling evidence” that the two had attempted to conceal their alleged misconduct from a team of outside lawyers hired by the company to investigate.
The disclosure is another disgrace for Boeing’s booming defense contract business, which had $1 billion in government rocket business stripped in July of 2003 after the Air Force ruled that the company broke the law by using records from rival Lockheed Martin to help win contracts. The scandal also refocuses attention on the government’s controversial multi-billion plan to acquire 100 of Boeing’s 767 planes for mid-air refueling tankers.
The Pentagon’s Office of the Inspector General has been looking into allegations Druyun acted improperly in giving Boeing financial information about a competing bid by Airbus. Specifically, the investigation revealed that Druyun , then the principal deputy assistant Air Force secretary for acquisition and management, told Boeing that Airbus had submitted a bid $5 million to $17 million less per plane than Boeing’s offer. She joined Boeing nine months later. The Pentagon is conducting its own internal investigation of the matter. Ms. Druyun and Mr. Sears potentially could face charges under the Procurement Integrity Act, a federal law enacted in 1990 specifically to address fraud in the defense contracting business. The act, which carries potential civil and criminal penalties, specifically forbids a company or its executives from making any offer or promise of future employment to a federal procurement officer.
Boeing said Sears was terminated for violating company policies last year by communicating directly and indirectly with Druyun about future employment before she had disqualified herself from acting in her official government capacity. The company also said an internal review found recently that both attempted to conceal their misconduct. The company, however, continued to maintain that it committed no wrongdoing during the process.
The last Boeing investigation, however, resulted in harsh punishment for Boeing when the government took away seven military satellite launches that were to use Boeing’s rockets, and indefinitely banned the company from bidding on future satellite launching contracts. At the least, this investigation will delay a government contract to lease Boeing jetliners as airborne refueling tankers, which was the same contact Ms. Druyun was negotiating on behalf of the government while allegedly discussing employment with Boeing. The communications between Mr. Sears and Ms. Druyun allegedly occurred through Ms. Druyun’s 27 tear old daughter who works for Boeing. In one e-mail to Sears, the daughter let him know that her mother was beginning to consider her options for post-government employment. The two principals meet in person in October of 2003. The meeting occurred about 21/2 weeks before Ms. Druyun officially disqualified herself from taking part in Boeing-related government decisions.
The company said that it had worked hard in recent months to strengthen its programs and policies in order to ensure an understanding that ethical breaches will not be tolerated. A Boeing representative said that when there is a breach of the company’s ethical standards, it will act swiftly to address them, as it did with this most recent scandal.
Yet, whether these efforts, coupled with the terminations, will contribute to putting the controversy to rest depends ultimately on the outcome of the inquiry and on the response in Washington. The Boeing dismissals could also impact the Pentagon, which has come under criticism by Congress for being too cozy with the defense industry. The latest scandal may lead to hearings that will examine the defense industry and its relationship with the Pentagon. A Boeing representative stated that the company did not benefit from the improper actions; and that he hoped the company’s “decisive actions” in firing the two executives will persuade government officials that the company is serious about enforcing high ethical standards.
In early December 2003, Boeing announced that Phil Condit, the company’s chairman and chief executive, had tendered his resignation immediately. The company stated that its board had determined that a “new structure for leadership” was needed.
Next, Harry Stonecipher came out of retirement to extricate Boeing from the scandals. He immediately wanted to send a message to the employees – that integrity and ethics mattered. Accordingly, he told the vice-president of corporate internal governance that he wanted all the firm’s employees, 157,000, to sign a code of conduct. Nonetheless, despite his renewed focus on ethics, investigations of the company are still continuing, and the company has already lost $1 billion in federal contracts. More than half of Boeing’s annual revenue comes from the Pentagon. The Air Force had already stripped the firm of a rocket launch project after it found that Boeing’s chief financial officer dangled a job offer to an Air Force official responsible for Boeing contacts. That put on hold Boeing’s $23 billion bid to build the 100 aerial refueling tankers for the Air Force. The company could lose part or all of that order. The biggest challenge facing Mr. Stonecipher is convincing customers that the transgressions were caused by a few rogue employees, rather than by systemic problems at the company. Since he took office, the company has created a central office to spell out its ethics policies. Overseen by an independent monitor, it has a staff of more than 100 people, whose jobs range from manning ethics hotlines to conducting employee seminars. The company also has new rules as to whom can approach job candidates. The company also will review certain employee involved in designated sensitive work for conflicts-of-interest for three years after their hiring. Moreover, a 30 page booklet, “Boeing Ethical Conduct Business Guidelines” was mailed to each employee, from janitors to executives. It includes a section on “frequently asked” questions, such as what do with confidential info of a competitor that an employee inadvertently comes across (and the “answer” is to immediately seal it and turn it over to the ethics advisor). Mr. Stonecipher’s efforts have been well received by many in Washington, though the company still has skeptics and critics. However, based on a tip to the company’s ethics hotline, Mr. Stonecipher was forced to resign due to a consensual sexual relationship with a company executive.
In September of 2005, the Wall Street Journal reported that Boeing and the Justice Department were negotiating an overall settlement to the Air Force scandal as well as another one dealing with the company improperly acquiring confidential Lockheed Martin documents dealing with rocket programs. The Journal reported that the company could be required to pay $500 million but would avoid prosecution. This penalty would be the most severe one ever imposed on a U.S. defense contractor. While the company is attempting to overcome the negative impact of its ethical lapses, its management sees a comprehensive settlement with the Justice Department as an essential step in repairing its image. The company now has a new chairman and CEO, Jim McNerney, who definitely wants to move the company past its ethical and legal troubles and focus on Boeing’s future. Pursuant to the agreement, Boeing will not plead guilty to any charges, but will admit wrongdoing in the rocket and employment cases. In addition, no high ranking executives are expected to be prosecuted, except for the former CFO, Michael Sears, who has admitted recruiting the Air Force official for the $250,000 company job in violation of conflict-of-interest laws and ethical guidelines.