questions at end please

hy CASE 4 Boeing: How Low PUBLE Can They Fly? THE START OF THE ETHICS PROBLEMS AT BOEING Stenlo CFO Mich Oster atves. saliendene or m hade In November 2003 Boeing board of directors fired the company's chief financial of ficer, Mike Scars, and vice president of missile defense systems, Darleen Druyun, for ethical misconduct. It was alleged that Sears had offered Druyun a job at Boeing in 2002 when she had a high-ranking acquisition position with the U.S. Air Force. This was not only a violation of the Boeing ethics policy, but could also be considered a vi olation of the Procurement Integrity Act, which does not allow government officials who have acquisition authority to discuss potential employment opportunities with a supplier during the contract review process. Druyun was offered a vice president po sition at Boeing with an annual salary of $250,000 and a $50,000 signing bonus. The offer was given to Druyun when she was in the process of reviewing a Sul billion contract between Boeing and the Air Force for the leasing of one hundred B ing 767 airborne refueling tankers. It was alleged that the close relationship betwe Druyun and Boeing included Druyun supplying Boeing with the details of Airbus for a military tanker contract. It was also alleged that Druyun lobbied politician nker contract. The con hearings or solicitations al level of profitabil Congress in a covert operation to ensure Boeing got the tanker contract. 1. tract was awarded to Boeing by Congress without any public hearings or solic for other bids. In addition, the contract gave Bocing triple the usual level of ity for a commercial plane contract. Druyun later admitted that the high price Bocing in the tanker deal was a parting gift" to Boeing before she started Boeing. Keith Ashdown from the Taxpayers for Common Sense stated it Force's Enron with certain people doing unethical activities that impact people. Druyun's former boss at the Air Force, Marvin R. Sambur, stated Force had been negatively impacted by the scandal, The illegal activities the core values of the Air Force, which include inte It was also discovered that communicatie Druyun's daughter and son-in-law, who both worked at Boeing. A me unications took place between former b. People doyers for high price paid started working at ated it was the Air pact thousands of stated that the ties went against tegrity, service, and excellence. een Sears and memo thar 239 written by an Air E dit, Druyun, ands Laimed that Dricing in geneugust 13,205 rele cember 3, 2002 trast with Boei the discussions ing with mili the two employees y suppliers ter in 2005 dit was had decided to immed Boeing's corporate ployed by the US and Druyun Boeing: How Low Can They Fly? an Air Force general counsel and was released in 2004 stated that Phil Con- and Sears met on August 13, 2002, to talk about Druyun's potential cm with Boeing "in general terms. * Additional documents released in 2004 Joye r Druyun and Sears started negotiating for her new job at Boeing on Se 2002. and finalized her new position on October 17, 2002. This is in con- sh Bocing's statement that Condit was not involved in the discussions and that sessions took place later in 2002. Druyun did not recuse herself from negotiat- military suppliers until November 2002. In commenting on the dismissal of oployees, Boeing's chairman, Phil Condit, stated that the board of directors ecided to immediately fire Sears and Druyun. Sears was dismissed for violating as corporate policy of communication with Druyun while she was still em- by the U.S. government. Furthermore, new evidence was presented that Sears Druyun tried to cover up their unethical activities. Therefore, Bocing would re- mine its corporate policies pertaining to the procedures and the hiring of former nment employees. A time line of the Druyun scandal is shown in Table 1. TABLE 1 A Summary of the Time Line of Darleen Druyun's Relationship with Boeing government emplos 2001: Druyun, an acquisitions officer for the US Air Force starts negotiations with Boeing to lease Boeing jets as refueling tankers. April 2002: An exchange of e-mails showed that Druyun had notified Boeing that its competitor Air- hus had underbid for a military tanker contract. Setember 2002: Druyun's daughter, Heather Mckee, who was a Roping employee, informs Boeing CFO Michael Sears that her mother is retiring from the Air Force and is interested in a job at Boeing October 2002: Representing the Air Force, Druyun negotiates a NATO aircraft order, which Boeing receives. October 2002: Two days later, Druyun meets with CFO Sears to discuss her potential job opportu nities at Boeing. October 2002: Druyun sells her house to a Boeing attorney who was involved in the negotiations with the Boeing refueling contract. Druyun received 5692,000 for the house, which she had bought fourteen months earlier for $614,523-a profit of $77.477. November 2002: Druyun formally removes herself from any negotiations pertaining to Boeing and retires from the Air Force. January 2003: Druyun officially starts her employment with Boeing as a member of Boring's mivile defense operation Summer 2003: In response to pressure by the Department of Justice and the Pentagon, Boeing starts a formal internal inquiry pertaining to its ethics policies. September 2003: The Pentagon starts an investigation to examine the role Druyun had with their Forces negotiations with Boeing, November 2003: Boeing fires both Druyun and Sears for having discussions about future employ ment opportunities during the fuel tanker negotiations Fred B December 2003: The Pentagon starts an investigation into the military contracts that were awarded to Boeing during Druyun's employment with the government. October 2004: Druvun admits that she broke conflict-of-interest rules by giving favorable treatment to Boeing. January 2005: Druyun starts serving her nine-month prison sentence for violating government con flict-of-interest laws. Adapted from Seattle Times December 21, 2003. www.seattetimes.com and Wall Street Journal March 7.2005, www.wsj.com Racing. She did 240 Case 4 alan five hundred court that an TABLE 2 Special Treatment Given by Druyun for Boeing 200-C-17 Can Restructure Drwyn wo da 12 million increase in the contract originally awarded to Bogin w e was helping run future son-in-law get a job. 20-C-130 Modernization Drwyn www Boeing $t billion contract to upgrade the avionics of more than C-130 plne cenowych they were built by Lockheed Martin. She adau the touchanty may not have selected Bocing, 2002-NATO AWACS Program Drun d a 100 million payment to Boeing that she now says was too high del sob e of her own job nepociations and the Boeing jobs of her daughter and son 2001 2001-767 Refueling Tankers high. She said she und son-in-law. eing proprietary pricing Druy agreed to a higher price than she thought was appropriate and gave Boeing propriet date for a competing bid from Airbus Times, October 2.2004 Morelle Help to Boine Seattle Times Papon Official Arts See DowBowermes tain the high 10 When Sears was fired lence A New Model for includes tine e rules included estab In addition, Condit stated that Boeing has a responsibility to maintain the est standards of ethical conduct in every part of its operations. When Seare he was finishing work on a book titled Soaring through Turbulence: A Ne Me Who Winnt to Swarred in a Changing Business World. The book inelu rules developed by Sears to help managers succeed. Some of the rules included lishing clear-channel information flow, making good decisions, taking responsi for your actions, becoming a high-proximity leader, and protecting your secrets After pleading guilty to one count of conspiracy, Druyun was sentenced to in months in prison on October 1, 2004. In addition, she was also given seven month of community confinement, and 150 hours of community service. She also paid a fin of $5,000, One-time heir apparent to the CEO position at Boeing with a salary of more than $1 million a year, Sears pleaded guilty to the felony charge of conflict of in terest and was sentenced to four months in prison in February 2005. In addition, he was given two years' probation, he had to pay a fine of $250,000, and he had to serve two hundred hours of community service. The special treatment provided to Boeing through these transactions is shown in Table 2. ETHICAL CHALLENGES AT BOEING: ROUND TWO After the information on the tanker contract was released. Representative Nom Dicks stated that he hoped that Boeing could get a handle on the ethical conduct its employees. The Pentagon had previously withdrawn a $1 billion contra Boeing when it was discovered that Boeing had access to the trade secrets of petitor, Lockheed Martin. Boeing was in possession of approximately thousand pages of documents that were taken from Lockheed Martin. A for executive at Boeing, Larry Satchell, was charged with obstruction of justice conspiracy to violate U.S. procurement laws and stealing trade secre approximately thirty-five of justice as well as tealing trade secrets of Lockheed fartin.' In response to Boeing or she charges, a Boeing representative, Dan Beck, Satchell in 1999 based on the normation did not know what we information babe urther on the matter. Furthermore, the ined that Bocing had previously wed proper way Bocing took api that was available come available se general accoun cary information a proprietary This scandal was in at Boeing during Con under the watchful Bocing manipulated ery penalties the accounting, which average the expenses th up-front profit m program's executi ke appropriate action against Satchel ilable at that time. Boeing did not know who so it could not comment further on the matter unting office had determined that Boeim srion from Raytheon on its defense missile su le system.16 Condit Era at Boeing was just the latest in a number of questionable activities what Condit's watch. In 1996 Boeing merged with McDonnell Dual ale activities that occurred chful eye of Philip Condit. To ensure that the deal would be me ipulated its financial statements by not recording in reserves late deliv that occurred due to production problems. Bocing used program which smoothes out the costs and revenues by allowing the company to expenses throughout the length of the program." Boeing developed an profit margin for the entire program, which was adjusted throughout the execution. As a result, there was a lack of transparency of transactions made the determination of the appropriate expense and income level for m. It was alleged that these numbers were manipulated so Boeing looked more attractive company for the McDonnell Douglas investors. Lynn Turner, for er former chief accountant for the Securities and Exchange Commission. mented that the main limitation of program accounting is that it is impossible dit. There was not a reliable figure that could be generated to determine shether Boeing would be able to produce as many airplanes as needed to recover e costs of the investment." In 2002 Boeing settled a lawsuit pertaining to its pro- em accounting methods for $92.5 million without admitting any guilt in the Times October 2014 maintain the he en Sears was to - A New Middle Boeing made the determin the program. It was alleged tha book includes the les included the king responsible your secrets. sentenced to rin Given seven months She also paid a fire ng with a salaryd ge of conflict of 05. In addition, and he had to see provided to Boeing practice. In 2002 Boeing faced a class-action lawsuit by thirty-eight women employees who claimed that they were discriminated against based on their compensation rates The potential number of women to be eventually included in the lawsuit was twenty- eight thousand. It is alleged that Boeing knew of the pay inequities since 1994, when its Diversity Salary Assessment Team was formed. The lawsuit stated that Boeing officials willfully paid women less than men and refused to promote them. In 1997 internal doc- uments revealed a PowerPoint presentation by the Diversity Salary Assessment Team that concluded that women employees were paid less than men and that starting nes were also different between women and men employees. It was estimated that lary gap between men and women for entry-level management jobs was more than $3,700.19 8 the Diversity Salary Assessment Team also concluded that employees Asian and black received lower starting salaries than white employees in the In 1999 Boeing estimated that it needed to reserve at least 30 million e salary levels of the women employees. Boeing allocated $10 million to men's pay rates. The Office of Federal Contract Compliance Program mpensation system that systematically der the U.S. Labor Department, investigated Boeing for having in place the salary gap between men an JD TWO presentative e ethical conducta million contrat e secrets of an In 1998 the Diversity who were Asian and bla Northwest.20 In 1999 to upgrade the salary level adjust the women's pay ra (OFCCP), under the U. animately thin Tartin. A farmer ystem that systematically discriminated against women and minority of justice as well Secrets of Lab for its labor practices, 242 Case 4 E- bou phe His second mar- rted a relationship with a with Hawthorne lasted pe was laid off dur- at he had made certain of code imgs dos to her son certo03, Philip probleme works employees. ? Boeing paid OFCCP to settle the claims against it for its labor prace Boeing also settled a lawsuit in 1999 brought on by thirty-six hundred African Am cans who alleged that Boeing discriminated in both pay and promotion opportun for minorities. Condit was also romantically linked with Boeing employees. His second riage was to a Boeing secretary, and after that divorce, he started a relationshin Boeing receptionist. Laverne Hawthorne. The relationship with Hawthorne until 1992, when Condit was promoted to president and Hawthorne was laid of ing a downsizing. Hawthorne went to Condit and claimed that he had made promises to her in which Condit allegedly replied, "only one person in this to balls, and that person certainly is not you. 22 On December 1, 2003, Philip Condit resigned as the CEO and chair Boeing, based in part on the ethical problems that Boeing had to address duri past year. A Washington, D.C., attorney who works with military contractors. S. Ryan, stated that he was surprised that a company such as Boeing would have cthical scandals within a six-month time period. Former Boeing president and chi operating officer, Harry Stonecipher, came out of retirement to take over the CFO and wident positions at Boeing. Stonecipher had been CEO of McDonnell Douala when it merged with Boeing. alls, and that perser 1, 2003, Philip problems Boc boar naj. ethic nam May milit with On December 18, 2003, Boeing announced the results of two independent reviews of its ethics program. Former Senator Warren Rudman's law firm announced the results. The law firm concluded that, based on the results of the review. Boeine had gone to great lengths to try to improve the ethics program for the company. The scope and detail of the program was impressive, and the review team did not believe that the alleged unethical conduct of obtaining proprietary information about a com petitor was a systematic problem at Boeing. The review team did make a number of recommendations to further strengthen the ethics program at Boeing. The chair man of Boeing, Lewis Platt, responded by stating that the board of directors and er ecutives at Boeing had a zero-tolerance policy for unethical behavior. Boeing realized that maintaining a high level of trust with its customers is critical for the success of the company. Boeing would implement not only the recommendations of the rene team, but also additional steps for Boeing to be a forerunner in ethical commitment In its review of Boeing's ethics program, the business ethics consulting firm E Leadership Group stated that it noted Boeing's commitment to ethical and respo ble behavior. However, Boeing also needed to examine its communications within the company because it appeared that open and candid communications of th ignat steal natio and decis ethic new which tablis the Boein neither supported nor encouraged. communications were thica ging cell Yeyer The Rise and Fall of Harry Stonecipher In August 2004 Bocing CEO Harry Stonecipher told his employees that worried about their jobs being outsourced or that they would no long then it was the employees' responsibility to enhance their skills so they mand at Boeing or anywhere else. 7 Two months later, in October 200 commented that he had the highest confidence in the integrity of bu were any problems, he would be committed to resolving them. Noyees that if they were no longer be needel o they could be inde ober 2004, Stonecipher Bocing and if there ng is www vir with E-mails en CO w her was in violation of B. de of cook. The chairman of . 7. 2005, Harry Stonecipher resigned from hissi On because he was having an extramarital Affair i n C w Stonecipher, which included very graphic deta card became worried that there could b e The Suomipher with his affair with the female he a ls that olyan nation of Bocing's internal code of Conduc e ed shat Stonecipher had to resign because his actions stated Platt.de of conduct and his decisions reflected poorly on his cing Racing in the future. Every employee at Boxing is re w ment, which states that arvy boting employee will dembarrass the company or r equestions about the ethical that comidentified person who was done to the deliberations made or commented that Boeing had a serious ethical problem with of dire the US government. How can the CEO tell its emples when he can't even do the yob himself Stonecopher, who was his is the Harryfor his decisive management style, had planned to retire in ability to lead the code of conducta Bocing. One uniden major customer, the named "Hatchet May 2006,2 w team ni wake a Boing The vard de military expert, stated with Stonecipher. Bori of the same unethical act ignation came one stealing the pro nation, Stoneciph and violated his own stand are to the actions of Boeing's past two CEOs, Loren The In reference to the actions of Bor a stated that the public wanted Boeing to have higher ethical Sicher. Boeing was going backward by having a CEO who displayed ethical activity as the previous CEO, Phil Condit. Stoncinhas one week after the Air Force had lifted the twenty-month assis for che proprietary documents from Lockheed Martin. In response to listesi Stonecipher commented that he had set a higher ethical standard Boeing Leted his own standards. He admitted that he had used poorament in bis s 34 The letters were sent to the board, Boeing's general council, and the new officer at Boeing, whose position had been established by Stonecipher. The ethics offic whics officer was included in the reorganization by Stonecipher to focus on the issues. Under Stonecipher, Boeing established an Office of Internal Governance, hich reports directly to the CEO. The office is responsible for addressing alleshi internal audit, and compliance issues at Boeing. In addition, Boring also had es- shlished an ethics hotline for employees to use for whistle blowing on unethical activities. Boeing required every employee to sign a code of conduct statement. After the new ethical procedures were established in 2004, Stonecipher commented that chavit B cal for the endations of the new ethics officer was included in th nethical committee consulting firms to ethical and Top communicate id communications Racing was committed to investigate every piece of information to ensure that ethical activities did not occur. If unethical activities do occur, they would be dealt with swiftly 39 In the same week of his resignation, it was announced that Boeing was going to pay Stonecipher a $2.1 million bonus for the former CEO's focus to obtain excellent financial and stock price results for 2004. A military expert for the The payers for Common Sense, Keith Ashdown questioned how Boeing could state that it is tough on unethical behavior when it gives the unethical CEO a $2 million bonus. A week after his resignation, Joan Stonecipher filed for divorce after fifty years of marriage. In the subsequent week, Debra Peabody, the Boeing employee who had the romantic relationship with Stonecipher, resigned from Boeing after more than twenty years with the company. A time line of Stonecipher's career at Boe- ing is shown in Table 3. ployees that there Id no longer be me is so they coulders tober 2004 Se w of Booty with Bocing new Boeing 244 Case 4 Time Line of Harry Stonecipher's Relationship will TABLE 3 August 1997: Harry Scoil CEO of McDonnell Douglas, negotiates a merger with which Steinber hold the title of president and operating chief of the new sked to take over the Company May 2001. Sanieris lected to serve as vice chairman of the board of directors at Bar June 2002. Skocinhere n cutive positions at Boeing Dromber 2009. Candi CEO of Boeing, and Shanecipher is asked to take CEO positie Early 2004 Bo sc uts thical monitoring to ensure that the new ethics program shed by Stonecipher are implemented out the March 2005 S i ndrore from his position as CEO after it was revealed the married Stoober was having an affair with a colleague at Bocing James Bell replaces St pher as Boeing new CEO. unal March 2005, www.t ournal.com Sure Wall S On June 30, 2005, James McNerney, former CEO of 3M and the head of General Electric's jet engine division, became the third CEO at Boeing in eighteen months. McNerney had been a member of Boeing's board of directors since 2001. In September 2005 Boeing started negotiating with the Justice Department to settle two federal probes based on the Lockheed Martin stolen documents and the hiring of Darleen Druyun. It was estimated that the settlement could be close to S500 million. In February 2006 Boeing started negotiations with the Department of Justice to settle the criminal investigations pertaining to the acquisition of Lockheed Mar tin's propriety information and the relationship between Boeing and Darleen Druyun. The Justice Department was initially seeking $1 billion in penalties and fines for Boeing's unethical behavior but had reduced that number to $750 mil- lion. On May 14, 2006, Boeing agreed to settle with the U.S. Department of tice for $615 million with the condition that Boeing would not have crim. charges brought against it and that it would not be required to admit any wrong ing. The $615 million was composed of $565 million to pay for all civil claims 550 million to resolve all criminal charges against the company. Another com of the settlement was that Boeing was required to provide the Department tice with the results of any internal ing of any Boeing employee. Allowing Boeing to not admit any guilt limited inquiries that related to questionable bem Martin's legal options in pursuing civil claims for damages with regard to quisition of Lockheed Martin's internal docu The settlement was a victory for McNere who wanted to wipe clean of Boeing's past unethical behavior. MON the settlement was a victory for i.cuments managers at Boeing did not put enough emphasis on ethical behavio MeNerney believed that previo tion, McNerney adjusted the compensatie Boeing. Instead of focusing solely on finan on system for top-level excci used on broader performance criteria, which included integrity mncial goals, executives were no Department of Jus able behavior mited Lockheed regard to the wipe the same at previous to wior. In add Tecutives leadership. 90 Ty and ethi Questions for Thought Boenvey: How Low Can Twey 1. Identify the 2. What is the entify the stakeholders in this case. What is the Procurement Integrity Act? Wha act? What is its relevance in this case? The cover-up of an unethical action alwa Act? What are the ethical implications of the 245 stion always seems worse than the crime. Do you agree or disagree? Why? TERTIA blonel esti head of eighteen ors since partment ments and d be close at of Justice kheed Mar nd Darleer enalties and to $750 m tment of are crimir any wram vil claims Scher cand Sartment of Snable bu mited Loch egard to the