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Boeing CEO quits amid ethics flaps

Boeing Co. chairman and chief executive Phil Condit resigned unexpectedly, a week after the aerospace manufacturer fired two top executives over an alleged ethics breach.
/ Source: news services

The sudden departure of Phil Condit as chief executive of Boeing Monday is intended to clear the air over questions about unethical bidding practices. But incoming CEO Harry Stonecipher acknowledged that the company has its work cut out for it in order to mend fences in Washington with those concerned about its business ethics in competing for defense contracts.

The company's board accepted Condit’s resignation, effective immediately, after deciding “a new structure for the leadership of the company is needed,” according to a Boeing statement.

Condit, 62, said he resigned to “put the distractions and controversies of the past year behind us.”

Company spokesman John Dern insisted that Condit was not fired and said the board accepted his resignation “with great sadness.”

The company named Lewis Platt, 62, a Boeing board member and retired chairman of Hewlett-Packard, as non-executive chairman and Harry Stonecipher, 67, who retired from Boeing last year, as president and chief executive officer, effective immediately. Stonecipher had worked in a number of capacities, including vice chairman, president and chief operating officer.

The shakeup is the latest bombshell in a series of disclosures that have raised questions about the company’s government bidding practices. In one of his last acts as Boeing chairman, Condit last week fired two top officials who helped Boeing land a controversial $27 billion defense contract for refueling tankers to replace the Air Force’s aging fleet.

Now the Pentagon is investigating whether or not Boeing got proprietary pricing information about Airbus’ bid for that same contract.

“That does concern us a bit,” John Leahy, Airbus’ chief commercial officer, told CNBC Monday. “There were rumors last summer that our bids were discussed and Boeing had access to them. We’re anxious to hear what the Pentagon’s investigation reveals. Our A-330 would have had a 40 percent lower cost structure than the 767 as a tanker. So we’re quite concerned about why the taxpayer in the U.S. isn’t getting more for his/her money.”

Two Republican Senators, John McCain of Arizona and Peter Fitzgerald of Illinois, have sent a letter to Defense Secretary Donald Rumsfeld asking that the tanker deal be re-examined in light of the conflicts of interest.

InsertArt(2082974)Boeing has had a big Washington footprint for years. Its Virginia headquarters is just minutes from the Pentagon and Capitol Hill. The company ranks No. 1 in lobbying money spent in the aviation industry, with more than $8 million a year. And it doles out an equal amount in campaign contributions to lawmakers on both sides of the aisle.

The firm has hired former New Hampshire Sen. Warren Rudman to review its ethics program. Watchdog groups say look for Boeing to step up its lobbying and public relations effort as part of an image makeover.

“Boeing is definitely on the defensive right now,” said Stephen Weiss at the Center for Responsive Politics. “And it’s often when companies are on the defensive that they try to call in those chits, in terms of relationships they have made on Capitol Hill, or relationships with the administration. This is a company that is trying to cover a lot of negatives.”

A defense appropriations bill signed last month by President Bush authorizes the Air Force to lease 20 tankers and buy 80. McCain and others have called the leasing agreement a sweetheart deal for Boeing. Asked about the firings last week, McCain said: “I think it substantiates our reason for the inquiry and the concern I had about the way that this whole deal was concluded.”

On Monday, Boeing dismissed its chief financial officer — long considered a prime contender for the top job at the aerospace giant — for unethical conduct in the hiring of a senior Air Force procurement official. The second-largest U.S. military contractor said Chief Financial Officer Michael Sears violated company policies by talking to Darleen Druyun about future employment at Boeing while she was still acting in her government capacity as a procurement officer. The company also fired Druyun, who had served as an executive in Boeing’s missile defense unit for less than a year.

InsertArt(2082975)Sears, 56, issued a statement last week denying wrongdoing. He was named to the financial post 3-1/2 years ago and had been considered a top candidate to succeed Condit.

Boeing has been the subject of a series of reprimands about its bidding practices. In January, the General Accounting Office said Boeing improperly obtained and used data from Raytheon Co. during bidding on a defense contract awarded in the late 1990s. Boeing also was sanctioned this year for illegally using a competitor’s proprietary documents when it bid for the initial $2 billion Evolved Expendable Launch Vehicle rocket contract.

In July, the Pentagon punished Boeing for stealing trade secrets from rival Lockheed Martin to help win rocket contracts. Boeing has been indefinitely banned from bidding on military satellite-launching contracts, which has already cost it seven launches worth about $1 billion.

InsertArt(2083036)Incoming CEO Stonecipher said setting the record straight in Washington will be a top priority.

“We will deal probably first with our principal customer, which is the Pentagon,” he said. “You have to always be concerned when you get this much fire and smoke moving around the issue. But the need is still there. Our forces will need new tankers.”

In the meantime, Stonecipher said, the company plans to continue a thorough investigation of the bidding process.

“You cannot stonewall this thing,” he said. “You have to look it squarely in the eye and deal with every issue they bring up. And that’s what we plan to do.”

Beltway ties
Defense experts say clearing the air is crucial to both Boeing and the Pentagon. The military side of Boeing’s business is becoming more important because of stiff competition from Airbus in the commercial space. And Boeing is a major if not sole supplier to the Pentagon for major portions of the strategic arsenal, including the F-15 fighter jet, according to Daniel Goure, a military analyst at the |Lexington Institute.

“There’s a lot of the military side of Boeing where they’ve been very successful,” he said. “They are the really the only suppliers of critical defense items.”

For decades, Boeing was primarily an aircraft maker, earning most of its money from its airliners. But in the aftermath of the Sept. 11, 2001, terror attacks, Boeing’s defense division now brings in more revenue than commercial airplanes. Boeing has expanded its space, communications and other businesses as well.

Meanwhile, rival Airbus expects to eclipse Boeing this year as the world’s largest commercial aircraft manufacturer.

Condit has been chief executive since 1996 and chairman since 1997, the company’s seventh chairman since it was founded in 1916.

Condit’s departure comes as corporate boards have become much more aggressive in making changes at the top, in response to tough new corporate governance requirements, according to Dan Lufkin, co-founder of investment company Questor Management and a founder of Wall Street brokerage Donaldson, Lufkin and Jenrette.

“You will see a board take its responsibility much more seriously in the future than in the past,” he said. “I think it is a new era, a new time.”

(The Associated Press, CNBC’s Hampton Pearson and Tom Costello contributed to this report.)