The Wall Street Journal

March 8, 2005

U.S. BUSINESS NEWS
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RESOURCES
 Company statement15 | Executive bios16 | Timeline17
 
 Analysts' reactions18
 
 Boeing's code of conduct19
 
 See a transcript20 of Boeing's conference call, provided by Thomson StreetEvents (http://www.streetevents.com/21). (Adobe Acrobat Required22.)
 
MORE BOEING NEWS
 Boeing Satellite Unit Expects Profit for 200523
 
 Air Force Pact Sets Stringent Oversight24
 

Emergency Exit
Boeing's CEO Forced to Resign
Over His Affair With Employee

Stonecipher Was Brought In
To Restore Credibility
In Wake of Other Scandals
Undone by a Secret Tipster

By J. LYNN LUNSFORD, ANDY PASZTOR and JOANN S. LUBLIN
Staff Reporters of THE WALL STREET JOURNAL
March 8, 2005; Page A1

Harry Stonecipher was lured out of retirement to restore the reputation of the scandal-plagued Boeing Co. and set himself up as the company's chief ethics enforcer. Yesterday, the company said he was forced to resign as president and chief executive of the aerospace giant after an indiscretion of his own undercut the credibility of his efforts.

In a remarkable turn of events, Boeing said its board unanimously asked Mr. Stonecipher to resign the positions he had held for 15 months after it learned of his consensual relationship with an unnamed female executive. Yesterday, Boeing said the affair violated the company's Code of Conduct not because it was extramarital, but because the CEO used poor judgment and placed Boeing in a potentially embarrassing and damaging situation. (See the company's statement.1)

[stonecipher]

The events leading up to Mr. Stonecipher's ouster began a little over a week ago. Lew Platt, a former Hewlett-Packard CEO and Boeing's nonexecutive chairman, confronted Mr. Stonecipher, 68 years old, with a tip from an anonymous employee about the relationship. The tip came to light through one of the mechanisms Mr. Stonecipher himself had established to prevent such scandals.

In an interview, Mr. Stonecipher said he made no attempt to hide the affair. "I said it was true," Mr. Stonecipher recalls. He added that an additional allegation -- that he was using the affair to influence the pay and career of the woman -- was "absolutely false."

Boeing said the revelation put Mr. Stonecipher in an unflattering light. According to people familiar with the board's discussions, the tip came in a letter to which was attached an excerpt of a "very graphic" e-mail written by the chief executive. Some board members worried that additional e-mails existed and that they could become public. The e-mails were apparently written on Boeing's main corporate system, not the encrypted e-mail system it uses to communicate with the Pentagon. Boeing wouldn't confirm that the correspondence was in the form of e-mail, and officials said they don't know how Mr. Stonecipher and the female executive lost control of the messages. The board doesn't know who sent the tip.

RELATED ARTICLES
 Chairman Platt Takes On Added Duties at Boeing2
 
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Mr. Stonecipher, an aviation legend who came out of retirement in late 2003 to revive the company after a series of ethical scandals, has trumpeted the company's reforms to Wall Street and Congress.

"We set -- hell, I set -- a higher standard here," Mr. Stonecipher said. "I violated my own standards. I used poor judgment."

People familiar with the situation say the relationship was the sole reason for the board's decision. Investigators have already pored over the pair's expense accounts and other corporate records seeking evidence of other improper behavior. They didn't find any, these people say.

The resignation was immediate and adds further uncertainty to a big government contractor. Boeing makes commercial and military jets and is also the U.S.'s largest exporter. Mr. Stonecipher also resigned from Boeing's board.

Boeing named Chief Financial Officer James Bell as president and chief executive on an interim basis. Nonexecutive Chairman Mr. Platt, who has sat on the Boeing board for a little more than a year, will take on expanded duties, the company said.

Mr. Stonecipher's ouster marks the second time in 15 months that Boeing has fired its CEO. The previous chief executive, Phil Condit, was forced out in late 2003 on the heels of two scandals. One case related to Boeing's then-finance chief, who had illegal employment discussions with an Air Force official who oversaw Boeing contracts; the other related to the company's possession of thousands of pages of a rival's proprietary documents.

WALL STREET JOURNAL VIDEO
[logo]  Interim CEO James Bell and Chairman Lew Platt discuss5 the forced resignation of CEO Harry Stonecipher.
 
 S.G. Cowen defense analyst Cai von Rumohr talks6 about Boeing's reasons for firing Stonecipher.
 
 WSJ's John Bussey reports7 on CEO shake-ups in the news.
 

The Pentagon's initial reaction suggested that the news won't affect anticipated settlement talks to resolve these two scandals. Since the firing didn't involve Pentagon business or dealings with the military, an Air Force spokesman said yesterday, the military considers the matter entirely to be "an internal Boeing issue."

The board's quick move to oust Mr. Stonecipher shows how company directors are under pressure to act when faced with problems they might once have swept under the rug. The circumstances of Mr. Stonecipher's ouster also raise awkward questions about the proper dividing line between senior executives' professional obligations and their personal lives.

At any time, Boeing would have had a challenging task finding a successor to Mr. Stonecipher, who was due to retire again in May 2006. Its internal candidates have been hurt by the earlier controversies and the poor performance of Boeing's commercial-airplane unit versus archrival Airbus. Some believe the board may turn to one of its own such as Boeing director W. James McNerney Jr., who is also 3M Co.'s chief executive.

Contenders within the company could be Alan Mulally, chief executive of Boeing's commercial-airplanes unit, and James Albaugh, head of the company's defense-systems unit. Another possible outside candidate is David Calhoun, who heads up General Electric Co.'s engine unit.

Messrs. Albaugh and Mr. Mulally declined through spokespeople to comment. A 3M spokeswoman said Mr. McNerney "says he is very happy at 3M and has no plans to leave." Speaking for Mr. Calhoun, a GE spokeswoman said the company doesn't speculate on such matters.

[Lewis E. Platt]

The affair came to light via letters sent to the company's new ethics officer as well as Mr. Platt and Boeing General Counsel Doug Bain. Mr. Platt quickly confronted Mr. Stonecipher as the company hired outside counsel to start an investigation. As the investigation unfolded, it discovered several other e-mails sent by Mr. Stonecipher, say people familiar with the matter.

Mr. Stonecipher said he stood up during a Feb. 28 board meeting and told Boeing's directors: "I'm going to look you in the eye and answer every question you want to ask." Ninety minutes later, he was still answering questions relating to the affair, according to two people who were in the room.

Mr. Stonecipher, Mr. Platt and other Boeing officials declined to name the female executive or describe her role at the company, except to say that she didn't report directly to Mr. Stonecipher. A person familiar with the situation said that the female executive works in one of the company's Washington, D.C., offices.

Mr. Stonecipher said in an interview that he had "had some stress" in his marriage of about 50 years for some time, which was entirely of his own doing. His relationship with the unnamed executive began "seven or eight weeks ago," he said.

Mr. Stonecipher said he believes he has been treated "very fairly" by the board. He praised the board, noting that it has "both the process and the will to take action" when it finds something inappropriate. "In the end, this is not about the affair itself. This is about the judgment of Harry Stonecipher."

[Turbulent Times]

In a conference call with investors and reporters, Mr. Platt said the resignation was "in no way" related to the company's operational performance or financial condition. Indeed, Boeing's shares recently traded at their highest levels since 2001. "However, the CEO must set the standard for unimpeachable professional and personal behavior, and the board determined that this was the right and necessary decision under the circumstances," Mr. Platt said.

Mr. Stonecipher's abrupt departure comes after more than two years of tumult at Boeing. In one case, former chief financial officer Michael Sears and former Air Force acquisitions official Darleen Druyun received prison sentences after admitting to discussing the possibility of hiring Ms. Druyun at Boeing even though she was still overseeing billions of dollars worth of Boeing military contracts at the Pentagon. Congressional auditors and federal prosecutors in Alexandria, Va., have discovered that contracts valued at more than $6 billion were improperly influenced by Ms. Druyun, a senior civil servant who amassed unusual power over contracts.

In the other scandal, the Los Angeles U.S. attorney's office has conducted a two-year grand-jury probe looking into Boeing's illegal acquisition and use of proprietary documents from rival Lockheed Martin Corp. to win government rocket-launch business in the late 1990s. The government withdrew more than $1 billion in Air Force rocket contracts and suspended Boeing from bidding on new business after it was discovered that several midlevel employees had obtained the illicit documents.

That suspension was lifted after 20 months on Friday. In lifting the suspension, Acting Air Force Secretary Pete Teets said a key reason was Mr. Stonecipher's work to rebuild the company's reputation.

Since taking over as chief executive, Mr. Stonecipher has hired outside ethics consultants and has faithfully implemented their recommendations. One of his earliest moves was to create a centralized Office of Internal Governance, reporting to him, which was responsible for handling ethical issues, internal audit and compliance with the new companywide rules.

As part of the initiative, Boeing set up a toll-free hotline, dubbed the Boeing Ethics Line. It issued handbooks and other materials to explain its use and encouraged employees to make referrals if they suspect any wrongdoing. All company employees, regardless of position, are required to sign a code of conduct each year. The development caused some grumbling among Boeing's rank and file, who wondered why they faced such scrutiny when many of the company's problems were traceable to high-ranking officials. (See the code of conduct.8)

'POOR JUDGMENT'
[Icon]9
In a conference call Monday morning, the company gave more details on why it asked for Stonecipher's resignation, and answered questions from reporters. One key exchange:

CNBC's Phil LeBeau: I'm curious, and I know you don't want to get into specifics, but you left open the question of what reflected poorly on his judgment? Was it having an affair with another employee, was it having an affair because he's married? What was the line that he crossed here?

Boeing's Lewis Platt: We're not going to be specific about that. I can tell you it's not the fact that he was having an affair; that is not a violation of our code of conduct. But as we explored the circumstances surrounding the affair we just thought there were some issues of poor judgment that, as I said earlier, impaired his ability to lead going forward. That's about all we're going to say about it. We think Harry is entitled to some privacy regarding the details of this relationship. But it's not because he had a relationship.

 Read full transcript.10
 
Source: Thomson StreetEvents (http://www.streetevents.com/11)

With his gruff, plainspoken manner, Mr. Stonecipher used his position as the company's elder statesman to assure government officials and others that he was serious about restoring the company's reputation. He repeatedly said if any senior executives ran afoul of the new rules, he wouldn't have any qualms about meting out punishment.

"You can rest assured that we will investigate every tip, and if we find out that somebody did something they shouldn't have, we will deal with it swiftly and summarily," Mr. Stonecipher said during an interview with The Wall Street Journal last year.

The fixes Mr. Stonecipher designed helped put a swift end to a storied aviation career. He worked early in his career at General Electric's aircraft-engine unit. Later, he was chief executive of aircraft component-maker Sundstrand Corp., where he led the company through a government settlement after it was found guilty of overcharging on defense contracts. Such forthrightness helped him secure the top spot at McDonnell Douglas Corp., which merged with Boeing in 1997. Mr. Stonecipher served as vice chairman and president before retiring in 2002. He returned in late 2003 on the heels of Mr. Condit's ouster.

Last year, Mr. Stonecipher's base salary was $1.5 million, the company said, with a target bonus of the same amount. The company hasn't disclosed his final compensation. In addition, he received pension benefits from his previous retirement of $638,000. He remains one of the largest individual shareholders of Boeing stock, with 1.76 million shares, the company said.

Monday's events come as Boeing was beginning to pull out of the ethical spiral. The abrupt departure isn't expected to derail broader settlement talks with the Justice Department and the Pentagon aimed at putting to bed the company's two big scandals. Mr. Stonecipher hasn't been personally involved in recent negotiations with government officials and the broad parameters of a potential settlement already have emerged.

Boeing could be liable for up to $700 million in penalties in the rocket case alone, according to government projections. Federal prosecutors in California and Virginia continue to mull seeking criminal charges against the company in that case as well as the Druyun affair.

Mr. Stonecipher, though he dealt extensively with Ms. Druyun 15 years earlier on a controversial cargo-plane contract, hasn't been a target or subject of either of the recent investigations.

The manner in which Mr. Stonecipher's downfall came is particularly surprising at a company that has already been given plenty of reasons to be circumspect in e-mail communications. Boeing has been hypersensitive about e-mails since it began scuffling with Arizona Republican Sen. John McCain over internal communications related to a proposed deal to provide $23 billion worth of refueling tankers to the Air Force. Sen. McCain's campaign to obtain and review tens of thousands of Boeing and Air Force e-mails became a major squabble that embroiled the White House in a high-profile public debate.

Some of the e-mails proved embarrassing to Boeing and the Air Force because they illustrated the unusually close relationship between the company and Ms. Druyun, while others revealed James Roche, the then-Air Force Secretary, denigrating Boeing's main European rival.

Write to J. Lynn Lunsford at lynn.lunsford@wsj.com12, Andy Pasztor at andy.pasztor@wsj.com13 and Joann S. Lublin at joann.lublin@wsj.com14

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