Flying Below the Radar at Boeing
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International Management - Case study 2 for Assignment 1 Flying below the radar at Boeing The Boeing Company is the world's leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. Additionally, Boeing designs and manufactures rotorcraft, electronic and defence systems, missiles, satellites, launch vehicles and advanced information and communication systems. Headquartered in Chicago, Boeing employs more than 157,000 people across the United States and in 70 countries. Corporate Governance The following extract from their website suggests that governance standards and ethics at Boeing are in line with best practices: “The Board and the corporate officers recognize that the long-term interests of the company are advanced when they are responsive to the concerns of communities, customers, employees, public officials, shareholders and suppliers. Additionally, the Board has adopted a Code of Ethical Business Conduct to focus the Board and each Director on areas of ethical risk, provide guidance to help them continue to effectively recognize and deal with ethical issues, enhance existing mechanisms to continue the reporting of unethical conduct, and help to continue to foster and sustain a culture of honesty and accountability.” “The Boeing Company Ethical Business Conduct for All Boeing Employees The Boeing Code of Conduct outlines expected behaviors for all Boeing employees. Boeing will conduct its business fairly, impartially, in an ethical and proper manner, and in full compliance with all applicable laws and regulations. In conducting its business, integrity must underlie all company relationships, including those with customers, suppliers, communities and among employees. The highest standards of ethical business conduct are required of Boeing employees in the performance of their company responsibilities. Employees will not engage in conduct or activity that may raise questions as to the company’s honesty, impartiality, reputation or otherwise cause embarrassment to the company. Employees will ensure that: They do not engage in any activity that might create a conflict of interest for the company or for themselves individually. 1 They do not take advantage of their Boeing position to seek personal gain through the inappropriate use of Boeing or non-public information or abuse of their position. This includes not engaging in insider trading. They will follow all restrictions on use and disclosure of information. This includes following all requirements for protecting Boeing information and ensuring that non- Boeing proprietary information is used and disclosed only as authorized by the owner of the information or as otherwise permitted by law. They observe that fair dealing is the foundation for all of our transactions and interactions. They will protect all company, customer and supplier assets and use them only for appropriate company approved activities. Without exception, they will comply with all applicable laws, rules and regulations. They will promptly report any illegal or unethical conduct to management or other appropriate authorities (i.e., Ethics, Law, Security, EEO). Every employee has the responsibility to ask questions, seek guidance and report suspected violations of this Code of Conduct. Retaliation against employees who come forward to raise genuine concerns will not be tolerated.” It wasn’t always so. In the late-90s and the early years of the 21st century, Boeing ran up a record of corporate infamy in terms of dubious business practices. 1998: The US Air Force discovers that Boeing has improperly obtained and disseminated proprietary information belonging to Raytheon, a competitor for a contract to build sophisticated missiles. Boeing is forced to withdraw from the competition. 1999: It appears Boeing has learned its lesson. Boeing announces the firing of an engineer, Ken Branch, for being in possession of just seven pages of material (later raised to 197 pages) belonging to competitor, Lockheed Martin (“Lockheed”). Boeing and Lockheed were rivals for a huge Air Force rocket programme, regarded as a vital element in both their future military and space prospects. It was revealed that Branch had previously worked for Lockheed, and had apparently brought the documents with him to Boeing. Notwithstanding the intense competition which existed, Boeing immediately informed both the US Air Force and Lockheed of its discovery. The apparent act of honesty seemed more like a ruse three years later, when Boeing lawyers inadvertently let slip that there were 3000 pages of Lockheed documents found in Branch’s files. The Air Force became suspicious of the different numbers coming from Boeing and asked for a proper tally. Boeing admitted to 25,000 pages of stolen documents. Later, when The US Justice Department and Lockheed attorneys began investigating the matter, it was suggested that as much as 66,000 pages of stolen documents had been identified with at least five Boeing employees. In 2003, despite ongoing investigations, the Pentagon expressed its displeasure by cancelling $1 billion of launches by Boeing and suspending its rocket division from bidding on future government contracts. Undersecretary of the Air Force, Pete Teets, said at a news briefing: "Boeing has committed serious and substantial violations of federal law." The US Air Force also referred the case to federal prosecutors. 2 To make matters worse, in March 2003, the Boeing Satellite Systems division confessed to making improper technology transfers to China, following two failed satellite launches in 1995 and 1996, when it was known as Hughes Satellite Systems. An intriguing tale of corporate spies, whistle-blowers, big-dollar defence contracts and alleged cover-ups emerged as events unfolded. Why was this so important? In 1995, the US Air Force announced the Evolved Expendable Launch Vehicle (EELV) programme for the creation of a new generation of advanced yet affordable rockets, estimated to be worth more than $15 billion over the next 20 years. Boeing and one other contender were eliminated in the first round in December 1996, but Boeing managed to stay in the race by acquiring McDonnell Douglas, one of the other EELV finalists. Along with McDonnell Douglas came its Delta IV rocket programme. The competition was Lockheed with its Atlas V rocket. Ken Branch joined Boeing in January 1997, receiving a 7.5% pay rise over his Lockheed salary. It was alleged that Branch had shown Lockheed drawings to his future employer at his job interview and hinted he could do even better if he got the job. Like all rocket engineers, and especially those from Lockheed, Branch was a highly prized find. He was of special interest to a unit in Boeing called “the capture team”, which was charged with getting as much data as possible about the competing Atlas V rocket. Although there are conflicting versions of what actually transpired, it is clear there was a “whatever it takes” attitude amongst those involved at Boeing. The stunning volume of Lockheed documentation found in their files is not a matter of dispute. In October 1998, the Air Force awarded portions of the EELV contract to both finalists. Lockheed’s Atlas V was regarded as the better rocket, but Boeing's lower prices for the Delta IV attracted the Pentagon, and it gave 19 of the first 28 EELV launches to Boeing. In defence documents, Boeing denied that any of the Lockheed information in its possession had influenced the pricing of its bid to the government. As everything unravelled in 2003, another bombshell dropped. In November, Boeing announced the firing of two executives: Chief Financial Officer, Michael Sears and Darleen Druyun, Vice President of Missile-Defense Systems, a recent recruit from the Department of Defense. Druyun later admitted to giving Boeing preferential treatment in the award of more than $5 billion of Air Force contracts to lease 100 Boeing 767 refuelling tankers to the US Air Force, by agreeing to a higher price for the lease of the aircraft than she believed was appropriate. In return, she was given jobs at Boeing for herself and members of her family. She also acknowledged that she gave Boeing proprietary pricing data supplied by Airbus, the European aircraft maker, which was bidding against Boeing on these contracts. Michael Sears was the officer who had arranged for Druyun to be hired. A week after the Board of Being agreed to the firing of Sears and Druyun, it accepted the resignation of then CEO, Phil Condit, as “doing the right thing.” While Condit was not implicated in the scandals, it was clear that he had tolerated and even encouraged a culture of cutting deals in order to secure contracts for Boeing. Getting the job done was more important than getting it the right way. He was succeeded as Chairman and CEO on 1 3 December 2003 by Harry Stonecipher, who said his top priority was "dealing with this perception that we're a bunch of crooks." Later, in 2006, Boeing was to cut another unique deal with the authorities. They accepted a $50 million “monetary penalty” to settle both the Lockheed case and the improper hiring of Druyun. No criminal charges were filed and no admission of criminal activity was required by the government. Sears eventually served four month in prison for his impropriety, while Druyun served a month, with additional time for community service. She also paid a small fine. As a quirky end to this unhappy tale, Harry Stonecipher was forced out of Boeing in March 2005, when he admitted having a sexual affair with a female executive. Although the lady in question did not report to Stonecipher, and the relationship was said to be consensual and had no effect on the conduct of Boeing's business, the relationship violated Boeing's code of conduct. The Board took the view that the affair reflected poorly on Stonecipher’s judgment and would impair his ability to lead the company. A final footnote: All these lapses were revealed by “whistle blowers”.