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DECEMBER 15, 2003 www.businessweek.com BOEING WHAT REALLY HAPPENED Flawed strategy. Lax controls. A weak board. Personal shortcomings. CEO Phil Condit lasted longer than he should have. BY STANLEY HOLMES (P. 32 ) 6330BW Boeing 5/17/04 11:59 AM Page 2

News Analysis & Commentary 6330BW Boeing 5/17/04 11:59 AM Page 3

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EXECUTIVE SUITE BOEING WHAT REALLY HAPPENED Flawed strategy. Lax controls. A weak board. Personal shortcomings. CEO Phil Condit lasted longer than he should have. BY STANLEY HOLMES

he really surprising tion of bailing out this time, according to though always a bold visionary, Condit thing about Philip M. people who are close to the company. was frequently indecisive and isolated as Condit’s resignation as But with its crucial defense business in a ceo—in stark contrast to his predeces- chairman and chief execu- jeopardy, a board that had overlooked sors. Starting with founder William Boe- tive officer of Boeing Co. missteps before finally took firm action. ing, the company has been led by a suc- was not that his seven- The ceo had to go. Under pressure from cession of strong, commanding leaders year tenure ended so the board, Condit offered his resigna- who enjoyed near-total autonomy, dis- Tabruptly on Dec. 1, but that it lasted so tion. According to an old friend who played unwavering devotion to a culture long. Recent allegations of questionable talked to him on Monday night, the ceo of engineering and manufacturing ex- conduct by a Boeing executive involved in was distraught. Condit and Boeing insist cellence, and led modest personal lives. negotiating an $18 billion deal with the his exit was voluntary. Condit may have enjoyed a similar de- Pentagon was only the latest mishap in a gree of latitude, but he was further re- series of ethical lapses and managerial A BOLD VISIONARY moved from the company’s operations. blunders that marred Condit’s tumul- the story of Philip Murray Condit, He also developed a reputation as a tuous reign from the start. 62, is the tale of a manager promoted womanizer, often with Boeing employ- Condit’s resignation has been por- beyond his competence and blind to his ees, and an appetite for the high life. In a trayed as the selfless gesture of a leader own shortcomings. The skills that made hiatus between one of his four mar- who put the company’s interests before him a brilliant engineer—obsessive riages, Condit took up residence in the his own. In fact, Condit had survived an problem solving and an ability to envi- Boeing suite at Seattle’s Four Seasons array of crises before this latest up- sion elegant design solutions—were of Olympic Hotel, where he had the suite

brian smale heaval, and the chairman had no inten- less use in an executive position. Al- remodeled at company expense to add a 6330BW Boeing5/17/0412:00PMPage4

(this page, clockwise from top) photographs by daniel sheehan/getty images; none; jon simon/afp/getty images an outsizeeffect onthe Boeingculture. mix butthesmallerMcDonnell alsohad tracting amuch biggerpartofBoeing’s only didthatdealmake defensecon- acquisition ofMcDonnell Douglas. Not crucial stepinthatprocess was the1997 r more deeplyintodefensecontracting scandals. there isnoevidencelinkingCondit tothe close totheedge.”Boeinghassaidthat lowing hissubordinates toplay business huge amountofdefensebusiness byal- tute inArlington,Va. “Condit booked a defense analystattheLexingtonInsti- management,” says Loren Thompson, a ethics seemedtolosesway oversenior “Under Condit, engineeringskillsand scandal after anotherinrecent years. trial excellencehasensnared itselfinone long beenaparagon ofAmericanindus- C damage donetoBoeing’sreputation on un owns 2millionBoeingshares. “It was of VictoryCapital Management, which says Richard Turgeon, research director w P & under Condit—while theStandard stockhasfallen6.5% Boeing’s The result: with estimatedearningsof$790million. slip toanestimated$49billionthisyear have beendecliningsince2001andwill in allitsbusinesses. However, revenues commercial aviation,” Boeingisprofitable of theworstdownturninhistory pany officials pointoutthat“inthemidst $1 billionindeal-related Com- write-offs. year alone,Boeinghastaken more than plagued withintegration problems. This equally damning CLOSE TO THEEDGE aw the acquisitionshemadetodiversify threat from Europe’s Airbus. Andsomeof tenure, Condit misread badly therising 2002). Even worse,through mostofhis M damage priortothecrucialmerger with of usingaccountingtrickstohidethe shareholders whoaccused thecompany telling coda,Boeingpaid$92.5millionto Lastyear,$2.6 billionwrite-down. ina ultimately causedthecompany totake a Street—and theboard—by surpriseand a manufacturingcrisisthattookWall Within ayear, hehadsteered Boeinginto C miliar withthematter. bedroom, say somepeoplewhoare fa- epresented ahistoricshift. Themost oor’s 500-stock indexrose“That 500-stock 61.8%. oor’s ondit movedintothe ondit’s watch. Acompany thathad as adifficult record torunaway from,” cDonnell Douglas(BW—May 20, The decisiontosteerthecompany H acceptable.” ay is troubles startedalmost assoon

from commercial aircraft were News w as theheavy ceo’ s office. Analysis the company came toviewhimasanen- nonconfrontational Condit. Many inside the temperamental oppositeofthealoof, cisive, brutallycandidStonecipher was No take secondplace. Building planessometimesseemedto power brokers andwinthecontract. ability toschmoozewithWashington most esteemedatMcDonnell were the line workers—as family. Butthevalues ing employees—from designersto Seattle, hadalways prideditselfontreat- thejewelofitshometown of Boeing, frozen. T and was alsofired. She took thejob job for Druyun. cussed aBoeing ousted over allegations that hedis- Airbus bid.CFO MichaelSearswas have tippedBoeingoff aboutalower P Air Force. Documentsrevealed that a a dealto sellrefueling planesto the Lo in thecourtroom. under constantfire inWashington, onWall Street, and Since Condit tookoverinApril, 1996, Boeinghasbeen Of PhilCondit T A he dealhasbeen entagon official, Darleen Druyun,may .2 nd withMcDonnell came anew ose Talk

exec, Harry C.Stonecipher. Thede- he Troubled Controversy swirls around & Commentary ny most assoonhearrivedatthe compa- caught theeyeofBoeing’stop brass al- culture formore than30years. He master’s degree inaeronautics. Early in ing abitlike unlovedstepchildren. many ofthoseleft behindinSeattle feel- pleted thecultural uprooting,leaving company headquarterstoChicagocom- house. Condit’s 2001decisiontomovethe managers ontheBoeingsideof stint aspresident antagonizedmany Stonecipher brought tobearduringhis forcer. Therelentless bottom-line focus

C in 1965, fresh outof Princeton witha of F Th lines soworkers couldcatch up. fo number of airplanes.The chaos 1997 by tryingto pumpoutarecord p shareholder lawsuit allegingithad without admitting guilt,to settle a 2002, Boeingpaid$92.5 milllion, annual lossinhalfacentury. In $2.6 billionandforced itsfirst deal, itcreated aculture clash. happy withthe McDonnell Douglas though investors were generally $1 billioninwrite-downs. Even businesses resulted inmore than ondit hadbeensteepedintheBoeing actory Fiasco apered over themess. R

rc its commercial airplaneplantsin at ed Boeingto stop two assembly

cost thecompany more than eign Boeing lostcontrol flight-information and Jeppeson Hughes satellite purchase of the recor spotty acquisition Boeing hasa Tr oubled Buys d. The 6330BW Boeing5/17/0412:00PMPage5 employees. a cross-section of Boeing’s female by e of in Seattle, alleges that top company T set to cometo trialinApril,2004. a sex-discrimination class action, W to denied thempromotion, inorder Boeing’s female employees and xpense. The suitwas brought he lawsuit, filedina federal court f

omen Problems?

“ icials knowingly underpaid 38 women whorepresent enrich thecorporation” at their who firstmetCondit inthemid-1960s. Boeing seniorexecandlongtime friend son,” recalls Granville Frazier, aretired C der hiswing.“It was clearthatyoung man and ton A.“T”Wilson,thenBoeing’schair- skill thatattracted theattention ofThorn- effect today. It was thatproblem-solving jumbos andsmalleraircraft, rulesstillin develop rulesforsafespacingbetween the Federal Aviation Administration to when jumbojetstake off. Thisallowed calculating theforce ofthevortexcreated his career, hesolvedavexingproblem by ondit was astandoutengineer andper- ceo , whotooktheengineerun- Boeing faces billion of future businessto Lockheed. and thePentagon hastransferred $1 bidding onmilitary satellite launches, has beenindefinitely bannedfrom commercial-jet deliveries. has seized theleadfrom Boeingin 120 orders inhandfor theA380and A380. Today, Airbushasmore than new passenger jet,the 555-seat $13 billionondeveloping amassive determination of Airbusto spend Feisty budgeted for$6billionindevelopment overshot hisinitialbudget.The planewas pensive mockups. ButCondit wildly screen tothefactoryfloor, avoiding ex- r software thatallowedBoeingtogodi- breakthroughs, mostnotablyswitchingto ple, Condit madesomeinspired design poor management.Onthe777, forexam- withproblemsriddled thatresulted from prowess, somesay bothprograms were won great praise forhisengineering to take overthetopjob. Butalthoughhe programs positionedhim the 757and777 ectly from adesignonthecomputer Later, Condit’s designleadershipon

Rival Condit miscalculated the contracts. Boeing win rocket that helped Martin rival Lockheed documents from f punished Boeing the Pentagon R or possessing ocket Ban In July, There’s my F.” pened, andsoit’smy responsibility. give myself averypoorgrade. It hap- sponsibility forthestumble,saying: “I year toplantworkers, Condit tookre- suffer suchindignity again.In atalkthis Conditwelling, vowedhewouldnever and aslumpingstock.Withtears broken promises, theproduction fiasco, called aliarbyshareholders fedupwith ecs present atthemeeting.He hadbeen gry investors ontheEast Coast, recall ex- had suffered whiletryingtosoothean- complained abouttheembarrassment he then- headquartersinSeattle—Condit execs intheboard room ofBoeing’s year—with more thantwo dozensenior fore,” Woodard told he was almostdumped two monthsbe- had areal closebrushwiththeboard, and manufacturing collapse.“He toldmehe W more thanithurtsyou—andfired him. fice. Condit toldWoodard thishurtsme vision, andasked himtocometheof- president ofthecommercial airplanedi- tember, hecalledRon Woodard, then not solucky. OnaSaturday inearlySep- saved hisownposition,butotherswere suring directors todosomething.Condit were callingforCondit’s headandpres- and thestockunderpressure, investors globalmarkets inanosedive, struggling, over. Bythespringof1998, withearnings but condit’sproblems THE FALL GUY new Street—a humiliationthatseared the had lostmostofitscredibility onWall time order was restored, thecompany a yearafter heassumedoffice. Bythe sembly linesnearlybroke downin1997, 200 mph.Boeing’smassive Seattle as- r equivalent ofreplacing theengineona mated manufacturingsystem—the company was shifting toamore auto- step upairlinerproduction evenasthe office, Condit overreached intryingto more worrisome.Within ayearoftaking shortcomings asamanagerbecame proprietary. cuss developmentcosts, saying theyare mercial success.” Boeingdeclinedtodis- isnotacom- stand-alone basis, the777 though it’sawonderfulmachine,on former high-ranking Boeingexec.“Even w from the767 andthe737, andthatmoney close observers. “We were milkingmoney costs butultimatelycost$12 billion,say ace carasitwheelsaround thetrack at as goingrightintothe777,” saidone oodard becamethefallguy forthe But ifthere was any lingeringsense of Once hereached thetopspot, Condit’s ceo . In ameetingonAug. 5ofthat BusinessWeek were farfrom .

(this page, clockwise from top left) photographs by john clark; none; carleton bailie/ap/wide world 6330BW Boeing 5/17/04 12:00 PM Page 6

News Analysis & Commentary

shame, it didn’t deter Condit from his but several Boeing executives say both ior. Piggott did not return calls seeking taste for lavish living. In the early ’90s, he happened. “There was a lawsuit and a comment. Said one Boeing lawyer to a built a massive medieval-style mansion settlement,” said one Boeing exec. Con- senior Boeing executive: “We have an- outside Seattle, replete with a custom dit declined to comment. other Bill Clinton on our hands.” miniature train that chugged from room As Condit’s airplane factories were im- to room, delivering drinks to guests. Con- ploding in 1997, so was his third mar- SEALED COURT FILES dit hosted elaborate parties that often in- riage. That’s when he moved into the boeing has other woes relating to cluded poetry readings and evenings of suite at the Four Seasons. Condit had women. A class action alleging wide- Camelot themes, featuring characters married Jan Condit— his first cousin—in spread pay discrimination against from King Arthur. women is now pending in That extravagance soon DREAMLINER Much is federal court in Seattle. The began filtering into a com- riding on whether the suit alleges that top compa- pany culture that had been 7E7 aircraft goes ahead ny officials knowingly un- based on modesty, fiscal re- derpaid women and denied straint, and the singlemind- them promotion to “enrich ed pursuit of building big the corporation” at their ex- airplanes. Former ceos Bill pense, says plaintiffs’ Allen and T. Wilson both es- lawyer Mike Helgren. Boe- chewed the trappings of ing says that allegations are corporate privilege. Wilson without merit. The docu- lived in the same middle- ments in this suit have been class house during his sealed by the court. Busi- whole career at Boeing. nessWeek has asked to have When Condit succeeded them unsealed. That motion Frank Shrontz as ceo in is pending. 1996, Boeing had three Although Condit often small corporate jets, and trumpeted his visionary senior execs were required strategic skills, they failed to fly commercial airlines to him when it counted most. stay in touch with their cus- As late as 1996, in a meeting tomers. Now, Boeing has a with Boeing’s legendary fleet of corporate jets, in- European salesman, Rudy cluding a 737 for Condit, Turbulence at Boeing Hillinga, Condit assured done up in English-library him that Airbus would nev- style. er launch the A380 pro- gram. According to RAISED EYEBROWS -6.5% 275 $1.1 Billion Hillinga, Condit said: “I’ll condit’s personal life Drop in Boeing’s Boeing’s deliveries This summer’s give you my personal guar- was similarly prone to ex- stock price since of commercial jets write-off to antee, that this time around, cess, and it began to raise Airbus will not succeed.” eyebrows within the com- Condit took over in in 2003. Airbus will account for quality Condit not only underesti- pany and among directors. 1996. Meantime, surge into the lead problems and the mated the Airbus threat but After his second marriage, the S&P 500 rose with 300 planes. reduced value of also waffled when he need- to a Boeing secretary, broke 61.8%, and the In 1999, Boeing Boeing’s satellite ed to respond decisively. up in 1990, Condit em- S&P aerospace delivered 620, vs. and rocket-launch Under Condit, Boeing first barked on a relationship index is up 20%. 294 for Airbus. businesses. proposed the 747x, a super- with a Boeing receptionist, sized 747, and then later the

Laverne Hawthorne. They Data: Bloomberg Financial Markets, Boeing, Airbus Sonic Cruiser, a high-speed dated for about six jetliner. months—until Condit got promoted to the early ’90s. The two divorced in 1998, Despite the marketing hype and president in 1992. About the same time, and their file is sealed in the King County strong suggestions that Boeing would the company’s customer relations de- Superior Court in Seattle. Jan Condit now launch both jetliner programs, Condit partment downsized, and Hawthorne lives in the mansion. did not pull the lever. While Airbus got was issued a pink slip. She told Business- As Condit rose through the ranks, his bigger, Boeing stagnated. The failure to Week that she immediately went to see private life became more of an issue with- formulate a strategy that could keep up him in his office and reminded him of in the company. Former Boeing Chair- with an emboldened Airbus began to tell promises he had made to her. As man Shrontz had long been concerned as Boeing fell behind in both technology Hawthorne recalls it, she looked him in and had confronted Condit several times and manufacturing efficiency during the the eye and said: “One of us in this room about his personal relationships, say peo- ’90s. Boeing, once the manufacturing has balls, and it certainly isn’t you.’’ ple in the know. Shrontz declined to com- marvel of the world, now spent 10% to Then she stormed out. Hawthorne de- ment. Former Boeing director Charles M. 20% more than Airbus to build a plane. clines to say whether she filed a wrong- Piggott, retired chairman of Paccar Inc., The loss in market share—from nearly ful-termination suit against Condit or re- had expressed concern to several senior 70% in 1996 to roughly 50% today—has ceived a settlement from the company, Boeing executives about Condit’s behav- marked an astonishing reversal. Boeing 6330BW Boeing5/17/0412:00PMPage7 plane business. balance tothevolatilecommercial air- growth opportunity andwouldadd more space, inparticular, represented ahuge time supportedBoeing’sbeliefthat services business. Many investors atthe and expandHughes’s fledglingsatellite of thehigher-margin servicesbusinesses for pilots. Boeinghopedtocapture more provider offlightmapsandotherservices S billion forTribune Co.’s Jeppesen- Div. for$3.75billionandlaterpaid$1.5 Corp.’s Space&Communications tronics late 1999, BoeingboughtHughes Elec- some ofhisforays failedtobearfruit.In No ing Boeingthenation’s company’s revenues, mak- for more thanhalfofthe r business waned. Defense- fense asitscommercial let Boeingexpandinde- r though theclashincompany cultures M outfits. Condit getshighmarksforthe small aerospace andinformation-service ny C the airlinebusinessandriseofAirbus, strategies forany amountofmoney.” told employees:“Iwouldnottrade by theendofyear. Condit recently whether togoforward make adecisionon company says itwill to acollapsingspacemarket aswellto related the latestinaseriesofwrite-offs perform.” The$1.1billioncharge was thought itwas goingto be, andwedidn’t k ployees thissummerthatthespacemar- w but conditlater admitted SNOWBALLING SCANDAL cient proposal: thesupereffi- committed toitslatest Boeing hasstillnot wa A any cost.”Butwhile “not market share at focusing onprofits, jumbo jet,andsays it’s against Airbus’ A380 flights willprevail planes anddirect believes thatsmaller elated salesnowaccount aised seriousmanagementchallenges, it et “didnotturnouttobewhatwe anderson Inc., theworld’slargest ondit tookstepstodiversifyhiscompa- irbus iswellunder as wrong. He toldEverett (Wash.) em- cDonnell Douglasacquisition.Al- . Boeingstartedgobblingupbigand But asCondit gottheacquisitionbug, Pa y withtheA380, .2 rtly todealwiththecyclicalnature of

defense contractor. 7e7 jetliner. The R eprinted from This reprintimpliesnoendorsement,eithertacit orexpressed,ofanycompany,product,serviceinvestmentopportunity. ‘‘ B usinessWeek that he , December 15, 2003, copyright by The McGraw-Hill Companies, Inc.,withall rights reserved. management.” sway over senior seemed to lose skills and ethics engineering Un unit, told Boeing’s integrated defensesystems w mit thatthecommercial spacebusiness to turnitaround. “I’llbe thefirsttoad- satellites. Boeingofficials are stilltrying problems doggingtheformer Hughes serious quality andmanufacturing t for ethicsviolations. TheJustice Dept., Sears andmanagerDarleen A. Druyun sack ChiefFinancialOfficer Michael gation intotheactionsthatledBoeingto Boeing 767 tankers, pendinganinvesti- $18 billionAirForce dealtoacquire 100 the Pentagon postponedactiononthe misconduct isjustheatingup. OnDec.2, dit in.Theintensescrutiny ofBoeing’s contracts. In theend,that’swhatdidCon- and healthy: itslucrative government Boeing’s businessthatwas stillgrowing problem threatened toimperilthesideof fense contractor. Asnowballingethics scandal can’tbe.Not whenyou’re ade- execute canbeoverlooked byaboard, same problems.” had thesameaspirations andhadthe good company, andalotofgoodpeople wo investigative branches oftheDefense as adryhole,”Jim Albaugh, But ifstrategic blundersandfailures to de – BusinessWeek Loren Thompson,ananalyst r Condit, at theLexingtonInstitute . “Butweare in ceo of engineer. an ironic legacyforabrilliantaviation with acommercial aviation subsidiary— tion ofBoeingintoadefense contractor history may beensuringthetransforma- most enduringcontributiontoBoeing’s ing byMcDonnell Douglas. Condit’s r Boeing’s storiedairplanebusiness.” could meanthebeginningofendfor consultants. “Failure toinvest inthe aerospace analystatTeal Group Corp. ment,” says Richard L.Aboulafia,an market. “Thisisreally apivotal mo- commitment tothecommercial airplane decision willsay muchaboutBoeing’s ing’s firstnewairplaneinadecade.The of the whether tocommitthedevelopment Dec. 15,theboard isexpectedtodecide be testedbyamomentousdecision.By post ofnonexecutive chairman. Co., tothenew man ofHewlett-Packard r At ter Boeingacquired McDonnell Douglas. served forfiveyearsasCondit’s No. 2af- their own,Stonecipher, 67, whohad board awarded the dit foryears. After Condit resigned, the which hadbeenpaying outrope toCon- famously forgiving board ofdirectors, ments was toomuchevenforBoeing’s But therecent fusilladeofembarrass- in eitherofthisyear’sAir Force scandals. leged documenttheft. Ma pending areview ofitsethics. Lockheed contracts from bidding onfuture rocket gon hasindefinitelysuspendedBoeing tary rocket-launch contract. ThePenta- during the1998 competition foramili- Corp. documents of LockheedMartin involved thepossessionof35,000pages epresents thedefactotakeover ofBoe- ector LewisE.Platt, theformerchair-

To Stonecipher’s mettle willimmediately C the sametime,board nameddi- rtin isalsosuingBoeingovertheal- ondit was notpersonallyimplicated

many, theascentofStonecipher 7e7 ❚ jetliner, whichwouldbeBoe- ❚ boss Platt ischairman is now CEO, andex-HP McDonnell exec, St NEW TEAM dal, dating fromdal, 1998, tracts. Asecondscan- aerospace defensecon- t an effort towinatleast ly, orevencriminally, in Boeing actedimproper- ing al mittee are investigat- A Dept., andtheSenate wo multibillion-dollar rmed ServicesCom- onecipher, aformer ceo legations that title tooneof 7e7

(l to r) photoraphs by john clark; tao-chuan yeh/afp/getty images