6330BW Boeing 5/17/04 11:59 AM Page 1 MUTUAL FUNDS THE WORKPLACE BEST PRODUCTS WHY THE SCANDAL GAYS IN CORPORATE HOTTEST PICKS WAS INEVITABLE (P. 98) AMERICA (P. 64) OF THE YEAR (P. 112) 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 ALSO IN THIS SECTION: It’s a battle of stores Levi’s: What made the Eisner must pay heed The Medicare bill 40 | against shoppers 44| jeans maker fade? 46| to his critics at Disney 48| is a giant Band-Aid 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 Boeing 5/17/04 12:00 PM Page 4 News Analysis & Commentary bedroom, say some people who are fa- miliar with the matter. His troubles started almost as soon as ceo’ The Troubled Reign Condit moved into the s office. Within a year, he had steered Boeing into a manufacturing crisis that took Wall Street—and the board—by surprise and Of Phil Condit ultimately caused the company to take a $2.6 billion write-down. Last year, in a Since Condit took over in April, 1996, Boeing has been telling coda, Boeing paid $92.5 million to under constant fire in Washington, on Wall Street, and shareholders who accused the company in the courtroom. of using accounting tricks to hide the damage prior to the crucial merger with McDonnell Douglas (BW—May 20, Factory Fiasco Boeing lost control 2002). Even worse, through most of his of its commercial airplane plants in tenure, Condit badly misread the rising 1997 by trying to pump out a record threat from Europe’s Airbus. And some of the acquisitions he made to diversify number of airplanes. The chaos away from commercial aircraft were forced Boeing to stop two assembly plagued with integration problems. This lines so workers could catch up. year alone, Boeing has taken more than That cost the company more than $1 billion in deal-related write-offs. Com- pany officials point out that “in the midst $2.6 billion and forced its first of the worst downturn in the history of annual loss in half a century. In commercial aviation,” Boeing is profitable 2002, Boeing paid $92.5 milllion, in all its businesses. However, revenues have been declining since 2001 and will without admitting guilt, to settle a slip to an estimated $49 billion this year shareholder lawsuit alleging it had with estimated earnings of $790 million. papered over the mess. The result: Boeing’s stock has fallen 6.5% under Condit—while the Standard & Poor’s 500-stock index rose 61.8%. “That Loose Talk Controversy swirls around Troubled Buys was a difficult record to run away from,” a deal to sell refueling planes to the Boeing has a says Richard Turgeon, research director Air Force. Documents revealed that a spotty acquisition of Victory Capital Management, which owns 2 million Boeing shares. “It was Pentagon official, Darleen Druyun, may record. The unacceptable.” have tipped Boeing off about a lower purchase of the Airbus bid. CFO Michael Sears was Hughes satellite CLOSE TO THE EDGE ousted over allegations that he dis- and Jeppeson equally damning was the heavy damage done to Boeing’s reputation on cussed a Boeing flight-information Condit’s watch. A company that had job for Druyun. businesses resulted in more than long been a paragon of American indus- She took the job $1 billion in write-downs. Even trial excellence has ensnared itself in one scandal after another in recent years. and was also fired. though investors were generally “Under Condit, engineering skills and The deal has been happy with the McDonnell Douglas ethics seemed to lose sway over senior frozen. deal, it created a culture clash. management,” says Loren Thompson, a aphs by daniel sheehan/getty images; none; jon simon/afp/getty images aphs by defense analyst at the Lexington Insti- tute in Arlington, Va. “Condit booked a Boeing, the jewel of its hometown of forcer. The relentless bottom-line focus huge amount of defense business by al- Seattle, had always prided itself on treat- Stonecipher brought to bear during his lowing his subordinates to play business ing employees—from designers to stint as president antagonized many close to the edge.” Boeing has said that line workers—as family. But the values managers on the Boeing side of the there is no evidence linking Condit to the most esteemed at McDonnell were the house. Condit’s 2001 decision to move the scandals. ability to schmooze with Washington company headquarters to Chicago com- The decision to steer the company power brokers and win the contract. pleted the cultural uprooting, leaving more deeply into defense contracting Building planes sometimes seemed to many of those left behind in Seattle feel- represented a historic shift. The most take second place. ing a bit like unloved stepchildren. crucial step in that process was the 1997 And with McDonnell came a new Condit had been steeped in the Boeing acquisition of McDonnell Douglas. Not No.2 exec, Harry C. Stonecipher. The de- culture for more than 30 years. He only did that deal make defense con- cisive, brutally candid Stonecipher was caught the eye of Boeing’s top brass al- tracting a much bigger part of Boeing’s the temperamental opposite of the aloof, most as soon as he arrived at the compa- mix but the smaller McDonnell also had nonconfrontational Condit. Many inside ny in 1965, fresh out of Princeton with a (this page, clockwise from top) photogr (this page, an outsize effect on the Boeing culture. the company came to view him as an en- master’s degree in aeronautics. Early in 6330BW Boeing 5/17/04 12:00 PM Page 5 costs but ultimately cost $12 billion, say close observers. “We were milking money from the 767 and the 737, and that money was going right into the 777,” said one former high-ranking Boeing exec. “Even though it’s a wonderful machine, on a stand-alone basis, the 777 is not a com- mercial success.” Boeing declined to dis- cuss development costs, saying they are proprietary. Once he reached the top spot, Condit’s shortcomings as a manager became more worrisome. Within a year of taking office, Condit overreached in trying to step up airliner production even as the company was shifting to a more auto- mated manufacturing system—the equivalent of replacing the engine on a race car as it wheels around the track at Feisty Rival Condit miscalculated the 200 mph. Boeing’s massive Seattle as- determination of Airbus to spend sembly lines nearly broke down in 1997, a year after he assumed office. By the $13 billion on developing a massive time order was restored, the company new passenger jet, the 555-seat had lost most of its credibility on Wall A380. Today, Airbus has more than Street—a humiliation that seared the 120 orders in hand for the A380 and new ceo.