In December 2003 Boeing faced a leadership crisis. Phil Condit, the 62-year-old chairman and CEO, stepped down after a scandal in which Michael Sears, the company’s former CFO, was accused of offering a job to a Pentagon official who was then head of procurement for the air force. These problems, which caused Boeing to lose credibility with the U.S. department of Defense, a major customer, came at a time when the company was already under severe competitive pressure from Europe ‘s Airbus in the commercial aviation industry. To make matters worse, Boeing was also losing money in its satellite and space businesses.
To help resolve the crisis, the board of directors called upon Harry Stonecipher, Boeing’s former chief operating officer, to come out of retirement to take on the job of CEO. In addition, Lewis Platt, former CEO of Hewlett Packard and Kendall Jackson Wine Estates, who had been a Boeing board member, became the company’s non-executive chairman. In a conversation with Michael Useem, director of Wharton’s Center for Leadership and Change Management, Platt discusses how he and Stonecipher are trying to ensure that Boeing’s steep nose-dive doesn’t turn into a crash landing.
Platt will be one of the presenters at the Wharton West Leadership Conference in San Francisco on March 23. The conference focuses on how great leadership can be applied and developed in an era of uncertainty and change.
Useem: On Dec. 1, 2003, Boeing went through a leadership change in which Phil Condit resigned as CEO, you became non-executive chairman and Harry Stonecipher was named the CEO. Could you speak about the factors that led to the leadership change?
Platt: You probably know from reading the press that there were a number of incidents that contributed to that change. The most troubling incidents centered around standards of business conduct. On a couple of occasions, we had material from competitors that we should not have had, and that situation was not dealt with properly. This was followed by a disclosure that our CFO Mike Sears had entered into improper discussions with a former government employee [Darleen Druyun] – who was at that time the head of procurement for the air force — and had discussed employment opportunities at Boeing with her before she recused herself. This was an obvious violation of standards of business conduct; as a matter of fact, it was a felony offense as far as she was concerned.
Phil was never implicated in any of these incidents, but there was a general overall loss of confidence in Boeing among employees and certainly among our customers — particularly among our very important government customers. As we were working through these issues, Phil said to the board that he would be willing to step down if we felt that that would help clear the decks, get some of this behind us, and lead to restoration of confidence more quickly. That’s what led up to the leadership change.
Useem: Let me ask a related question. The events involving Mike Sears and Darleen Druyun were, in a sense, one level removed from the board. But thinking about the lessons for governance, could the board have done anything before these incidents that could have averted the problem?
Platt: Probably this might sound self-serving because I’m a board member, but I think it would have been very difficult for the board to see these things. But since these incidents have taken place, and even before we uncovered the Sears-Druyun issue, we decided that we would have our own independent look at a number of things that were going on at the company: The handling of sensitive data, the overall ethics tone in the company, record keeping, and all those things. We [the board] hired an outside firm to come in and do a thorough audit of the entire company. The audit turned up a number of things, most of which did not point to the board’s lack of vigilance, but to the overall ethics tone of the company, which was not where it should be. The audit also uncovered a lot of record-keeping issues. There were many, many, many of these; even where we had done the right thing, it was hard to prove that we had because the record-keeping was so sloppy.
We have extended this outside audit to all our procurement practices, especially those that surround government procurements. That part of the study will be wrapped up this month. It will be reported publicly and copies of our report will be given to people in the government who are working on investigations. We are trying to cooperate with them by showing that we will share all the data that we have with them.
At the end of the day, other than the fact that we could have somehow detected an overall lax tone within the company, it would have been very difficult for the board to understand the details about having documents from competitors or the details about the hiring of Darleen Druyun by Mike Sears.
Useem: You have a division of responsibilities between yourself as non-executive chair and Harry Stonecipher as CEO. Could you speak to the division of labor between the two of you and what each of you is doing to restore confidence and credibility at Boeing?
Platt: As you know, Harry and I have both been board members. Harry was the former chief operating officer of the company, so he knows the internal operations of the company very well, and that is what he remains focused on. He focuses on getting performance within the company tuned up. I have taken on the role of overseeing all the board activities, which helps him because it takes that load away from him.
It’s not easy to chair the board of a company these days. There’s a lot going on because of new SEC regulations and new NYSE regulations, Sarbanes-Oxley, and so on — and I am dealing with all that. I set up the board agenda and run the board meetings. In addition, I have told Harry that I am available to do whatever he would like me to do that could help, such as visiting customers. I have gone to Washington and spoken to several of our government customers. I have told them what we are doing inside the company to restore confidence. I have also spoken to employee groups.
So Harry focuses on performance and on restoring the reputation of the company, and I focus on the board. We are operating as a team to get a lot of work done quickly. We haven’t drawn up charts or anything; he gives me a call and says, hey, can you cover this for me, or could you go and see so-and-so? Sometimes there may be a customer visit coming up that he cannot attend, and he might ask me to cover that for him. That is how we work together.
Useem: One of the great debates in corporate governance at the moment is whether to have a non-executive chair. Can you speak about how you plan to manage a relationship that is unusual in American business? Do you see this as an enduring arrangement, or is it in effect something to get Boeing through the crisis and then return the chair’s position to the CEO?
Platt: Let me take the second of the questions first. When we made the announcement in December, we signaled very carefully to the world that this is a structure that we have chosen at this point in time. We wanted to be very clear with everyone that we do not necessarily believe that we will have a separate chair and CEO going forward. But certainly as long as Harry and I continue in these roles — and that, by the way, is indeterminate; we’ve said probably at least a couple of years — we will continue to have those jobs divided. I do not personally believe that one must divide the job of the CEO and chairman in order to have good governance. I just don’t believe that. But it is a convenient way to get a lot of work done in a short period of time. He and I have a great relationship, and we know how to stay out of each other’s way. It’s two hands on deck instead of one, but that is not meant to signal that it will be that way forever.
Useem: Harry Stonecipher, aged 67, is one of several executives in Corporate America who has been called back to service after retirement. This has happened in another half dozen companies in the past year or two — with Larry Bossidy, famously, at Honeywell, for example. Harry Stonecipher is the former vice chair of Boeing. Why did the board decide to invite him back to become CEO? Why did it not go to the next tier to bring in a younger executive from the ranks below?
Platt: There’s a simple answer. We just did not feel that there was anyone in the next level below Phil who was ready to take on this job at this point in time. Therefore we either needed to go outside and find someone or choose someone who was familiar with the business and involved with it, and Harry was a natural choice. The bottom line is that we really don’t have anyone at the next level who could have taken on what is a really difficult job right now. These are not even normal times at the company.
Useem: Thinking about Boeing’s relationship with Airbus and the Department of Defense, and looking ahead over the next year or two, what do you see as the strategy to restore Boeing’s competitive position with relation to Airbus, and also restore relations with the U.S. government?
Platt: Let me start with Airbus. Over the short term, it is likely that Airbus will continue to deliver more airplanes every year than we deliver. I assume that you are aware that in 2003, for the first time, Airbus delivered more planes than we did. That is the result of a couple of factors. One, they have a somewhat more modern fleet that they can offer airlines. Also, quite frankly, they have continued to show a willingness to sell airplanes for less money than we’ll sell them for. We think some of that may be cost-related; they may actually have some cost advantages, but certainly some of it is a willingness to give up profit that we are not willing to do. Our commercial airplanes group has done a wonderful job managing the business as it declined by 50%. We have maintained profitability throughout and intend to continue doing that into the future. In the short run, you can expect Boeing to be more competitive, but not willing to deeply discount in order to hold market share.
Over the longer term, we are banking heavily on our new airplane, the 7E7. We have a new airplane as they do — the A380. We are very confident that we have the right airplane for the future. Airbus will sell some A380s, but based on our conversations with the airlines, the 7E7 is really the airplane they want. You can expect that when we get that airplane out in the marketplace in 2008, you will see the orders roll in and we will recover a significant amount of our market share.
Now let me touch on the government piece — because that is equally important. Our government business is very strong. Integrated Defense Systems booked $52 billion in orders last year, a really remarkable achievement. What we need to do with the government is simply to restore our credibility. They have lost a lot of confidence in the way we conduct business. But everyone we talk to — and I mean everyone — wants us to be a strong defense supplier. They want to be able to do business with us. Right now these people are hampered by the standards of business conduct issues and things we have done incorrectly in the past. But once we get those things cleaned up and convince the government that we are doing things properly, you will see that the prohibitions we face today will be relaxed.
Useem: Regarding the government work itself, you’ve gone into the space business. You acquired Hughes Electronics a couple of years back but so far, that has been a money-losing operation. Could you comment on the space business and Boeing’s presence there?
Platt: Well, the space business itself has been extremely difficult. One thing that happened shortly after the acquisition is most of the commercial business went away. That was driven primarily by telecom companies that were launching satellites. But our military business has remained quite strong. Having lost most of our commercial base, not to competitors, but just because it doesn’t exist any more, that has really caused a lot of problems for that business. We think demand will come back in time. Already the telecom companies are beginning to recover and some of them are interested in launching new satellites. So it’s just a matter of time.
A lot of the technology we acquired has been used in other places. You may remember that we were awarded a contract for the Army’s new way of fighting wars. It’s an electronic warfare system that keeps all the units in touch with one another via computers. A lot of that technology came from the Hughes acquisition. So while the space business itself is very poor right now, we have been able to use that technology in some other areas. Some of the $52 billion in orders last year came because we had the right technology to offer solutions to the government.
Useem: It has often been said that Boeing’s original bet on the 707 and later the 777 were bet-the-company decisions. Would you characterize your decision on the new aircraft, the 7E7, as a decision that has a bet-the-company feel to it?
Platt: To those of us in the company, it has a bet-the-company feel. We will be spending a lot of money developing a new airplane to re-take our leadership from Airbus, and it is very important that it succeeds in the marketplace. I am very confident that it will succeed. We are doing some things with the development of this airplane that remind me of the 707 — and that is, it is a very big reach technologically. There is a technological risk associated with it in that sense, which Airbus doesn’t have. Airbus has some other risks, but they are using technology that is in use today. So, it is a bet-the-company decision for us.
Useem: Before you became chair of Boeing, you ran Hewlett Packard and then Kendall Jackson Wine Estates. How does leading Boeing differ from leading HP and Kendall Jackson?
Platt: Honestly, it’s not that much different. Leadership is leadership. It is interesting that when I went to Kendall Jackson from Hewlett Packard, I found that most of what I had learned and used to lead HP was very useful at Kendall Jackson. Now I can say exactly the same thing as far as Boeing is concerned. It’s about setting clear objectives, motivating people, recognizing and rewarding people. Frankly, it doesn’t make much difference what business you are in; these fundamentals are the same.
Useem: What made you step up to the hot seat at Boeing?
Platt: My wife has asked me the same question (laughs). Well, I was on the board, and I was playing the role of lead director, though we did not have an official lead director. So I was in the thick of things. Then the call came, and I love this company, I really want to see it restored to its former glory and the luster it has always had, so when I was asked [to be non-executive chair] I said, ‘Sure, I’ll serve.’ It wasn’t something I had planned on doing, but it needs to be done, and I guess I am the right person to be working with Harry at this point, so why not?