Boeing’s $40 Billion Ethics Bill
Mar 3rd, 2008 • Posted in: Commentaryby Rushworth M. Kidder
Is ethics worth $40 billion? Not officially. Last week’s stunning announcement from the U.S. Air Force — that Boeing had lost a massive contract for a new fleet of refueling tankers — has been couched in strictly economic terms. In announcing that the company’s 50-year franchise to build those famous gas stations in the sky had been handed to a partnership between Europe-based EADS (the European Aeronautic Defence and Space Company, makers of the Airbus) and Northrop Grumman, Air Force acquisitions chief Sue Payton insisted that the choice was based only on the “requirements of the war fighter” balanced with “the best interests of the taxpayer.” It was never debated, she insisted, as a choice between jobs for U.S. or European workers. Nor was it framed in terms of the ethics of the bidders (one of which, Northrop Grumman, is, as we need to note in the interests of full disclosure, a corporate sponsor of this publication).
In a year of presidential politics, with recession looming and the dollar sliding against currencies worldwide, the decision to send jobs overseas is eliciting howls of protest at Boeing’s Seattle plants and in Congress. Behind all that racket, however, a quieter lesson risks being lost: the parable of Boeing as a morality play about the relationship of ethics and the bottom line.
The drama unfolds in three subplots. The first begins in the late 1990s, when Boeing employees start stealing proprietary documents from Lockheed, a competitor for government business in rocket launching programs. In 2004, the Pentagon strips $1 billion in rocket launch contracts from Boeing and nails the company with a 20-month suspension of its right to re-bid — a record among major military contractors.
Meanwhile, the second subplot comes to a head in 2002, when Darleen Druyun, a procurement officer at the Pentagon working on Boeing contracts, is recruited secretly by Boeing’s chief financial officer, Michael Sears, to a position within the company. In return for a promised job, she steers contracts toward Boeing. Convicted on charges stemming from this conflict of interest, both she and Sears are fired, fined, and jailed.
The third subplot erupts when Boeing CEO Philip Condit suddenly resigns in late 2003, as the above-mentioned scandals are braiding themselves together into a federal ethics investigation. His replacement, Harry Stonecipher, moves quickly to work out a settlement with the government, which by February 2005 he is predicting confidently. The settlement finally comes three months later. It frees Boeing of criminal charges relating to the earlier scandals, but imposes a $615 million fine, said to be the largest ever levied on a military contractor. But by then, Stonecipher himself is already out of office. Two months earlier, he had been sacked for having an affair with D.C.-based Boeing employee Debra Peabody, breaking ethics rules he himself imposed on the company.
Conflict of interest, stealing documents, sexual dalliances — you couldn’t write a textbook case on the collapse of corporate integrity that features a more potent interweaving of unethical forces. In fact, of all of the temptations known to and studied by defense-industry ethics officers, these three are the showstoppers:
- Procurement scandals. When 32 major defense contractors formed the Defense Industry Initiative on Business Ethics and Conduct in 1986, it was partly in response to public outrage over press accounts of spare-parts suppliers colluding to charge the Pentagon $600 for a toilet seat and $400 for a hammer. Now the DII, as it is currently known, vigorously promotes its ethics training programs through case studies on conflict of interest. One of their training videos — involving Jim, a defense contractor, doing insider deals with Mike, an old friend who is now a government procurement officer — could have set Darleen Druyun’s and Michael Sears’s hair on fire by its parallels to their own situation.
- Information theft. An earlier case widely noted in the defense industry teaches this lesson. It began early on May 16, 1991, when William Haggett, the CEO of Bath Iron Works, a Navy shipbuilder in Maine, spent 15 minutes examining documents obtained from a competitor and then asked to have them copied. He recognized and reversed his mistake by late afternoon — and was exonerated finally by the Navy. But he lasted only three more months before his board, unable to tolerate even that 15-minute lapse of integrity, sent him packing.
- Sexual affairs. Of all of the pitfalls Stonecipher should have foreseen, this was perhaps the most obvious. His predecessor, Philip Condit, had fallen into that very trap by having an affair with Boeing receptionist Laverne Hawthorne. Condit had other difficulties — a penchant for lavish spending, spectacular parties, and bad financial decisions. But at least part of the reason for his firing appears to have been his tangled personal life and his fraternization with a junior employee. Now, having thought they had found in Stonecipher a well-settled grandparent and husband of 50 years, the board simply couldn’t tolerate this further down-drag on the company’s reputation. Ten days after they were alerted to the affair, Stonecipher, like Condit, was history.
Fast forward to last week, and remember this history. What does the public need and want from its defense contractors? Engineering excellence? Of course. Deep commitment? Certainly. But neither of these has any guarantee of surviving without ethics — a point not lost on Boeing, which diligently has been upgrading its ethics programs since Stonecipher’s departure. So did these prior ethics lapses lose Boeing this contract? Better to say that a slow drip of public uneasiness with Boeing’s integrity made politicians and Pentagon officials just that much more open to alternatives. It created just enough of a void for EADS and Northrop Grumman to step in and at least win a hearing.
What’s the moral of this morality play? Simply this: Without an ethical wobble, there’s no void. Without a void, there’s no serious competition developing. Without the competition, there’s no tough choice. And without a tough choice, Boeing wins. Which suddenly puts a price on ethics — $40 billion and rising — that few would have thought possible before last week. Anybody still want to argue that ethics is unrelated to the bottom line?
©2008 Institute for Global Ethics
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