Dec 2, 2003 By Dave Carpenter Ap Business Writer 5 min read

CHICAGO (AP) – An ethics scandal and questions linked to Boeing’s huge and growing stake in defense contracts cost Phil Condit his job Monday as CEO and chairman of the company, which rushed to install new leaders and control damage to its image. Condit’s stunning resignation came a week after the firings of two executives for ethical misconduct, and as Boeing decided that “a new structure for the leadership of the company is needed.” One of those fired was chief financial officer Mike Sears, who worked closely with Condit in Boeing’s Chicago headquarters.

Condit, 62, said he quit to try to prevent the company from getting “bogged down” after a year of controversies involving its defense business – most notably the much-criticized government plan to acquire Boeing 767 planes for use as refueling tankers.

The abruptness of the move, which surprised Wall Street and company observers, underscored that Boeing could be in for more difficulties depending on the outcome of a Defense Department investigation into the circumstances surrounding the negotiations for that $17 billion contract.

Boeing brought back Harry Stonecipher, its 67-year-old former president and chief operating officer, from retirement in St. Petersburg, Fla., to become chief executive officer in what analysts saw as caretaker leadership. Stonecipher has served on Boeing’s board since joining Boeing from McDonnell Douglas when the two companies merged in 1997.

The company also split Condit’s duties in two, naming board member and former Hewlett-Packard Co. CEO Lewis Platt as chairman.

Emphasizing that Condit has not been implicated in any misconduct, Boeing said he would help in the transition to new leadership through the end of the year before officially retiring in March. Platt said there appeared to be “nothing whatsoever” connecting Condit to the ethical issues that resulted in the firings of Sears and Darleen Druyun, the former Air Force official whom the company said was in communication with Sears about a Boeing job while still involved in the contract-review process at the Pentagon.

Even Boeing backers in Washington, however, were hesitant to say the company’s troubles on the controversy are over.

“I hope this is the end of it,” said Rep. Norm Dicks, D-Wash., a senior member of the House Appropriations Defense Subcommittee and a leading proponent of the tanker deal. “But I don’t know. There are still other investigations by the IG (inspector general) and internally by Boeing that are under way. We’ll have to wait and see how that turns out.”

Pentagon officials said the resignation was a private company matter and declined to comment on the inspector general’s investigation, which continues.

Boeing, the second-biggest U.S. defense contractor behind Lockheed Martin, has been roiled for months by ethical controversies over the aggressive methods used to obtain lucrative defense contracts.

In addition to the tanker dispute, the Pentagon punished the company in July for stealing trade secrets from Lockheed to help win rocket contracts.

Boeing has been indefinitely banned from bidding on military satellite-launching contracts, which already has cost it seven launches worth about $1 billion.

Condit, who moved company headquarters to Chicago from Seattle in 2001 and engineered Boeing’s shift from primarily an airplane maker to a diversified corporation with a bigger stake in defense, said he first offered to step aside a week and a half ago and quit only “after a great deal of soul-searching.”

“In the end, I concluded that the controversies and distractions of the past year were obscuring the great accomplishments and performance of this company,” he said on a conference call. “My fear was we would get bogged down.”

Despite Condit’s solid reputation, the news sent Boeing shares down just 37 cents, less than 1 percent, to $38.02 on the New York Stock Exchange.

Morningstar Inc. analyst Nicolas Owens said Condit’s resignation, coupled with the two earlier firings following an internal investigation, should go a long way toward helping Boeing regain the trust of the Defense Department.

Robert Friedman, senior aerospace defense analyst for S&P Equity Group, said naming a known “straight shooter” like Stonecipher also was clearly aimed at helping to restore its now-battered reputation.

“I don’t think Phil Condit per se was involved in the controversy regarding the tanker negotiations,” Friedman said. “I just think that in order to stanch any further unease with the Pentagon in current and future contracts, and any concerns that internal controls were weak, Phil Condit had to fall on his sword.”

Defense contractors moved to shore up their ethics practices in 1994, when a seven-year Pentagon investigation called “Operation Ill Wind” concluded with big fines against 10 defense contractors, including prominent companies such as United Technologies, Loral Corp., Grumman Corp. and Litton Systems Inc. A total of 54 corporate executives, defense consultants and government officials were convicted. Among them was Grumman Corp. CEO and chairman John O’Brien, who resigned in 1990 and later pleaded guilty to fraud charges in connection with a $305,000 payment from a subcontractor.

Stonecipher, who retired last year, praised Condit on the company’s conference call but said a primary task of the new leadership is to strengthen the company’s reputation for integrity with customers, employees and investors.

“We have the right strategy,” Stonecipher said. “The task before us is to execute. … Boeing is a great company with tremendous capabilities to define the future in each of our markets and deliver consistent, profitable growth.”

Condit had been with Boeing since 1965, when he joined the company as an aerodynamics engineer, serving the past seven years as chairman and CEO.

He reduced the company’s historical reliance on commercial jets, beefing up its defense and space operations in a strategy that helped cushion the severe blow of the aviation downturn after the Sept. 11, 2001, attacks. But he also had been criticized by some within the company for being more cautious and getting away from its legacy as a bold leader in developing new airplanes.

Rival Airbus is expected to eclipse Boeing this year as the world’s largest commercial jet manufacturer.

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Associated Press Writer Matthew Daly in Washington contributed to this report.

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