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Cleaning Up Boeing

When W. James McNerney Jr. decided that Boeing Co.’s top managers needed a loud wake-up call, the new chief executive chose the obvious place to sound the alarm: the company’s annual executive retreat. A year earlier, the event had been held at the posh Mission Hills Country club in Palm Springs, CA, and nobody apparently had a better time than Mcnerney’s predecessor, Harry Stonecipher. After a day devoted largely to socializing and playing golf, the former CEO, surrounded by Boeing’s elite, closed down the bar and the fired up a cigar. It was at the same event that the married Stonecipher began a relationship with a female vice-president at Boeing – a misjudgment that ultimately paved the way for his humiliating ouster, and for McNerney’s appointment as CEO.

The “Palm Springs Fling,” as it became known at Boeing, marked an all-time low for the company. It followed a three-year binge of widely publicized corporate misbehavior highlighted by the jailing of Boeing’s former chief financial officer for holding illegal job negotiations with a senior Pentagon official, the indictment of a manager for allegedly stealing some 25,000 pages of proprietary documents from his former employer, Lockheed Martin Corp., and the judicial finding that Boeing had abused attorney-client privilege to help cover up internal studies showing that female employees were paid less than men. Scandals involving multiple forms of misconduct in geographically scattered locations enveloped nearly every division at Boeing, leaving little doubt that the legendary company, even as it began to enjoy a cyclical boom, was plagued by a poisonous culture.

Given that backdrop, nobody was particularly shocked when then 2006 annual retreat was moved to the more quotidian Hyatt Regency in Orlando and pared from three days to one and a half. The real surprises began during a breakfast speech when the normally upbeat McNerney launched into the sharpest critique of the company he had ever aired before such a large audience. Speaking without notes, McNerney said “management had gotten carried away with itself,” that too many executives had become used to “hiding in the bureaucracy,” that the company had failed to “develop the best leadership.” The next day, McNerney introduced General Counsel Douglas G. Bain, who really lowered the boom, railing against Boeing’s pervasive “ culture of silence.” To grab the group’s attention, Bain rattled off the federal prison numbers of two jailed former employees. “these are not ZIP Codes,” Bain snapped. With McNerney looking on in clear support, Bain warned the audience that many prosecutors “Believe that Boeing is rotten to the core.”

The Challenge of cleaning out the rot at the heart of Boeing is one for which McNerney, 56, has spent his entire professional life preparing. Since earning his master’s degree from Harvard Business School in 1975, he has uprooted his family every two or three years in search of the next professional test. He started in brand marketing at Procter & Gamble Co., jumped to McKinsey & Co., and then climbed the ranks through General Electric Co. for 18 years, where he topped out as CEO of GE’s aircraft engine business, one of Boeing’s most important business partners. After losing in a three-way race to replace Jack Welch as CEO of GE, McNerney was snapped up by 3M Co. in 2001 to turn around the struggling manufacturer. A short time later, he joined Boeing’s board.

McNerney is a leader who both understands and cares about the aerospace giant. The series of ethical violations that surfaced at Boeing grated on the arrow-straight McNerney when he was a director, as did the fact that in 2003 the iconic company lost its status as the world’s No. 1 commercial aircraft to Airbus. Now McNerney has what he has always wanted: a chance to seal his legacy at one of America’s most important companies. But to do so, he’ll have to reinvent the 153,000-employee, $55 billion colossus, which, besides losing its moral compass, has not yet reached its profit-making potential. “I think the culture had morphed in dysfunctional ways in some places,” the polished, soft-spoken McNerney said in a recent conversation with Businessweek, his first extensive interview since taking the job. “There are elements of our culture that I think we all would like to change.”

Specifically, McNerney wants to unite a balkanized management team that has been at war ever since Boeing merged with McDonnell Douglas Corp. in 1997. The distinct cultures of the two companies never meshed, and the differences calcified into bitter rivalries. Having spent his first six months on the job in“deep dive” learning about the company, McNerney believes that internal rivalry not only is at the root of the company’s ethical scandals but also has prevented managers from cutting costs and sharing good ideas effectively. His prescription includes some predictable elements, including exerting more effective central leadership over Boeing’s three divisions, changing the way executives are paid, and encouraging managers to exploit the giant manufacturer’s cost-cutting leverage. But it also includes some unusual ones, such as encouraging managers to talk more openly about Boeing’s severe ethical lapses. “I want to try to make it OK to have that dialogue,” says McNerney. The scandals at Boeing aren’t “something that happened in a separate part of the company that half of us aren’t responsible for.”

Relentless ethical scandals and bitter infighting, he believes, have dampened the aerospace giant’s performance. “If we can get the values lined up with performance, then this is an absolutely unbeatable company,” says McNerney. Rather than simply giving speeches about management virtue, insiders say that McNerney is trying to lead by example. He wins praise from coworkers for paying attention to the small things like remembering people’s names, listening closely to their presentations, and not embarrassing underlings in public. That marks a sharp distinct ion from the blunt Stonecipher and the remote Philip M. Condit, who stepped down as CEO in 2003 in the wake of the Pentagon scandals.

More important, McNerney asks different types of questions than Stonecipher and Condit. “Phil or Harry would get into the weeds on the technical stuff,” says this executive. “But Jim is more interested in the human side. He is interested in how to ……. Create a culture where people speak up and take the risk and stop a production line because something is wrong.”

Revamping pay is another powerful tool McNerney is using to reform Boeing’s culture. In the old days, no points were awarded for collaborating with other units or following ethical rules. Now pay and bonuses are directly linked to how well executives embrace a set of six leadership attributes such as ‘Living Boeing Values.” That includes new criteria such as promoting integrity and avoiding abusive behavior. Mcnerney is also giving managers financial incentives that better reflect the cyclical nature of the aerospace industry. Boeing’s past long-term incentive system, called Performance Shares, paid out based on a higher stock price. But that system failed to consider management’s performance during the down cycles inherent in the industry, thus offering managers few incentives to find a way to improve performance during a downturn.

REQUIRED:

Using your knowledge in business ethics (articles and books) give a comprehensive REPORT to the following questions;

What kinds of factors resulted in Boeing’s unethical culture?

After identifying ethical issues in this case, how would you deal with these issues? What ethical programs will you recommend.

What steps is its new CEO taking to change Boeing’s culture and make ethical behavior the center of attention?