Unexpectedly Intriguing!
14 March 2005

Welcome Carnival of the Capitalists!

Chalk it up to the public nature of the internal conflicts brewing within the black corporate cauldron of the Walt Disney Company, where a longstanding dispute between major shareholders Roy Disney and Stanley Gold and company Chief Executive Officer (CEO) Michael Eisner on the company's direction has just resulted in the latter's announced early departure from the head post, but I've been thinking about the nature of corporate succession in an environment of ethical controversy. In the Disney case, company insider and board member Robert Iger can expect to face significant challenges to his ascension of the CEO post as the result of the company's board of directors having failed to clearly define their process for his selection for the company's shareholders. This lack of transparency comes with a huge cost to Disney's shareholders, as both the shareholders' confidence in the Disney Board of Directors combined with the almost assured future expense of continuing the company's corporate turmoil will burden the company's performance for some time to come.

As a former employee of the Boeing Company, I have been following the Boeing Board of Directors' recent decision to ask for CEO Harry Stonecipher's immediate effective resignation with some interest. While I could comment upon the reasons the board has put forward for their decision, as many others have, what I find most remarkable is the environment in which the board's decision occurred and its timing.

Boeing's Ethical Environment

The decision to dismiss Stonecipher came little more than a week after the U.S. Air Force lifted a suspension that had prevented the company from bidding upon military satellite launch contracts since July 2003. The Air Force's suspension was based on the ethical misconduct of low-level Boeing managers who had obtained confidential documents related to competitor Lockheed-Martin's bid for the same contracts Boeing was also pursuing. Another negative consequence of Boeing's conduct was to have the launch contracts it did win taken away.

The company's efforts to regain the ability to bid on the satellite launch contracts had also been complicated by the independent misconduct of former Chief Financial Officer (CFO) Mike Sears, whose efforts to secure a contract to lease commercial 767 aircraft converted into aerial fuel tankers to the Air Force led him to offer jobs with Boeing to senior Air Force procurement officer Darleen Druyan and her daughter, while Druyan still had decision-making authority over the proposed contracts. The resulting scandal led to the ouster of both Sears and then-CEO Phil Condit. Sears went on to face criminal charges for his misconduct and was recently sentenced for his role in the scandal. The contract to supply the converted 767s has since been torn up.

Had the Stonecipher affair occurred independently of these events, the Boeing Board of Directors' decision to oust Stonecipher would be seen as an overreaction. However, as SG Cowen analyst Cai von Rumohr noted, "in Boeing's circumstances, there was no way they could overlook it. The company is really trying to get beyond this image of kind of hiding the bad dirt."

A Problem of Timing

In making the decision to dismiss Harry Stonecipher as CEO however, Boeing's Board of Directors may have also crossed another ethical line - this one defined by the Board's timing of its decision. Although the Board clearly had knowledge of Stonecipher's personal misconduct for several weeks before it took action, it also held off on taking action until after the Air Force had lifted its suspension of the company's ability to bid on satellite launch contracts. By holding off the disclosure of the problems they knew they had with the company's CEO, it appears that Boeing's board members were calculating that once the Air Force lifted their suspension, the Air Force would be unlikely to re-impose those sanctions. In effect, Boeing's Board of Directors gambled that the company would profit from knowledge they were willing to keep secret that could otherwise have negatively affected the Air Force's decision and in turn, Boeing's bottom line.

This kind of calculation made by members of a corporate board isn't uncommon. Newsweek recently reported on the circumstances at personal information tracker ChoicePoint - where even though that company's board of directors had knowledge of a breach in the company's security that would expose thousands of people in its database to identity theft, it still allowed ChoicePoint executives to sell large amounts of stock for months before publicly acknowledging the problem. That these lapses are not uncommon is a sign that many of the boards of directors of Corporate America are not exercising the due diligence that is required by their company's shareholders to oversee their company's operations and practices in selecting their leadership.

Choosing the Next CEO

If the boards of directors of Corporate America are serious about facing up to the demands of fostering high ethical standards within their businesses, they need to be fully transparent in providing their shareholders with the data they need to assess the basis of the board's decisions, particularly where the company's leadership is concerned. At Boeing, this transparency will mean placing a spotlight on the requirements for ethical behavior that it will demand of its next CEO. It also means shining a light on the Board of Directors as well.

Note: Former CEO Phil Condit's biography appears to have returned to Boeing's web site! Also, much of the background information for this post was taken from a Seattle Post-Intelligencer article Boeing Leader Ousted, which offered an excellent summary of the company's recent ethical transgressions while placing recent events in context.

[Full Disclosure Statement: I worked for Boeing for more than a decade, leaving the company as part of the massive layoffs that came as part of the aftermath of the September 11 terrorist attack's effect upon the commercial aviation industry. I own some 5 shares of Boeing common stock.]

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