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Tuesday, January 31, 2006 - Page updated at 12:16 AM

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Transcript of speech by Boeing's Doug Bain

Speech by Doug Bain, Boeing senior vice president and general counsel, at Boeing Leadership Meeting on Jan. 5, 2006, in Orlando, Fla.:

"Good morning.

As I walked up here, I think I heard [Boeing Chairman and CEO] Jim McNerney mutter, 'Here comes Dr. Death.'

Jim asked me to give you kind of a candid assessment of our major scandals and how we got there.

My overall message is fairly simple: We as the leaders of the Boeing Company get to choose what kind of culture we are going to have. And we make these choices every day by what we do and frankly what we choose not to do. But the consequences of all those choices are our collective responsibility.

I want to talk about these scandals not so much from the perspective of how we have tried to argue them or spin them, but from the perspective of the prosecutors and what they have told us.

The recurring message we have gotten from the prosecutors and frankly everybody else we deal with is one of shock and surprise.

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They say, 'You guys are the Boeing Company. You build things that are larger than life. You do things that are larger than life. You're not a sleazy company. How did this happen?' And the question that they always ask: Where was the leadership?

EELV [Evolved Expendable Launch Vehicle, the space-rocket program for which Boeing competed against Lockheed Martin]:

Nine years ago, Ken Branch went to work as a non-management engineer at the McDonnell Douglas facility in Cape Canaveral, Fla. And he traveled frequently to Huntington Beach, Calif. He brought with him approximately 25,000 pages of documents, many of which had proprietary markings from Lockheed Martin and other employers.

Of these 25,000 documents, about a dozen pages became important and two pages became critical to the prosecutors. About a dozen people saw some of these documents, and this went on for a period of two and a half years before anybody said anything.

Finally, in June 1999, an employee came forward and complained. We launched an investigation. We did a poor job of the investigation, did a poor job of disclosing it to the government.

But the legal questions came down to two issues: One, were the documents used? And two, did they affect the competition?

Despite the legal questions, the issues the prosecutors keep looking at are the volume of the documents: How could you have that many documents floating around and nobody said anything? Why was there two and a half years of silence?

Were these documents in fact offered during the interview process as a quid pro quo for being hired? And last, but not least: What was the internal-control system for the bidding practices that were going on? Why didn't somebody say something?

The cultural questions that these events raise are as follows:

Was there a culture of win at any cost? We now know what that cost is.

Was there a culture of silence?

And last, but not least: Where was management throughout this?

So what are the consequences?

We lost $1 billion of launches. We underwent a 20-month suspension from the launch business.

And we have a truly burdensome administrative agreement that Bonnie [Soodik, senior vice president of Boeing's Office of Internal Governance]'s organization is in charge of implementing.

Lockheed sued us for anywhere from $1 billion to $2 billion.

And I'll get to the criminal and civil issue in a minute.

What are the consequences to the individuals?

Ken Branch and his boss were both fired. A midlevel manager was suspended. All have been indicted on felony counts and all three are awaiting trial.

Sears/Druyun:

On October 17, 2002, Mike Sears [then chief financial officer of Boeing] flew in a company airplane down here to Orlando and met with Darleen Druyun [then chief acquisitions officer for the Air Force] and offered her a job.

The question everyone keeps asking is, why? The rules on dealing with government employees are not hard. In fact, during the meeting Darleen told him, 'I have not recused myself from Boeing business.'

As best we can figure out, Darleen told Mike in Orlando that she had just received a handshake offer, which she had accepted, from Lockheed Martin. It's my personal belief that Mike then went into a sales mode. He not only wanted to make sure that he got Darleen; he wanted to make sure that Lockheed Martin did not.

The next day, Mike sent an e-mail that said "I had a 'non-meeting' with Darleen Druyun."

If this were all we were facing, we might have been able to deal with it better. But there were a lot of other events that came out. It turned out, in August 2002 Mike had had Darleen come to Chicago and even though the R word was never used, the prosecutors say 'This looks like a recruitment meeting.' So maybe the Oct. 17 conversation was not a one-off.

During the month of September, there was a string of e-mails between Mike and Darleen's daughter, who was employed as an HR person in St. Louis. The e-mails clearly are negotiations for Darleen coming to work for us.

Again, if this is all we were dealing with, we might have had a different issue. However, in the year 2000, Darleen sent a copy of the résumé for her future son-in-law to Mike, asking for his assistance in getting him a job. Mike merely sent on the resume, did not ask for anything to be done. But the people who received it assumed Mike was going to say 'Make it happen' — and they did. A few months later, this had worked, Darleen sent the résumé of her daughter to Mike. Same thing happened. Mike sent the résumé along, and the people made it happen.

All this stuff came together when Darleen was sentenced and she said 'I might have favored Boeing in awarding contracts' because of the favors Boeing had done for her in hiring the son-in-law and the daughter.

So, the cultural questions: How come nobody said to Mike, 'What in the hell do you mean by a non-meeting'? How come in the year 2000 nobody said, 'Should we really be hiring the relatives of our chief procurement officer for the largest customer we have on the defense side?'

It also raises the question, Do we have a culture of silence — don't ask the tough questions?

So what are the consequences? For the company, it's my belief that if this never happened we'd be selling tankers to the U.S. government, and Italy would not be our only customer.

We were forced to recompete the C-130 AMP [Avionics Modernization Program] program and the small-diameter bomb.

I'll get to the criminal and civil issues in a moment.

But, after EELV, the biggest hit we took was to our reputation and there was a sense from everybody of piling on.

These are not ZIP codes. These are the federal prisoner numbers for Mike Sears and Darleen Druyun.

Prisoner 70040, Mike Sears, pled guilty to one felony count of aiding and abetting a violation of the conflict-of-interest laws.

He served four months in the federal correctional center in Oxford, Wis. He was released this past June 29.

In addition to serving hard time, he was fined $250,000. He was sentenced to community service and to two years of probation.

Also, when he was fired for cause, he forfeited approximately $5 million in equity-based compensation that was based on the then-current Boeing stock value of $39 per share.

Prisoner 47614, Darleen Druyun. Darleen pled guilty to one felony count of violation of the conflict-of-interest laws. She served nine months at the federal correctional center here in Marianna, Fla. She was released Sept. 30.

One of the reasons that Darleen got a stronger sentence was that she lied to the prosecutors throughout the process. She was fined $5,000 and sentenced to community service plus three years of probation.

So where are we today?

We have been trying to resolve these things. We have not been successful yet. It is my hope we will be.

But there are some within the prosecutors' offices that believe that Boeing is rotten to the core.

They talk to us about pervasive misconduct and they describe it in geographic terms of spanning Cape Canaveral to Huntington Beach, to Orlando, to St. Louis to Chicago.

They talk about it in terms of levels within the company that go from non-management engineers to the chief financial officer. Fortunately, not all prosecutors view us this way, but there are enough to make it difficult.

The U.S. attorney in Los Angeles is looking at indicting Boeing for violations of the Economic Espionage Act, the Procurement Integrity Act, the False Claims Act and the Major Frauds Act.

The U.S. attorney in Alexandria, Va., is looking at indicting us for violation of the conflict-of-interest laws. And both are looking to throw in a few conspiracy and aiding-and-abetting charges for good measure.

When we first met with the Department of Justice to see if we could resolve this, it's their view Boeing's actions have tainted the EELV contract, the NASA 19-pack contract [a 2002 contract for up to 19 Delta II rocket launches], and 27 Darleen Druyun-related contracts. Their estimate of damage is $5 billion to $10 billion.

So what's the impact if we get indicted or convicted?

Besides the normal fines and that kind of stuff, there's a presumed denial of export licenses, and that would be both on the commercial and the government side. In a moment, I'll give you an idea of why we are concerned about that one.

We can get re-suspended or all of IDS (Integrated Defense Systems) can be debarred.

We can lose our security clearances.

And one nasty little thing is that the Bureau of Alcohol, Tobacco and Firearms, which has an almost explicit prohibition on possessing explosives. For those of you who are at BCA [Boeing Commercial Airplanes], you might remember that every single door on an airplane has actuators that are triggered by explosives.

So, why do we keep talking about this stuff?

The simple answer is, if we're not careful it can happen again.

Today, I think our biggest issue we face is export.

These are our five biggest export problems, and I think you can see every heritage company and every business unit represented here.

We have not resolved QRS-11 [a gyrochip Boeing exported inside some of its commercial jets without an export license between 2000 and 2003], which is a BCA issue. But the other four, we have paid a total of $50 million in penalties, we've had three consent decrees and several special compliance officers.

It's also affected the way we do business, because we've had to go the extra mile.

When I was in BCA, we had four people in export. Today, Mike Bair [head of the 787 program] tells me, on the 787 program they have over 100.

The State Department's view of Boeing is we just don't get it. There are too many violations, and as a result it's probably their intention to hammer us on QRS-11.

The cultural question we need to ask is, do we view export as somebody else's problem because my job is to sell product? Or is it all of our responsibilities?

The numbers at the top [apparently referring to a chart] are the number of formal ethics cases the of Ethics and Business Conduct opened in 2004 and 2005.

What is astounding to me, of course, is that if you look at 2005, 900 of them were found to have substantiation.

So is the problem the rank and file? Or is the problem us?

We participated in a survey conducted by the Defense Industry Initiatives, and they surveyed our employees. Of the employees surveyed, 26 percent said they had observed abusive or intimidating behavior by management.

I also went back and counted the number of vice presidents who have been separated from the company for ethics violations over the last few years.

The total is 15. I found that to be an astronomically high number. While only two of the 15 were separated for committing crimes, among the other issues we've had are expense-account fraud, travel abuse, violating our procedures for hiring consultants, abusive behavior, surfing the Net for porn, sexual harassment and retaliation.

Whenever we hear that somebody has done some offense, I guess the question we really ought to ask ourselves is were we surprised? With 150,000 employees, you are going to get some surprises.

But the question is, if you were not surprised that somebody did something, the next question to ask is how did they get there? How did we tolerate their conduct for this long?

The cultural question we need to ask, of course, is are we going to model the leadership values? And are we going to hold accountable those of us in this room, our subordinates and even our superiors?

This obviously is one of those deals where I get to wear the black hat and Bonnie is going to wear the white hat. But I really feel that we've turned the corner and that there's a renewed emphasis and energy on doing the right thing. But the bottom line is, we just cannot stand another major scandal.

And all it takes for there to be a next time is one misstep by one employee, and it doesn't really matter whether that employee is a rank-and-file person or somebody in this room.

Our jobs as the leaders of this enterprise is to establish a culture that ensures that there is no next time. And frankly the choice is ours.

Thank you."

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