Lawmakers question Boeing’s ethical commitments

Legislators grilled the chief of defense supplier Boeing Co. on Tuesday, questioning whether the company has done enough to put two contracting scandals behind it with a $615 million settlement and a new ethics program.

But in testimony before the Senate Armed Services Committee, a Justice Department official acknowledged that the company's market dominance rules out applying severe penalties such as contract termination.

The settlement, first announced in May and finalized June 30, includes payments of $565 million to resolve civil investigations and a penalty of $50 million related to a deferred criminal prosecution agreement.

The payments relate to two separate sets of charges involving Boeing. They address potential civil and criminal charges against the company over the improper possession of documents belonging to competitor Lockheed Martin Corp. that likely were used to win a contract for government rocket launches and may have been used to win additional business with the National Aeronautics and Space Administration. A criminal trial of the two individuals indicted in that matter is scheduled to begin in early 2007 in the U.S. District Court for the Central District of California.

The settlement also addresses possible civil charges relating to the actions of Darleen Druyun, an Air Force official who served prison time for negotiating employment with Boeing for herself and family members while participating in government contract negotiations with the company.

At Tuesday's hearing, James McNerney, Boeing's chairman, president and chief executive officer, said the company would not seek tax deductions for the $615 million in settlement charges.

NcNerney, who has led Boeing for just more than a year, described the settlement as tough but fair. "Coupled with the loss of $1 billion worth of … business and the huge toll these matters have had on our reputation, the settlement serves as a stark reminder of the direct impact that unethical conduct can have on our bottom line," he said.

NcNerney described an ethics program introduced partially as a result of the scandals. Employees must annually sign a code of conduct and participate in ethics training, and are evaluated on aspects of their leadership abilities, including ethics, in pay and bonuses. He said the company is committed to developing an open culture that accepts internal whistleblowing, and has a new Office of Internal Governance with consolidated oversight, investigation and audit responsibilities.

Senate Armed Services Committee Chairman John Warner, R-Va., questioned McNerney closely about the ethics program, and challenged the CEO's claim that Boeing had cooperated fully from the beginning of the government's investigations.

Some senators questioned the Justice Department's policy of not addressing the tax consequences of settlement agreements, citing the open question of whether Boeing can legally write off portions of this agreement, despite its public commitment not to do so.

Deputy Attorney General Paul McNulty testified that as a matter of policy, Justice writes settlements in tax-neutral terms to leave the work of analyzing the Tax Code to the Internal Revenue Service. Justice has neither the expertise nor the knowledge of a legal party's finances to determine the tax implications of different settlement terms, he said.

He also defended the settlement against suggestions that the department might have applied other penalties against the company. "Cases such as Boeing's are further complicated by the fact that the contracts at issue are critical to the national security," McNulty said. "They cannot practicably be terminated. The government must go forward with the contracts and attempt to measure today the impact of Boeing's fraud on the future … Boeing is likely to perform these contracts through at least 2020."