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2006 Speeches
W. James McNerney, Jr.

Jim McNerney

Chairman, President and Chief Executive Officer

The Boeing Company

"Turning Ethics and Compliance Into A Competitive Advantage"

The Conference Board

"Pulling It All Together"

The 2006 Ethics and Compliance Conference

Hilton La Jolla Torrey Pines

La Jolla, CA

April 27, 2006

The theme of this conference--"Pulling It All Together"--suggests that our collective efforts within the corporate world when it comes to ethics and compliance have lacked focus; have been too scattered, too piecemeal, too marginal. I am in complete--and wholehearted--agreement with that assessment. I think you're right on in what you're doing over these few days. This morning, I will tell you how we are striving to pull it all together at Boeing . . . so that we can move from defense to offense--going from "This will keep us out of trouble" to "Hey, this will make us different ... and better ... and give us a competitive edge." We'll come back to that theme later.

First, let's step back and look at the bigger picture. The fact that this conference is the 14th in a series of Ethics & Compliance conferences held annually since 1992 tells us something, as does the fact that The Conference Board, for the first time, is holding two such conferences this year--this one on the west coast and a similar one in New York in May.

Number one, it tells us that there has been a critical mass of ethics and compliance officers--large enough to support these conferences--for more than a dozen years. Today, virtually every one of the 200 largest companies in the U.S. has an ethics and compliance program.

And number two, it tells us that industry wants--needs--more help in creating and sustaining effective ethics and compliance programs, and putting them together, because simply having a program--even a comprehensive one--may not be enough. Boeing has learned that lesson.

If you think of the emergence of ethics and compliance as an organizational function in big corporations, it is something that began to emerge more than 20 years ago--as a reaction to abuses in the defense industry. Then in 1991, the Federal Sentencing Commission strongly encouraged other big companies to adopt vigorous compliance and ethics programs of their own. It issued new guidelines that reduced fines for companies that launched internal ethics and compliance programs ... and increased fines for companies found guilty of wrongdoing that had not already taken positive steps in the same direction.

On top of all this, over the last 15 or so years we've seen the passage of Sarbanes-Oxley . . . new and stricter sentencing guidelines . . . and the emergence of a new and more aggressive stance toward white-collar crime enforcement . . . which have come into play at local, state and national levels. As a result of all of these factors, we have seen the rapid spread of formal ethics and compliance programs to more and more companies.

Despite all of this, over the past decade, a number of companies--Boeing included--have suffered from some very public ethics-related mistakes. It's tough to pick up a newspaper or magazine without seeing the mention of another corporate scandal or executive indictment. It is unfortunate, but any large company will have a few employees who either lack integrity or want to do harm to the company. Given that, why do some large companies experience significant ethical "escapes," while others do not? I believe some of the difference lies in whether the company has the character and the culture to ensure that potential ethical failings are stopped before they escalate.

A few years ago, Boeing was stunned to find itself among the companies that made headlines for some very high-profile ethical lapses. We thought of ourselves as good and ethical people. Like many companies, we thought of "the ethics organization" as the centerpiece of our ethics and compliance program. We thought we'd done all the right things; we had an ethics leader, ethics advisors assigned around the company, and an anonymous ethics-line to report suspected violations.

It wasn't enough.

So then we had to ask ourselves some really tough questions: Were these lapses symptomatic of a larger issue with our corporate culture? Were we lacking in systems and processes to guide our people toward ethical behavior? Were our leaders modeling ethical behavior, and did they routinely discuss ethical issues with their teams? Did our people feel confident enough to speak up about ethical concerns without fear of retaliation? Were our people hiding in the bureaucracy; were they "winking" at wrongdoing or looking the other way? Did our investigating functions and oversight bodies talk to one another, or did they operate in silos?

We started the search for answers by initiating a series of external reviews to look at everything from our processes ... to our investigation procedures ... and most importantly, to our culture. The studies concluded that, overall, the lapses were not part of a systemic problem but that there were definite weaknesses in our structure and in our culture. The nugget here was that while a few individuals had chosen not to follow the proper processes, certain cultural weaknesses had permitted the people (including leadership) who suspected a problem to, in effect (although they didn't regard it this way) look the other way.

In other words: Too many people who thought something "didn't feel right" failed to raise a red flag for a variety of reasons: They wanted to win a contract, they feared retaliation, they just didn't want to rock the boat, or they lacked the courage to speak up in a command-and-control culture.

We also found that just about every part of our organization responsible for guiding, investigating and enforcing ethics and compliance worked pretty much in isolation--they didn't necessarily share information with each other.

And, in pockets of the company, there was a "win-at-any-cost" attitude.

Once we had the facts, Boeing faced a whole new set of challenges: Do we hunker down, fall back on "process" and make everybody dot every "i" and cross every "t"? Or do we go for the gold and drive a real shift in how we operate and the culture we operate in?

Boeing chose to take the big step. We concluded that we had to make three major changes:

  1. 1. Get committed, and get aligned.
  2. 2. Open up the culture.
  3. 3. Drive ethics and compliance through our core leadership model, not off to the side of other things we're doing every day.

First, to get us committed and aligned, Boeing created the Office of Internal Governance in November 2003. This was a major organizational commitment from the very top of the company.

With OIG, as we call it, we established a single organization that is now working toward creating a more sophisticated data-mining system to enable our business leaders to detect potential problems earlier and take corrective actions to avoid serious mistakes. Before OIG was created, we weren't comparing and correlating data gathered by separate sources, such as the Law Department, Corporate Investigations, Audit, Human Resources and the Ethics team itself. Now we are--because each of these organizations is either part of ... or works with ... OIG. And that gives us an advantage in addressing potential problems and seeing them early.

Every day, OIG walks a fine line. Its challenge is to operate effectively in support of our businesses ... while remaining independent in pursuit of our Boeing values. I think it does that very well.

By the way, the senior vice president of OIG is in the audience. Bonnie Soodik, will you stand up? I consider Bonnie one of Boeing's greatest assets. If you've had the pleasure of meeting her, I'm sure you understand why I say that.... Thanks, Bonnie.

Another equally important decision Boeing made in 2003 was to have the position that Bonnie holds report to the CEO--so Bonnie reports directly to me, not through any other leader or function. She also reports regularly to our Board of Directors on how we're doing. This level of leadership engagement is vitally important to the success of an ethics and compliance program.

On the second point: To open up the culture, we are creating an environment that encourages our people to speak up about their concerns and feel safe in doing so--and I'm referring to everything, not just ethics . . . but ethics particularly so. We drive home the principle that the only way to be profitable and to operate long-term is to conduct our work ethically and compliantly. There are significant consequences for believing you can--or should--"win at any cost" or that it's okay to ostracize someone who raises an ethical concern.

I strongly believe this, and that's why, at Boeing, we stress that there can be no tradeoff between values and performance. They go together, and we can't stray from our values or principles as we strive for better performance. Something done unethically will only undermine our ability to perform.

To make sure everyone understands this, I think that you have to create a work environment that encourages people to talk about the tough issues--business- or ethics-related--and to make the right decisions when they find themselves at the crossroads between hitting their numbers for the quarter and stepping forward when there's a problem. Whenever I go around the company, I try to sit down with between 50 and 75 employees. I make ethics and compliance a regular topic of conversation. If they don't bring it up, I do. We talk about it. The dialogue is rich, and openness and candor are a big part of it.

I'm not the only one who does this. I expect all of the leaders at Boeing--from front-line supervisors to the top leaders of our company--to talk with their teams about ethics and compliance. I don't mean "preaching," but initiating an open and probing dialogue and doing their level best to unearth problems and concerns.

I know . . . and you know . . . that one of the absolute prerequisites for success in ethics and compliance is the belief that it is OK for people to question what happens around them.

You have to be absolutely honest and candid in talking about those things. At our annual leadership retreat early this year, I asked Bonnie and our general counsel to lay it on the line in explaining how costly our past lapses had been ... or still could be ... to Boeing, and how they had destroyed the promising careers of some people who thought--very mistakenly--that they were acting in the best interest of the corporation.

I wanted Boeing leadership to talk about these past issues for two reasons. First, to underscore the point that openness and candor have to start at the top. People should be aware of their obligation to maintain and promote ethical behavior . . . and they should be aware of the adverse consequences that follow from a failure to do so. People mustn't be allowed to think that they can hide in the corporate bureaucracy or wink at the misconduct of fellow workers, or even their leaders--especially their leaders. The second reason is that I want us to learn from the past. My challenge as the CEO is to ensure that we're learning from our mistakes, leveraging them into opportunities, and then creating advantages for our company by doing so.

Before 2003, Boeing had long required annual ethics training for all employees; but afterward we added regular ethics recommitment events and started talking about ethics and compliance at every opportunity. At first, many of our people felt that we were punishing them--making them do penance--for mistakes that others had made. But lately the light bulb is beginning to go on.

We are now starting to "get it". We know that even if Boeing had never had a single ethical lapse, today's general business environment would still drive an ongoing, major focus on ethics and compliance. The reality is that there are many more regulations, there is much more scrutiny, and in this world of instant communications, there's far more opportunity for mistakes to occur ... and far less time to correct them if they do happen.

We realize that the intense focus we have on ethics and compliance is not going to abate. So now we are striving to be the best--to make ethics and compliance a clear competitive advantage.

We also realize it all starts with leadership. If an organization's leaders don't model, encourage, expect and reward the right behaviors, why should anyone else in that organization exhibit those behaviors? Companies have to take the hugely important step of driving ethics and compliance through their core leadership and Human Resources processes. This must be . . . and must be seen to be . . . a central part of the whole system of training and developing leaders and of the whole process of evaluating and promoting people. This is the key.

At the end of the day, the ethos or character of an organization . . . its culture . . . comes down to the behavior of its leaders; leaders get the behavior they exhibit and tolerate. What really makes the difference between one company and another? More than anything else, it's people and how they view themselves and their jobs. Are they excited about what they do? Do they feel empowered? Do they feel they can speak their mind freely . . . or do they have to be wheedled and cajoled into giving an opinion? You can always tell if you go out among your people and are willing to listen.

One of the most important aspects of my job is leadership development. This is where I can have the most significant impact--not just today but well into the future.

I fundamentally believe that you can manage and teach leadership. You can measure and demand it.

At Boeing, as at 3M, we started by defining leadership--in the form of six leadership attributes--some borrowed shamelessly from 3M: Chart the course, set high expectations, inspire others, find a way, live the Boeing values, and deliver results. These sound pretty basic, right? That's really the point. They are basic. There's no magic. First you have to define how you want people to behave.

Then you have to model that behavior. And teach it. And expect it. And measure it. And reward it. That's when something simple--defining behavior--becomes more difficult--driving behavior. That's where we are now--familiarizing people with the attributes, helping them understand that "find a way" doesn't mean "find any way;" it means "find a way within the Boeing value system."

What's more, in defining our leadership attributes, we have begun to measure and factor into the whole pay and promotion process the kind of behavior that I just described (and if it's not simple, you can't measure it). We are doing this partly through 360-degree evaluations of our leaders at all levels--asking how well they do in modeling each of the six leadership attributes. And frankly speaking, if certain people are only able to measure up well on "delivers results," they will soon find that they have no future with Boeing. In short, we are molding the kind of leadership that we want to take into the future. And part of that is getting rid of abusive leaders and anyone who thinks it is better to lead through fear and intimidation than it is through the ability to include and inspire people.

In closing, I'd like to draw on an analogy.

Bonnie sits with me and 12 other people on the Boeing Executive Council. One of the reasons all of us feel lucky to have Bonnie in her position is her deep and extensive background as a leader in the Quality Revolution that transformed much of corporate America back in the 'Eighties. To meet the sudden challenge raised in those days by foreign competition offering superior quality at a lower cost, American companies set new performance standards and changed their management systems. They learned that they couldn't inspect quality into a product by relying on a few people to test products at the end of a production line. They learned that they had to make everyone responsible for quality. More than that, they learned (or went out of business for failing to learn) that "Quality doesn't cost; it pays." In other words, you made a competitive advantage out of quality ... or you went the way of the makers of television sets, steel and other products that have moved offshore.

I believe that American companies are in an analogous position today with ethics and compliance. We have to get everyone involved in taking responsibility for ethics and compliance. More than that, we need to make the leap from defense to offense . . . in thinking of ethics and compliance as part of the leadership agenda and as a powerful discriminator between companies--indeed, for the best companies, a real source of competitive advantage.

To make that leap, your company might want to think about what Boeing is doing:

With ethics and compliance, as with quality, it comes down to people--and leadership. In every company I've ever seen, if leaders grow, companies grow. People always ask me how Boeing is going to grow, and they want me to talk about 787s, C-17s and other products. But I think that the most fundamental way companies grow is if people are excited about what they are doing and really care about the customer, the company, and their fellow workers. It is caring, excited people who really make the difference.

That's the way we see it at Boeing.