CORPORATE GOVERNANCE AND BUSINESS ETHICS

Boeing Frontiers recently sat down to discuss the issue of corporate governance and business ethics with Boeing Controller and Vice President of Finance James Bell, Corporate Secretary and Vice President Jim Johnson, and Gale Andrews, vice president of the company’s Office of Ethics and Business Conduct. Here are excerpts from that discussion:

Q: "Corporate governance" and the financial and ethical misconduct of top officers at certain major U.S. companies is a hot news topic these days. Are these problems something we employees at Boeing have to worry about?

Bell: Employees should have a degree of awareness on the topic, but we have processes in place. These practices and processes are robust and well understood. I don't think there's any cause for concern for what we at The Boeing Company are doing.

Johnson: We are dedicated to clarity and integrity in our public statements. Our financial disclosures are not only within the current rules — and those new rules that are being discussed — but they are well ahead of them.

Q: What are some of the safeguards or steps that Boeing has taken to ensure it doesn't become entangled in some of the issues we are hearing about at other companies?

Bell: On the accounting side, we have been very conservative. We've gone through and reviewed some of the accounting issues that are making news, and find that our critical accounting practices and policies in these areas represent the preferred treatment under the Generally Accepted Accounting Principles.

We also find ourselves in a very comfortable position with respect to proposed new rules. In most cases, what we are doing today is compliant with these rules.

Johnson: Ten of our 12 members of the board of directors are what are called "independent" directors. Only Chairman and CEO Phil Condit and former Vice Chairman Harry Stonecipher are not — though Harry is no longer a member of management.

This is a board that meets essentially every two months — sometimes for for a total of two days. They receive a lot of material, deep material, and they spend a lot of time with it.

At each meeting the outside directors meet in executive session, with no members of management present. The audit committee also meets separately with our internal audit people and separately with our outside auditors.

Boeing's is an active, engaged board. We've been publishing our governance principles for several years now. Our charter already requires that the key committees — audit, governance and compensation — be composed solely of independent directors.

Q: Do Boeing's outside auditors, Deloitte & Touche, solely perform auditing duties? Or do they perform consulting work for us as well?

Bell: In December 2000 we decided to discontinue using our outside auditor for non-audit consultant effort. We also determined that the consulting work performed, prior to the decision, was in areas that did not raise any concerns on independence.

Q: Does Boeing's role as a defense contractor help?

Bell: A large part of our business is engaged in work performed under government contracts. There are a number of Federal Acquisition Regulations, Cost Accounting Standards, and other regulatory guidance that governs how you develop financial information. This, coupled with the rigorous program management and audit regimen performed by our government customers, creates a very disciplined control environment for high-integrity, accurate financial data.

Our processes have been developed to meet these high standards, and our people have the critical skills needed to consistently execute them with precision. Through our Process Councils and rotation of people we are able to leverage these practices, as appropriate, across our total enterprise.

Q: Can senior Boeing executives sell stock anytime they wish?

Bell: There are very conservative and tight controls on when and how senior executives can sell their stock.

Johnson: Our top officers are restricted to trading Boeing stock only during a set trading period. This is a time period after our quarterly earnings are announced, about a two-week window, when all information should be known publicly.

Even then, there's a requirement to notify me that they're going to do it, and why they're going to do it. That's so there's not an "appearance of conflict" problem.

There are even administrative blocks on their VIP accounts, so these individuals cannot move in and out of Boeing stock in their 401K plans except during this period.

Q: How does Boeing handle stock options? How is this different from most companies ranked in the Fortune 500?

Bell: We made a very conscious decision in 1998 to rethink our long-term executive compensation plan. We wanted a plan that incentivizes real performance. Most stock option plans pay out once the stock vests and the price is above its grant price. A minimal increase in stock price can result in a payout. Our [Performance Shares] plan is different.

Our plan contains specific performance criteria that must be met for payout. It doesn't begin to pay out unless there is a very significant increase — a more than 60 percent gain — in share price and shareholder value. As a result, the cost of our share-based compensation plans must be expensed against earnings and reflected in our income statement. (See story.)

Q: Jim and James have discussed corporate governance from the Board's and the senior executives' perspective. Gale, what is Boeing doing to assure that the company, its senior managers and its employees practice good corporate ethics?

Andrews: Boeing has had a code of conduct for decades. We've always been driven by ensuring the integrity of our products. You can't build high-integrity products with low-integrity people.

As a defense contractor, we've been an active participant in the Defense Industry Initiative since it started in the mid-1980s. This included forming an Ethics organization with a full-time executive reporting to the top management levels of the company. It also involved placing specially trained ethics advisors, which today number 65, throughout the enterprise. We've also established an Ethics Hotline, (888) 970-7171, and Ethics Website. (See http://www-co.boeing.com/ethics/)