On the Economy
Boeing's troubles reach to the top
Tuesday's announcement of a record $1 billion charge for delays in the 747-8 should be a moment of clarity. And when all the debris of excuses and blame is cleared away, we stand at the door of Chairman and Chief Executive James McNerney and the Boeing board of directors.
Special to The Seattle Times
Delay of the 747-8: $1.7 billion.
Blunders in rolling out the "game-changing" Dreamliner: $2.5 billion and counting.
Cost of good corporate governance: Priceless.
There are indeed some things money can't buy.
Tuesday's announcement of a record $1 billion charge for delays in the stretch version of the jumbo jet should be a moment of clarity. One of the most famous names in American business is in trouble, its reputation for great engineering and on-time delivery badly wounded. And when all the debris of excuses and blame is cleared away, we stand at the door of Chairman and Chief Executive James McNerney and the Boeing board of directors.
McNerney, who led GE Aircraft Engines before going to 3M and eventually Boeing, should ask himself: What would his onetime boss Jack Welch do with him for such performance? He'd be one more unemployed person among the six chasing every available job in this economy.
Instead, he cruises along above the trouble. That only happens for one reason: an ineffective board of directors.
Only directors can act in the ultimate interests of shareholders. And while McNerney's defenders would say he was dealt a bad hand with last year's machinists' strike, he has presided over repeated management pratfalls. Among them:
• Moving ahead with a risky new, heavily outsourced supply chain for the 787, a plane that already was pushing the technology envelope. Worse, he was too slow to recognize the problems and rectify them. The shakeup in the commercial airplane unit, including the shunting aside of boss Scott Carson, came particularly late. Now Boeing not only must pay compensation to some customers, it is also seeing some canceled orders.
• The 747-8 has brought numerous engineering and design curve balls, raising its costs — and this for a version of a long-established airplane. As Welch would say, execution is everything, and the chief executive is accountable.
• Boeing shareholders have seen their stock fall as low $29.05 in March. It was just headed back toward the highs it held last fall, despite the bank panic, when Tuesday's announcement came. Shareholders don't pay a handsomely compensated CEO to tread water with their investment, particularly when this comes primarily from leadership and operational troubles rather than the recession.
Seattle has already seen the damage such complacent boards do. In the absence of effective regulators, Washington Mutual's Prince of Destruction, Kerry Killinger, should have been reined in or fired by his board long before WaMu assumed final approach to become the nation's largest bank failure. Instead, he had a lap dog board of cronies and enablers.
Unlike WaMu, Boeing has a board that should be a model of independence and executive competence. There's John Biggs, the former boss of TIAA-CREF, who should be a maniac for protecting shareholders such as the huge retirement fund he once ran. John Bryson ran the parent of a tiny, simple company called Southern California Edison for 18 years. Linda Cook is executive director of Royal Dutch Shell and Mike Zafirovski (another Welch protégé) is the former CEO of Nortel. No other Boeing employee but McNerney sits on the board.
It's a struggle to understand why a board of this stature and intelligence would allow McNerney to continue as chief executive. The clubby and insular world of top business leaders should only get him so far with these directors unless it's yet another sign of even deeper troubles. One would be the kind of CEO cult of personality pioneered by Welch. Another is the kind of Kool-Aid keg party held by seemingly strong boards that nevertheless bought into a flawed and insular worldview of their company. General Motors comes crashing to mind.
One telling element is missing from the board. The only "airplane guy" is retired McDonnell Douglas CEO John McDonnell. Not for nothing do commenters to The Seattle Times often write of a McDonnell Douglas takeover of Boeing, and especially its executive culture, with unfortunate results. It should be obvious that making planes isn't the same as drilling for oil, running a power company or even building aircraft engines, despite what high-paid management consultants will say.
Lucky for McNerney, Wall Street is fixated on much worse governance: The sudden "I'm taking my ball and going home" resignation of Bank of America's Ken Lewis with no succession plan.
Still, Boeing shareholders are rightfully angry. And after the union and suppliers and underlings have been sufficiently kicked around, the shareholders will turn that fury on the executive suite. And the board.
Unless those shareholders (and concerned employees) are heeded — and quickly — the supposed "bad business climate" of the Puget Sound region is going to be the least of Boeing's worries.
You may reach Jon Talton at firstname.lastname@example.org
About On the Economy
Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
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