Oct. 7, 2019, © Leeham News: A recent call for Boeing CEO Dennis Muilenburg by my friend Ernie Arvai to resign or be removed has a litany of woes at the company that occurred under the CEO.
These mostly relate to the 737 MAX crisis, but also include the policy of returning free cash flow to shareholders rather than investing in new airplanes. Other issues are also cited.
Arvai makes many good points, but he doesn’t go far enough.
If Muilenburg deserves to go, so does Greg Smith, the Chief Financial Officer and Executive Vice President, Enterprise Performance & Strategy.
The emphasis on cost control, which have become part of the focus of the MAX development, emanates from Smith. The strategy for new products ultimately falls under Smith, who vehemently opposes investment in the New Midmarket Airplane.
If these two deserve to go, so do the Board of Directors.
It’s the Board of Directors who set the shareholders’ value policy that Muilenburg carries out.
In particular, if Muilenburg goes and Smith goes, those long-serving Board members who were there at the beginning of the MAX program launch should be on the list to go.
This list includes lead director David Calhoun (2009); Arthur Collins (2007); Adm. Edmund Giambastiani (Ret.) (2009); Lawrence Kellner (2011); Ed Liddy (2010); Susan Schwab (2010); Ron Williams (2010); and Mike Zafirovski (2004). This is eight of the 13 members, which includes Muilenburg (2015).
Where was the Board when it came to asking about safety and the safety culture? We outsiders don’t know. Board deliberations are confidential and only lawsuits with discovery would be able to access the meeting notes from the era.
I’ve no doubt that if the questions were asked, the Board members relied on the answer given by the executives.
But financial and shareholders’ value policies and approvals for new airplane programs rest with the Board. Exercising oversight on management rests with the Board.
Boeing’s Board has a reputation on Wall Street of largely compliant with management. This may not be entirely fair, but it sure seems to have circled the wagons in this case.
Calhoun, the lead director, repeatedly expressed full confidence in Muilenburg when asked. Of course, to some degree, he could hardly do anything else under the circumstances. Besides, it is not Boeing’s way to push executives (or even mid-level officers) out during a crisis. They either leave, retire or get transferred after the crisis is over.
Exceptions were the public executions of Phil Condit (over the 2004 air force tanker scandal in which CFO Mike Sears and a former USAF procurement officer hired by Boeing went to jail; Condit resigned); and the forced departure of Condit’s successor, Harry Stonecipher (over an internal sex scandal).
Condit previously barely survived being ousted in connection with the 1997 financial scandal over hiding financial charges at Boeing and a production meltdown at the time the McDonnell Douglas merger was being negotiated. Boeing later settled a lawsuit for $97m in connection with this.
The problem with holding people accountable in the MAX crisis is that the key executives are already gone.
Jim McNerney, the CEO of The Boeing Co., retired. McNerney greenlighted the MAX in July 2011. (Muilenburg wasn’t named president until December 2013. He became CEO in July 2015.)
James Bell, CFO when the MAX was launched, claimed doing MAX would cost 10% that of a new airplane. He retired in April 2012. (According to our information, the MAX development cost was not the $1bn Bell initially touted, or even the $2bn internal budget that was set, but closer to $4bn. The latter figure is unconfirmed.)
Jim Albaugh, the CEO of Boeing Commercial Airplanes at the time the MAX was launched, retired in October 2012, although he was replaced in June by Ray Conner. Conner retired at the end of 2017.
Pat Shanahan was SVP of Airplane Programs from 2008 until he left in 2016 to become deputy defense secretary under President Trump.
Keith Leverkuhn and Beverly Wyse served as general managers of the MAX program during the era involved. Leverkuhn is still with Boeing. He was sent to Rolls-Royce in May 2018, before the first MAX accident, to help RR solve engine problems on the Trent 1000, which powers the 787. It’s unclear if he’s still there; his LinkedIn still lists him as VP/GM of MAX. Wyse left in 2017.
About the only current executive who has clean hands is Kevin McAllister. He was named in November 2016 CEO of Boeing Commercial Airplanes. The first flight of the MAX was the preceding January and certification was the following March.
Thus, Muilenburg, Smith, the named Board members and Leverkuhn would seem to be the only ones in authority during the MAX development remaining.
If Muilenburg or Smith leave, it undoubtedly will be with a hefty retirement package. What compensation departing Board members might receive is a question for which I don’t have an answer.
MAX crisis aside, the longevity of the Board smacks of entrenchment. Good governance should include term limits.
But don’t hold your breath.
You can bet there won’t be any immolation at Boeing.