By the Leeham News Team
Jan. 13, 2021, © Leeham News: Today marks the first anniversary of David Calhoun becoming CEO of The Boeing Co.
Calhoun’s first year faced challenges unprecedented in Boeing’s history. There was the 737 MAX crisis. Sales of the 777X were stagnant. The balance sheet was stressed.
And then COVID exploded, all but destroying commercial passenger demand and with it, ability by airlines to take delivery of new airplanes.
Boeing’s balance sheet went further upside down. Production and quality control problems with the 787 emerged.
Finally, Calhoun was afflicted with a case of foot-in-mouth disease. This contrasted with his calm, well-received initial public face during the waning days of then-CEO Dennis Muilenburg’s stilted public persona.
When Calhoun was named chairman in October 2019, he became Boeing’s face in televised media interviews. In contrast to Muilenburg’s stiff, scripted style, Calhoun was relaxed and appeared to talk casually. There was even a sense of openness that was lacking in Muilenburg’s approach. It was a welcome change. However, Calhoun stepped in it three times in short order that made it clear he needed a bit of scripted discipline.
Calhoun initially expressed strong support for Muilenburg in CNBC interviews. On Dec. 23, 2019, the board fired Muilenburg. Wall Street analysts said repeated failed promises for RTS, poor relations with the FAA and with customers were the reasons. CNN encapsulated the issues and noted Muilenburg had become the “face” of Boeing’s problems.
Calhoun was named president and CEO, effective in mid-January. CFO Greg Smith was named interim CEO. Long-time director Larry Kellner was named chairman.
The choice of Calhoun to lead Boeing out of its crisis drew skepticism. He had been on the board since 2009. He was there when MAX was launched. Calhoun was on the Compensation Committee. He supported cost-cutting and shareholder value, two elements that came under scrutiny in the MAX crisis. And he was the lead director. Many viewed him as an insider who was part of the problem.
But not Calhoun himself. When asked about this on his first media call after assuming office on Jan. 13, Calhoun said he was like a moviegoer with a front-row seat, but he wasn’t an insider.
By Securities and Exchange Commission’s rules, his position on the board is the very definition of an insider. Wall Street, media and critics hooted at the claim. It was the first “stepping in it” Calhoun made.
In an interview with the New York Times, Calhoun confounded some institutional investors with his criticism of Muilenburg.
“Mr. Calhoun has become more willing to criticize Mr. Muilenburg openly. He said the former chief executive had turbocharged Boeing’s production rates before the supply chain was ready, a move that sent Boeing shares to an all-time high but compromised quality,” the New York Times reported.
“I’ll never be able to judge what motivated Dennis, whether it was a stock price that was going to continue to go up and up, or whether it was just beating the other guy to the next rate increase,” he said. He added later, “If anybody ran over the rainbow for the pot of gold on stock, it would have been him.”
Once again, Wall Street hooted. They objected to throwing Muilenburg under the bus. After all, the board approved buybacks and dividends. Calhoun was part of these decisions. The board was behind returning 100% of free cash flow to shareholders. Shareholder value had been the top corporate goal since the McDonnell family and Harry Stonecipher took over Boeing in the 1997 merger. Blaming Muilenburg to boost the stock price and support the board’s objectives of buying back shares and increasing dividends was poor form.
Then Boeing lobbied the Trump Administration for $60 billion in government funding once the coronavirus became a global pandemic. Boeing would take a portion of this for itself and disperse the rest to its supply chain.
The Treasury Department said stock warrants and an equity position would be required as a bailout condition. Calhoun backtracked and said Boeing wouldn’t take the money under these conditions and didn’t need it anyway. It became another example of Boeing wanting its cake and to eat it, too.
All this within the first 60+ days of becoming CEO.
Calhoun needed some scripting, after all. (Boeing canceled the post-earnings media call for the third quarter.)
Muilenburg wasn’t the only one who was tone-deaf. Calhoun was given an annual salary approaching $2 million. There was a commitment for a $7 million bonus for getting the MAX recertified. When asked why he took a salary, Calhoun said he wasn’t sure he would have taken the job without one.
The bonus was also puzzling since everyone associated with the MAX worked diligently to recertify the airplane. Why Calhoun deserved a bonus remains a question.
Given Boeing’s deteriorating financial position—and Calhoun’s wealth—symbolically, accepting any salary above $1 a year was also questionable. Lee Iacocca famously took only $1 when he was named CEO to save Chrysler in the 1980s. Boeing employees were facing cost-cutting and loss of jobs.
After the virus crisis and government bailouts looked necessary, Calhoun and Kellner gave in to pressure and suspended their salaries for the balance of 2020.
When filed with the Securities and Exchange Commission, Boeing’s financial reporting for the full year 2020 will reveal Calhoun’s compensation for the year.
It was a rough first year.
Calhoun is on borrowed time. He will be 65 in April 2022, Boeing’s mandatory retirement age. The board could extend his contract. There is a lot to do between now and then.
Over the last year, he had to use his private equity skills of debt raising significantly more than he would have wanted. It was probably quite useful in the COVID-19 pandemic. Working closely with CFO Greg Smith, Boeing has billions of dollars in debt to pay down.
Calhoun must rebuild relationships (customers, regulators) and Boeing’s reputation. Transparency has not been his strong suit, but it will be essential in the years to come.
Boeing faces the need for a future airplane program. The 737 MAX must be replaced this decade. But facts speak against this: significant layoffs without putting measures to safeguard know-how like part-time work until a recovery. Closing of the Seattle R&D center sends the wrong message.
When on the board, Calhoun was a crucial part of setting the company’s overall targets, course, and culture. As CEO, he is now first-hand seeing the fruits of this, and it’s not a pretty sight. He’s running from one major fire to the next. They are all the results of decades of GE style management, from the board down.
Many believe Calhoun played a considerable role in creating the mess he’s now in charge of cleaning up. Solving the problems requires him to make at least a 135-degree turn from the path he’s followed his entire career. And solving these issues is critical if Boeing’s going to maintain its role in the duopoly.