Boeing’s top executive explains why it crashed

Summary: Boeing has crashed. We can only guess at the boardroom action that put it on that course. But on rare occasions, they speak frankly. Like these words by Boeing’s top executive in 2014. We didn’t listen, but it’s not too late for us to learn.

Look in the eyes of our corporate rulers.

Dollar sign in pupil of an eye
ID 35765159 © Gajus | Dreamstime.

Michael Kinsey’s definition of a gaffe “is when a politician tells the truth – an obvious truth he isn’t supposed to say.” As in this from the quarterly earnings conference call on 24 July 2014 with Boeing’s senior management, when the CEO blurted out a hidden truth.

Bloomberg News:  Jim, you have a birthday coming up next month. …Will you be at your desk, and has the Board approved you staying on past age 65?

Jim McNerney, CEO: Yes, the heart will still be beating. The employees will still be cowering {laughing}. I’ll be working hard; there’s no end in sight. We’re continuing to build the succession plan …But there’s no discussion of it yet. So you’ll still be asking questions of me.

Jim McNerney was President, CEO, and Chairman of Boeing from 2005 through 2015. He was Chairman in 2016. He learned that workers are cattle while working from 1982 – 2001 as an executive at GE under an architect of modern corporate America – Jack Welch. Under his leadership, Boeing decayed to a shell of the once-great aerospace giant. For this he was lavishly paid. He earned $80 million in 2013-2015 and retired with a $4 million for 15 years pension – plus uncountable other perks.

Boeing has worked hard to demoralize its workers (the most recent round early this year). In 2014, McNerney exulted in his success. Six years later, Boeing reaped the consequences of treating their highly skilled workers like cattle. This is one of the reasons that America’s giant corporations are decaying. It is one of the great trends of our time, ignored (as usual) by the news media.

Boeing and other leaders of American businesses – such as Amazon, Nike, and Walmart – have forged a new corporate-worker relationship. They have weakened or broken their unions. They converted many of their workers into a contingent, low wage, no benefit peons – and outsourced jobs to lower-wage nations.

As a result, wages as a fraction of America’s gross domestic income (GDI) fell from 59% in 1970 to 53% in 2018. And corporate profits rose from 4.5% to 6.6% of GDI. This is a victory on scale rarely seen in our history. It’s natural that their great success creates contempt for their employees.

Compensation of employees as a percent of Gross Domestic Income.

Compensation of Employees as a percent of GDI

 

McNerney’s thinking is that of our ruling elites. As seen in Mitt Romney’s most famous speech during the 2012 campaign.

“There are 47% of the people who will vote for the president no matter what. All right, there are 47% who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That’s an entitlement.

“And the government should give it to them. And they will vote for this president no matter what …These are people who pay no income tax …[M]y job is is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives.”

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How should we react to this information? Anger might motivate us to act, as described in these posts. Pride might motivate us to act.  See these posts for more information about steps to political reform in America. Whatever we do, we must do soon. Our ruling elites grow more powerful every years. The clock might be running out on us as a New America arises on the ashes of the America-that-once-was.

“Nothing is written.”
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  1. America, the land of limited opportunity. We must open our eyes to the truth.
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Books to help us better understand our peril

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The Great Exception: The New Deal and the Limits of American Politics” (2016). See my review of it here.

Stayin’ Alive: The 1970s and the Last Days of the Working Class (2010).

The Great Exception: The New Deal and the Limits of American Politics
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Stayin’ Alive: The 1970s and the Last Days of the Working Class
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28 thoughts on “Boeing’s top executive explains why it crashed”

  1. Sorry , I cant see the connection between mcnerney and mitt Romney quote . What mitt Romney said seem quit reasonable , the fact that a large percentage of the country see the gov. as nanny . While Mcnerney is financier who follow profit above all else.
    Doesn’t Romney point that the people are tired from governing themselves and want gov to take care of them.

    1. Rolland Campbell

      and Mr M did not seem to have either respect for, or any sound leadership towards, getting the best possible performance and results from his workforce. Now the resulting corporate status and image of product inferiority dooms his company. The demise of another once great company. But he is probably sipping wine at some off shore villa where he imagines someone will want to read a autopbio he contemplates writing to promulgate his “wisdom”. I expect he shares birthday and Christmas cards with the Carolyn Kennedy type experts on the Boeing board.

    2. Mhb,

      “What mitt Romney said seem quit reasonable, the fact that a large percentage of the country see the gov. as nanny”

      First, Romney’s assumption is false. It’s false to say that half the population does not pay taxes. But many highly profitable corporations use clever bookkeeping (facilitated by their puppets in Congress) to pay little or no taxes.

      Second, they don’t see the govt as “nanny” – any more than do corporate executives who tap the government for low-interest loans, protection for their oligarchies and monopolies, tariffs or trade barriers against foreign competition, high-profit government contracts, and many other goodies.

  2. Under his leadership, Boeing decayed to a shell of the once-great aerospace giant. For this he was lavishly paid.

    This is the mystery, isn’t it? The fact that senior managers are being lavishly paid at the expense of both shareholders and workforce to destroy shareholder value. And to do that with policies which in an earlier period, measured by the standard financial management tools, would have been regarded as obviously almost certain to do that.

    There is perhaps a parallel in the careers of some of the heads of UK companies during the late years of the last century. GEC for instance was hollowed out by Weinstock, who was generally regarded as a management genius. Many other companies went to the wall in different ways.

    There looks to be a combination of circumstances. Government collusion in an oligopoly, often accompanied by increasing proportions of revenue from government contracts.

    Strong but myopic unions demanding future commitments, particularly retirement benefits and working practice restrictions, which management, feeling themselves immune to competition, give away. Particularly true in the auto industry. The sad saga of British Leyland aka Rover in the UK is a classic example.

    A sense of management powerlessness on critical long term issues, coupled with great powers to take short term decisions and then get out while the getting is good. And a very strange abandonment in the culture as a whole of the traditional financial management assessment tools.

    Its the progress from Harold Geneen through Jack Welch to McNerney. But you can look at other companies than Boeing – look at GM, GE. Even Kodak and Xerox can be considered examples. Northern Telecom is another case. And the contrast of course is the Japanese companies. Halberstam’s book ‘The Reckoning’ gives a lot of insight.

    It has taken a lot more than a few rogue managers and Boards. Its taken a whole national culture of collusion in and approval of the irrational destruction of shareholder value, and as to distentangling the causal chain and elements in it….

    Well, that is what desperately needs doing. But the time has gone in which I could have seriously thought of attempting it.

    1. Just using the term ‘shareholder value’ concedes the argument to Milton Friedman’s acolytes. McNerney did nothing more than implement that heretical model with which his compensation was carefully alined. Harold Geneen was and would have remained an outlier amongst managers at the time of Galbraith’s ‘New Industrial State’ but for conservatives’ and B-schools’ embrace of Friedman as the means to insulate themselves from the issues and causes of the 70s and 80s. And the Milkens of the LBOs and later private equity aided and abetted the cause.

  3. Today’s nitpick: OUR outsourced their jobs to lower-wage nations. Did you mean AND?

    My experience was that they demoralize by demeaning. My solution was to tell the grapevine that the next time I would file a complaint with HR and a government agency about the unprofessional treatment. They changed tactics, but demeaning was always part of the methodology.

    This tactic of making cattle does not work well in technology and research businesses. Harvard school of business noted this decades ago. It is all about short term gains. Makes one wonder about the stockholders and the boards.

    1. John: “Today’s nitpick: OUR outsourced their jobs to lower-wage nations. Did you mean AND?”

      I noticed this one as well. I think he meant “OR.”

    2. John,

      “This tactic of making cattle does not work well in technology and research businesses.”

      Boeing is the extreme demonstration of that.

      Technology companies have mostly adapted to this. There are exceptions, such as the big Pharma companies. They put the brilliant researchers at the bottom of the ladder. Now that talent has mostly migrated to biotech firms – who treat their talent like royalty. As a result, internal R&D progress by big Pharma has slowed to a crawl. They focus on sales and finance more than research.

      1. Speaking of Big Pharma resorting to sales tactics, a coworker told me that her younger sister, who is quite attractive, is paid a six figure salary to take male physicians out to pricey lunches and tell them how wonderful xyz drug is and why they should prescribe it to their patients. She doesn’t have a degree in pharmacology or any STEM major, she’s just a pretty face who reads from a script.

        And then of course are the endless barrages of TV commercials that encourage us to ask our doctor about XYZ. Given that so many have high deductible plans where they have to pay the full price of their medication until their $5K (or worse) deductible is met, it almost seems like an insult to people who can’t afford said medication.

      2. Frank,

        Using pretty women as salespeople is often effective when selling to men. It works when getting in the door is the primary barrier. It’s common in vendors selling products in the finanical industry (eg, to stocksbrokers, financial planners, etc). As you note, it’s common when selling to health care professionals.

        These women are often as well educated and trained as male salespeople (but, as you note, not always). The difference is that they function best when they do not have to close a sale. The limiting factor preventing women from dominating sales jobs given their frequently superior interpersonal skills and appearance (to men) is that many cannot take rejection. Direct sales requires a personality that can take frequent, often intense, rejection hour by hour, day after day.

      3. What amazes me is that the pretty girls are paid six figures and don’t even have to close a deal. But I suppose that strategy works or big pharma wouldn’t do it. Of course, it’s a relatively short career, as it is tied to looks, which fade with age.

      4. I fully agree. But how do you measure the effectiveness of the pretty girl who takes doctors out to lunch? Can big pharma find out how many prescriptions her doctors actually wrote? Is that information confidential, and protected by HIPAA?

  4. Very good article, Larry, you’re on a roll right now.

    Two additional items to expand on Boeing’s culture of ignoring the employees and endangering their customers in the name of profit:

    https://www.businessinsider.com/boeing-737-max-investigation-finds-new-concerns-with-wiring-engines-2020-1

    https://www.theverge.com/2020/1/7/21055743/nasa-boeing-cst-100-starliner-independent-investigation-team-launch-mishap

    Things to note in these stories:
    a) The press is VERY kind to Boeing management. In the past they’d have savaged the Boeing managers for building an environment where customer safety is placed well below profit. This implies that Boeing has threatened legal action against the press (which is financially weak these days).

    b) In the space story, Boeing failed a critical test and is now demanding that the test be marked as a “pass” so they can stay on schedule. Consider what will happen to NASA if a manned flight kills the crew vs. what happens to the Boeing management. The corporate culture emphases that the safety (and wealth) of the senior management is the only thing to be considered. Everything else (including the customer’s lives) will be sacrificed.

    I think I’m going to avoid Boeing products in the future.

    1. Pluto,

      I flagged this statement on the Boeing conference call on the day afterwards – saying that this was big. One of my 2020 New Years resolutions is to more carefully document by predictions, correct and wrong.

      “I think I’m going to avoid Boeing products in the future.”

      Then you won’t be flying much. The US economy has been transformed into cartels. You just have to accept high prices and poor quality goods and services. This began with Reagan and has continued under every president since, an example of the bipartisanship that the pundits love so much.

      1. Larry: “Then you won’t be flying much”

        Very true. Fortunately, I’m telecommuting a lot more because companies won’t pay for me to fly any more.

      2. FWIW, sites like Expedia show which model airplane is scheduled for the flight. One could select a flight that has an Airbus scheduled. Of course, airlines can swap models at the last moment.

        It will be interesting to see how the flying public will react once the Max is re-certified. Will a non trivial number of passengers refuse to fly on them, or will they just shrug their shoulders and board?

      3. Frank,

        “Will a non trivial number of passengers refuse to fly on them”

        I’ll bet on “no.” US passengers buy almost exclusively on the convenience of the flight (times and duration) and price. If they don’t care about the cattle car conditions and food, they’ll not care about the microscopic odds of a crash in the Max.

      4. I don’t travel often, and will do my best to avoid the Max until it has some crash free years under its belt. But I tend to agree with you, the public in general will just shrug and fly on the Max if it’s the most convenient and cheapest flight available at booking time.

    2. building an environment where customer safety is placed well below profit

      Its a contradiction in terms, isn’t it? You cannot make profits in this or any other business while making unsafe planes or other equipment. The necessary condition of profits in the aircraft (or any other) industry is that your products are safe.

      This is the puzzling thing: how it has come to pass that such self defeating behaviour so destructive of shareholder value and profits, has come to be acclaimed and rewarded as management genius.

      And the other puzzling thing, what to do about it.

      Boeing is one of many where management has, in different ways, destroyed shareholder value. In their case the obvious idiocy of abandoning safety. In other cases by equally obvious though different management freak-outs.

      1. henrik,

        “This is the puzzling thing: how it has come to pass that such self defeating behaviour so destructive of shareholder value and profits, has come to be acclaimed and rewarded as management genius.”

        It is “puzzling” in the sense that only thousands of articles and papers have been written about it during the past 20 years. Managers can optimize profit and be promoted (internally or at another company) long before the adverse results appear. For example, average CEO tenure is only 5 years. When managers and executives spent their entire careers at one company, they identified with the company and considered its fate to be theirs. Now they are mercenaries, looting and moving on.

        Short-term profit optimization has been the rule in corporate America since the 1970s. It works because the mechanisms that align current action with future results are broken. Boards of Directors are controlled by management. There are no “owners” in any meaningful sense. Wall Street controls a majority of the shares, and cares only for the next quarter’s profits.

  5. If Boeing is indeed being run on the GE model, that is a very big cause for concern. GE is known throughout the power industry as a financial vulture that buys good service companies, sacks their engineers (they are a cost not an asset in their eyes), then runs the firm into the ground and discards the husks. And all the time, the quality of the products drop. That may be OK if your power plant isn’t as reliable as it used to be. Maybe not OK if it is a plane in the air.

    It is why most of the new stations being built use European or Asian technology. The US has lost that competitive edge and won’t get it back until there is a major management change.

    1. Chris,

      Boeing isn’t as extreme as the GE built by “Neutron Jack” (as in Neutron Bomb), who developed the model you describe. But it’s in the same ballpark. It seems likely to flame out just as hard as GE has, however.

      1. I remember how the financial media used to sing Neutron Jack’s praises, about how he made GE into a lean, mean unstoppable machine. He of course departed for his tropical island retirement before it became time to pay the piper.

        Another destroyer was Mark Hurd. He first slashed NCR into oblivion, then gutted Silicon Valley’s venerable Hewlett Packard, which has fallen so low that basket case Xerox is attempting a hostile takeover. For reasons that remain inexplicable, Larry Ellison hired Hurd, who was finally fired from HP (the official reason was for sexual harassment, but I suspect that was a cover) to help him run Oracle. Hurd was in the process of devastating Oracle, and was only stopped because he died,

      2. Another Neutron Jack practice was that GE would fire the bottom 10% of its rank and file every year, regardless of objective performance. I once worked at a place like that, it was a morale destroying practice that brought out the worst in people, especially in places where peers would participate in your annual review process. The back stabbing was breath taking and I promised myself to never work in a place like that again,

  6. Larry, I’ve been writing and talking about Boeing for years. You’ve got a part of the result right but not the cause.

    The cause was Boeing’s ‘financialisation’ with its McDonald-Douglas merger. The company adopted Milton Friedman’s ‘shareholder value’ heresy — which MF devised to keep managers from implementing programs aimed at benefiting the broad range of stakeholders — and squeezed engineering and operations to create dividends and cash flow for stock buybacks. It moved operations to low tax states rather than supporting the communities that had nurtured the company. No small part of the destruction of what was up to the MD merger a healthy corporate culture was the decision to move senior management to Chicago well away from the capacity to manage by walking around. But — and this is the important part — Boeing is only the most visible and ultimately most costly failure of ‘the Friedman Doctrine’. A corporation is an entity to which until Friedman it was clear its managers and directors owed their first duty, not shareholders. It deeply troubles me that the real message of the Boeing catastrophe has been missed.

    1. Peter,

      “The cause was Boeing’s ‘financialisation’ with its McDonald-Douglas merger.”

      I agree, but only sorta. In life there are no red lines that mark a “beginning. The rapid change in Boeing began with its 1997 merger with M-D. But the takeover of Boeing by M-D’s management and culture shows that there was a weakness in Boeing’s culture and management. After all, Boeing was the larger company – and they didn’t have its managers taken out and shot.

      The rise of Philip M. Condit – becoming President in 1992, CEO in 1996, and Chairman in 1997 – shows the rot in Boeing predates the M-D merger. He decided to grow Boeing by acquisitions – the essence of financialization – beginning with the 1996 acquisition of Rockwell’s aerospace and defense units. M-D was next in 1997. This was followed by massive stock-buybacks – rather than investing in the company (the company spent $10 billion buying its own shares 1998 – 2001). This was core Boeing management at work.

      Blaming only M-D for Boeing’s decay is wrong. Lots of blame to go around.

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