Chief Executive Names Boeing’s McNerney ‘2015 CEO of the Year’

When Jim McNerney first came to Boeing 10 years ago, the company had grown through a series of acquisitions and a big merger with McDonnell Douglas. He took over on July 1, 2005, after two major military-procurement scandals had tarnished the company’s reputation. Six months later, at the company’s annual leadership retreat in Orlando, Florida, McNerney orchestrated a “scared-straight” speech by Boeing’s top lawyer, who laid out in blunt terms the potential consequences of any further breaches of integrity. It worked, appeasing those questioning the character and the moral compass of the company. Even his critics said he “righted the ship.”

McNerney set out a plan to impose discipline by pushing hard to cut costs and increase productivity across all its businesses. The $100 billion Chicago-based firm is approaching its 100th year in business in 2016 and is healthier than at any time in recent memory. CNBC’s Jim Cramer thinks the company is on a roll in part due to the economy being in the midst of an aerospace cycle. Airlines are rolling in cash, thanks to the major decline in the cost of oil. Companies like Boeing, with its highly efficient Dreamliner 787s, enjoy an almost unbeatable edge. Airlines want aircraft in the worst way because they can sell every seat that they offer. For its part, Boeing doubled its production over the last five years and intends to increase it another 40 percent over the next four years.

The company also took steps to thank shareholders by announcing a $12 billion share buyback in December 2014 and a 25 percent dividend hike. McNerney reports that Boeing’s backlog of orders has never been higher. “We are in a good place,” he says. Overall, growth and financial performance has improved, with five-year cumulative returns to shareholders significantly outpacing the broader S&P index and its Aerospace & Defense Index.

The company navigated some strong turbulence along the way. From 2007 through 2013, McNerney encountered disastrous and expensive troubles with the 787 Dreamliner program—from the initial delivery of the jet coming more than three years late to the grounding of Dreamliners worldwide for three months last year due to overheated batteries. But despite the storm over the 787 and the labor disputes, McNerney held his course. He expanded the South Carolina site into a full-fledged commercial-jet assembly center and broke Puget Sound’s traditional hold on that central Boeing role. Boeing acquired the South Carolina 787 parts plants not out of any grand design, but because its outsourcing partners had come up short. Even through the 2008 global recession, production of 777s and 737s was unfazed. Jets rolled out efficiently and cash rolled in to Boeing.

McNerney has expanded the company’s presence in international markets. Approximately 80 percent of Boeing Commercial Airplanes’ backlog and 36 percent of Boeing Defense, Space & Security’s backlog is with customers outside the U.S. For the defense, space and security business this is a dramatic jump from a decade ago, when international business represented 7 percent of the company’s defense business.

Born in Rhode Island and educated at Yale with an MBA from Harvard, McNerney has had a storied career. Early on, he worked at Procter & Gamble and McKinsey & Co. In 1982, he joined GE, where he held top executive positions, including president and CEO of GE Aircraft Engines, GE Lighting, GE Asia-Pacific, GE Electrical Distribution and Control and GE Information Services. When Jeffrey Immelt was tapped to replace Jack Welch as GE’s CEO in 2000, two rivals for the post were almost immediately lured to other companies—McNerney to 3M, which saw an immediate market value increase by more than $6.5 billion, and Robert Nardelli to Home Depot, where shareholder value jumped almost $10 billion.

Since Boeing is the nation’s largest exporter, it’s no surprise that McNerney chairs President Obama’s Export Council. The tall, affable executive is a former chairman of the Business Roundtable and currently serves on the boards of P&G and IBM. McNerney is mindful of the legacy he inherited. Along with the numerous models and photographs of Boeing’s commercial fleet that adorn the walls of the Chicago headquarters are dramatic scenes of B-17s and B-29s from the Second World War. Boeing produced 91,000 airplanes during that conflict, more than any other power on either side of the conflict. Chief Executive’s J.P. Donlon recently spoke with McNerney at his Chicago headquarters.

Q: With all the success Boeing has had, both in private and government aviation, what is the next big thing?

JIM McNERNEY: It is more of the same, but refreshed with new technology. Ours is a growth industry for two reasons: One, there’s an underlying growth in the application of aerospace technology, whether it’s satellites or airplanes or rockets or drones or whatever, as we penetrate more applications. Then there is a kicker to that growth, which is the refreshment of  new technologies. The 787 is a good example, where you obsolete the base, and get a multiple on an existing growth-market trajectory. I still think things will fly and will go into outer space. There will be surveillance, intelligence, reconnaissance kinds of missions and the need for better technologies and the data that manipulates them.

Q: I was hoping you might say something specific, like you’re working on a spaceship to Mars. 

JM: As it turns out, we are. The Space Launch System would be an example of a program that we’re working. We’re building a rocket in Michoud, Louisiana that’s significantly bigger than the Saturn V and will have the ability to go beyond the moon, beyond the asteroids, to Mars and even beyond that. By 2018 we will test the system in anticipation of a missions by 2021 or 2022.

Q: How do you keep entrepreneurial and innovation momentum in a big company, dealing with long lead times and complex technologies?

JM: The bigger you get as a company, the more that challenge is important to meet. We do it two ways. One, people are imbued with a sense of mission in this company and are excited by the things they do even if they’re a relatively small part of it.

For example, the Triple 7 is the result of tens of thousands of engineers designing it and 5,000 or 6,000 suppliers working with us. And it all has to come together. The thing that we do uniquely is bringing various things together—that final systems integration against performance parameters. Systems engineering and the manufacturing process to support it—that is Boeing’s sweet spot.

It helps to have something that is fundamentally exciting to begin with. “Hey, I’ve got an idea. Let’s design the world’s greatest airliner,” “Hey, I’ve got an idea. Let’s design a rocket that goes to Mars, then we’ll take people to Mars,” “Hey, I’ve got an idea. Let’s design an autonomous aircraft that can fly halfway around the world and stay aloft indefinitely like a satellite.” The kind of people attracted to our company are willing to be a small part of a big exciting thing.

Q: What is your role in all of this? How do you, doing what you do, push this forward?

JM: It’s not one thing; it’s kind of everything. Because you’re right, the biggest challenge of a CEO is to keep everybody aligned and feeling motivated about being aligned, and to be able to afford career growth and financial opportunities for those who are aligned. Painting a picture of what we’re all doing and why it’s important, and supporting each and every person to get it done, is a big part of my job.

When you become bureaucratic, people move along for reasons other than their performance. The discussions between a manager and the employee are not as candid as they should be, because everybody’s feeling trapped in the middle of something.

This can be difficult with tens of thousands of people, but a little easier here because of the fundamental excitement and passion that we have for what we do. Managing that part of our culture is very hard. It comes down to making people feel special about the special stuff we do, without embedding in them a feeling of arrogance that can morph into an attitude.

Q: Comparing your Boeing experience with 3M and GE, how have you changed as a leader?

JM: I’m a more mature leader than I was when I left GE 15 years ago. I recognize the role of culture and the motivations of people and their alignment to a greater degree than I did when I was younger. At GE, I was a typical young manager who felt that I could think my way through anything. And because the answer was obvious, everybody would follow.

As I went from GE to 3M to Boeing, I consciously adopted a different style. I’ve always been a pretty interpersonal person. I tend to be one who tries hard for alignment. I just have a broader set of tools now to get that alignment.

Q: What would you describe as your most difficult challenge over the last 10 years?

JM: It was defining a culture that we all wanted to grow toward, and in so doing, getting people out of the old legacy cultures that they were in. Recall that Boeing when I got here was a relatively unintegrated set of four companies. It was Boeing, Rockwell, Hughes and McDonnell Douglas, each of which had its own sites, its own language, its own culture. Some of the turbulence I inherited had to do with lack of alignment—people didn’t understand each other.

Functions weren’t stitched together to protect the company. Career pathing did not have the same language, the same set of development around it. In such circumstances you can [try to] have one of the four cultures win in that process, or you could define a fifth. That was the hard part, defining a fifth; creating all the hooks and handles that link career development, mission statements and business objectives while maintaining growth and productivity improvement. So there’s no loser among the cultures; rather, there’s a fifth, better one that we’re going to for. This was hard work during the first year and a half.

Q: Have you got that fifth culture nailed in?

JM: You never want to declare victory on something like this. There are still parts in the middle of our company where it hasn’t totally taken hold. But I would say we’re 70 percent of the way there. It takes a decade or more to really get that done.

Q: Some analysts are skeptical about sustained demand for the 787 going forward in light of its current production costs. They point to the fact that United Airlines likes the 787, but withdrew its order for 10 Dreamliners, choosing older, less efficient, but less costly planes instead. Where does Boeing go from here?

JM: We are coming down the learning curve on the cost of the 787 and have more to go. This is typical as new planes roll out. The plane will be significantly less costly to build in the future. Secondly, we have so many orders for 787s, we don’t know what to do with them—we’ve got about eight years of backlog, which is too big. If we could produce more at [the same] quality and cost, we would. This is the highest-demand widebody of all time, and we’re at the highest production rates of a widebody ever for us. So this is a huge success.

The United case is a story of a successful customer who needed a bigger plane than he thought he was going to need on some routes. So instead of having a 310-passenger airplane, he needed a 360-passenger airplane. We were glad to accommodate him. The backlog of our company actually went up a little.

Q: You delivered something of a thunderbolt when you warned that Boeing would move manufacturing and engineering jobs out of the country if Congress doesn’t reauthorize the Export-Import Bank. Is this a hard-bargaining chip, or a prediction on your part?

JM: I recall this a little differently. ExIm Bank is a treaty among 60 countries where they agree on the running rules of providing export credit for everybody’s domestic champions. Quite frankly, this treaty curbs a lot of bad behavior in the sense that there are a lot of countries that, if not bound by this treaty, would subsidize the heck out of their indigenous champion. There are countries that will subsidize, to a far greater degree than the ExIm rules allow, their domestic champions, even though in the U.S. we don’t believe in that so much. So, the structure of the ExIm Bank controls bad behavior and allows the quality of the products to be the differentiator on a global basis, not who throws the most money at it.

If one of the 60 unilaterally withdraws, it puts your domestic players at a disadvantage. Many deals in the developing world require export credit financing or you’re not allowed to bid. So it’ll be a competitive disadvantage for us and the U.S. economy if we don’t have this facility. My point in answering that question was simply, there would be an inevitable bias for exporters to look at other places to build things if you could get this kind of support everywhere else in the world except the U.S. That was my point; it was not a threat. It was simply a statement of what economic incentives do.

Q: But there are at least two presidential aspirants and many congressmen who want to kill this, calling it a New Deal relic, a vestige of crony capitalism and saying that companies like Boeing, if they are as good as we think, should easily be able to get financing through the other means. 

JM: Look, I realize that we’re in the silly season right now. People are changing positions and finding new ways of looking at life, depending upon the race they’re in. Ultimately, though, I have confidence that the U.S. Congress will come together and realize that we have a level playing field out there. It’s been reauthorized by Democratic as well as Republican presidents, as well as liberals and conservatives. Let’s keep it. Also, this doesn’t cost the country anything. We don’t lose money. It’s not a spending program. This makes money for the U.S. government.

Q: Boeing is an icon of American manufacturing. It has considerable knock-on effects on American manufacturers. Give us your critical assessment of American manufacturers as a class. How good are we versus global competitors? Where does it most have to improve?

JM: It’s an important question. We’re in the beginnings of a renaissance in U.S. manufacturing, after having experienced a steady, slow erosion over the last couple of decades. American manufacturing has struggled with higher costs in the U.S. as compared to other places, which accounts for the offshoring. It has also struggled with a regulatory environment that is not as supportive as it’s been historically, which curtails investment. It struggled with the strong dollar recently. It struggled with a lack of STEM-educated folks to design things, and it’s struggled with the readiness of the workforce to build things.

For example, when a Boeing employee comes in to be a machinist, one of our assemblers, it used to take two weeks of orientation. Now it takes two to three months of orientation to address these readiness issues. So there have been headwinds that we’re beginning to address. We’ve tried to rationalize the regulatory process, to engage in education, to advance STEM and to work with community colleges and apprentice programs that help prepare worker readiness.

America is really good at the nexus between the design and manufacturing processes. There are countries that are good at the manufacturing process, and there are countries that are good at design. But very few are good at producing globally competitive products by marrying the two together. I see a lot of kids now beginning to come out of engineering schools that are taught to design for manufacturability. They’re now taught to do things that we need, as opposed to theoretical things. It’s going to take a while for this to show up. It’s darkest just before the dawn. American manufacturing is finding its way.

Q: What advice would you give manufacturers about where they most need to improve?

JM: Over the last 20 years, too many of us have pursued horizontal business models. To use the old Japanese term, we “hollowed out” our manufacturing and became horizontal in the sense that we controlled a lot of suppliers, but we controlled less vertical engineering and manufacturing. We became assemblers. In industry after industry, including our own, we learned some lessons: That it’s very hard to control quality, cost and delivery, which are three key fundamentals. There’s more discussion about re-vertical integration. We’ve got to get more control over more of the design-sensitive and manufacturing process-sensitive things.

For example, when I came here a decade ago, after we invented the carbon fiber material for airplanes, we farmed out the ability to make a fuselage and make an airfoil. I thought that was wrong. Again, it’s not just the design, it’s the ability to manufacture without learning curves and get to the next material fast. I had to literally repurchase some of our supply base, to bring them back into Boeing, to get them on this pursuit of design and manufacturing together. If you ask me where we’ve got to change, it’s getting more control over one’s design and manufacturing processes.

Q: What has been the single greatest accomplishment or thing that you are most proud of as a leader?

JM: Three things: Bringing the cultures together around one distinct culture. I am proud of our leadership development pipeline and take personal ownership for that. The 300 to 400 people that represent the future of this company are a better and more broad-gauged pool than the one we inherited a decade ago. I’m also proud of the business results, the revenue and earnings growth, and the change in our market position from losing market share to gaining market share over the last five years. This will set us up well for the 21st century.

Why Jim McNerney? A Discussion of the ‘2015 CEO of the Year’ Selection Process