In October 2019, Boeing (NYSE:BA) decided to separate the role of CEO and chairman of the board of directors, electing David Calhoun as the chairman. It would be the first step toward a contingency plan in case Dennis Muilenburg would have to leave Boeing. That did indeed happen and since January 2020, Calhoun is the new CEO of The Boeing Company.
Having followed Calhoun’s predecessors, Jim McNerney and Dennis Muilenburg, I can say that Calhoun makes a much better impression. Especially Muilenburg often made a rehearsed impression and sometimes even seemed to lack emotion. As said, Calhoun makes a better impression, a much better one. However, some of the things he says really make me question whether he's the right man for Boeing, and a recent interview with him from The New York Times strengthened that question. I would highly recommend readers of this report to read the interview as well, even if only for informational purposes.
In this report, I will lay out why I do have my questions about Mr. Calhoun.
View on Muilenburg evolves
Source: The New York Times
When Calhoun became chairman of the board in October 2019, he said the following:
The board has full confidence in Dennis as CEO and believes this division of labor will enable maximum focus on running the business with the board playing an active oversight role. The board also plans in the near term to name a new director with deep safety experience and expertise to serve on the board and its newly established Aerospace Safety Committee.
In November 2019, on CNBC, he said Muilenburg did everything correctly:
So, there are two instances in which Calhoun expressed confidence in Muilenburg. Contrary to what Calhoun states, Muilenburg did things far from correctly, as I discussed in a previous report. Muilenburg’s main mistakes were suggestively putting blame with pilots absent of conclusive report findings, showing a lack of emotion during hearings and sticking to a Q4 return-to-service timeline, upsetting the FAA. Overarching is Muilenburg’s mistake to become the playball of corporate lawyers and instructions instead of letting his engineering mind speak.
In October 2019, I also pointed that if the schedule were to slip Muilenburg would lose his job. In December 2019 that did happen. Carefully crafted to mention Muilenburg’s name only once without Calhoun mentioning the name and timed just days prior to Christmas, the leadership change was decided.
Now the CEO of The Boeing Company, Calhoun says the following (from the NY Times interview):
It’s more than I imagined it would be honestly and it speaks to the weaknesses of our leadership.
Of course, views can change but the weaknesses of Muilenburg’s leadership didn’t manifest itself in just a couple of months but were visible since the first crash with the Boeing 737 MAX. They should have been visible and were visible during the various times Calhoun expressed confidence in Muilenburg.
He now says the following about that:
Boards are invested in their CEOs until they’re not.
I think that's a really easy way to shrug things off. It also gives the impression that Calhoun doesn’t necessarily speak his mind when expressing confidence and many of his actions and statements should be put in the corporate framework.
Chasing the profits
Calhoun now goes a big step further and questions the decision to increase production rates on the Boeing 737 MAX:
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.
Calhoun even said that if there would be anybody running over the rainbow for a pot of gold on stock it would have been Muilenburg. That’s an easy thing to say with the knowledge we posses now. The facts, however, are that the Boeing 737 is best suitable for demand-driven production scaling in the same way that's the case for the Airbus A320. The decision to go up in the rate was supported by demand and it was made in October 2014 while Muilenburg hadn’t become the CEO of Boeing yet or chairman of the board. At the time, he was president of Boeing. Something that doesn’t necessarily put him in the spot to make the decision to increase production rates.
Source: The Ferrari Consulting Group
At the same time, systems are stress-tested before going up in production rate. For Boeing, that went wrong somewhere in mid 2018. The system wasn’t robust enough to go up in the rate, it seems, but we are seeing that Airbus also had its challenges in keeping the targeted rate. You can hardly hold Muilenburg responsible as he was not the CEO at the time and decisions to go up in the production rate are complex and not taken by a single person.
Calhoun portrays Muilenburg as someone who willfully took risk, and because that had propelled Boeing’s share prices, the board did nothing. Fact is that Muilenburg can hardly be characterized as somebody who would gamble the company for money. We have been hearing Muilenburg talk for years on a new aircraft development, the new mid-size aircraft, to plug the gap between the Boeing 737 and Boeing 787, and no decision was taken because of the shaky business case for the aircraft. It also is not necessarily Muilenburg’s actions that propelled Boeing’s share prices. Muilenburg took the helm with the commercial Boeing 777 and Boeing 787 programs in a difficult spot, and while he de-risked the Boeing 777 program by going down on the production rate, you can hardly say that was an exceptional piece of leadership performance. It simply was the thing that was needed to do. On the Boeing 787, much of the step downs in production costs already were stipulated before Muilenburg took over as CEO.
Most notably the Boeing 787 and Boeing 737 production rates and performance generated cash flows to levels that investors were loving, but they are hardly the accomplishment or failure of a sole person, in this case Muilenburg. I have a hard time believing that Calhoun isn’t aware of this, and even if he isn’t, just because an executive takes decisions (which Calhoun now brands as risky) with positive outcomes doesn’t mean that all decisions will be positive and that the board can go into hibernation mode. Muilenburg’s leadership decisions weren’t reflective of extraordinary leadership qualities that would allow the board from walking away from their oversight duties.
The image that Calhoun tries to sketch, not only about Muilenburg but also decision-making processes in general, not just in the aerospace industry, it’s far from accurate.
Blaming the pilots and transparency
We talked a lot about Muilenburg in this report and so did Calhoun in the interview, but let’s also look at the way Calhoun does things. During the interview Calhoun was asked whether he believes American pilots would be able to handle a software malfunction. Calhoun requested to speak off the record, which The New York Times declined, to which Calhoun responded:
Forget it. You can guess the answer.
Calhoun has been appointed to repair the damage done to Boeing’s image. Asking to speak off the record and once declined giving an answer in the way he did, Calhoun doesn’t really radiate transparency. We can’t guess the answer. If I were to guess, I think he believes such an accident wouldn’t have occurred with American pilots. If that's the case, that hardly isn’t the problem. US pilots tend to be much more experienced, many having a past in the US Air Force. Non-critical features such as angle of attack indicators are much more useful to US Air Force pilots or people with such elaborate training than the young pilots we see entering the cockpits nowadays. Boeing knows who they are selling their aircraft to, so you could say they have the responsibility to provide the proper training material for all pilots. Boeing did not do that, MCAS functionality was absent in training material and there also was no indication on the flight deck. Even when Lion Air, the company suffering the first Boeing 737 MAX crash, asked for the need of simulator training they were mocked by Boeing employees. Calhoun is leaving a void here by not answering the question, and if we fill in that void then Calhoun might have a view that doesn’t differ much from Muilenburg’s, one that made Muilenburg lose credibility early on in the Boeing 737 MAX crisis.
If Calhoun thought US pilots wouldn’t be able to recover, he could as well decide not to answer or simply state that in simulator sessions it was found that line pilots didn’t follow procedures correctly. Either way, not answering the question was a mistake and it would have been better if Calhoun would have put the question into context, since who would be able or wouldn’t be able isn’t the key problem here. The problem is that Boeing should provide adequate training material and cockpit functionality to airmen for all its customers and design robust systems.
Reading the interview and his appearance during the Q4 earnings call, I can conclude two things. The first thing is that Calhoun makes a much better impression, the second thing is that Calhoun puts a lot of blame in Muilenburg’s shoes even when it is not realistic to blame him. His own role is hardly criticized by himself.
We shouldn’t forget a couple of things about Calhoun. The first thing is that Calhoun was a board member since 2009. Every mistake that the board was aware of, he has let leadership make them thinking it was worth the risk. Now that some of it backfired, he criticizes the then-leader[s] of Boeing instead of criticizing his own passive role.
During the Q4 earnings call, Calhoun said the following about that:
I get a lot of media attention around the idea that I'm somehow an insider. What if I change that a little bit? What if I told you I simply had a front row seat to everything you saw? And so all the things I read and see and hear, make no mistake, they all have an impact, they have an effect, and I get a front row seat. And ultimately, our board took action as a result of it. And now I'm the one sitting in the operating seat.
What Calhoun is basically saying is he saw everything happening, didn’t do anything, but the board saw the mistakes being made, and instead of preventing them, they let the mistakes happen and then changed the one in the operating seat. Calhoun was part of the board, he let everything happen waiting for the leadership to change, and in the process he expressed support in the leadership. It doesn’t become much more contradictory than that.
Putting it in another context, that of a bus company: The board received numerous complaints about a bus driver, and instead of dealing with it, they waited for the driver to crash the bus and then put in a new driver.
In the above analogy, the initial bus driver is Muilenburg, the bus is Boeing, the complaining passengers are FAA and some Boeing engineers (who spoke about mishaps at Boeing before the MAX crashes - not after it) and the new driver is Calhoun. If you pay close attention: Calhoun is now driving a broken bus while they could have saved the bus.
You can go even a bit further with questioning Calhoun’s role. Calhoun has been on the board since 2009. As a board you are responsible for shaping the long-term strategy of a company. Calhoun was one of the people responsible for shaping the long-term strategy of the company which also does involve the Boeing 737 MAX as well as the rate increases that have been decided on. The Boeing 737 MAX was launched in 2011 while Calhoun was a board member.
Calhoun with his background in accounting was part of the finance and audit committee. While he was on the board, Boeing made the decision to fund its pension plan with its own shares, basically obliging the entire company to put everything in the works to achieve higher share prices. If Calhoun was so concerned about the risks taken for financial gains, to me it truly is a question why CFO Greg Smith is still on board.
If you take a step back, Calhoun might be able to solve Boeing 737 MAX crisis but he has been on Boeing’s board for the past 10 years and counting and he has done very little to change the course of the company during his time on the board. He either wasn’t aware, wasn’t willing to or wasn’t able to, but he now blames weak leadership for things that went wrong. If you look at how heavily criticized McNerney was for straining relations with the work force and suppliers to optimize profits and combine it with the fact that Calhoun was appointed during McNerney’s tenure, you can only conclude that Calhoun is a product of what he now considers Boeing’s weak leadership. The public perception is that Boeing has been taken over bean counters, with his degree in accounting… Calhoun is exactly that.
Calhoun makes better public appearances than Muilenburg, but if you look at his past with 10 years of experience on the Board and how he seems to be blaming everyone, sometimes more justified than other times, it does seem like he really is lacking some self criticism. Maybe that will aid him in solving the Boeing 737 MAX crisis as he will be laser focused on it without distraction, but I don’t believe that going forward he's the person right for Boeing. Calhoun can be considered a prime example of the shift from engineering to financials at Boeing, and somehow, he seems to be forgetting that. Obviously, everything around Muilenburg is radioactive at the moment so we won't see Calhoun identifying with Muilenburg, but the way Calhoun is kicking around now, it lacks credibility and self criticism. If his interview with The New York Times is reflective of his approach to Boeing’s business, then Boeing might fly into further trouble and Calhoun would not be the man to serve as CEO in the same length of years.
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