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Jet Setter

After arriving to head Chicago’s troubled Boeing Comapny, Jim McNerney fostered a culture of openness and honesty—values he learned at the family dinner table growing up in Winnetka. The results: he has mended the company’s ethical reputation and led a stunning comeback against archrival Airbus.

Boeing Company’s chief executive, Jim McNerney, was growing up in Winnetka, the family table wasn’t the kind of place where a kid could slip by unnoticed. Sparked by a successful and demanding father and four high-achieving siblings, dinner conversation often turned into rapid-fire bursts of questions and exchanges.

“Dad was always a professor, asking us, What do you think and why do you think it?” recalls Jim’s brother Dan. Even away from the table, the father, Walter J. McNerney, a pioneering health care expert, looked for opportunities to put his kids on the spot. He might, for example, introduce a son to visiting business colleagues and then ask the boy about something that had happened at school-forcing the youngster to think on his feet and get to the point.

For Jim, it was good training. Since taking over at Boeing in July of 2005, he has served as the point man in leading the Chicago aerospace giant beyond several earlier ethical lapses that had badly tarnished the company’s reputation. A year into his tenure, McNerney was summoned to a hearing room in the Hart Senate Office Building, where he apologized on behalf of Boeing to members of the Senate Armed Services Committee, adding that the blunders had spurred the company to develop an ethics program that would represent “the lasting legacy-and silver lining-of this dark cloud in our history.”

Indeed, for all the discussion of the production rate for 737s or the combat range of the F/A-18C Hornet, McNerney’s 20 months at Boeing have been about leading an organization of more than 150,000 employees, with sales of more than $59 billion, out of a moral abyss. “People don’t wake up one morning and decide to be bad,” he says, sitting in a conference room at Boeing’s North Riverside Plaza headquarters. “What typically happens is that the pressure of business leads them to cut corners that they don’t even know they’re cutting at the time, and so that’s where the discussion has to get down to.”

Before Boeing, the now 57-year-old McNerney’s direct style had served him well as he ascended the ladder at corporate America’s bluest of blue-chip companies: Procter & Gamble, McKinsey & Company, and General Electric. “The bigger the organization, the more he seems to thrive,” says another brother, Peter, a partner in a Minneapolis venture capital firm in biotechnology and medical devices. But in 2000 McNerney wound up the runner-up in Jack Welch’s highly publicized search for his own successor at GE, memorably getting the bad news on a miserable, rainy night in Cincinnati. Almost immediately, McNerney was recruited to lead 3M, the multinational best known for Scotch tape and Post-it notes. A year later, he joined the Boeing board, getting a front-row view of the upheavals that would roil the company.

By the spring of 2005, though, Boeing presented an irresistible opportunity for McNerney. The aerospace market was rebounding from the recession earlier in the decade, and the company was gaining market share against its European archrival Airbus. The company’s new energy-efficient Dreamliner was generating buzz-and orders-from carriers all over the globe. Boeing just needed some tough love. McNerney became the third CEO in the four years since the company relocated its headquarters to Chicago from Seattle, just days before the 9/11 attacks. “[He] calmed the waters, which were pretty rough when he came in,” says Paul Nisbet, an aerospace analyst at JSA Research in Newport, Rhode Island.

Under McNerney’s watch, Boeing shares are up 38 percent, outperforming the Standard & Poor’s 500 Index (up nearly 20 percent for the same period) and the Dow Jones Industrial Average (up 22 percent-Boeing is a component of the Dow). A few months ago, Fortune put McNerney on its cover-hands squarely on hips to show his buttoned-down shirt and red tie-to help define “what it takes to be great.”

No doubt it helps to start with a strong family.

The troop of kids-four boys and a girl, with Jim the oldest-had powerful role models in their parents. Their mom, Shirley, a Vassar College graduate, stayed home with the children, while Walter made his mark in national health care. He and his four sons all graduated from Yale University (daughter Jennifer followed her mother to Vassar).

As founder and head of the hospital administration program at the University of Michigan School of Business Administration in the late 1950s, Walter oversaw a study that documented how the poor and elderly were unable to get proper health care. The family relocated from Ann Arbor to the North Shore when Walter was named the first president of the Blue Cross Association (which later merged with Blue Shield). Walter McNerney helped shape the Medicare and Medicaid programs that were passed under President Lyndon Johnson, and he spearheaded a private sector initiative to control burgeoning health care costs that was the beginning of managed care. He died in 2005. “He filled up the room with his strong Irish personality,” says Paul Earle, a senior director at the recruiting firm Spencer Stuart in Chicago, who considers Walter McNerney his mentor. “He could put people at ease.”

For the kids, there were summer vacations at their grandparents’ home in Duxbury, Massachusetts, where the young McNerneys were expected to chop down trees and yank up stumps before going golfing or fishing. Most Sunday mornings, the parents hustled the family off to services at Winnetka Presbyterian Church-Walter left his Catholicism behind when he married Shirley Hamilton in 1948. Sports were big. “People joked we couldn’t make it to confirmation classes because we were on the hockey rink all the time,” recalls Dan, a Presbyterian minister who still lives on the North Shore.

At New Trier, Jim played center in hockey, center in football, and pitcher on the baseball team (his brother Peter says Jim liked to pitch because “he liked to be in charge"). In his senior year, he was president of the TriShip Boys Club, a leadership position that involved organizing fundraisers and other events. “If you had picked people that would make a mark, Jim would have been one of them,” says Richard Williamson, a partner at Mayer, Brown, Rowe & Maw, the 1992 Republican Senate candidate and a friend of McNerney’s since junior high school.

At Yale, McNerney played hockey and baseball and pledged Delta Kappa Epsilon, where George W. Bush was fraternity president. “[Bush] initiated us and he enjoyed the pomp and circumstance,” McNerney says.

After getting his MBA from Harvard in 1975, McNerney began a corporate climb that would take him first to Procter & Gamble, the citadel of consumer products marketing, then to the consulting giant McKinsey, and then to a 19-year career at GE. There, McNerney thrived under Jack Welch, the longtime chairman, who became a media superstar for his relentless cost cutting, devotion to manufacturing excellence, and ruthless weeding out of the lesser performers in his work force.

In some ways, Welch’s approach may have echoed that of Mc­Nerney’s father. Walter McNerney had preached, “Whatever you do, manage it well.” But the father was also a teacher, and Jim McNerney says he views his role that way, too-helping people get better. Call it a kinder, gentler version of Welch. “I think at 3M and at Boeing, what’s re-emerged in my mind is respect for the individual,” McNerney says, “a reminder of some elements of the human side of leadership that was also at GE but
was balanced against a pretty hard-driving management environment.” So was the Welch management style unduly harsh? “I would say [it was] ‘hard-edged,’ because Jack is going to read [this],” McNerney says. “He always shoots me e-mails.” (Welch did not respond to a request for comment.)

Early in his GE career, McNerney’s first marriage ended in divorce, after he and his wife, Judy, a social worker, had had two children. “It was the hardest thing he had ever gone through,” Dan says. “It was not in our family history. I worried about him.”

Jim met his current wife, Haity, at GE-she was working for a company doing corporate training in health and wellness. They married in 1987 and have three children together. Corporate life forced the family to relocate every two to three years, but McNerney says the family thrived on the adventure. Haity was six months pregnant when the family moved to Hong Kong in 1992, and she delivered their son at a local hospital. “Most expatriate women-when they go overseas and are about to give birth-they’ve got the emergency plane set to go back to the hospital where they came from,” he says. “She was going to have the baby there in Hong Kong.”

Moving around may have fit Jim’s restless personality. He’s up early, making breakfast, constantly moving. While CEO at 3M and more recently at Boeing, he has coached his son’s hockey team, showing up for practice after flying in from a meeting in Seoul or São Paulo. “I would not want to be a competitor of his,” says Tim Traff, his friend and fellow coach. “He would know everything about me, have a game plan, and be trying to figure out how to win.”

At his son’s basketball games, where McNerney is only a spectator, he answers seven or eight messages on his BlackBerry. “I don’t think I have a horribly unbalanced life, but I think my problem is I never stop, even when I’m on the ski slopes,” he concedes. “So I think I can be accused of not disengaging; I’m not a great relaxer. I think Haity and the kids would like to see me just slow down. In my mind, I think I’m having fun with everybody. I think in their minds, they still see the CEO hanging around the dinner table a little too much.”

Executive recruiters found GE the perfect breeding ground for CEOs, and McNerney was high on many lists. “He was one of the stars coming down the pike,” recalls Gerry Roche, the Heidrick & Struggles chairman and recruiter who helped bring McNerney to 3M. “I went after him but he kept saying, ‘No, I like GE.’”

But in the late 1990s, Welch conducted a highly publicized multiyear competition among GE execs to find his own replacement. McNerney, who was heading GE’s Cincinnati-based aircraft engine business, was a finalist, along with Bob Nardelli, the recently deposed CEO of Home Depot, and Jeff Immelt. “Jack got outlandish performance from the three of us,” McNerney says. “I mean, none of us slept for two years. All we did was drive the heck out of GE’s three largest businesses.”

The competition culminated in the selection of Immelt during Thanksgiving weekend 2000. As Welch recounts in his 2001 autobiography, Jack: Straight From the Gut, he broke the bad news to McNerney in a conference room at Lunken Aviation in Cincinnati. “The place was soaked, dreary and dark,” Welch recalled. “It was a bone-chilling night. I walked across the tarmac through a light fog toward the barely lit private airport hangar.”

McNerney agrees it was like a scene out of Casablanca. “The competitive side of me didn’t want to lose it,” he says. “So I felt bad for a day, and I just got on with it.” Welch never gave a specific reason for his choice, but did say in his book that he wanted to pick someone young enough to be in the job for at least a decade, perhaps 20 years out. Immelt was 44 at the time while Nardelli was 52 and McNerney 51.

The careers of the runners-up certainly took different turns after GE. While both landed big pay packages, Nardelli had a tumultuous reign at Home Depot, where he lost board support in part because of arrogance and his unwillingness to consider a pay cut-a contrast to the more diplomatic McNerney.

Even before Welch announced his decision, McNerney was being courted by Ed Brennan, the former Sears, Roebuck & Company chairman who was heading a search committee for 3M. They met for the first time at a remote airport location in Florida: “I instantly was impressed,” Brennan recalls. “He’s the kind of person you chat with at a dinner and feel very comfortable with. He’s a good listener.”

A week after losing the horserace, McNerney was named 3M’s CEO, becoming the first outsider to get the top job in the company’s nearly 100-year history. With businesses in consumer and industrial tapes, films, and abrasives, 3M, with $16 billion in revenues, was underperforming, and investors regarded the culture as somewhat insular. “We needed a change agent without killing the culture,” says Brennan.

McNerney introduced manufacturing process improvements that lowered costs. During his tenure, earnings more than doubled to $4.12 a share in 2005 from $1.79 a share in 2001. “He attacked the low-hanging fruit in taking costs out,” says Dmitry Silversteyn, research analyst at Longbow Research in Cleveland. Analysts say McNerney wasn’t as successful in sparking revenue growth-although sales climbed 30 percent over 2001 to $21.2 billion in 2005.

McNerney saw potential in 3M’s health care business, including a skin cream used to treat precancerous lesions and genital warts. But the expansion initiative stretched 3M’s expertise, and the drug, Aldara, didn’t live up to expectations. (McNerney’s successor, George Buckley, the former CEO of the Lake Forest–based Brunswick Corporation, cut a deal in November 2006 to sell the division for an estimated $2.1 billion.)

Still, under McNerney the stock rose by about 30 percent to the $73 range, outperforming the S&P 500, which fell by nearly 10 percent in the recessionary years following the attacks of September 11, 2001. “It was a matter of reaching for as good as you can be, as opposed to being a little better than you were last year,” McNerney says.

McNerney himself would soon be reaching again. While serving on Boeing’s board, he had twice turned down the top job. But by the spring of 2005, McNerney saw that he could add value by making ethics a top priority. The company certainly needed a crash course. In one case, Boeing had offered a job to an air force procurement officer during negotiations on a contract. In another, the company had used proprietary documents taken from a competitor to win government rocket-launch business. The scandals brought down CEO Phil Condit, and his successor, Harry Stonecipher, resigned 15 months later in the wake of an affair with a female executive.

In the days and weeks after he took over, McNerney told the troops that it wasn’t enough to make the numbers-you had to do it honestly. And it wasn’t enough to preach-ethical behavior had to be incorporated into corporate life. Raises and promotions would depend on it. “A leader finds a way without running over people,” he told managers. People had to feel they could speak openly without fear of reprisal. And they had to know the consequences of crossing the line.

At his first management retreat, in Orlando, McNerney had Boeing’s general counsel, Douglas Bain, reveal the federal prison numbers of two jailed former employees. “These are not ZIP Codes,” Bain said.

Ultimately, McNerney concedes, measuring the attributes of leadership is subjective. But his reforms have gone far to restore the confidence of customers and investors. “Boeing gained the respect of customers, particularly the Pentagon, all of which is necessary to enable the company to continue to get a fair shake in the programs they have to bid on,” says Paul Nisbet, the analyst.

Of course, McNerney benefited from a happy confluence of events. Orders for new jets-from the workhorse 737 to the long-haul 777-started to take off in 2004. In 2006, Boeing received orders for 1,044 planes, surpassing the record 1,002 orders booked the year before and topping Airbus’s total for the first time since 2000. The company is busy enough that it is turning away some orders rather than risk overproducing or not meeting commitments.

What’s more, Boeing is riding a wave of enthusiasm for its new 787 Dreamliner. With a skin made from 50 percent carbon fiber instead of the traditional aluminum, the plane is supposed to be 20 percent more energy efficient. The company had 448 orders for the craft at the end of 2006. The first deliveries were scheduled for mid-2008.

The Dreamliner’s success so far has vindicated Boeing’s assumption that the major airlines want relatively smaller planes (seating 210 to 330 passengers) that are capable of long-haul routes connecting cities in “point-to-point” nonstops. European rival Airbus bet on the A380, a two-deck superjumbo with 555 seats that would haul passengers to hub cities such as New York and London, where they would have to reconnect to other cities.

The future wasn’t clear in 2001, when Airbus launched the A380, one of its “biggest self-inflicted wounds ever,” says RIchard Aboulafia, vice president of analysis for the aerospace consulting firm Teal Group. Airbus’s share of jetliner orders plunged to 41.7 percent in 2005 from 50.9 percent the year before. Boeing’s share climbed to 63.9 percent last year, Teal Group data show.

Meanwhile, Airbus fell behind on the orders it did have-it is two years behind schedule and 30 percent over budget on production of the A380. In his new book on the battle of the aerospace giants, Boeing Versus Airbus (Alfred A. Knopf; 2007), author John Newhouse notes that it took Airbus only 18 months to fall from the comfortable plateau it had shared with Boeing. “Its fortunes fell steeply,” Newhouse notes, and “the top tier of Airbus’s management had become nearly as complacent and risk averse as Boeing’s had been [when it lost market share earlier].” Last fall, Airbus named its third CEO in the span of six months. That kind of downward spiral is often hard to reverse. In November, the Memphis shipping giant FedEx Corporation canceled an order for ten Airbus freighters because of the production delays and ordered 15 Boeing 777 cargo planes instead. The news boosted Boeing’s stock price by more than 5 percent the day of the announcement.

In the defense sector, one that represents half of Boeing’s revenues but in which Boeing is a relatively smaller player in a wider field, analysts have been predicting flatter growth with a tapering off of Pentagon spending. But Boeing has been on a roll here, too. In September it won a three-year contract from the Department of Homeland Security to build a virtual fence along the Mexican and Canadian borders. The contract is estimated to be worth as much as $2 billion. And in November Boeing beat two rivals to win an air force contract to supply 141 rescue helicopters, with a version of its Vietnam War–era model Chinook. The initial contract was pegged at $712 million but may be worth as much as $13 billion. And late in 2006 Boeing completed a deal with defense contractor Lockheed Martin Corporation to combine their rocket-launch operations in a joint venture. It was the discovery of documents stolen from Lockheed that caused the air force to suspend Boeing for 20 months between 2003 and 2005, which resulted in lost contracts estimated at $1 billion in addition to a $615-million Justice Department settlement. (McNerney won admiration among members of the Senate Armed Services Committee for refusing to seek a tax write-off of the payment.)

Perhaps the biggest concern for Boeing investors and customers is whether the company can meet targeted delivery dates in 2008 for the 787. The model must still go into test flights and receive FAA certification. In late October, Boeing allocated more money to research and development to back the Dreamliner-about $300 million on top of a second-quarter boost of $335 million, which McNerney said was due to issues of weight and “supplier implementation.” And in late January, Boeing shares retreated briefly, in part on new concerns about delays and cost increases for the Dreamliner.

McNerney is being paid well for his work. His Boeing payday was estimated at $53 million, including an annual salary of $1.75 million and a maximum bonus of $4 million, according to Boeing’s filings with the Securities and Exchange Commission. The package included $25.2 million in restricted Boeing shares and a $22-million pension-sweeteners to make up for the pay package he was leaving behind at 3M. (The practice of using a so-called golden hello to lure highly qualified executives is controversial, because that compensation isn’t at risk-it doesn’t depend on how the CEO performs in his new job. McNerney has to stay at Boeing at least six years to collect the full value of the package.) He moved his family to Lake Forest last summer after commuting for a year between Minneapolis and a downtown Chicago condo.
Reflecting on the next big challenge for Boeing, McNerney says risks cannot be avoided, but cultural change should discourage cover-ups. “In an open culture, you get the problems out early and deal with them,” he says. He has never functioned any other way-those dinner table conversations back in Winnetka cemented the habit. “You weren’t allowed to be an observer; you were asked to be a participant,” he recalls. “So that taught you, at an early age, to stand up for what you believe, argue your point, face derision if your arguments aren’t any good.”

At Boeing, at least so far, his arguments have been holding up.     

Cause Effects

Jim McNerney is expected to take an active role in Chicago’s civic and cultural scene, but he won’t be leading a return to the days, not so long ago, when CEO members of the Civic Committee of the Commercial Club of Chicago actively set the agenda for the city’s civic improvement. “The new kind of Chicago executive must have different priorities because of the demands of global business,” says Anna Eleanor Roosevelt, vice president of global corporate citizenship for Boeing. “It’s not the same as the 1980s and 1990s when a CEO culture shaped Chicago.”

Nevertheless, McNerney is a member of the Civic Committee. He is on the board of the Field Museum and  a trustee of Northwestern University. And he hasn’t shied away from high-profile events-last May (above), for example, he introduced Australian prime minister John Howard to members of the then Chicago Council on Foreign Relations, who had come to the Peninsula Hotel to hear Howard give a foreign policy address. Australia is a customer of both Boeing and Airbus-Qantas Group has 45 Boeing Dreamliners on order.

McNerney’s involvement offers a contrast to the actions of his immediate predecessor at Boeing, Harry Stonecipher, who “dialed civic involvement way back,” says Paul O’Connor, executive director of World Business Chicago, an economic development organization. Chicago receives $4 million, or nearly 10 percent, from Boeing’s annual charitable budget of $48.5 million. The money is allocated for programs in education, culture, civic concerns, the environment, and health and human services. And the company has made some well-publicized gifts, such as $5 million for the Boeing Galleries at Millennium Park, which provide space for public exhibitions at the park’s midlevel terraces. 

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