Boeing (BA): Proof That Management Incompetence Needs Regulation

The federal government has set up a number of systems to effectively control the financial and credit systems along with most of the major firms that operate in the sector. The most aggressive, and perhaps most prudent step, the Administration has taken is to force the most poorly managed banks to restructure their boards. The Treasury put proposals before Congress to substantially increase the power of the Fed, in essence giving it life or death power over banks that become, in its judgment, irreparably crippled.

The auto industry has fallen under the same government thumb. Ford (F) may have dodged the unprecedented interference that comes with bailout dollars. GM and Chrysler are essentially wards of the state. The auto parts  companies could end up in the same position if the government is forced to nationalize some of them to keep the car industry from running low on parts.

What the government has failed to do is mandate that stupidity be pushed out of the executive suites of America’s largest companies. Incompetence has always been the enemy of employees, shareholders, and customers. Each of these is much more evident in a recession when the margin for error for creating profits often falls to zero.

Boeing delayed the launch of its 787 Dreamliner again today, for the fifth time. This disaster will cost the company sales in upcoming quarters and will force airlines which are flying old and inefficient planes to pay more to operate them than they would have if the new aircraft were delivered on time. The pressure on Boeing’s margins may well lead to layoffs. Shareholders watched the value of the company’s shares drop 6% yesterday. The first of the five product setbacks came in October 2007. Boeing’s stock traded at just above $100 then. It changes hands at $44 now.

Boeing management made a number of mistakes that contributed to the delays. It did a poor job of managing the construction of the 787. Sets of fasteners were installed incorrectly. The company announced it would have to replace some of them last November. Boeing was greedy with labor, particularly when labor was critical to company product release timetables. The International Association of Machinists and Aerospace Workers walked out on the company last fall. According to MSNBC, “Boeing lost about $100 million in revenue a day from the Machinists strike.”

The most stunning aspect of the 787 delays is that they have all happened under James McNerney, a losing contender for the GE (GE) CEO job, and the aircraft company’s chief since 2005. This is almost as amazing as the fact that all of Boeing’s board members have served since before the first delay of the Dreamliner. No one has been held accountable. The board has not even had the good sense to replace McNerney with a more competent manager.

McNerney is as much to blame if not more so than bank executives such as Vikram Pandit of Citigroup (C) and Ken Lewis at Bank of America (BAC) are for the trouble at their companies. Pandit can argue that most of the collapse of Citi was underway when he moved to the corner office. Lewis can blame Henry Paulson and Ben Bernanke for shoving the Merrill Lynch acquisition down his bank’s throat and undermining its balance sheet. The best McNerney can claim is that he has been unlucky. Unlucky CEOs are even more dangerous than incompetent ones. Luck lacks the logical pattern that poor management has.

The Administration is leaning toward giving shareholders more say in the selection and compensation of executives at public companies. It is too early to tell how this will turn out. Corporations may effectively lobby that their boards are competent to handle the matter of hiring and paying senior managers. Boeing is proof that the case for an entrenched board is hardly compelling.

A sixth delay of the 787 launch may even earn McNerney a raise

Douglas A. McIntyre