Image: Jim McNerney
Michel Euler  /  AP
Jim McNerney can't claim credit for the resurgence of the world's second-largest airplane maker as he marks a full year with the company, but he has steered the company clear of ethics controversies.
updated 6/30/2006 1:05:18 PM ET 2006-06-30T17:05:18

First-year CEO results don't get much better than they've been for Jim McNerney at Boeing Co.: a soaring stock price, a stumbling rival and a new airplane that's an industry darling before it ever leaves the ground.

McNerney can't claim credit for the resurgence of the world's second-largest airplane maker as he marks a full year with the company; it was well under way when he arrived from 3M Co. last July 1.

But he has done something his two predecessors couldn't manage: steering the company clear of ethics controversy and lessening the whiff of scandal that has surrounded it for several years.

"At the one-year point, Jim McNerney's contribution has mainly been in returning credibility to the corporate office," said Peter Jacobs, an analyst for Ragen MacKenzie in Seattle. "He has raised the ethical bar and put into place things to prevent some of the misdeeds of the past."

Now the industry is watching to see what McNerney does with the business momentum the company has generated — and whether he can improve on Boeing's runnerup spots to Airbus SAS in commercial airplane sales and Lockheed Martin Corp. in military contracting. So far in his term, success is due in no small part to banner sales of the still-in-development 787 airplane.

"He's doing a great job steering a supertanker, but the course changes were largely set in place before he arrived," said Richard Aboulafia, an aerospace analyst for the Teal Group in Fairfax, Va. "There's not a whole lot of booking business and execution that he can be credited with."

Improving ethics is a path Boeing has started down before, only to have a pratfall.

Harry Stonecipher was brought back from retirement in 2003 to erase the taint from the company's image following a string of defense scandals. While unable to save a $23 billion tanker deal with the Air Force, he and his no-nonsense message went over well with Wall Street and Washington, assuring Capitol Hill and the Pentagon that the company was not "a bunch of crooks." He also overhauled ethics policies and required employees to sign a new code of conduct or lose their jobs.

But after acknowledging that Boeing employees had done "really dumb things" in the past, he did just that himself, violating the code of conduct with improper behavior during an affair with a female company executive. So much for setting the right tone — Stonecipher was forced out in March 2005.

The 56-year-old McNerney, who formerly ran General Electric Co.'s airplane engine business, also has stressed ethics. But he has done so less publicly, keeping a relatively low profile while trying to build ethics more strongly into the company culture.

Among other changes, he has linked pay and bonuses to how well executives embrace "Boeing values," such as promoting integrity and avoiding abusive behavior. He also established financial incentives for managers not based solely on a rising stock price but on improved performance.

McNerney told analysts Thursday that the company is pursuing "substantial efforts" to strengthen its ethics and compliance programs. "We are focused on turning ethics and compliance into a competitive advantage for Boeing," he said.

On the legal and political front, McNerney has pushed to resolve a three-year Justice Department investigation into defense contracting scandals. The company announced it expects to take a second-quarter charge reflecting a settlement with the U.S. Justice Department in which it will pay the government $615 million — the largest financial penalty ever imposed on a military contractor — without having to face criminal charges or admit wrongdoing.

In the meantime, analysts say he has left key decisions involving Boeing's commercial airplane manufacturing and defense contracting businesses to the leaders of those units, Alan Mulally and Jim Albaugh.

Cai von Rumohr of SG Cowen Securities called McNerney a stabilizing influence at Boeing.

"I think his style, which is a little more low-key, giving the heads of his businesses their day in the sun instead of hogging the microphone, has helped bring the company together," he said.

Numerous observers attribute the current hot streak to Mulally and the commercial airplane sales team that bagged a record 1,029 orders for new planes last year — along with the key decision to not follow Airbus by building a superjumbo jet like the delay-plagued A380.

"A big part of the success they've had in the past two years is the strategy Boeing picked — a conventional-sized aircraft that was more fuel-efficient and point-to-point," said Sam Maxwell of RBC Dain Rauscher, referring to the 787.

That plane remains the biggest threat to McNerney's legacy if high hopes for it are not met, although ongoing woes in the commercial satellite program and newly announced delays in an international airborne surveillance system are among other concerns.

The 787 risk was underscored recently when engineers discovered bubbles in the high-tech composite materials used in the fuselage during testing, although Boeing said the problem shouldn't delay the jet's scheduled mid-2008 debut.

While he endured a strike by airplane assembly workers early in his tenure, observers say McNerney has yet to face a real test as chief executive. But with the stock up more than 30 percent since his hiring — from $61.67 to its current trading range in the $80s after reaching an all-time high of $89.58 in May — profits and sales growing at a double-digit clip in 2006 and Boeing dreaming realistically of overtaking limping Airbus, negative reviews are hard to come by.

Even the union that struck for four weeks last year has no beef.

"He's got a clean slate with us so far," said Mark Blondin, president of Machinists District Lodge 751, representing about 19,000 Boeing employees in the Seattle area. "Whether it's him doing a good job, the economics of the industry, a little bit of luck, hard work or all of the above, the company's doing well since he's been in there."

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