Aerospace & Defense

Boeing's bad week in Washington: US lawmakers push CEO to resign, but investors wait for 737 Max approval

Key Points
  • Boeing's CEO faced calls in Congress for his resignation over two crashes that killed 346 people.
  • The board stripped Dennis Muilenburg of his chairmanship last month but has expressed "full confidence" in him as CEO.
  • The best-selling 737 Max planes have been grounded worldwide since March.
Boeing Chief Executive Dennis Muilenburg testifies before a Senate Commerce, Science and Transportation Committee hearing on "aviation safety" and the grounded 737 MAX after two deadly 737 MAX crashes killed 346 people, on Capitol Hill in Washington, October 29, 2019.
Sarah Silbiger | Reuters

In two combative hearings on Capitol Hill last week, lawmakers pressed Boeing's CEO Dennis Muilenburg on why he hasn't given up his pay after two fatal crashes of its 737 Max planes that killed 346 people.

The embattled executive, whose compensation topped $23 million in 2018, the year of the first crash, said that is up to the company's board. Others lawmakers called for a more drastic measure.

"Mr. Muilenburg, if you had an ounce of integrity, you would know that the right thing to do is to step down," Rep. Debbie Mucarsel-Powell, D-Fla.,said Wednesday at the House Committee on Transportation and Infrastructure hearing.

"You are the captain of this ship. A culture of negligence, incompetence or corruption starts at the top and it starts with you" Rep. Jesus Garcia, D-Ill., said while questioning Muilenburg whether employees were pressured to cut corners to get the plane to market, accusations the executive denied. "I think it's time that you submitted your resignation, don't you?"

The buck stops

A day earlier, Sen. Ted Cruz, R-Texas, was dismayed that Muilenburg only learned recently the details of an instant message exchange of a former Boeing pilot telling a colleague of trouble he was having in a 737 Max simulator. "You're the CEO," said Cruz. "The buck stops with you."

Replacing Muilenburg would fall to Boeing's board, which stripped him of his chairmanship on Oct. 11 but expressed "full confidence" in him as CEO. He was replaced by board member and Blackstone Group executive David Calhoun, who also sits on the board of Caterpillar. The company later in the month ousted the head of Boeing's important commercial airplane unit, which makes the Max.

Some analysts and experts say replacing Muilenburg in the middle of this crisis could cause more uncertainty and drag out even more the all-important task of getting the 737 Max flying again. Boeing is facing several investigations about the plane's development and certification by regulators, including a Justice Department probe.

'The right person, right now'

The Max, Boeing's best-selling plane accounting for about 40% of its profit, has been grounded by regulators around the world since March after the second of two crashes, a flight ban that has rippled through Boeing's supply chain to its airline customers.

"I think he's the right person right now, given he's worked through this process and the changes that need to be done to make the improvements necessary to get it ungrounded," said Jeff Windau, a Boeing analyst at Edward Jones. "After that point, it depends on the view of the board."

Despite the two confrontational hearings, Boeing shares ended the week up 1.6%, slightly more than the broader market. Shares have lagged the broader market this year but were still up 7% as of Friday's close.

"My take has been all along, the ultimate arbiter is the share price," said Ron Epstein, Boeing analyst at Bank of America Merrill Lynch, who added that some investors have asked him whether Muilenburg will be replaced. "If you were to see the shares meaningfully underperform for a while, that's when the pitchforks come out."

One more disruption

He said replacing him now "is one more disruption" and that "it doesn't make it easier" to move forward.

"Committee members were prepared with pointed but reasonable questions for BA, and some displayed clear anger with what they viewed as obfuscation of the culture behind decisions that undermined MCAS and the MAX," Credit Suisse analysts wrote in a note after the hearings. "That said, we found the exchange to be largely as expected: hardline questioning from members with a sympathetic but tactical responses from Boeing."

Recent executive departures under investor pressure have spanned Big Food, retail and technology.

It is not unheard of for a CEO to resign or a board to replace its leadership if it's "involved in a crisis of this magnitude, even if the CEO is found to be without any blame or responsibility," said Jill E. Fisch, who teaches business law at University of Pennsylvania Law School. "Clean slate, new image."

But a challenge to replacing Muilenburg amid the 737 Max crisis is finding someone who can both do the job and who would want it, potentially from outside the company. "It's not an attractive time to join a company," said Fisch said.

During a sales-practices scandal three years ago, Wells Fargo CEO John Stumpf stepped down and was replaced by the bank's COO, Tim Sloan. Sloan then stepped down last March after struggling to overhaul the bank at regulators' demands in the wake of the scandal. The bank's board then said it is seeking an external replacement, and eventually named former Visa CEO Charlie Scharf to run the embattled bank. He didn't start until last month.

In a surprise move last year, General Electric's board replaced John Flannery as CEO after he was in the job for just over a year, with recently added board member Larry Culp, as the industrial conglomerate struggled to regain its footing.

The last time Boeing's board said it asked a CEO to step down was in March 2005, when Harry Stonecipher resigned after admitting to an affair with a subordinate, who didn't report to him.

""The resignation was in no way related to the company's operational performance or financial condition, both of which remain strong," then-chairman Lew Platt said in a statement. "However, the CEO must set the standard for unimpeachable professional and personal behavior, and the Board determined that this was the right and necessary decision under the circumstances. Later that year Boeing named former 3M CEO James McNerney as CEO.

Some companies look for someone within their ranks. On Sunday, McDonald's said it fired CEO Steve Easterbrook over a consensual relationship with an employee and replaced him with the president of the fast-food giant's U.S. business, Chris Kempczinski.

'We made mistakes'

Muilenburg was contrite during the hearings, victims' family members sitting behind him — at times holding up photos of their loved ones who died in the crashes. Muilenburg admitted: "We made mistakes" and apologized to lawmakers and victims' families several times. He withstood criticism that Boeing cut corners to rush the plane to market to take on rival Airbus and had too much control over the Federal Aviation Administration's certification process. Lawmakers say they're reviewing a decades-long program that outsources certification tasks to manufacturers.

At the center of the controversy is a flight-control system that was implicated in the two crashes — a Lion Air flight that went down shortly after takeoff in Indonesia in October 2018, and another nearly new Boeing 737 Max operated by Ethiopian Airlines in March. Boeing included the system on the Max jets to make them handle like older models. The 737 Max is a derivative of jet Boeing has sold since 1967. A clean sheet airplane would have taken longer to get to market.

The system automatically pushes the nose of the planes downward to avoid a stall, but pilots were battling the system that was fed by inaccurate data from a faulty sensor. Boeing brought the planes to market with the system receiving information from just one sensor.

He took heat in the hearings during the revelations of documents that showed an engineer was concerned about using only one sensor. Boeing said that and other messages showed it had an open culture where employees felt comfortable raising issues. Another message from a 737 manager who fretted employees were cutting corners under pressure to meet lofty production goals for the plane. Boeing touted to airline customers that they wouldn't need to provide pilots with costly, time-consuming simulator training. It offered Southwest Airlines, its biggest Max customer in the U.S., a $1 million per-plane rebate if simulator training was needed, the House committee said as part of its investigation.

Different decisions

Lawmakers sharply questioned Boeing's executives why the planes weren't grounded after the first crash in October.

"I think about that decision over and over again," Muilenburg said in the Senate hearing on Wednesday. "If we knew everything back then that we know now we would have made a different decision."

But Muilenburg, who has been with Boeing since he was a college intern and became CEO in 2015, withstood calls to step down, saying instead he wants to see the crisis through, citing his upbringing on an Iowa farm.

Boeing CEO Dennis Muilenburg: My focus is on safety, not resignation

A group of victims' relatives said during the hearing that he "go back to to the farm, the mother of one of the crash victims told the Muilenburg after the questioning. "It has come to the point where you are not the person anymore to solve the situation," the woman told Muilenburg.

"You're no longer an Iowa farm boy," said Rep. Peter DeFazio, chairman of the House committee, on Thursday. "You are the CEO of the largest aircraft manufacturer in the world. You're earning a heck of a lot of money, and so far the consequence to you has been, oh, you're not chairman of the board anymore."

DeFazio blamed Boeing's design and sales approach of the 737 Max on investor pressure.

"This all starts on Wall Street," he told reporters before the hearings.

Regaining trust

Boeing has designed a series of fixes for the beleaguered planes to make the flight control system less aggressive and with data from two sensors instead of one. Regulators still haven't signed off on the changes, but Boeing expects them to before the end of the year.

BofA analyst Epstein expects the planes to be cleared to go back into service late in the first quarter. Airlines don't expect the jets to be back until January or February but have repeatedly delayed their projected return dates to avoid having to rebook travelers at high-priced last-minute fares and scramble to reassign crews.

Muilenburg has said he wants to regain the public's trust. More than a quarter of the world's commercial aircraft fleet is a Boeing 737, according to Teal Group, and the latest iteration of that aircraft is key to Boeing's future.

Some surveys have shown passengers will be hesitant to fly on the planes and labor unions representing flight attendants at American and United, which both have the Max in their fleets, said more questions need to be answered about the plane's safety.

"After these two days of hearings it is clear there were serious breakdowns in the supervision of the 737 Max," Lori Bassani, president of the Association of Professional Flight Attendants, which represents American's 28,000 cabin crew members, wrote in a letter to Boeing's CEO on Oct. 30. "We have fundamental questions about whether the FAA has the resources necessary for oversight moving forward."

Sara Nelson, president of the Association of Flight Attendants, which represents United's flight attendants and those at 19 other airlines, said passengers are confused about the plane and often ask whether older 737 models are safe.

"We will not work the 737 Max until and unless we have full assurance from regulators around the world, our colleagues in the flight deck, engineers, and our airlines that the 737 Max is safe," Nelson said in a statement. "This week took a step backward in this process, not forward."

Because of the uncertainty and controversy around the plane, Boeing's board should again come out to either express confidence in Muilenburg or let him go, said William Klepper who teaches executive leadership at Columbia Business School.

"You can't leave him flapping in the wind," he said.

How Boeing's board may respond to CEO Dennis Muilenburg's testimony