Power Sheet - January 29, 2015

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In a month or so, we’ll begin to see this year’s crop of corporate proxy statements, the annual SEC filings in which companies invite shareholders to the annual meeting, propose the election of directors, and—the hottest news—report the CEO’s pay for the previous year. We’ll see lists of the highest paid CEOs and hear outrage over the giant pay packages some chiefs received in a year when their stock price or profits declined. The big problem is that such evaluations, while easy to do—last year’s pay vs. last year’s performance—are at best flawed and at worst nonsensical. A story in Friday morning’s news illustrates why.

Yesterday, just 12 days after the West lifted sanctions against Iran, the country signed a deal to buy 12 Airbus A380 superjumbo jets (and 112 other Airbus planes). The deal breathes “new life into the European group’s troubled superjumbo jet programme,” the Financial Times reported. It does indeed, but it still won’t save the jet. The company has sold just over 300 A380s since their introduction in 2007. No analyst seems to believe Airbus will ever recoup its $12 billion investment. Financially, the world’s largest passenger plane, which can carry 800 people and lists for over $400 million a copy, is a bust.

Virtually no one would have predicted that outcome back in December 2000, when Airbus announced its decision to build the A380. On the contrary, the conventional view held that the move was brilliant. Business professors wrote about how Airbus had outmaneuvered Boeing. Airbus CEO Noel Forgeard looked like a genius.

One of the few people who might have guessed the A380’s unhappy fate was Alan Mulally, Ford’s future savior CEO (2006-2014) and back then the chief of Boeing’s commercial aircraft business. Three months after Airbus announced its decision, Boeing said it would not follow and would instead focus on smaller, faster planes. “It’s a different perception of the world going forward,” he told the WSJ. That turned out to be the winning bet. The Boeing 787 – 1,100 orders since its introduction in 2011 – is better suited to today’s market, which values frequent departures and more flights to second-tier destinations like Jakarta and Manila that can’t handle the massive A380.

But wait – there’s another twist. Despite the A380’s failure, Airbus booked more total net orders than Boeing last year for the third consecutive year. That’s largely because Airbus’s revamp of its workhorse A320 is strongly outselling Boeing’s revamp of its equivalent 737.

The common thread is that the key decisions are made years before anyone can possibly know how they’ll turn out. Last year’s performance was probably affected significantly by a previous CEO. And Boeing CEO Dennis Muilenburg and Airbus chief Tom Enders are making decisions today that won’t prove wise or foolish until after they’ve left. It’s the same with CEOs generally. Their job is to lead the company toward a future beyond their time.

I wish there were a a simple way to evaluate CEOs, but there isn’t and never will be. Let’s by all means debate each one’s skill or lack of it. Boards of directors are required to do so. But let’s not judge their pay based on a formula that’s chosen because the math is easy.

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What We're Reading Today

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