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3M chief McNerney leaves for top job at Boeing
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James McNerney, who has headed 3M since 2001, has resigned to become the CEO of Boeing. (Photo by TOSHIFUMI KITAMURA/AFP/Getty Images)
3M has lost its CEO James McNerney to the Boeing Co. 3M announced Thursday one of its board members, former PepsiCo vice chairman Robert Morrison, will lead the Maplewood-based company while it searches for a replacement for McNerney. Analysts say McNerney leaves 3M much stronger than he found it when he arrived nearly five years ago. 3M stock took a beating Thursday on news of his departure.

Chicago, Ill. — James McNerney, 55, came to 3M in January 2001, promising to transform the company -- and he did. He came from General Electric's jet engine division and was the first outsider to be named CEO of 3M.

Months after taking the helm, McNerney began cutting jobs. He eliminated slow-growing operations, such as some sandpaper production, in favor of ventures with stronger potential like health care products. The company formally changed its name from Minnesota Mining and Manufacturing to simply 3M. Despite periods of decreasing sales, 3M's profits increased.

3M declined to comment for this report, but said in a news release it has begun an "expeditious selection process" for McNerney's replacement, and that it will consider internal and external candidates.

Just a few months ago, McNerney said he was not in consideration for any other job, including at Boeing, and that he was happy at 3M. On Thursday, McNerney said he was sincere about initially wanting to remain at 3M, but began having second thoughts earlier this month.

"It was a difficult decision, a late change of heart, but as I sit here today I just couldn't be happier," McNerney told analysts and reporters on a conference call.

A Goldman Sachs analyst expressed surprise and disappointment that McNerney's leaving, but qualified that sentiment by saying the loss will not alter 3M's "positive momentum."

Merrill Lynch & Co. calls McNerney's departure a major blow to 3M. And despite the company's assurances, Merrill Lynch says it sees no internal successor and that a protracted search could pose operational and growth problems for 3M. Merrill Lynch also predicts 3M stock is unlikely to appreciate much in the foreseeable future.

3M investors are apparently unhappy with the news. The company's stock closed Thursday down nearly 5 percent.

While McNerney's departure looks to be problematic for 3M, University of St. Thomas professor Fred Zimmerman sees opportunity in a leadership change. The cost-cutting and focus was all good, Zimmerman maintains, but he says 3M needs to return to it innovator roots.

"In any company we can get to a certain stage where things have to be tightened up and organized a little bit, and I think McNerney did that," says Zimmerman. "But if you keep doing that, and if you don't have the underlying innovation, then ultimately those kind of companies plateau some. Because you can't just keep cutting, you have to also come up with some new ideas and promote them effectively."

It was a difficult decision, a late change of heart, but as I sit here today I just couldn't be happier.
- James McNerney

McNerney sought to make 3M more efficient through a management program called Six Sigma, which he brought from General Electric. Alfred Marcus, a professof of strategic management at the University of Minnesota's Carlson School, says Six Sigma is a way of scrutinizing business practices.

"The basic idea behind Six Sigma is to reduce the number of errors you have by breaking down processes into their smallest parts, and trying to understand which processes really contribute to increasing the outcome, and which are wasteful," says Marcus.

Marcus says it's notable that former PepsiCo executive Robert Morrison is taking over as interim CEO and chairman of 3M. PepsiCo is widely regarded as an exceptional marketer. Marcus says with 3M's operations relatively strong, the company now needs to ramp up sales.

"PepsiCo's a tremendous, dynamic marketing company. I actually think that ... some kind of infusion of marketing energy is something that 3M could use," says Marcus. "The challenge 3M faces right now is to increase sales and grow. McNerney was at the point where he's done all that he could do at 3M in terms of improving operational excellence, and he needed a second act. And the second act would have to do with marketing."

At Boeing, McNerney will reign over a substantially larger company and one that's been struggling with leadership problems. He'll be Boeing's third CEO in just 18 months.

McNerney has been a Boeing director since 2001. Before joining 3M in 2001, he held several executive spots at General Electric Co., including CEO of GE Aircraft Engines and GE Lighting and as an executive vice president of GE Capital.

McNerney inherits a company performing well financially but still struggling to smooth over lingering tensions with the Pentagon and Capitol Hill.

Despite the recent turmoil, Boeing's defense sales rose nearly 10 percent annually in 2003 and 2004, its commercial airplane business is on the rebound and its stock price has doubled in two years.

The Chicago-based company also is locked in a tight competition with Airbus SAS for supremacy in passenger jet sales as the airline industry shows signs of recovering. The battle features Boeing's planned new fuel-efficient 787 against its rival's A380 "superjumbo."

"Clearly one of the major challenges he will face is how you beat out Airbus," said analyst Paul Nisbet with JSA Research. "And there's certainly still fence-mending to do on the military side. (McNerney) seems very qualified to keep their momentum going."

McNerney said he realizes Boeing has "a little bit of a hole to climb out of in a few places" but stressed he would place a large emphasis on business ethics.

Analyst Cai von Rumohran at SG Cowen Securities said McNerney's experience heading GE Aircraft Engines brings a valuable customer focus to Boeing.

"Because he knows the customer well, I think he's going to be setting the right tone coming in to sustain the momentum they've recouped recently," von Rumohran said.

He added that McNerney's time spent as head of GE Asia-Pacific in the early 1990s will be valuable as Boeing seeks the edge over Airbus in China, Japan, India and other key Asian markets.

The company did not disclose McNerney's compensation package. But Platt called it a "lateral move" from McNerney's 3M package, which paid him a salary of $1.62 million and bonus of $3.52 million in 2004, according to Securities and Exchange Commission filings.

"There were no inducements, no big numbers to convince him to move," Platt said.

(The Associated Press contributed to this report)

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