A most baffling resignation: Why did United Technologies’ stalwart CEO step down?
It was one of the most baffling C-suite resignations in recent memory. At 7 a.m. on Monday, November 24, United Technologies announced that Louis Chenevert, its CEO since April 2008, was stepping down immediately at age 57. His replacement: his long-time CFO Gregory Hayes.
I spent time interviewing Chenevert for a recent story, and everything about him was big. He stands 6’5”; shaking his hand is like clutching an electrode. And he was all about big ideas and super-stretch goals. It was Chenevert who orchestrated the biggest deal in aerospace history, United Technologies’ $16.3 billion acquisition of Goodrich in 2010. By pursuing a deal in a depressed market, he snagged the maker of brakes and landing gear at a bargain price. That merger made United Technologies, which was already a big engine-maker, a full-service manufacturer that provides everything that goes on an airliner, from tail to nose, except avionics.
Chenevert also restored United Technologies (UTX) to the front ranks in the largest market for jet engines, those designed for narrow-body airplanes. “Louis’ baby,” as his lieutenants used to say, is the geared-turbofan, a revolutionary engine that saves around 16% on fuel over conventional designs, and reduces noise at takeoff and landing by 75%. It’s the sole choice on the new Bombardier C-Series, and a strong rival to an engine produced by a GE (GE) partnership on the best-selling Airbus A320-neo.
Under Chenevert, United Technologies reigned as arguably the most profitable conglomerate in America. Its cash return on total assets last year was 11.4%, far better than General Electric’s 8.2%. During Chenevert’s time at the top, he’s delivered an 84% total return to shareholders, about 20 points better than the S&P 500.
So, given Chenevert’s excellent record—and typically ebullient optimism about the future, justified or not—why did he resign? The company states that the decision was his alone, and that no financial improprieties were involved. Indeed, the company reaffirmed its current earnings guidance for 2014.
United Technologies has suffered a few setbacks this year, including a fire in the prototype for the geared turbofan on the Bombardier C-Series and an engine blowout on the F-35 Joint Strike Fighter. Both problems have been fixed. The C-Series is slated to launch on schedule at the end of 2015.
The appointment of Hayes, an insider with a careful eye on operations, also suggests that the company’s board is satisfied with its current performance.
The problem may be Chenevert’s promises for the future. Of course, it’s possible that Chenevert is departing for purely personal reasons. But it’s also possible that he has simply set the bar too high for United Technologies, and that a mature, old-economy stalwart, no matter how well run or how adept at harnessing fresh technology, simply cannot soar as high, and as fast, as the CEO’s flight plan demands.
Chenvert never stopped pushing his business heads to achieve the near-impossible. Early this year, the buildings systems unit, which accounts for more than half the company’s sales, pledged to lift revenues from $29 billion to $50 billion by 2020, and raise margins by over 4 points to 20%. Getting there requires an epic 8%-a-year growth rate in sales, and an even faster increase in earnings. That 8% is more than twice the rate of projected global expansion in GDP. But that’s what the boss wanted.
Since Chenevert set those goals, the outlook in Europe has only become more dire. His plan also counts on big growth in China to drive sales of its Otis elevators. The rise of ghost cities, and the specter of vast overbuilding, means the biggest, fastest-growing elevator market on the planet may slow substantially in the years ahead.
So one possibility is that Chenevert’s goals exceeded what the board believes are achievable. In fact, United Technologies already downgraded its expectations for this year’s EPS growth. Another possibility is that the directors advocated splitting the aircraft engine and building services businesses. The former is the less profitable of the two. At United’s engine-maker Pratt & Whitney, operating margins stand at 12.9%. Sikorsky, the company’s helicopter unit, which has suffered from cutbacks in defense spending, earns just 9.5%. By contrast, buildings systems—consisting of Otis, as well as Carrier HVAC products—boasted margins of 15.7% for 2013. The idea is that an independent building systems company would merit a premium multiple and a split would provide big gains to shareholders.
It’s long been rumored that United Technologies is pondering a sale of Sikorsky. Chenevert is a big believer that United Technologies should stand on two strong legs. It’s unlikely that he would favor either the aerospace-building systems split or the sale of the helicopter-maker. Nor do we know the board’s view on either, or whether it conflicted with the CEO’s. What’s obvious is that 57-year old CEOs with sterling records seldom step down without some sort of clash in strategy with their boards, assuming the reason isn’t health-related or personal.
The Canadian-born Chenevert deserved to be far better known. It’s instructive that one of his few outside activities was serving as a director of the Congressional Medal of Honor Foundation, whose mission is to promote awareness of the valor of its recipients, many of them in their 80s or 90s. “He’s obviously inspired by stories about soldiers who succeeded in taking the hill against all odds,” says Jack Jacobs, a Medal of Honor winner from his service in Vietnam. “Louis has a view that nothing is impossible if it’s important enough.”
Did Chenevert push his troops to do what was genuinely impossible, and let his success in reaching elastic goals convince him that the next one was always within reach? All we know is that, for the most part, his relentless optimism worked as a management style. Under Hayes, we’ll probably see a more conservative United Technologies. But it will greatly benefit from the growth engines that Chenevert put in place.