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Boeing’s deadly scandal holds lessons for investors

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Boeing’s deadly scandal holds lessons for investors


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Thanks to shoddy management and deliberate deceit at the world’s biggest aerospace company, 346 people are dead — killed in wholly avoidable crashes following squarely from obsessive cost-cutting that undermined the safety of Boeing aircraft.

Boeing’s new plea deal with US authorities means that the company will become, in effect, a corporate felon. But it agreed to pay a strikingly small fine, and the deal has angered bereaved families who want to see the company’s top brass held accountable. There’s no sign that those lavishly paid executives will face prosecution for the deadly corporate culture that they presided over.

But it has brought real costs for shareholders — and a reminder that even the hardest-nosed financial investors ignore issues of social responsibility at their peril.

Corporate accountability

Boeing’s self-defeating quest for shareholder value

Sunday might have looked like a day of unprecedented shame for Boeing, as the 108-year-old aircraft manufacturer agreed to plead guilty to fraud and pay a fine to US authorities. But investors seemed rather pleased, sending Boeing shares up 3 per cent when the stock market opened on Monday morning. This was the latest turn in an ugly saga with lessons for companies and investors far beyond the US aviation sector.

In October 2018, a Boeing plane — the recently launched 737 Max model — crashed soon after take-off in Indonesia, killing all 189 people on board. A faulty sensor had triggered software that forced its nose to dip, revealing a dangerous vulnerability in the aircraft.

Instead of moving to address the flaw in other planes, Boeing fought to calm fears and keep the 737 Max flying — until another crash five months later in Ethiopia, which killed a further 157 people. Finally, regulators took action, and 737 Max planes were grounded globally for nearly two years. In 2021, Boeing reached a deal with US prosecutors, in which it paid a fine of $244mn and avoided prosecution, provided it adhered to a new compliance programme.

After a door panel blew out during an Alaska Airlines flight in January, the US justice department ruled that Boeing had breached the terms of that earlier agreement. Under the latest deal, Boeing has admitted to misleading US regulators over the safety problems on the 737 Max, and agreed to pay a further $244mn fine.

The positive investor response has two obvious drivers. First, the deal has given clarity on this matter, and removed the threat of a drawn out criminal trial. Then there’s the fact that the new fine is so small — just 0.3 per cent of Boeing’s revenue last year. (It’s interesting to compare it with the far larger fines that US authorities have imposed for financial crimes — say, the $4.3bn that cryptocurrency exchange Binance agreed to pay last November over money laundering and sanctions charges.)

The penalty “will have little effect on Boeing’s finances or operations,” analysts at Moody’s Ratings wrote yesterday. “The company can readily fund the fine with no noticeable effect on liquidity.”

A woman on her knees, weeping
Relatives mourned at the site after a Boeing 737 Max crash in Ethiopia killed 157 people in 2019 © AP

The scandal at Boeing has cast a harsh light on the workings of the US government in more ways than one. It has raised doubts about the light-touch regulatory approach of recent decades, with the Federal Aviation Administration delegating much of its inspection and monitoring work to Boeing employees. The latest settlement also raises new questions about the justice department’s practice of arranging plea bargains and fines instead of pursuing criminal trials of companies and their senior executives.

In theory, Boeing’s corporate guilty plea itself is a serious thing — companies found guilty of felonies are commonly barred from federal contracts. But as the FT’s Claire Bushey reported yesterday, lawyers see this as unlikely in Boeing’s case, given its status as a key supplier to the US military, and its wider strategic importance to the economy.

Meanwhile, despite the urging of families bereaved by the 737 Max crashes, there is no indication that senior Boeing executives are to be prosecuted in relation to the disasters (one test pilot was tried and acquitted in 2022 of deceiving regulators).

By choosing not to pursue top managers despite the avoidable deaths of 346 people, the justice department has missed an opportunity to set an important precedent around executive accountability.

In May, Dave Calhoun — a longtime Boeing board director who has been chief executive since 2020 — was awarded a pay package of $32.8mn. His predecessor, Dennis Muilenburg, who presided over the 737 Max rollout and the disastrous response to the crashes, walked away with a golden parachute of $62.2mn.

In the book Flying Blind, journalist Peter Robison described how incentives for managers at various levels of Boeing shifted in recent decades, with bonuses increasingly linked to financial rather than operational targets. That was part of a wider cultural shift towards eking out profit gains and cost cuts, which led to various shortcuts and compromises that helped to cause the 737 Max crashes.

Dave Calhoun, with large photographs of people held up behind him
Boeing chief executive Dave Calhoun testified to a US Senate subcommittee last month, as people held photos of crash victims behind him © AP

It was reflected, too, in the company’s tireless pursuit of share buybacks — worth $43bn between 2013 and 2019 — which helped juice the share price (and top executives’ stock-based bonuses), but bled capital that could otherwise have gone towards long-term product investment.

Boeing also jumped on the outsourcing bandwagon, relying on outside suppliers for much of its manufacturing. That strategy has worked brilliantly for Apple — but what works for smartphones may not be the most responsible strategy for a product that can kill hundreds if it fails.

January’s door panel blowout stemmed from shoddy work by Spirit AeroSystems, on which Boeing has relied to build the fuselage of its planes since spinning the supplier out in 2005. Boeing workers had to remove the door panel to repair defective rivets in the fuselage, and then failed to insert all the bolts needed to hold the panel in place. Last week, Boeing announced that it was buying back Spirit in a $4.7bn all-stock deal. That looks like an effort to reverse at least one part of Boeing’s cultural shift away from a clear focus on in-house manufacturing excellence.

The long-term outlook for Boeing’s culture will be shaped largely by the company’s next chief executive, with Calhoun due to depart at the end of this year. The board’s decision on the new boss, and what that person does once in post, will show whether Boeing has learned the right lessons from this ignominious chapter in its century-long history.

In a grim irony, management’s obsessive focus on profit and shareholder returns has ended up undermining both. Boeing has now suffered four consecutive annual losses, totalling $14.6bn. The knock to its reputation has helped drive a dramatic loss of market share to European rival Airbus, which now has nearly Boeing’s sales volumes in the crucial category of large single-aisle aircraft.

Line chart of Share prices rebased in $ terms showing Airbus has outstripped rival Boeing in the stock market

Airbus shares have risen 157 per cent over the past decade, well over triple the gains for Boeing stock, which is down by over a quarter so far this year. (Airbus chief executive Guillaume Faury, incidentally, got a pay package worth less than a fifth of Calhoun’s in the past financial year.)

So there’s an important lesson here, even for companies whose strategic importance to their government means they are shielded from the worst consequences of their wrongdoing. Compromising on product safety to pursue investor returns isn’t just bad for society. It’s bad for investor returns too.

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