The Delaware Court’s Decision Highlights Boeing’s Defective Corporate Culture and Board Governance Failures (Part II of IV)
When considered in light of the Chancery Court’s decision, DOJ’s essential findings in its Boeing investigation are problematic at best. The Chancery Court’s decision outlines how Boeing’s culture of safety deteriorated into a culture of cost-cutting and profits, while under supervision of a board with star-studded credentials. The Delaware Court’s decision provides a perfect example of how weak corporate governance can have a direct and immediate impact on innocent lives with devastating financial consequences.
The Delaware Chancery Court’s decision involving the Boeing board and its failure to conduct proper oversight of the 737 MAX safety scandal is premised on a damaging set of facts. To set the stage again, several plaintiffs filed derivative lawsuits in 2019, claiming that Boeing’s board breached its fiduciary duties, specifically (i) Boeing did not implement a reporting system to monitor the safety of Boeing’s airplanes; (ii) Boeing ignored red flags and its duty to investigate; and (iii) the Board terminated the CEO and allowed the CEO to cash out his equity compensation.
The Court’s Indictment of Boeing’s Culture
The Chancery Court cited the basic thrust of the case – the defendant board members, many of whom were well-qualified and long-time members, failed to carry out their respective duties to monitor the safety and airworthiness of Boeing’s aircraft, and the extent of those failure only became apparent in the aftermath of the tragic crashes of the two 737 MAX flights.
Rather than prioritizing safety, the Board members focused on an oversight agenda that emphasized rapid production and profit maximization. As a result of this tragic failure to attend to safety, Boeing suffered substantial harm, losing millions in revenue, and paying fines, fees. In an ironic twist underscoring the fundamental governance failures, Boeing rewarded several of the board members responsible for a failure to attend to safety concerns with hefty compensation and retirement packages.
Boeing was founded in 1916 and built as “an association of engineers.” Its executives were familiar with engineering requirements, and for years, Boeing emphasized engineering and safety.
As the company grew (organically and through acquisitions), Boeing’s commitment to safety dwindled. In 1997, Boeing acquired McDonnell-Douglas, an aerospace company focused on profits and reducing its commitment to safety. In time, this profit-first priority became Boeing’s focus.
By the 2000s, Boeing’s business model was obsessed with productivity, employee engagement, and process improvement, which was guided by the objective of reducing costs and increasing profits. With the change in focus and culture, Boeing’s engineers were unhappy and went on strike to improve Boeing’s culture and regain influence in the direction of the organization.
With the change in focus, Boeing experienced an increase in safety violations and regulatory enforcement actions. Between2000 and 2020, Boeing was cited roughly twenty times for safety violation and poor quality controls, maintenance and non-compliant parts, along with failures to provide crucial safety information. Boeing was fined between $6000 and $13 million. Boeing’s quality suffered and airline customers raised questions concerning overall leadership. Management scandals resulted in the firing of two successive CEOs.
After the appointment of a new CEO in 2005 with an engineering background, Boeing’s performance improved but was still inconsistent. In 2013, the 787 Dreamliner suffered from lithium-ion battery fires and was grounded. The next year, the NTSB ordered Boeing to improve its safety assessments and controls. In July 2012, a Boeing 777 airplane crashed, which was the result of inadequate plane documentation and training manuals.
Boeing’s poor safety performance continued in 2015 – thirteen separate pending civil enforcement cases were initiated focused on Boeing failures of quality control, safety protocol violations and manufacturing errors. In late 2015, Boeing settled these matters with the FAA and agrees to pay fines of $12 million, with up to $24 million deferred pending on Boeing safety improvements. In February 2021, the FAA announced it had assessed $6.6 million in deferred settlement penalties against Boeing.