The Company Failed to Walk the Talk of Ethics

I have previously blogged about the failures at Boeing in production systems, inspections, internal audits, a safety culture, and reporting to the board of directors. One lingering question is: Why didn’t the board of directors at Boeing act to disclose the problems with the production design and manufacturing process? Is it possible they had no idea what was going on? Probably not, at least they should have known. Both the internal auditors and external auditors should have been aware of the problems and informed the board.

Board of Directors

While Boeing’s Audit Committee of the Board of Directors was charged with oversight of risk as a general matter, the Audit Committee never examined or even considered airplane safety. For example, when the Board discussed audit plans in 2014 and 2017, it did not mention nor address airplane safety. Instead, the Audit Committee maintained a singular focus on financial risks and profits. Even after the Lion Air 737 MAX crash, Boeing’s chief compliance officer failed to update the Audit Committee and failed to mention “product safety” as a “compliance risk.”

Where were the auditors? This has often been the mantra after the failure of an external audit to identify fraudulent financial reporting. However, it should also be applied in internal audits, and the Boeing case is one such example.

There were many failings of the board of directors cited in the FAA Expert Panel Review report including:

• Overseeing airline safety.
• Failure to formally monitor or discuss safety on a regular basis.
• Management’s periodic reports to the Board did not include safety information related to overall product safety issues.
• The board did not have a mechanism for receiving internal complaints about airplane safety and it never learned about any employee or whistleblower safety complaints.
• Absent controls on airplane safety, the Board pushed for meeting production deadlines and remaining competitive with its chief rival, Airbus.
• Boeing adopted an aggressive schedule to develop the 737 MAX in response to Airbus competition thereby glossing over significant re-engineering issues.

Safety Culture

The report criticizes the lack of a safety-first culture at Boeing. Instead, the company sought to maximize profits and push production out of the door.

Boeing engineers became concerned about safety and manufacturing concerns. In the summer of 2018, an engineer raised safety concerns with the 737 MAX general manager and factory leaders, stating in a written communication, “And for the first time in my life, I’m sorry to say that I’m hesitant about putting my family on a Boeing airplane.” Other Boeing employees raised similar concerns. While some made their way to senior management, none were reported to the board by employees, although they should have been.

Post-crash governance failures existed as well. The Board was not notified of the Lion Air crash for ten days. Even though the FAA and internal Boeing engineers quickly identified the MCAS as responsible for the crash, the CEO reported to the Board that the 737 was safe. The CEO even told the Board that reports of the failure of the system and safety concerns were wrong and the 737 MAX was safe. A formal Board meeting was not held until almost two months after the Lion Air crash. There were no minutes of the meeting and management talking points provided misleading explanations and false denials of responsibility. The Ethics and Compliance presentation to the Audit Committee listed the Lion crash as a “hot topic” but did not include any specific mention of airline safety issues. In January 2019, the Department of Justice opened a criminal investigation.

On March 10, 2019, less than one month after the Boeing Board declined to launch an internal investigation, the Ethiopian Airliner crashed killing all 157 passengers and crew. Several days later, the 737 MAX was grounded by the FAA. Between November 2018 and March 2019, when the FAA ordered the grounding of the 737 MAX, the Board never considered or even discussed grounding the plane because of safety concerns. The blow out of a door in-flight may be the best known problem Boeing had with the 737 MAX planes.

Caremark Doctrine

Corporate governance alleged deficiencies raised in shareholder lawsuits are resolved by the Chancery Court in Delaware. In the case of In re the Boeing Company Derivative Litigation, the Delaware Chancery Court denied a motion to dismiss the lawsuit, filed by defendants, the board of directors for Boeing, against plaintiff shareholders’ claims alleging failure to establish a reporting system for airplane safety and ignoring red flags about airplane safety problems related to the development of the troubled 737 MAX jet.

The so-called Caremark doctrine (1996) established by the Chancery Court establishes the parameters of a board’s duty of oversight. Personal liability for directors with respect to their oversight function may “arise from an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss.”

The Delaware Court permitted the Caremark duty-of-oversight claim to proceed against the directors of Boeing. Stockholder plaintiffs sued Boeing’s board, seeking to recover costs and economic losses associated with the crash of two 737 MAX jetliners. The plaintiffs’ complaint alleged that the directors failed to monitor aircraft safety before the crashes and then failed to respond to known safety risks after the first crash. The lawsuit seeks to hold the directors liable for the resulting loss of “billions of dollars in value.”

The court then determined that Boeing’s board “turn[ed] a blind eye to a red flag representing airplane safety problems,” citing allegations that the directors “treated the [first] crash as an ‘anomaly,’ a public relations problem, and a litigation risk, rather than investigating the safety of the aircraft.” The court added that Boeing was even alleged to have “publicly lied” about its own monitoring efforts. The company’s directors now face the prospect of intrusive document discovery, extensive depositions, and either an expensive settlement or a trial to defend the effectiveness of their oversight.

The Chancery Court cited the basic thrust of the case as follows:

“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”

Perhaps the best known problem is when a door blew out in flight on a 737 MAX plane. A report from the National Transportation Safety Board found that four crucial bolts holding the door plug in place were missing. An initial investigation from the Federal Aviation Authority suggests that Boeing's safety culture leaves a lot to be desired.

Whistleblowers

Boeing has been hit with 32 whistleblower complaints since 2020, according to a report of the Occupational Safety and Health Administration (OSHA). The figures shed light on the extent of alleged retaliation by Boeing against whistleblowers. OSHA handles complaints of retaliation against workers who blow the whistle on the employer, under the Sarbanes-Oxley Act (SOX). The complaints were filed under different statutes, the majority under aviation safety. Two were filed under the category of fraud.

There is no doubt that there was a breakdown in corporate governance, especially the failure of the company to conduct operational audits, engage the board of directors in efforts to correct production flaws, and follow through on the whistleblowing process. Employees said that they did not feel comfortable speaking up as encouraged to do by Boeing’s own Seek, Speak & Listen policy.

Posted by Steven Mintz, Ph.D., aka Ethics Sage, on August 13, 2024. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/.