Considered in light of the Court of Chancery ruling, the DOJ’s core findings in its Boeing investigation are problematic at best. The Court of Chancellery decision describes how Boeing’s safety culture has deteriorated into a culture of cost reduction and profit, under the supervision of a board of directors with prestigious credentials. The Delaware court ruling is a prime example of how poor corporate governance can have a direct and immediate impact on innocent lives with devastating financial consequences.
The Delaware Chancery Court ruling involving Boeing’s board of directors and its failure to properly oversee the 737 MAX safety scandal is based on a damaging set of facts. To set the stage again, several plaintiffs filed derivative lawsuits in 2019, claiming that Boeing’s board of directors violated its fiduciary obligations, in particular (i) Boeing did not have a reporting system in place for monitor the safety of Boeing aircraft; (ii) Boeing ignored the red flags and its duty to investigate; and (iii) the board terminated the CEO and authorized the CEO to cash his compensation in shares.
The indictment by the Boeing culture court
The Court of Chancellery cited the gist of the case – the defendant board members, many of whom were well-qualified and long-time members, failed to fulfill their respective duties of overseeing security and monitoring. the airworthiness of Boeing aircraft, and the extent of those failures, only became apparent after the tragic accidents of the two 737 MAX flights.
Rather than prioritizing safety, Council members focused on a surveillance program that emphasized rapid production and maximization of profits. As a result of this tragic failure to ensure safety, Boeing suffered substantial damage, losing millions in revenue and paying fines and costs. In an ironic twist highlighting fundamental failures of governance, Boeing rewarded several of the responsible board members for ignoring safety concerns with high payouts and retirement plans.
Boeing was founded in 1916 and built as an “association of engineers”. Its managers were familiar with the technical requirements, and for years Boeing has focused on engineering and safety.
As the company has grown (organically and through acquisitions), Boeing’s commitment to safety has waned. In 1997, Boeing acquired McDonnell-Douglas, an aerospace company focused on profit and reducing its commitment to safety. Over time, this profit priority has become Boeing’s priority.
In the 2000s, Boeing’s business model was obsessed with productivity, employee engagement and process improvement, driven by the goal of reducing costs and increasing profits. With the change in focus and culture, Boeing engineers were unhappy and went on strike to improve Boeing’s culture and regain influence in the leadership of the organization.
With the shift in focus, Boeing has seen an increase in safety breaches and regulatory enforcement actions. Between 2000 and 2020, Boeing was cited about 20 times for security breaches and poor quality controls, maintenance and non-conforming parts, as well as failing to provide critical safety information. Boeing was fined $ 6,000 to $ 13 million. Boeing’s quality has suffered and airline customers have raised questions about overall leadership. Management scandals have resulted in the dismissal of two successive CEOs.
After the appointment of a new CEO in 2005 with an engineering background, Boeing’s performance improves but remains inconsistent. In 2013, the 787 Dreamliner suffered lithium-ion battery fires and was grounded. The following year, the NTSB ordered Boeing to improve its assessments and security checks. In July 2012, a Boeing 777 crashed due to inadequate documentation and training manuals.
Boeing’s poor safety performance continued in 2015: thirteen separate civil law enforcement cases were initiated, focusing on Boeing’s failures in quality control, safety protocol violations and manufacturing errors. In late 2015, Boeing settled these issues with the FAA and agreed to pay fines of $ 12 million, with up to $ 24 million deferred pending Boeing’s safety improvements. In February 2021, the FAA announced that it had assessed Boeing $ 6.6 million in late settlement penalties.