Article from the Globe and Mail, August 5th, 2019. David R. Beatty is a founder of the Directors Education Program, in partnership with the Institute of Corporate Directors and Rotman Executive Programs at the University of Toronto.
In an era in which technology, ethics and managerial responsibly are becoming more complex, a chief executive officer sets the tone for their organization. If something is rotten in the company, the board of directors should fire the top executive. With the recent well-publicized failures of the Boeing 737 Max leading to two catastrophic accidents, that should have been the fate of Boeing’s CEO, Dennis Muilenburg.
For the past two decades, Boeing has been in a race against its main competitor, Airbus, for customers in the large passenger jet category. With the industry’s main customers, global airlines, becoming ever more concerned with the rising price of jet fuel, the Boeing-Airbus race also turned into a competition to develop new fuel-efficient planes.
Developing a new plane is an expensive and time-consuming project, typically consuming billions of dollars in capital. Airbus took the approach of installing a new, larger engine in the exact same place on its Airbus320 that it said would save its clients about 15 per cent in fuel. The new A320neo model was the same plane as the A320, so there was no need for extensive pilot training.
Boeing was not able to update its 737s in the same manner, because the larger engine did not fit under the wing. Under commercial pressure from its rival, it then made a number of unfortunate decisions.
The 737 Max engines are placed higher and further forward on the wing, causing the plane to respond differently aerodynamically. One issue identified was the potential for the plane to stall during a climb. New software was created to prevent such stalls, called the Manoeuvring Characteristics Augmentation System, or MCAS. But the software created new problems, namely the inability of pilots to control the plane while MCAS was in effect.
Even though, in fact, the plane responded differently, Boeing insisted that the 737 Max was simply an engine update similar to that of the A320neo. To top the situation off, the Federal Aviation Administration seemed to hand over its regulatory oversight of the 737 Max to the manufacturer. In light of the two deadly accidents, it appears that these hardware and software engineering workarounds were lethally flawed.
It would have been impossible for the Boeing board of directors to know the details of the challenges facing Boeing in attempting to respond to the advent of the Airbus A320neo. Of its 12 independent directors, all had extraordinary careers, but only three had direct airline industry experience: David Calhoun, a former head of GE Aircraft Engines; Admiral Edmund Giambastiani, who was Chairman of the U.S. Joint Chiefs of Staff; and Lawrence Kellner, the former CEO of Continental Airlines.
After the first accident, involving Lion Air, questions about safety would likely have been asked of Boeing’s leadership team by the board. But after the second accident involving Ethiopian Airlines, there must surely have been more detailed inquiries into the challenges Boeing faced in matching the Airbus innovation and the resulting tradeoffs that were made between commercial success and passenger safety.
The person ultimately responsible for the operating culture at Boeing is the CEO, Mr. Muilenburg. And it is the board’s solemn task to hold him accountable for these tragedies. What is holding it back? The board’s continuing failure to act is reminiscent of the Wells Fargo board, which apparently never discovered the decades-long push to make sales targets at the branch level that led to three-and-a-half-million fraudulent accounts. And when the fraud was uncovered, the board initially did not move to remove CEO John Stumpf.
Why are boards of directors so captured by CEOs like Mr. Stumpf and Mr. Muilenburg? First, the businesses are hugely complex and nuanced, so it is highly unlikely that a non-expert director would know much about the business except what he or she discerned from the CEO at board meetings. Put simply, directors eat what they are fed.
Second, few directors ever get out into the field to see the operating cultures at work. A Boeing director would have had significant obstacles to understanding the operating culture of the company; but, just perhaps, chatting with pilots who fly the company’s planes may have uncovered something.
Third, boards composed of directors with eminent business credentials tend naturally to be more polite and politic than outspoken and demanding. Most have been on the other side of the table and would be terribly respectful of the challenges faced by a CEO. There is a natural tendency to believe and befriend the sitting CEO.
Whatever the real reasons behind Boeing’s lack of action and Wells Fargo’s delayed action, the trust that is placed in these men and women as the fiduciaries responsible for the business has been lost. Their failure to act is not a practice for other boards to emulate. Instead, they provide a cautionary tale about the need for independent advice to boards and for directors to take a much more active approach to their responsibilities to the organization – and to society.