Boeing: A Failure in Corporate Governance
Focusing on financials over product quality never works out
Growing up, I was a major plane enthusiast.
I remember gazing up at the sky, watching in awe as giant planes soared overhead.
The flights I took were experiences in their own right. I was a window-seat hogger: my eyes locked onto the plane’s colossal wing as it sliced through the clouds and soared above them.
For much of my life, Boeing and Airbus have dominated commercial aviation. Naturally, as a kid, I idolised both companies — but Boeing especially.
Way before my time, it had already been known for engineering excellence. Since the iconic Boeing 707 was launched in the 1950s, Boeing had cultivated a reputation for technical mastery and safety. Cue the company’s iconic slogan: “If it’s not Boeing, I’m not going.” (Boeing still sells t-shirt merch with that line).
But Boeing’s reputation has plunged. It’s faced a multitude of disasters over the past decade, which have ramped up in recent years. Its 737 Max crashed in 2018 and 2019, killing 346 people in total. In January, a door plug launched out the side of another 737 Max of Alaska Airlines, less than 10 weeks after it was delivered. And just over a week ago, an emergency slide came off a Delta Airlines Boeing 767, forcing the plane to make an emergency return to JFK Airport.
Unsurprisingly, CEO Dave Calhoun has announced that he will be stepping down from the company. This is a good sign of accountability. Calhoun’s appointment as CEO in 2020 was baffling to many in the industry. He had no engineering background, previously serving as head of portfolio operations at Blackstone, CEO of Nielsen, a media company. Before that, he also spent 26 years at GE, much of it under the tenure of Jack Welsh. (Yes, that Jack Welsh that normalised the rank-and-yank system, ruthless cost-cutting, and a relentless focus on quarterly earnings over long-term business health.)
Calhoun’s resignation is a good sign of accountability, but more needs to be done. Boeing’s problems may have gotten worse under Calhoun, but they were definitely brewing before that. Calhoun was only appointed after predecessor Dennis Muilenberg left in the wake of the two fatal 737 Max crashes.
Boeing’s 1997 merger with McDonnell Douglas is largely considered to be the start of Boeing’s engineering downfall. Before the merger, Boeing had a reputation for prioritising quality and safety over financial performance. This meant that Boeing had lower corporate profits than its peers, but a higher standard for excellence.
Officially, Boeing acquired McDonnell Douglas, but many executive positions became filled by McDonnell Douglas executives, who prioritised financial performance over engineering safety. Gradually, according to experts, “everything had to be cost-justified”. They began systematically cutting costs, promoting accountants and business execs over engineers, and spending money on share buybacks and acquisitions instead.
What’s next for Boeing? It’s facing a Justice Department investigation (potentially involving criminal liability) regarding the 737 Max crashes. It also has to search for a new CEO. Calhoun is pitching an internal candidate, Stephanie Pope. Pope has an impressive resume as a financial management executive, but has never served in a manufacturing oversight position before.
Also, Calhoun should not be publicly involved in the selection process for the next CEO. As a CEO departing in disgrace, it’s highly unusual for him to be even suggesting a successor.
However, there’s hope with new board chairman Steve Mollenkopff. Mollenkoff, a former Qualcomm CEO, was appointed chairman on March 25, the same day Calhoun announced his departure. With 38 patents to his name, he’s actually an engineer by training, who innovated training and quality control processes at Qualcomm. It’s been rumoured that under his leadership, the board is considering Pat Shanahan, a veteran manager with a strong mechanical background.
That’s good news. But even if the new CEO has a strong engineering background, it’ll be an uphill battle to turn around Boeing’s culture and reputation. With even Boeing’s own engineers saying that they “wouldn’t fly on one of these planes” as far back as 2014, it’s clear that Boeing’s workforce culture has some deep-rooted, systemic issues. Culture takes time to improve, and even the best, more inspiring engineer-manager can’t solve these issues within 1–2 years.
Improving Boeing’s reputation will take longer still. As Warren Buffett once said, “It takes 20 years to build a reputation and five minutes to ruin it.” Travellers are increasingly using filters to eliminate flights on Boeing planes on online travel agent platforms. In February, customer trust in Boeing fell 16 percentage points since December. It’s reasonable to say that it’ll have fallen even further by now. And Boeing’s not only facing backlash from passengers, but governments and airlines too. Trust in Boeing will take a long time to mend.
Ironically, in Boeing’s single-minded pursuit of monetary results, its financial performance has plunged. CNN estimates that Boeing’s various scandals have cumulatively resulted in more than $31 billion in losses since 2019. And in the past five years, Boeing stock price is down 56%. That return is 87% below Airbus’ stock, which is up 31% in the same timeframe.
Milton Friedman said: “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.” A similar statement holds true in business:
A business that puts financial performance before customer satisfaction will get neither. A business that puts financial performance before customer satisfaction will get a high degree of both.
Putting financial performance above customer satisfaction isn’t new. But Boeing’s been one of the biggest examples in recent years demonstrating why that’s such a bad idea.
Ultimately, what this incident proves is that the main driver of business performance is how good your product actually is, not how many costs you can cut. Executives will do well to remember that.
