In December, when Boeing’s board of directors fired CEO Dennis Muilenburg, some corporate governance experts and investment analysts wondered what took so long.
By then, the aerospace company’s latest iteration of its best-selling airplane, the 737 MAX, had been grounded worldwide for more than nine months following two crashes that killed 346 people.
Investigations, lawsuits and news stories revealing festering internal problems had piled up. Muilenburg faced public grillings and calls for his resignation during Congressional hearings. Revenues and stock values plummeted. Worst of all, Boeing’s once sterling reputation for quality and safety was badly tarnished.
The prolonged hesitance to fire Muilenberg in the face of spiraling crises underscores concerns about the board’s oversight of the company, even as it faced the most troubling period of its 103-year history. It also raises questions about the board’s culpability in the tragedies and its ability to reestablish confidence in the company among regulators, Wall Street and the flying public.
“Nine months is a long time — it’s a forever in business for a crisis like this,” said Charles Elson, a professor of finance and head of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “So, the question is, where was the board during that time? If they only came around ‘late in the game,’ well why is that?”
It wasn’t until Muilenburg backpedaled from what had been his steadfast forecast that the MAX would be cleared to fly again by the close of 2019 that the board’s confidence in him finally broke. Once the timeline for the MAX’s recertification fell apart, the company’s already strained relationships with suppliers, airline customers and regulators reached a tipping point.
Up until then, “every board meeting ended with a confidence question, and we always asked the question: Does he have it?” Dave Calhoun, a Boeing director for a decade and Muilenburg’s eventual replacement, later told reporters. “And we stayed with it and we stayed with it, and then we got into December, where we really did have sort of a schedule that was committed to in a really big way.”
“The vote at that moment in time, at the end of the last meeting, simply was the end of our confidence,” Calhoun said of the board’s Dec. 22 decision. “And then, we moved forward.”
Calhoun, as Boeing’s new president and CEO, has said board members didn’t learn of the various problems that ultimately surfaced during Boeing’s developing crisis — from design flaws with the MAX’s flight control software to deep-seated cultural issues within the company — “until too late in the game.”
“And that’s life,” he said. “We all wish it was earlier, but it wasn’t.”
Consumer advocate Ralph Nader, whose grandniece was killed in the second MAX crash, doesn’t buy such excuses, calling Boeing’s board “completely culpable.”
“Why should [Boeing] keep the old regime that ratified all of the problems under Muilenburg?” he asked. “The whole board should resign.”
Several of Boeing’s board members did not respond to interview requests for this story, nor did the company make any of them available for comment despite repeated requests.
The Boeing board boasts big-name officials with varied backgrounds in business and industry, government and the military.
They include three former U.S. ambassadors (Caroline Kennedy, Nikki Haley and Susan Schwab); two retired Navy admirals (Edmund Giambastiani Jr. and John Richardson); and a slate of current or former corporate executives with experience in medical and biotech industries (Robert Bradway and Arthur Collins Jr.); electrical utilities (Lynn Good); air carriers (Larry Kellner); insurance companies (Edward Liddy and Ronald Williams) and private equity (Mike Zafirovski).
Calhoun, a board member since 2009, held executive roles at the Blackstone Group private equity firm, marketing researcher Nielsen and General Electric.
Corporate boards, which exist to ensure publicly traded companies are managed properly for shareholders, typically seek a mix of directors “that balance different competencies,” said John C. Coffee Jr., a Columbia Law School professor and director of its Center on Corporate Governance.
“The bulk of these boards will be current and former CEOs of big companies, then maybe someone with international trade expertise, and a senator with connections in Washington, D.C.,” Coffee said. “Then, you might throw in some window dressing — a Nobel Prize winner or another prominent name that looks good to the outside world.”
Boeing’s board, while not lacking in name recognition or business prowess, has drawn criticism for a seeming deficit of technical, safety and engineering expertise. That’s a byproduct of Jim McNerney, a longtime GE administrator who, in 2005, became Boeing’s first chief executive without an aviation background, said Richard Aboulafia, vice president of analysis for the Teal Group, an aviation industry analyst.
“The board you see today was largely created by McNerney, and he packed it with people with zero engineering experience,” Aboulafia said.
When Muilenburg, an engineer who climbed the ranks into the boardroom, succeeded McNerney as CEO in 2015, few other directors had any technical experience. Calhoun, who is not an engineer, oversaw aircraft engines as an executive at GE, and Giambastiani managed some high-tech programs in the military.
“There’s a lot of politically connected folks, but not so much engineering,” Elson said. “And obviously, something went awry with this company in the tone that was set for engineering and safety.”
It wasn’t until late September, well into the MAX crisis, that the board sought to address such weaknesses by announcing it would permanently empanel an Aerospace Safety Committee, formed in August and headed by Giambastiani, to oversee safety in aircraft design, production, operation and maintenance. Richardson, the other retired admiral who joined Boeing’s board in October, was promptly assigned to the safety committee, bringing military experience that included regulatory and safety compliance management for nuclear warships.
Calhoun, since assuming command, has emphasized that a primary focus will be restoring trust and transparency in “both the engineering disciplines [and] the safety-monitoring processes.”
Such assurances so far haven’t kept investment analysts from downgrading the governing board’s performance. Research analytics firm MSCI rates Boeing a 4.8 on a 10-point scale for “quality of governance” — decidedly average among its industry peers.
“For a company of this size, that’s not what we want to see,” said Ric Marshall, who heads MSCI’s research on environmental, social and governance risks.
Boeing’s governance ratings have steadily declined over the past five years, with MSCI slightly downgrading them again last month.
“The circumstances Boeing has faced is revealing the weaknesses on the board,” Marshall said.
“Crises occur at all companies, but sometimes when they occur, a company can immediately deal with them so they don’t have an adverse impact,” he said. “What we’re seeing here is that there was a problem, and Boeing’s board lacked the strength and resiliency to deal with it quickly and effectively. Now, Boeing has a crisis because the board wasn’t up to the challenge.”
With pressure mounting in October, Boeing’s directors tried to quell perceptions of weak governance by stripping Muilenburg of the board’s chairmanship, even while retaining him as chief executive.
Having one person fill both roles is generally viewed as a poor corporate governance practice because it centralizes power too much. At the time, Boeing announced the move in part aimed “to strengthen the company’s governance and safety management processes.”
Calhoun, who was installed as board chairman, further explained in a statement that the move sought to enable Muilenburg to “focus on running the business with the board playing an active oversight role.”
During last month’s press call, Calhoun said directors never saw signs that the company, under Muilenburg, had traded safety priorities for business interests during what he described as “a nine-month trial by fire in the crisis-management world.”
“All of us were hoping and praying that Dennis could get through that … in good order,” Calhoun said. “And that just didn’t happen. So here we are.”
Later, on an earnings call with analysts at the end of January, Calhoun described his oversight role on the board while Muilenburg was CEO in a surprisingly passive way, as he asserted his intent as the new CEO to fix Boeing’s cultural problems.
“I get a lot of media attention around the idea that I’m somehow an insider,” Calhoun said. “What if I told you I simply had a front-row seat to everything you saw? … And now I’m the one sitting in the operating seat.”
One reason some board members may have given Muilenburg so much leeway was a coziness they’d developed while serving with him on other boards, some good-governance experts theorized.
Calhoun and Schwab, among Boeing’s longest serving board members, simultaneously served with Muilenburg on Caterpillar’s board of directors. Calhoun and fellow board member Zafirovski also previously worked together at The Blackstone Group, and before that, in executive roles at GE under cost-slashing CEO Jack Welch.
Such outside relationships among board members create a potential conflict situation that may impact decision-making, the experts say.
“They call it ‘director interlock,’ and it’s a concern for effective oversight,” Elson said. “Your relationships on other boards could compromise your independence and objectivity, which is critical for a director.”
The sheer number of directorships an individual holds at any given time can also create “overboarding” problems, or a situation where directors spread themselves and their oversight expertise too thin, Marshall said.
Boeing’s governance principles require that at least 75 percent of its board directors satisfy the New York Stock Exchange criteria for independence, meaning that they have no material relationship with Boeing other than as a director. The company also limits its directors from serving on more than four other corporate boards.
As of last year, 11 of Boeing’s 13 directors simultaneously served on at least one other corporate board besides Boeing’s, with two of them (Liddy and Schwab) sitting on three other boards.
Such red flags and lackluster governance performance ratings haven’t deterred Boeing from paying its board members well, however. On average, the board’s directors receive $345,469 annually in cash and stocks, according to the company’s 2019 proxy statement.
That puts Boeing in the top tier of director compensation for publicly traded companies, according to two studies last year. Equilar found Boeing’s median pay for directors ranked 23rd among Fortune 100 companies, and CGLytics ranked Boeing’s governing board pay 91st among all S&P 500 companies.
Boeing’s high pay set the tone for creating a “trophy board of interlocking cronies … selected to say yes to the CEO,” Nader contends.
Instead of building a new airplane, he said, Boeing cut costs by adding big new engines to an existing 737 airframe to create the MAX. Muilenburg and Boeing’s pliable board then redirected at least some of the company’s R&D savings into more than $43 billion of stock buybacks that drove up stock values in recent years, Nader said.
“The board presided over and ratified this disinvestment in its own company and created this situation,” he said. “Is that the kind of governing institute you want for an airplane company? What’s really needed to restore Boeing’s tradition is putting people on the board who know the business and are skilled and knowledgeable enough to say Job One is engineering.”
Aboulafia noted the genesis of the MAX crisis lies with McNerney, who opted to upgrade the 737 series instead of developing a new airplane. McNerney also launched Boeing’s aggressive stock buyback plan, with Muilenburg later continuing down that path, Aboulafia said.
“I think [board members] let a very toxic culture happen,” Aboulafia said. “They allowed Boeing to become a culture of cash extraction instead of engineering, and walked away from the people who had helped build the company’s reputation.”
Calhoun has pushed back against suggestions he isn’t up to the task of restoring Boeing’s reputation, insisting “I’ve probably got more convictions around [engineering and safety] topics than almost anybody.”
Corporate strategies consultant Christopher Clearfield, who co-authored “Meltdown,” a book examining how organizational complexity results in systems failures, said he doesn’t think Boeing’s directors have implemented a winning plan for solving the company’s root problems.
“The board’s failure to catch problems with the MAX is not a technical failure, it’s a failure of not having the right organizational perspective and oversight systems that make sure management is asking the right questions when it comes to risk factors,” Clearfield said. “And those problems likely have existed at Boeing long before either of the crashes.”