Boeing needs a radical board shake-up to regain its altitude

The Boeing board had made some progress on the governance front since the 2018 and 2019 737 Max crashes.  (AFP)
The Boeing board had made some progress on the governance front since the 2018 and 2019 737 Max crashes. (AFP)

Summary

  • A CEO switch with shareholders still in full control of the company may not help. What it needs is safety-focused employee representatives on its board now. It’ll help it regain trust.

Last fortnight, Boeing’s airline customers sent two clear messages when they asked to meet with the planemaker’s directors without its chief executive officer David Calhoun.

The first was that they had lost confidence in Calhoun and his deputies. No matter where you fall on the organization chart, it’s never a good sign when a client wants a tête-à-tête with your boss and doesn’t invite you along.

The board clearly received that message: Last Monday, Boeing said that Calhoun would exit by the end of the year and that Stan Deal, head of the commercial airplanes division, would retire immediately. The other big message had to do with the board itself. By summoning the company’s directors, the airline CEOs were signalling that at the heart of the Boeing mess they see a huge governance problem—that the company’s issues, whether quality or culture or strategy or leadership, all fall squarely on the board, which needs a meaningful overhaul.

Again, Boeing’s directors got the message. The company announced that Chairman Larry Kellner would not stand for re-election at its annual meeting in May. He will be succeeded by Steve Mollenkopf, the former Qualcomm CEO who joined the board in 2020, which gives him some distance from the 737 Max crashes in 2018 and 2019 that killed a total of 346 people.

Even the way the executive shuffle was handled showcased just how ill prepared, complacent and out of touch the board was. Despite all the scrutiny that the management team faced, the board did not have a successor ready to jump in for Calhoun or even for its troubled commercial unit. It pushed longtime executive Stephanie Pope into the unenviable job.

Governance issues are hard to fix. Boards are insular, entrenched and often reticent to create conflict among their members. PwC’s 2023 Annual Corporate Directors Survey found that 45% of directors think at least one member of their board should be replaced but only 11% said their board’s assessment processes led to the decision to not renominate a director. Few companies have term limits for board members, resulting in a paltry 7% turnover rate among directors of companies in the S&P 500.

The Boeing board had made some progress on the governance front since the 2018 and 2019 737 Max crashes. An analysis by Harvard Business Review found that the board lacked technical expertise at the time. With three of the company’s 13 board members also serving on the Caterpillar board and two on the Marriott board, Boeing’s directors at the very least had the appearance of the kind of cosy interpersonal relationships that make objectivity difficult. Meanwhile, the company’s audit committee was responsible for overseeing risk, but its remit was to oversee the financial kind rather than safety. The board has since set up a safety committee and refreshed its membership. Since the start of 2020, four board members with at least 11-year tenures have departed.

But whatever Boeing has done hasn’t been enough. Harvard Business School professor Sandra Sucher told me that given the colossal mess that Boeing is in, it has “permission to think quite differently." Anything else will seem merely incremental.

One way for Boeing is to consider adding a union representative to its board, a request made by the International Association of Machinists District 751, which represents more than 30,000 Boeing workers. Doing this would give the board the voice of employees, many of whom have been sounding the alarm on Boeing’s safety and manufacturing shortcomings for years. It could also go a long way in restoring trust with the public, among which unions have historic levels of approval.

While rare, involving unions in corporate governance in the US is not unheard of, especially in the transportation industry during times of crisis. Both United Airlines and Chrysler added union members to their boards in the past. Former Labour Secretary Robert Reich argued recently on his blog that Boeing archrival “Airbus’s clear leadership over Boeing in matters of flight safety stems largely from differences in ownership and worker power."

It is not a model that translates perfectly to the US, where a board’s duty is above all to the shareholders. Critics argue that it puts union representatives in an impossible position, likely raising conflicts of interest because their loyalty would be to their colleagues rather than shareholders.

But right now, putting safety first rather than cutting costs is in the best interest of all of Boeing’s stakeholders. It’s a culture change that its current directors have so far failed to execute. Opening up the boardroom to employee representation might seem radical, but radical is what Boeing needs now. ©bloomberg

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