What Corporate Boards Can Learn from Boeing’s Mistakes

In February, Boeing shareholders filed a lawsuit against the company’s board of directors. They argued that the board had neglected their oversight duty, failing to hold Boeing accountable for safety before and after the crashes of two 737 MAX airplanes that killed 346 people in 2018 and 2019. “Safety was no longer a subject of Board discussion, and there was no mechanism within Boeing by which safety concerns respecting the 737 MAX were elevated to the Board or to any Board committee,” they wrote in the 120-page filing. Boeing’s strategy to minimize training costs in order to keep the overall cost of the plane low was predicated on unrealistic expectations of 100% pilot effectiveness in correcting MCAS system malfunctions in four seconds. The cost was several hundred lives, billions of dollars in losses, reputational damage that Boeing is still trying to recover, and more. The shareholders suing Boeing argue the board could have prevented it. We argue that there’s much other boards can learn from the Boeing shareholder suit. Boards are fiduciaries, which means that their duty is to protect other people’s interests, generally defined as consisting of a duty of care, a duty of loyalty, and, some legal scholars would argue, a duty of candor. In Back to the Drawing Board authors Colin B. Carter and Jay W. Lorsch, a professor at Harvard Business School, list the responsibilities of boards that include: approving a company’s strategy, budgets and plans and monitoring progress against them; approving the company’s capital structure, major expenditures and M&A activity; appointing the CEO and approving senior executive compensation; ensuring risks to the company are identified and managed; ensuring compliance with legal and community requirements; and establishing ethical standards for the company. Operationalizing these duties is harder than it sounds, and Boeing’s fall from grace offers five main lessons: 1. Hire board members for competence and objectivity. Boeing’s fall from grace didn’t happen overnight. Rather, it occurred over time as the processes that made Boeing a trusted engineering company were eroded. By the time of the crashes, the Boeing board was light on safety and engineering experts and heavy on former government officials. Four of the Boeing board members named in the suit were former government officials in positions unrelated to the industry, including a former ambassador to the U.N. and a former White House chief of staff. Moreover, out of its 13 members, three sat on the board of Caterpillar, and two on the board of Marriott. These inter-relationships increase the difficulty of getting an objective opinion and can foster sectionalism. “Any cross relationship is a problem because it interferes with objectivity,” Charles Elson, professor of finance and former director of the John L. Weinberg Center for Corporate Governance at the University of Delaware explained to Fortune in 2019. Board members have three main roles: to monitor, decide, and advise. Before adding new members, identify the skill sets that are core to achieving your company’s mission in its industry. On issues where the board lacks expertise, bring experts in to help you. 2. Ensure the board structure aligns with industry needs. The Boeing board had five committees (Audit; Finance; Compensation; Special Programs; and Governance, Organization, and Nominating). Audit oversaw risk, but its charter focused on financial risk, and it had no mandate to discuss safety. Moreover, the committee had no mechanism for receiving alerts from whistleblowers. According to the lawsuit, this is at odds with the industry where several different airlines, including Southwest, JetBlue, and Delta have board committees specifically established to address safety. Boeing didn’t establish a board committee to address safety until April 4, 2019, which was six months after the first crash in Indonesia, and nearly a month after the second crash in Ethiopia. Instead, safety issues were reviewed by a “Safety Review Board” run by employees, which had neither a mandate nor a mechanism for reporting to the board. Meanwhile, the Boeing board was not even aware the Safety Review Board existed until after the 737 Max Jet had been grounded in 2019. 3. Prepare for the worst case. The CEO of Medtronic, a Boeing board member, said every board meeting at Medtronic started with a discussion about product safety. Another board member shared this suggestion with Boeing CEO Dennis Muilenburg, however at the next board meeting, in April 2019, the company’s vice presidents for engineering and safety gave their first presentation to the board — and it was focused on certification, according to an account in The Wall Street Journal. Research shows that when there’s an impending disaster, up to 70% of people enter a state of denial call the “normalcy bias.” It’s called “normalcy” because our desire to flee from disaster goes so deep that when a terrible event occurs our first instinct is to deny reality instead of dealing with it. And it’s a “bias” because it interferes with our ability to imagine the scale and impact of a situation we’ve never encountered before. Boards need to mitigate for the normalcy bias. Create a process to periodically imagine the largest threats to the company and estimate all the potential costs they could create, including government actions like the $2.5 billion settlement Boeing entered into with the Department of Justice. This will anchor projections to the real world and will inspire speed of response, skills boards need to avoid a scenario like Boeing’s. 4. Manage for truth and realism. If a board can’t have an open and honest discussion where everyone shares their opinion even if it’s unpopular, it will not be able to produce good decisions. In order to create an environment where people share the truth, Dr. Amy Edmonson, a Harvard Business School professor who studies psychological safety, recommends responding to input with appreciation — even if the news is bad or someone is pointing out a potential problem. Foreseeing a problem means averting a crisis and deserves thanks. UPS’s board earned kudos throughout the late 1980s and early 1990s because members were able to have candid debates with each other and with the CEO. Debates covered everything from UPS’s signature brown to the strategic decision to go global after developing partnerships with other mail carriers around the world. Another useful tactic to promote candor is holding board-only meetings without the CEO, a best practice that emerged post-Enron to allow board members to share concerns related to approaches the CEO is taking. The board is itself a team, and like all teams, needs to build effective working relationships, including the ability to conflict openly. If people are hesitant to speak up, use anonymous polls to help members raise tough questions and issues that keep them up at night. Finally, in the event of a disaster, boards should focus on gathering all the information they can about what happened, particularly asking about warnings from knowledgeable insiders further down in the organization. Minimizing the harm and demonizing bearers of bad news are sure red flags that the normalcy bias is, or has been, at play. 5. Practice accountability, and punish wrongdoing. Despite CEO Muilenburg’s several missteps, from failing to ground the 737 Max jet immediately to insisting that the issue would be fixed with better training and a software upgrade, the board continued to back him up. On November 5, 2019, Board Chairman David Calhoun told CNBC that the board believed Muilenburg had done “everything right.” Muilenburg wasn’t let go until December 22, 2019, and he left with an $80 million exit package even without severance. He was succeeded by Calhoun. The shareholder lawsuit alleges the exit package is because a dispute between Muilenburg and the board would have exposed the board’s mistakes. In a 2018 study, trust researchers found that trust scores in a company improved after a CEO who had committed wrongdoing was dismissed. By continuing to back Muilenburg and then letting him walk away with nearly $80 million, the board sent the message that it condones his missteps, which inspires very little trust in them and their ability to right Boeing’s wrongs. It’s no surprise that the board is being sued. Board members have an incredibly difficult job. On average they spend between 250 to 350 hours a year advising the company, and they must understand the manifold issues management is dealing with, as well as the industry and global context. Members are expected to monitor the CEO and company’s performance, serve as its ethical backbone, and act to course correct when things go wrong. When they fail at these duties, public outrage can be immense — as we saw from the Boeing shareholder lawsuit. And these lawsuits are on the rise: 165 were filed in 2013, as compared to 403 in 2018. Boeing’s board failed in many ways but buried in its failures are lessons other boards can learn. You can set yourselves up for success by ensuring you have the right members, are structured correctly, and are able to have have intentional, open, honest, and timely conversations where issues of accountability can be fully addressed. Editor’s Note (8/23/21): Charles Elson’s title has been updated.

What Corporate Boards Can Learn from Boeing’s Mistakes

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