Is Boeing too big a company to fail, or jail?

Is Boeing too big to fail, or jail?  After the two Boeing 737 MAX 8 crashes, the Department of Justice found that Boeing had acted fraudulently with respect to the FAA and executed a deferred prosecution agreement that was signed in 2021 and had a provision that Boeing had to toe the line for a period of three years. Three days before that agreement would have expired, Boeing had a major incident with the Alaska Airlines door panel blowout that clearly demonstrated that Boeing failed to comply with the terms of the agreement. That means that the DOJ has until July 7th to decide whether or not to file criminal charges against Boeing.

Clearly, the DOJ has a difficult decision on its hands. Were it to accept the demands of the Boeing victim families and fine Boeing nearly $24 billion, it could bankrupt one of America’s largest employers, causing extreme economic dislocation. While that would entail justice for some, whose tragic losses merit justice, it could cause difficulties for tens of thousands of employees, and the supply chain that was uninvolved with Boeing’s fraud on the MAX. The DOJ has to balance the needs of the many against the needs of the few.

Leadership at Boeing continues to be an issue. Some of those in charge of the company just before the crashes remain on its Board, including current CEO Dave Calhoun, but many of the key players have left the company. It is difficult to prove that individual executives or directors directly participated in fraud, even though their actions created the toxic culture that enabled shortcuts on safety to be taken. The question is who do you jail, and how would that make a difference at this point?

Both the former CEO Dennis Muilenberg and current CEO David Calhoun are fair targets, as they set the cultural standard for the company. But proving that they actively participated in the fraud, rather than setting the lack of ethical standards is difficult. David Calhoun has already admitted failure, leaving the company speculating about successorship, which cannot arrive soon enough. The problem is that several industry-knowledgeable candidates have already turned Boeing down, as the turnaround task entails significant risk and is by no means certain.

While bringing charges against lower level employees could implicate those that they report to, working up the chain to bring charges at the highest level would be time consuming and counter-productive, as the company would quickly be in cover your own rear end mode. Without a smoking gun and obvious person to prosecute, who to charge, and whether such an action would be effective is difficult at best. Perhaps the CEO position is the one to target, particularly with David Calhoun already effectively retired in the view of most employees and the industry. Would you listen to him, or to the potential candidates to replace him as an employee?

Boeing has seen it market capitalization drop by $100 million in the last few years. The difficulty in punishing the company with further significant fines would risks its viability. The company is in jeopardy of moving to junk bond status after the next quarterly report, which our sources indicate will be another cash flow disaster. It has already paid a heavy price for its prior managerial incompetence. But it is also clear that the status quo cannot continue.

But if the DOJ continues to accept FAA oversight of the company without a strong incentive for corrective action, life at Boeing could continue in the same mode that it has, with a flawed and arrogant culture and Boeing executives and managers laughing at regulators behind their back. It is quite clear that the FAA hasn’t been able to appropriately influence Boeing, and despite the crashes occurring in 2018 and 2019, corrective actions are still necessary. While improvements have been made over the last five years, the Alaska Airlines decompression event indicates that Boeing still has a long way to go. The FAA has had five years to make improvements that were meaningful, but focused on paperwork audits rather than physically observing what went on in Boeing’s factories. That needs to change. Should we take it on faith that the FAA will change its stripes and crack down on Boeing? Would you if you were in the position of the DOJ? I certainly wouldn’t.

So what does that leave? If the company is in too weak a financial condition for meaningful fines and has too large a footprint for economic sanctions that would cause even more displacement, enforcement of needed change will need to come from another directions. That will likely entail the employment of an independent monitor of Boeing.  The DOJ has compliance officers for DPAs, but this may be the largest and most complex they will handle.

In that process, somebody needs to have the power to pull the plug when something goes wrong and shut down production until it can be fixed. An independent monitor could do that, but it will take quite a few people and likely new internal procedures at Boeing to succeed. The questionsis how well could existing DOJ compliance teams, under a new deferred prosecution agreement, execute that task?

There are certain things that are obvious. First, the compliance team will need to work closely with the FAA, and have the back of their sister agency. Second, failures in compliance will need to be closely monitored on the line, with whistleblowers listened to rather than ridiculed in a new Boeing culture. The days of cutting corners and managing only to shareholder value need to be over, and an external monitor must both understand and help the company implement cultural change.

The Bottom Line

What is likely to happen is that a new deferred prosecution agreement will be executed, along with fines and a requirement to be monitored by DOJ compliance personnel. Those individuals will have the power to enforce the agreement. That agreement is likely to balance fines, operational oversight, and culture in an effort to restore Boeing to the company it once was. While no individual is likely to be prosecuted or jailed, a compliance team must have the ability to impact operational processes and effect cultural change.

One example is traveled work that happens when a task remains incomplete when it is time to move an airplane to the next work station. The process of continuing to move an airplane that has non-conforming installations to the next work station needs to be stopped, as does traveled work. Boeing needs to learn to get thinks right the first time, without exceptions, if they are going to re-build their safety reputation.

Fines are easy to impose. Compliance monitoring of a very complex manufacturing process is somewhat more difficult. Changing a corporate culture is extremely difficult, even though that is what needs to be done. Boeing needs to return to a culture in which doing the right thing was never in question, as it is today. Can the law and DOJ truly impact cultural change? In this case, it needs to if Boeing is to pull out of its downward spiral.  Our national security may depend on their success.

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Ernest Arvai

President AirInsight Group LLC

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