Boeing CEO Survives Vote, but Shareholder Speech Criticized

News Boeing’s Chairman and CEO was re-elected after a proposal to oust him as Chairman failed to win enough votes, as 34% of voters supported the proposal, which argued that an independent Chairman would be better suited to helping the board develop long-term strategy while allowing CEO Denis Muilenburg to focus on day-to-day operations. Boeing’s Board of Directors recommended voting against the proposal. Boeing’s last 13F filing indicated that the company has 69.96% institutional ownership, which means that some institutional investors voted in favor of the proposal, which wasn’t passed with the overwhelmingly margins that most proxy votes are when recommended by the board. As a result, despite survival, a message has been sent by Wall St. to Mr. Muilenburg and Chicago through this vote. Muilenburg in his speech backed away from culpability for the accidents, citing a “chain of events” and “some procedures not being completely followed” in speaking about the MAX crashes. This was a major PR gaffe, and could backfire in legal and insurance liability. Analysis Muilenberg’s survival as Chairman illustrates how difficult it is for individual shareholders to impact change when institutional investors typically vote with management. While Muilenburg has improved the stock prices, primarily through share buy-backs, the company’s portfolio is losing ground. The MAX has only a 40% market share with Airbus now taking 60% of the narrow-body market that was traditionally 50-50. The 777X, the next aircraft to be introduced, has not sold well and appears on the verge of being a major market disappointment, while the 787 is selling well, but may never break even after the initial development debacles, and Boeing’s performance on the tanker program is an embarrassment. The NMA, Boeing’s next airplane, has been deferred another year while Airbus gains market share from 757 and 767 operators. While share buy-backs have pumped the stock price, the emergence of whistleblowers talking about 787 production issues, the USAF rejecting tankers for poor quality, and the failure of a safety system on the MAX, Muilenburg’s leadership has not left Boeing looking like a world-beater once you look under the hood. The 737 problems have been well described, and it is clear that the MCAS system, and Boeing’s failure to train pilots adequately on it (or even inform them of its existence) were among the causal factors in both crashes. The combination of events that resulted in the fatalities started in Renton, where some responsibility is likely. Were the accidents in France, it is likely that criminal charges would be brought against the engineers and regulators responsible for the oversights. Insight Muilenburg stated that “both accidents were a series of events...what we know is that in this case, there was erroneous angle of attack information that came into the airplane from multiple causes. We know that at some point during the flight, that activated the MCAS control loss. And we know that ultimately, there were actions or actions not taken that contributed to the final outcome.” He stated that the crashes were not due to a technical slip or an unknown that slipped through the certification process. Apparently, Boeing’s lawyers didn’t like his previous statements, which seemed to admit at least some culpability. Our view is that the design of a flight critical safety system that relied on a single sensor borders on criminally negligence in design given normal industry standards for redundancy, which combined with the software not performing as intended, a likely result of inadequate testing, and a lack of knowledge about this system in Boeing’s training were the major causes of the crash. The culpability for all three elements lies with Boeing. It now appears that Boeing will push a solution with the FAA for tablet training for pilots. Even the American Airlines pilots union is calling for additional simulator training, and it is likely that foreign regulators will also require additional simulator time. This is not the time for Boeing to be looking for the easy way out. They have already demonstrated what results from that approach.

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