Ignoring Quality Controls to Maximize Profits

The case of Boeing and its manufacturing deficiencies and production flaws is a tale of what can happen when a company puts profitability over safety. Most readers will be aware of the Boeing airplane crashes between 2018 and 2024 that threatened the very existence of a manufacturing company whose name was once synonymous with engineering excellence. What you may not know is the extent to which Boeing ignored manufacturing deficiencies that led to flaws in the MAX line of planes. As a result, hundreds of passengers lost their lives. Boeing hid the problems, stating to the public and regulators that there was nothing wrong with the planes all the while problems were being discovered.

I have previously blogged about safety issues including the role of whistleblowers. In this blog, I look at regulatory actions taken against Boeing, in large part due to an unethical culture that ignored safety risks to keep up with the competition from the European manufacturer of the widebody airplane—Airbus.

The internal controls should have led to full disclosure of the production flaws to protect investor and creditor interests. The possible financial effects of lawsuits were ignored. Even though Boeing was aware of the risks, they ignored them to meet their objectives.

There were many failings of the board of directors and failure of quality controls including:

·         Failure to implement priority safety oversight. None of the Board’s committees were specifically assigned responsibility for overseeing airplane safety.

·         Failure to properly train pilots on the airplane control system--the Maneuvering Characteristics Augmentation System (MCAS).

·         Failure to formally monitor or discuss safety on a regular basis.

·         Management’s periodic reports to the Board did not include safety information related to overall product safety issues.

·         The board did not have a mechanism for receiving internal complaints about airplane safety and it never learned about any employee or whistleblower safety complaints.

·         Absent controls on airplane safety, the Board pushed for meeting production deadlines and remaining competitive with its chief rival, Airbus.

·         Boeing adopted an aggressive schedule to develop the 737 MAX in response to Airbus competition thereby glossing over significant re-engineering issues.

Boeing engineers became concerned about safety and manufacturing concerns. In the summer of 2018, an engineer raised safety concerns with the 737 MAX general manager and factory leaders, stating in a written communication, “And for the first time in my life, I’m sorry to say that I’m hesitant about putting my family on a Boeing airplane.”

Fallout from the MAX Crashes

Boeing CEO Dave Calhoun had the opportunity to reset the company’s culture in the aftermath of the disasters in Indonesia and Ethiopia. Instead, he essentially doubled down on the same strategy, laying out a plan in 2022 to generate $10 billion of annual free cash flow by 2026 and start returning some of that to shareholders.

Following the blowout, FAA inspectors found “multiple” instances where quality control procedures were not followed. Another assessment by an expert panel mandated by Congress described a “disconnect” between Boeing’s senior management and its assembly workers, some of whom feared retaliation for reporting safety issues. “Their priorities have been on production, and not on safety and quality,” according to FAA Administrator Michael Whitaker. The agency ordered Boeing to cap rates of production until it is satisfied the problems have been addressed.

Since the Alaska incident, Boeing says it has responded by, among other things, giving mechanics more time to complete compliance sweeps and rewriting an incentive formula for employee bonuses to focus mainly on safety metrics. Boeing also entered talks to repurchase Spirit, the fuselage manufacturer at the center of many quality issues.

SEC Rulings

On September 22, 2022, the SEC charged Boeing and its former CEO, Dennis A. Muilenburg with making materially misleading public statements following crashes of Boeing airplanes in 2018 and 2019. The crashes involved Boeing’s 737 MAX airplane and a its flight control function. MCAS. According to the SEC’s order, after the first crash, Boeing and Dennis Muilenburg knew that MCAS posed an ongoing airplane safety issue, but nevertheless assured the public that the 737 MAX airplane was “as safe as any airplane that has ever flown the skies.” Later, following the second crash, Boeing and Muilenburg assured the public that there were no slips or gaps in the certification process with respect to MCAS, despite being aware of contrary information.

"There are no words to describe the tragic loss of life brought about by these two airplane crashes," said SEC Chair Gary Gensler. "In times of crisis and tragedy, it is especially important that public companies and executives provide full, fair, and truthful disclosures to the markets. The Boeing Company and its CEO, Muilenburg, failed in this most basic obligation. They misled investors by providing assurances about the safety of the 737 MAX, despite knowing about serious safety concerns. The SEC remains committed to rooting out misconduct when public companies and their executives fail to fulfill their fundamental obligations to the investing public."

According to the SEC’s order, one month after the Lion Air flight, a 737 MAX airplane, crashed in Indonesia in October 2018, Boeing issued a press release, edited and approved by Muilenburg, that selectively highlighted certain facts from an official report of the Indonesian government suggesting that pilot error and poor aircraft maintenance contributed to the crash. The press release also gave assurances of the airplane’s safety, failing to disclose that an internal safety review had determined that MCAS posed an ongoing “airplane safety issue” and that Boeing had already begun redesigning MCAS to address that issue, according to the SEC’s orders.

Approximately six weeks after the crash of the Ethiopian plane, another 737 MAX, and the grounding by international regulators of the entire 737 MAX fleet, Muilenburg, though aware of information calling into question certain aspects of the certification process relating to MCAS, told analysts and reporters that “there was no surprise or gap . . . that somehow slipped through [the] certification process” for the 737 MAX and that Boeing had “gone back and confirmed again . . . that we followed exactly the steps in our design and certification processes that consistently produce safe airplanes.”

"Boeing and Muilenburg put profits over people by misleading investors about the safety of the 737 MAX all in an effort to rehabilitate Boeing's image following two tragic accidents that resulted in the loss of 346 lives and incalculable grief to so many families," said Gurbir S. Grewal, Director of the SEC's Enforcement Division. "But public companies and their executives must provide accurate and complete information when they make disclosures to investors, no matter the circumstances. When they don't, we will hold them accountable, as we did here."

The SEC’s orders against Boeing and Muilenburg found that they negligently violated the antifraud provisions of federal securities laws. Without admitting or denying the SEC’s findings, Boeing and Muilenburg consented to cease-and-desist orders that include penalties of $200 million and $1 million, respectively. A Fair Fund was to be established for the benefit of harmed investors pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002.

Deferred Prosecution

On January 7, 2021, a decision was agreed to between the U.S. and Boeing to defer prosecution of the company pending the completion of additional events surrounding the crashes of 737 MAX planes and manufacturing flaws. The agreement stipulates that Boeing is being charged with Conspiracy to Defraud the U.S., in violation of Title 18, U.S. Code, Section 37   (“the Information”). By agreeing to the deferred prosecution, Boeing waived its rights to indictment, a speedy trial, and any change of venue. The company also consented to the Statement of Facts and filing of “the Information.” Moreover, Boeing accepted responsibility for the actions of its officers, directors, employees, and agents as charged in “the Information.” The agreement initially was for three years but extended for one more year on January 7, 2024.

The settlement results from serious problems with two of Boeing’s 737 MAX Flight Technical Pilots (Ethiopian and Indonesian crashes) and the company’s deception of the FAA about the planes MCAS that impacted the flight control system of the plane. Through its deception, Boeing interfered with the FAA’s evaluation of the MCAS and its failure to include information about the system in the 737 MAX report. The company also fraudulently obtained from the FAA a differences-training determination for the 737 MAX that was based on incomplete and inaccurate information about MCAS.

The Fraud Section set forth the resolution of the case in the Deferred Prosecution Agreement as follows:

• A criminal monetary penalty in the amount of $243.6 million, and
• Compenstion to airline customers of $177.0 million, and
• Additional compensation to the heirs, relatives, and/or legal beneficiaries of the crash victims of Lion Air Flight 610 and Ethiopian Airlines Flight 302, and
• Agreement of the company to meet with and report to the Fraud Section as set forth in the agreement.

Upon request of the Fraud Section, Boeing agrees to truthfully disclose all factual information with respect to its activities and those of their present and former directors, officers, employees, agents, and consultants, including any evidence or allegations and internal and external investigations, about which the company is aware or about which the Fraud Section requests, including documents, records, or other tangible evidence requested

Boeing is a case study in what happens when the very controls that have been put in place to prevent disasters are ignored. When it comes to airplanes, the result can have deadly consequences for families of those whose lives were taken because of faulty decision-making made top management that ignored the red flags and risk assessment, and, instead, put profits above all else.

As we reflect on the Boeing incident two questions arise: (1) How could such a reputable company engage in such improper behavior that affected the safety of the planes when the lives of the flying public were at stake? and (2) Knowing what you know now, would you fly on a Boeing-manufactured plane?

Posted by Steven Mintz, Ph.D., aka Ethics Sage, on May 1, 2024. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/.