Could Boeing’s org chart be faulty, too?
It’s the question many shareholders and some corporate governance experts are asking in the aftermath of the 737 MAX crashes of Lion Air and Ethiopian Airlines and the plane’s subsequent grounding around the world.
At Boeing’s late April shareholder meeting in Chicago, 34.8% of shareholders voted for a measure to divide the role of Chairman and CEO, both of which are currently held by Dennis Muilenburg. Splitting leadership roles into standalone positions has long been a hotly debated corporate governance issue, and every year, a flurry of proposals appears during proxy season, few of which actually win. But in Boeing’s case, considering this year’s proposal gained almost 10 points more than the previous year’s proposal, shareholders signaled that they’re pretty worried about the level of oversight at the company.
“Just because the proposal was shot down doesn’t necessarily mean [Boeing CEO and Chairman Dennis Muilenburg] is safe when it comes to keeping both roles,” says Courtney Yu, Director of Research at compensation research firm Equilar. “If the company or the board deems that it is in the shareholder’s best interests to separate out the roles, then they will certainly do so.”
That often involves dramatic circumstances. A recent example: As part of a securities fraud settlement with the SEC last year, Elon Musk was removed as Chairman of Tesla’s board. And in 2016, the board of Wells Fargo uncoupled the roles to improve oversight after the scandal surrounding unauthorized customer accounts.
Indeed, across the board American corporations have been steadily embracing the practice of an independent chair. According to the 2018 U.S. Spencer Stuart Board Index, more than 30% of S&P 500 boards have an independent chair up from 16% in 2008. Proponents of two distinct roles maintain that separation provides better oversight and fewer conflicts of interest. And a strong independent chairman is better able to offset a powerful CEO when necessary.
The aerospace industry, however, hasn’t exactly embraced the practice. Of the five biggest companies in the sector, only Northrop Grumman has a split structure. Among airlines in the Fortune 500, half of them separate the roles. Following intense criticism after a passenger was dragged off a plane last year, United Continental CEO Oscar Munoz opted to change his employment contract so that he wouldn’t automatically become Chairman in 2018 as expected.
Interestingly at Boeing, there is precedent for the separation of roles. From 2003-2005, it divided the roles after a procurement scandal that ended the leadership of Phil Condit. Harry Stonecipher presided over the company as CEO during that time, while former Hewlett-Packard CEO and Chairman Lewis Platt took the non-executive Chairman reigns. Platt then played a central role in ousting Stonecipher in 2005 over an extramarital affair with a Boeing employee. Boeing’s CEO and Chairman roles reunited under Jim McNerney.
Will Boeing’s 737 MAX crisis lead to a similar arrangement?
Since the October 29 crash last year of Lion Air Flight 610 into the Java Sea, taking all 189 lives aboard, scrutiny of Boeing’s safety, engineering, design and certification processes has heated up. Questions intensified further after the Ethiopian Airlines Flight 302 crash on March 10 a few minutes after takeoff from Addis Ababa killing all 157 people on the flight. In both flights, a faulty sensor activated a system that erroneously pushed the nose of the plane downward. In the aftermath, media revelations about certification, training, and what and when airline customers were told of the issues have prompted inquiries and lawsuits, including a Department of Justice criminal investigation.
“Separating those roles and installing an independent chair would signal to shareholders that the board is taking this seriously and making changes,” says Courteney Keatinge, a senior director at shareholder advisory firm Glass Lewis. “It sounds like the board was not discussing safety.”
So far, the Boeing board is supporting Muilenburg. But, notes Brian Tayan of the Corporate Governance Research Initiative at Stanford Graduate School of Business: “If people should have known or people did know and didn’t act on it, then you’ll see that pressure rise higher.”
That pressure deepened this week after a Boeing statement over the weekend that admits the company knew a year before the October 29 Lion Air crash that a safety warning on the 737 MAX wasn’t functioning properly. It wasn’t until after the accident that Boeing informed the FAA. The statement also pointedly states that senior Boeing leadership “first became aware of this issue in the aftermath of the Lion Air accident.”
One tiny hint about how Muilenburg sees his leadership: In a short session after Boeing’s annual shareholder meeting, he faced sharp questions about why passengers should trust Boeing that the MAX will be safe once the software is upgraded and whether there was a design mistake. One questioner bluntly asked if he had considered resigning in light of the crisis. Muilenburg gave a long non-answer that referenced his 34-year career with Boeing and the deep regret over the accidents. “My clear intent is to continue to lead on the front of safety and quality and integrity.”
Shareholders can take that as a no.
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