Hamid Mehran examines the governance failures at Boeing that led to safety issues with its aircraft and proposes several measures to improve the company’s safety culture and accountability. Mehran suggests enhancing board accountability through increased disclosure requirements, improving FAA oversight, fostering a culture that prioritizes safety and employee concerns, and restructuring employee compensation to incentivize teamwork and vigilance in detecting safety issues.
Boeing has received significant worldwide attention since 2018, not because of what the company did right over its century in operation, but because of its corporate governance problems that made its 737 MAX unsafe to fly and led to two accidents in 2018 and 2019 that caused the avoidable loss of 346 lives. Both crashes were due to seriously flawed design features and inadequate training requirements for pilots. Since January 2024, more safety lapses on planes manufactured by Boeing have been disclosed. These latter cases show that the changes in management and internal processes that Boeing implemented in response to the 2018 and 2019 crashes inadequately addressed the company’s safety issues.
Boeing’s failures to protect its passengers reflect failures in leadership and corporate governance. In a previous paper, I argued that Boeing’s failures reflect market concentration and the United States’ dependence on increasing large and dominant firms. Here, I address several of the lapses at both Boeing and its regulator, Federal Aviation Administration (FAA), that enabled these costly errors and how governance at both institutions could be improved.
Board accountability. Did the Boeing board of directors take appropriate actions after the MAX accidents? The board could have adopted some additional guidelines to improve safety and work quality after the crashes. As revealed by the company’s ongoing problems, the board’s efforts clearly fell short of the needed reforms. Given Boeing’s size and its role in the U.S. economy, its board should face higher standards of accountability through more rigorous disclosure requirements.
The board should be required to reveal how safety issues come to light and discuss how the firm will address them. Stronger disclosure requirements would have put pressure on the Boeing board to find robust solutions as opposed to doing the minimum due to cost considerations.
However, there is no legal requirement for Boeing (and other corporations) to engage in reactive disclosure. Further, given the market power of Boeing, the firm is not likely to respond to consumer demands that it disclose information beyond what is legally required in the absence of government intervention.
FAA oversight. The FAA is entrusted with overseeing the safety of the nation’s aviation industry. While some of the agency’s culpability for the MAX accidents might be mitigated if its staff had been systematically misled by Boeing, the agency’s effectiveness before the crashes, and most notably since, can be questioned. Why did the FAA fail to determine that Boeing had a very poor culture overseeing safety issues following the crashes? Why did it not find that a culture of retaliation existed when employees spoke up about their concerns on issues related to safety (employees raised their hands but were ignored)? Further, given that 737 MAX pilots reported control issues with the plane in December 2021, a year after the planes went back into operation after they were grounded after the crashes, why did the FAA wait until March 2024 to instruct Boeing to address their concerns?
Ideally, the public demands a proactive agency overseeing aviation. The FAA not only failed to execute its oversight, but it also was unresponsive to complaints in real time. The FAA on June 13, 2024 accepted some responsibility for its oversight failure. Certain frictions made regulators and supervisors not fully effective and passive in their responses. To improve the incentives for regulators and, thus, to enhance governance of the Boeing Company, lawmakers should consider making regulators more accountable for their actions, or lack thereof.
Internal governance and culture. Boeing’s internal governance procedures and its culture should have been the focus of more attention following the MAX accidents. As noted, the FAA failed to examine Boeing’s weak culture in its report and recommendations after the crashes. Concern for these issues was raised only in March of this year. Even if attention were restricted to the problems that occurred only in the last year, Boeing clearly should have put much more effort into creating a culture that promotes teamwork. This is particularly so given that a Boeing MAX has more than 500,000 parts. Assurance of safety requires significant coordination and teamwork for effective oversight, and disassembling the entire plane for a routine safety check is not feasible.
Developing a norm or a culture at Boeing that emphasizes safety is vital. Taking into account employees’ concerns in real time could prevent future safety issues. Retaliation against employees who speak up on safety issues imposes a large risk on airline passengers as well as the welfare of Boeing stakeholders. The entire Boeing culture should be reexamined, with a mind toward underscoring the importance of employees’ observations and the knowledge that they gain in performing their jobs in all decision making related to safety.
Restructuring employee compensation. Boeing should institute a compensation structure that rewards employees for performance as well as functions as a control mechanism. An effective compensation design should encourage teamwork among employees and monitoring of ongoing work to detect defective work or unsafe practices. A pay scheme should reward employees for good work and internalize the cost of negligence. Paying a price for defective work completed by a coworker in a division is likely to turn every worker into a vocal advocate for safety. Staying silent or being passive becomes costly (see Mehran, 2021, for a discussion of this issue).A compensation policy that is likely to be effective at Boeing is a broad-based restricted stock plan (see Mehran, 2021, for a detailed discussion of the topic in the context of Boeing). However, if a determination is made that an employee failed to execute a task correctly, Boeing should claw back the unvested portion of that employee’s restricted stock grants.The proposed compensation plan would improve due diligence at Boeing and possibly avoid the problems caused by missing bolts, for example. The incentives for enhanced monitoring and teamwork among coworkers ultimately would benefit all stakeholders, including Boeing’s shareholders and its employees.
The idea also could address the risks that arose from behavioral issues that affected Boeing’s operation, which were mentioned in an FAA report. For example, some employees refrained from expressing their concerns about safety processes due to fear of retaliation by coworkers or division senior management.Opting out of escalating a complaint should become more costly for an employee as well as senior management. Realizing the employees’ incentive ex ante, senior management could become more diligent to ensure safety. Thus, restructuring pay at Boeing could in effect change the norm or culture at the company. Some might question the incentive effect of employee ownership through adoption of restricted stock grants as most employees do not have decision rights and have no influence on corporate policies. That is true, but the dynamic is through monitoring, as each worker attempts to protect her pay package. Monitoring supports effective implementation of corporate policies. Further, a large grant of stock is not needed to induce the monitoring incentive (see Mehran, 2021).
To sum up, the governance of Boeing can’t be improved without government intervention. Lawmakers, in addition to assessing the FAA’s effectiveness, might want to consider imposing a higher expectation on the Boeing’s board on disclosure safety issues and how the company would address it. Restructuring employee compensation is likely to change the norm on issues related to safety and complement compliance related issues on safety to restore confidence among airline travelers.
Author Disclosure: the author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
