Boeing 737 again in the news
 

Another set back for Boeing as shareholders take Boeing to court for loss of value of shares

https://www.bbc.co.uk/news/business-58483150


Boeing's board of directors must face a lawsuit from shareholders over two fatal crashes involving its 737 Max plane, a US judge has ruled.

Morgan Zurn said the first crash was a "red flag" about a key safety system on the aircraft "that the board should have heeded but instead ignored".

He said the real victims were those who died and their families but investors had also "lost billions of dollars".

Boeing said it would "consider next steps".

In his ruling the Delaware judge said: "While it may seem callous in the face of [the families'] losses, corporate law recognizes another set of victims: Boeing as an enterprise, and its stockholders.

"Stockholders have come to this court claiming Boeing's directors and officers failed them in overseeing mission-critical airplane safety to protect enterprise and stockholder value."

"Warning: The value of your investments and the income from them can go down as well as up and is not guaranteed at any time."

This will be thrown out, if anything, to further save a national treasure from further disgrace.

I think you may underestimate the combination of iconoclasm and masochism that drives much of the American judicial system. See also Enron, Arthur Andersen and Worldcom.

Wait, shouldn't the victims' families get to sue the shareholders? After all, shareholders are the ones that pressure the boards to increase profits by taking safety shortcuts.

Don't be daft. You can't sue for 'pressure'. The shareholders don't make operational decisions, the directors do and they should be held accountable both to the users of their products and to the shareholders.

Yes, this is the real culprit, but I think it is not possible to sue for that in court.
But, this is where our entire society is pushing - we all expect our shares/bonds/investments to go up and up (see Bitcoin and similar gambling etc.) and we often want to get the lowest possible price per flight ticket, and that results in cattle-wagon like way of air transport, zero hours pilot contracts and questionable safety practices, in short, race to the bottom. The one who adds a little piece to all this might be staring at you (me) in the mirror every morning.

For 340driver and hoistop: thanks, I needed that.
I don't think that the title of this thread is correct: it's Boeing in the news, and their suits.

The first step in this fiasco was when McDonnell-Douglas bought Boeing with Boeing's money and Stonecipher slithered in. It's been downhill since then.......

Hang on a minute. Boeing is owned by its shareholders, and if the plaintiffs (shareholders) succeed in extracting millions from Boeing their own investment in the firm will suffer. In effect they are suing themselves. Crazy stuff.

Presumably they are suing the Board members personally - not the Boeing Company - since as noted any payoff from Boeing to the shareholders would be silly.
Problem with that is, Board members are basically protected so long as they were acting legally and in good faith - the company has to defend them and would be responsible for any damages (I have some familiarity with this, the board having been sued when I was on the Board of my racing sanctioning body). Now, if the Board members broke laws or engaged in some sort of fraud, all bets are off - but that would be extremely hard to prove. Plus, while I'm sure the Board members have deep pockets, I don't think they are anywhere near that deep. We're talking several tens of billions of dollars of stock value - total net worth of the Board would be a small fraction of that.
Perhaps WillowRun will step in with a more legalistic take on this, but my take is this is some shareholders having a hissy fit that will simply make lawyers richer at the expense of Boeing and it's shareholders.

Boeing is (since 1934) incorporated in the State of Delaware.

This opinion was based on a precedent in Delaware law: In re Caremark International Inc. Derivative Litigation. The key point of which is that a Board's failure to effectively monitor Management with regard to product safety is prima facie evidence of bad faith. In other words, Boards can commit sins of omission as well as commission - and if those omissions lead to a specific loss (including shareholder value), the Board can be held responsible.

It is difficult to prove an omission, but in this era of email-trails, not as hard as it once was. The Board overall's lack of interest in safety vis-à-vis sales and production and stock value and "face" - at least until after the Ethiopian crash - is pretty well documented.

Caremark is a food service company. That case found the following deficiencies in how the Caremark Board operated. Substitute "aircaft" for "food," or "aircraft safety" for "food safety," and see where Boeing's Board comes out.

• no board committee that addressed food safety existed;
• no regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed;
• no schedule for the board to consider on a regular basis, such as quarterly or biannually, [whether] any key food safety risks existed;
• during a key period leading up to the deaths of three customers, management received reports that contained what could be considered red, or at least yellow, flags, and the board minutes of the relevant period revealed no evidence that these were disclosed to the board;
• the board was given certain favorable information about food safety by management, but was not given important reports that presented a much different picture; and
• the board meetings are devoid of any suggestion that there was any regular discussion of food safety issues.

Boeing's Board had an Audit Committee that was supposed to evaluate and inform itself - and the rest of the Board - as to any and all risks to the company's well-being. That committee failed to supervise risks to the company's well-being due to faults in aircraft (product) safety.

Some of Boeing's Directors made documented false statements to the press and others as to what role the Board played in supervising product safety. Which may not be illegal, but can definitely be considered evidence of bad faith.

Board members have responsibilities, including: Fiduciary Duty of Care (as a representative of the shareholders, you have to pay attention and be vigilant, as well as honest) and Fiduciary Duty of Loyalty (as a representative of the shareholders, the company's value as an institution comes ahead of all other factors, including short-term finances).

I'm on a Board myself (non-profit organization) - and just last spring we had to dismiss the Board Chair/COO for failure to responsibly execute those duties of care and loyalty (engaging in personal bias). And I spent the next 2 months - improving - the organization's By-Laws to prevent a recurrence.

I read the In re Boeing opinion and checked myself against it - "yep, took care of that," "yep, took care of that," etc.

In keeping with contemporary custom, "good morning, good afternoon and good evening....."

The ruling allowing some of the Plaintiffs' derivative claims to proceed is 103 pages and now it has become a must-read for yours truly. In the interim though, a couple of quick notes that might be legalistic (and thank you, tdracer).

A derivative action is a claim belonging to the Company against directors and/or officers of the corporate entity -- it's called "derivative" because it is brought by the shareholders on the Company's behalf. This can be seen in the content of the court's ruling which refers to the Director Defendants as well as Officer Defendants. (Those accessing the court's ruling could have noted that the judge is a "Chancellor" and the court division is "Chancery" - greatly oversimplifying, many state courts still are divided into the law courts and courts of equity, depending on the type of relief sought by the plaintiffs, and shareholder derivative suits are considered to seek equitable relief. In such litigation the process and other factors can be quite different than in, for example, liability suits for damages brought by survivors of people who were killed in the accidents.)

Second, the court dismissed two of the three claims brought in the derivative litigation. ("the stockholders have failed to allege the board is incapable of maintaining a claim against Boeing’s officers. The stockholders’ other claim against the board, regarding their handling of the chief executive officer’s retirement and compensation, is also dismissed." Opinion, at 2.) The wheels of court process may turn slowly, yet this sort of early skirmish over the scope of claims the court will allow to move forward under the relevant legal standards often receives intensive serious attention by the court.

One interesting and possibly impactful aspect of this litigation is that under Delaware corporate law, shareholders have a statutory right to obtain volumes of company records and documents even in advance of filing in court. Discovery conducted in liability lawsuits and other similar litigation usually would take some time and it would not typically be preceded by disclosure like that noted by the court: "Plaintiffs received over 44,100 documents totaling over 630,000 pages. It is reasonable to infer that exculpatory information not reflected in the document production does not exist." (Opinion at 1, fn.1.)

Not least, even just the first few pages of the opinion suggest to this SLF/attorney, strongly, that this opinion collects and recites persuasively a wide swath of the facts and contexts which, collectively, paint the picture of devastating malfeasance and nonfeasance that led to the overall 737 MAX debacle or, plural, debacles.

WillowRun

Thanks for that clear and enlightening summary of the matter (as it now stands)!

I have serious doubts about American corporate governance (and elsewhere). The roles of Chairman & Chief Executive should not be combined. Whilst shareholding activism is fine in principle (many Boards need shaking up) you only have to look at what Carl Icahn did to TWA & T Boone Picken's advances at Boeing to see what can happen. The whole governance issue needs considering & I would like to see a move towards the 'stakeholder' economy but you have to decide who the stakeholders are As previous posters have said, in the US shareholders are by far the pre-eminent stakeholder group so shareholders are effectively suing themseves! That said the business of how directors get elected is a very real one.

You cannot expect a Board to be experts on safety but they must make certain that there is an effective process in place. Where does negligence start?

It is said that American companies tend to be run by lawyers, British ones by accountants & German ones by engineers. Fine, but look at what happened at Volkswagen.

Boeing is a Delaware corporation as are many large corporations. Is it the equivilent of operating under a flag of convenience? Fun fact. The last time I checked Delta flew in 49 of the 50 states. The missing one Delaware. Guess which one it is registered in.

Risk is a very tricky area for Boards to manage. Of the 3 I've been on, none were anywhere near perfect. The lawyers will have a great fee earning bunfight.........

At least when I retired (5 years ago), Boeing Commercial did have a robust safety process. I was a long time member of the Propulsion SRB (Safety Review Board), and often participated in the Aircraft level and Cross Model SRBs. I never had any significant issues with how the SRBs handled their tasks, and with minimal 'interference' from higher ups, and this extended to the new program board I dealt with during the 747-8 development. More than once, I found that we needed to make an expensive change to meet safety and cert requirements and had to go to program to get the change approved. It may have been grudgingly, but the changes were approved. I have no reason to believe that changed significantly after I left (including feedback from coworkers that stayed on after I left). Interestingly, the one time I did get into it with a Chief engineer about an expensive (one million dollars) change I insisted was required to meet the regs was well before Boeing became a Delegated Organization - in fact my experience was factored into the 'undo pressure' rules to protect the designated "Authorized Representatives" (AR - the delegated equivalent of a DER).
So, unless the Board somehow interfered with the existing processes in place, it would not be unreasonable for them to have done a cursory review of the processes - found them adequate - and left them alone.
If, OTOH, the Board did somehow interfere with the existing safety processes which contributed to the MAX disasters, I'd think criminal charges would be in order.

Ignorance.

Any sensible company or organization carries Directors/Officers Liability Insurance, precisely to protect the "company," as well as the individuals, against malfeasance or nonfeasance.

https://www.investopedia.com/terms/d...-insurance.asp

Boeing's insurer will pick up the tab (if any). Boeing may face increased insurance premiums - and then again they may not, if the Board (now under "new management") can persuade the insurer that they have cleaned up their act.

It does amaze me (perhaps it shouldn't) that pilots here, who are grossly offended by the ill-informed opinions of SLF or flight simmers regarding aviation, are perfectly happy to babble on about business and law, where they often share an equally substandard level of knowledge.

Pattern is full.

If this was PLRuNe (Professional Lawyers Rumour Network) I would agree.

pattern_is_full

I wouldn't swear to this, but what I remember is that Boeing is basically self insured.

Thank you. Sounds risky to me, but many companies do take that option. I certainly wish Boeing the institution all the best, and hope it can recover its pre-McD/D reputation and "engineering-first" culture.

I'm sure I'm a "stockholder" by way of various mutual funds, but I haven't been counting the pennies. I just would like the company to get back to being as respectable as most of the people on the assembly floors and in the design offices.

On occasion lawsuits against big corporate entities hold significance because of the impact the litigation is likely to have on other aspects of the corporate entity's business prospects and even its existence.

The court's opinion tells the story of the 737 MAX in what might be - up to this point - pretty unique way. Recall that the plaintiffs, suing in the form of derivative action on behalf of the company, had obtained volumes of company documents and records prior to filing the "complaint" that is the basis of the court's decision. To indulge posters who wish that lawyers would just go away, and presumably would be willing either to fend for themselves in whatever form of legal and court system might obtain (or in the absence of any such system), I'm not using the formal nomenclature of this pleading here. But...

It actually is important to note that it is a "Verified" complaint. Unless Delaware law (I'm not licensed in that State, hence the caveat) contains some quirky wrinkle, when the complaint is "Verified" it means the parties filing it have sworn, under penalty of perjury - just like on the witness stand at trial in open court - to the truth of the factual assertions stated in the complaint. In other words, this is a significantly more advanced foray into the sordid facts of how badly Boeing went astray than the more familiar kind of complaints which are filed mostly just to get the courtroom process started.

I have to wonder, though, about how this Board "should" have considered the question of "safety" as that term has gained the prominence it now holds in this case. In an earlier client engagement of mine, a senior official of the entity was fond of remarking how much it irked him when the Board members wanted to get involved in "how the grass was getting cut" - the entity wasn't a golf course or anything where it would matter to the fundamental direction of its existence. Here, the right answer can't possibly be that the Directors were supposed to be quadruple, quintuple, x-multiple-guessing the evidently vast corporate bureaucracy responsible for deriving yet one more version of that venerable old workhorse airplane, "the" 737.

Isn't the better understanding of what the Boeing Board failed to do, that it failed to structure and direct the management of the business so to assure a very high degree of fidelity to all applicable regulatory and safety requirements, with a margin of safety to spare? I mean, several derivatives into "the" 737 is it realistic to envision any director, let alone the Board in a formal way, saying, "but will it be safe? Are airplanes ever safe? Sometimes there are crashes, you know." The notion that a derivative, the next derivative in what had become a very long line, was either safe or unsafe seems a bit, well, simplistic.

Maybe it's unfair to see the prominent role "safety" has claimed as the equivalent of requiring the board to question fundamentals of aeronautical design, calculations of lift and drag, intricacies of how synthetic airspeed might interact with possibly conceivable in-flight instrument failures and emergencies, at such an organic level.

In any event, with the changes made by the legislation hammered out by Rep. DeFazio's (excellent) Committee, oversight of Boeing not only by FAA, but by the professional staffs on Capitol Hill, and increasingly by other regulatory authorities especially in Europe, isn't going back to sleep at the switch. The progress of this shareholder lawsuit in Delaware, and the revelations that could yet occur, very likely will underscore the importance of implementing that legislation and doing so effectively, regardless of partisan political games being played. But please, no one need refer to "safety infrastructure."

Who ultimately green lighted the MAX program? That decision to proceed must have contained important caveats as to time lines and approved maximum spending. These were obviously fatally flawed so is the board responsible for incentivizing a corporate culture of cheap over safe and fast over good or is the problem centred in the C suite ?

WillowRun 6-3

If that's a roundabout way of saying that safety should never be a Band-Aid, but rather the lifeblood that courses through the veins of any company making things that can kill people, then I suspect few would disagree.

DaveReidUK

Thanks for articulating that point, though I wasn't trying to suggest there is much disagreement with regard to the intrinsically fundamental nature of "safety" for an airplane manufacturer.
(That said, we could summarily describe what the company did in the case of the 737 MAX as indeed putting a Band-Aid on a fatally flawed aircraft type variant.)
What I was trying to get at, is the idea that the particular engineering, design, and flight operations details about the flaws in the MAX - which obviously implicate safety of the aircraft - would not be subjects the Directors ordinarily would be expected to be deeply knowledgeable about. These subjects all are delegated to managerial ranks and their staff cadres. To draw on my Board experience, a trustee of a university viewing a presentation about expansion of a degree program wouldn't ask the presenters to justify and explain why specific pages of assigned reading are listed on a course syllabus for the degree program (if the syllabus was even tabled to start with).
So the failure of the Board here to drill down from the level of production plans, revenue projections, customer order statuses and so on, to particular detailed workings of - say - number of AoA sensors for anything being included that might bear resemblance to how stability matters were addressed in the KC-46 tanker -- such failure isn't the same as not having a focus on and oversight of safety.
But it is a failure to direct management. I'm not defending this Board (and while I give Kirkland its due, is this why any of them went to law school?).
A university trustee shouldn't ever have to ask if course syllabus content is being done right. Continuous attention to current matters in Academic Affairs should give enough sense about these occasional concerns. Of course building airplanes is much, much different than teaching college students. And much more difficult......but I hope the Delaware court gets more focused on the specific information flows the company's board failed to elicit. Not just "safety" as a broad overall category.

Big Pistons Forever

It might be worthwhile remembering why Boeing launched the MAX.
Boeing didn't really want to do another 737 and was working on a completely new 737 replacement - I knew people who were on the program. But, when Airbus launched the A320 NEO series, it caught Boeing with their pants down. There were two major problems with launching a brand new 737 replacement to answer the NEO - first off Boeing was still struggling to get the initial 787 and 747-8 aircraft certified and into service - the engineering resources to launch an all new aircraft simply were not available. Second, launching a new aircraft means a bare minimum of 5 years from launch to entry into service - probably quite a bit longer (and that's without accounting for the engineering resource shortage). Worse, it takes time to ramp up the build rate of a new aircraft - and at the time they were pumping out 737's at over 2/day, a rate that would probably take another five years from EIS to achieve. So, basically conceding the massive single aisle market to Airbus for about 10 years. Now, ten years later with the benefit of 20-20 hindsight of what happened, that doesn't look so bad. But at the time, conceding that massive market - several thousand aircraft - to Airbus was simply unthinkable. Hence the scramble to come up with the MAX.

And Airbus scrambled to meet the CSeries performance with the neo ending up owning the A220.

The A220-300 basically killed sales of the A319neo, but it does not compete with the A320neo and A321neo. Airbus was also more than happy to use the A319 production slots tot produce more profitable A320's and A321's.

Wall Street Journal reporting (article by Dave Michaels and Andrew Tangel) that former chief technical pilot, Mark Forkner, is expected to be charged criminally relating to his role in the development of the 737 MAX. The article does not identify what specific charge or charges are expected to be filed.

Among several factual items (familiarity with which is now presumed, among those following the sordid tale of the MAX) supporting a decision to charge - according to the article - are the explicit admissions made by Boeing about misconduct on the part of certain unnamed employees in Boeing's "plea bargain" in federal court in Texas, several months ago. More widely known is the regrettable reference to "jedi mind tricks" played on FAA, of course.

Whether this is part of a prosecutors' effort to "go up the ladder", I won't speculate. Especially after the recent posts here about decisions made by company officers and directors, though, if the employee -- whose job it was to carry out a plan for the MAX where that plan had deep and significant flaws to begin with -- gets charged, isn't it logical to expect serious consideration given to charging also those higher-ups who formulated that plan and authorized and directed its implementation from the start?

You would think so given comments made by employees, managers in big companies though like to sheet the blame for any hiccup down to the lowest on the totem pole.

“This airplane is designed by clowns, who are in turn supervised by monkeys”
“I just jedi mind tricked this fools. I should be given $1,000 every time I take one of these calls. I save this company a sick amount of $$$$.”
“Would you put your family on a MAX simulator trained aircraft? I wouldn’t.”
“I’ll be shocked if the FAA passes this turd.”
“This is a joke. This airplane is ridiculous.”
“Best part is we are re-starting this whole thing with the 777X with the same supplier and have signed up to an even more aggressive schedule!”
“Jesus, it’s doomed.”

I find it interesting that Forkner threw in his towel with Boeing before the two crashes, one wonders his motivation, he knew what a cluster %@*^ it all was and was prescient to what he saw as an inevitable out come?

As DeFazio said. “This is not about one employee; this is about a failure of a safety culture at Boeing in which undue pressure is placed on employees to meet deadlines and ensure profitability at the expense of safety.”

I've heard this view before. But surely Boeing would have known perfectly well what Airbus had in hand. The new engines coming along were a known, and doubtless long offered to Boeing on the same timescale. Airlines would have been approached and received presentations on the plans. Suppliers and vendors serving both would be early in on it. Personnel leave one company and join others, taking knowledge with them. Boeing market research, which they have long been regarded as world leaders in, would surely have been aware of where Airbus were heading. The issue that the new engines readily fitted under the A320 airframe but not the 737 was also long known.

There is a piece by Scott Hamilton at leeham news about this. Apparently, Boeing was in a squeeze by the delays and budget issues with other types and then came the unexpected threat of loosing AA as an exclusive customer.

Everyone in he industry knows since decades that higher efficiency engines mean higher bypass ratio, which means larger fan diameter. So nobody can tell me that this came as a surprise for Boeing.

On those decisions the fish stinks always from the head. You see it in the automotive industry too, that it easier to drag the mid management levels to court on misconduct. While every one knows that expensive decisions (or decisions to save said expenses) will be made by top management. Especial if sums way above 6 figures are involved.

The game at court then played out is who knew what at what time. As if CEOs or top managers get paid for not knowing their trade.

As spronrad notes, the problem was that at that time Boeing was severely resource limited. Remember, the 787 was supposed to be certified and in service in 2008. Not only did the delays on the 787 mean that engineering couldn't be released to work another program, Boeing had tens of billions tied up in program (at one point it was estimated that Boeing had over $30 billion just in inventory costs related to the 787 delays). The 747-8 program was also going full tilt - and also over budget and behind schedule although not nearly as bad as the 787 (and most of the schedule issues on the 747-8 could be traced to our being resource starved due to the demands of the 787). There was barely enough to do what needed to be done to get the 787 and 747-8 certified and into service - forget launching an all new program...

The original plan had been to have a new 737 replacement aircraft ready by 2016 (for a while the development program was called 'Project 2016') - which incidentally is when the first A320NEO was delivered. But the fiasco of the 787 program meant that Boeing simply didn't have the resources necessary to do that - which ultimately lead to the MAX fiasco.

If the Max really is such a boondoggle, one wonders why it nevertheless managed to make a very respectable sales volume with mainstream carriers. Putting the software incompetencies to one side for a moment, the rest of it seems to have formed a very significant sales competitor to the Neo, without the clean sheet development costs. It's like the strategy was right, but some aspects of the implementation were screwed.

How were the airlines to know?
They wanted a product that carried more passengers at less cost. The 737 MAX promised just that.
They relied on Boeing's reputation and the FAA's approval, which had always been sufficient before.
Even their pilots who flew it weren't aware of the safety defects.

As to why is the 737max such a sales sucess, two factors need to be remembered:

1. Airlines which already had 737s had already invested in trained crew, spares, etc. and changing to the A320 would nean new costs.

2. The total number of single aisle aircraft being ordered were far beyond the supply capabilities of Airbus. Two, or more, manufacturers were needed to meet the market demands.

This looks to be an interesting development. Can anyone else shed light?
https://www.seattletimes.com/busines...t-report-says/

See post #29. No doubt more details will emerge in due course.

One wonders where Boeing has wandered off to. In addition to the 737 issues, there have been continuing hardware and software problems with the Boeing Starliner space capsule .