Death by a thousand suits

This is a good article on a merger in the 1990s which goes a long way to explain the organisational failures we’re now seeing at Boeing. The standout passage:

The key corporate protection that had protected Boeing engineering culture was a wall inside the company between the civilian division and military divisions.

Have a guess what happened? Then there’s this:

In 2005, Boeing hired its first ever CEO without an aviation engineering background, bringing in James McNerney, who got his training in brand management at Proctor & Gamble, then McKinsey

Uh-huh. I urge you to read the whole thing.

Staying broadly on topic, this Twitter thread is fun too.

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21 thoughts on “Death by a thousand suits

  1. Amusingly, the aviation industry mergers mirror what happened in the UK in the 50’s. A dozen or so companies shoehorned together progressively until they fell apart and got nationalized.

  2. I didnt read the article but had a squiz at their long term share price.

    If you wanted to speculate on their future then right now may well be a great buying opportunity to pick up Boeing shares.

  3. From the linked article: “Some of the board of directors would rather have spent money on a walk-in humidor for shareholders than on a new plane.”

    But after making that key observation, author Matt Stoller incredibly calls for Congressional Hearings! If there is one group in the world who are less capable of doing anything right than company Directors, it is Congress-scum. Can you imagine Sandy Occasional-Cortex trying to sort out the problems of Boeing?

    Stoller got it right the first time — the problem lies with Boards of Directors who have no clue about the business and select the wrong kind of people for CEOs. If Boeing’s Board of Directors had any independence, CEO Dennis Muilenburg would already have been fired and Boeing would now be suing him for every penny he ever took from the company.

    But Boards of Directors are often appointed by CEOs, in effect. And most of them have only trivial investments in the companies for which they are responsible. No skin in the game.

    If Congress could be trusted to do anything right (I know! I know!), they would make it a legal requirement for every Director to have a minimum of 25% of his personal total net worth invested in stock of the company, with a provision that the stock could not be sold until at least 3 years after the Director resigned from the Board. Suddenly, CEOs would have Boards that actually asked hard questions and got independent advice before approving actions by the CEO. And Golden Parachutes would go away — under-performing CEOs would face the same harsh consequences as under-performing office cleaners.

  4. @Gavin

    Good to see your viewpoint expressed on here, a rare voice. In my experience with mid sized Boards over the years, Non-Executive Directors are a complete waste of time, I cannot think of any that added value, quite the opposite. Executive Directors are far more effective and should have bigger voting rights. Yes, we have the Chairman, the wise old owl, that stewards the board, but chances are that he is influenced by the MD, not the CEO (who may not be a director) but at least the MD is on line with the business plan, its risks and opportunities.

    As to your main point, whether they are a director or a non-executive director with skin in the game or not, then their governance is far more effective than a non owner CEO, director or whatever that has no skin in the game.

    When its your money on the line, your analysis and decision making criteria are far more aligned with the ultimate objective of the firm, and more beneficial to the firm, than those who do not have their money on the line.

    Dyno Nobel used to require that the plant manager of their dangerous explosive plants, resided with his family in a house that was located within the plant. The frequency of plant incidents dropped off a cliff after they introduced this.

  5. Bardon, your experience is different from mine. Working in the UK, no director even visited my building. But while in the Netherlands, working in a poorly performing subsidiary, a non exec wandered into my office and asked about my problems. I showed the stack of hate mail complaining of inaccurate billing and explained how I was trying to get the messages – excuses for non payment, real errors etc – and it was clear that he would have liked to get into detail with me. The minders moved him on, in accordance with the timetable.

    My boss thanked me for blinding him with the science of how fucking difficult it is to analyse thousands of bills and reach convincing conclusions. Millions of bills are way easier to generalise.

    Apologies to Hari Seldon

  6. That particular non exec had been the Finance Director of Shell. He had never seen data…

  7. @Grareme

    I didn’t mean to imply that Boards were full of good guys down here either. Most of them are asleep at the wheel, and are never there before the shit hits the fan. D&O Policy fees are rising faster than margins. Just saying that a CEO/MD with skin in the game will perform far better than one that doesn’t have skin in the game.

    The non-executive Board circuit is bit of a racket down here, old boys and sons ltd, may even do a bit of it around the place myself later on, it sure beats grafting for a living.

  8. Tom Peters was railing against this decades ago, how the idea that a CEO in soft drinks can be dropped into computing or manufacturing just doesn’t work.

    At best, they just follow the herd in a certain direction, or maybe buy a few companies. You don’t even have to know that company, but you have to have some depth of knowledge of the field.

  9. “My boss thanked me for blinding him with the science of how fucking difficult it is to analyse thousands of bills and reach convincing conclusions. Millions of bills are way easier to generalise.”

    I worked with a bloke who was the replacement Project Director for a $6b Desalination Plant, the previous one was run out for spying on the unions, he was a colleague of mine from Brisbane. He got hung out to dry but is doing well now.

    The new guy, was a very capable, older, craftier, larrikin, nasty piece of work Banjo Paterson type of a man, we got on well with each other. He was struggling to get a financial report for the project that would actually tell you what was going on. All he wanted to know was what his daily cash burn rate was, it was a big number. He said that he rued the day, that they stopped using cheques for everything. He swore by adding up the cheque stubs and said that they were never wrong.

    Sacked desal plant ‘spy’ wanted $1.5m payout

    https://www.theage.com.au/national/victoria/sacked-desal-plant-spy-wanted-1-5m-payout-20101222-195nt.html

  10. This technically is the best summary of what boards should be doing better to avoid litigation and disasters, because the guys that wrote it are the ones that are relying on their competence.

    ………………………………………………….

    D&O insurance insights:
    10 key takeaways for 2019

    From #MeToo to the move towards more collective redress regimes outside of the US, to failure to manage cyber risk – exposures for Directors and Officers (D&O) continue to rise globally. Here are 10 developments boards will need to stay on top of in future.

    The environment and landscape which D&Os navigate on a daily basis is becoming more complex and risky. Regulator, investor and public expectation of boards continues to intensify, and personal accountability for not meeting these expectations is increasing. The shift from corporate responsibility to personal responsibility continues at pace. When these expectations are not met the propensity to litigate is now given extra ‘fuel’ by the further emergence of collective actions, increased capital flow into shareholder activism and the growth of litigation funding, which is now seen as an alternative asset class producing high returns.

    Boards operate under this spotlight in uncertain economic and political times where equity and asset price volatility is the norm. Here are 10 global and regional trends that D&Os need to stay on top of over the next 12 months:

    ……………..

    https://www.agcs.allianz.com/news-and-insights/expert-risk-articles/do-insurance-insights-10-key-takeaways-for-2019.html

  11. The company that runs Travelocity appointed Chelsea Clinton (yes, that Chelsea Clinton) as a well-paid Director. Need anyone say more?

    Directors are supposed to be the wise experienced heads in charge — appointing key executives, making (or approving) major business decisions, setting policy. Instead, company directors are mostly merely expensive ornaments (a la Chelsea Clinton), or payoffs to politicians or buddies in some form or another.

    Making company directors put a significant amount of their own money at risk in the company is an obvious way to get back on track. As would restoring the former rule prohibiting a company from buying back its own stock.

  12. Ya wanna know what really killed Boeing? And, don’t let the zombie-like signs of life fool you, the company is dead, dead, dead–At least, the bits we knew as Boeing.

    1997, when Boeing merged with McDonnell-Douglas, a failed corporation that build shit aircraft and relied on over-priced military contracts to stay afloat. That’s what did it, because the merged company kept the name Boeing, but the McDonnell-Douglas executives basically performed a coup, and the McDonnell-Douglas corporate culture took the company over. There were more McDonnell-Douglas execs in critical places inside Boeing than there were Boeing people, and the impact was noticeable. I’ve got friends and family who’ve worked for Boeing for decades, and they all saw it happening around them. It wasn’t anything really major, at first, but the McDonnell-Douglas mentality crept in gradually.

    Engineer we know hung around for a few years after the merger, and as soon as he could, he sold all his stock. Swore the handwriting was on the wall, and that it would all end in disaster. He was mostly talking about all the outsourcing on the 787, back then, but this latest deal with the 737 software is fully in consonance with what he was talking about.

    Basic gist of it is that McDonnell-Douglas had a really crappy corporate culture, short-sighted, “business-driven”, and which was entirely too prone to doing the expedient in the name of making more bucks. They’re in the midst of reaping the whirlwind, right now, and I expect that McDonnell-Douglas is going to kill another company.

    Insiders tell me that the majority of the problems that Boeing was involved with since forever stem from outsiders hired in, or from mergers. The actual “up-from-within” Boeing guys are who made that company what it was, and it’s sad to see the suits supplanted them with the incompetency of McDonnell-Douglas corporate culture.

  13. It is amazing how quickly the aircraft manufacturing business has changed. Within living memory, the US had three competing manufacturers of jumbo jets — Lockheed L1011, Douglas DC-10, Boeing 747. Within a working lifetime, Lockheed and Douglas (later McDonnell-Douglas) have cried uncle and Boeing now mainly assembles parts made elsewhere. Half of global aircraft business is being done by Airbus, which has grown mightily based on disguised subsidies from European governments.

    Meanwhile, the regional jet business has exploded, while US manufacturers were looking elsewhere. Brazil and Canada are reaping the benefit — with Embraer now moving up-market to compete directly with Airbus and Boeing.

    On the horizon, China is coming. Given the astonishingly rapid manufacturing progress China has made in the last 3 decades and the huge growing domestic market for planes in China, it is only time until they crack the aircraft business. I had been guessing that Airbus would effectively be a Chinese company within a decade, once the Europeans found they could no longer afford to subsidize it. But maybe Boeing will be available sooner and cheaper.

    Business is always tough. But future historians will write books (probably in Chinese) about the unparalleled stupidity of the US Political/Business Class which threw away their immense post-WWII manufacturing lead without so much as a whimper.

  14. “On the horizon, China is coming. Given the astonishingly rapid manufacturing progress China has made in the last 3 decades and the huge growing domestic market for planes in China, it is only time until they crack the aircraft business.”

    They already are keeping the market happy with their massive increase in demand for more bums on seats, much bigger and faster than anything we have seen before scene. Aircraft, pilots, support staff and facilities are required now due to the billions of new Asian bums on seats, plus the Asian market and Singapore are coming up with Uber aircraft financing that fast tracks the increase in everything that they need.

    You can finance a new aircraft in one day. Fasten your seatbelts

    Solution to the design approval problem as well coupled with the advantage of creating a reduced liability market. Use the R&D bits and bobs aircraft in the developing and third world airspace only flying in the domestic market.

    This will also cover those underneath, with a payout figure on claim, have a mandatory lotto scheme linked to ticket purchase. Lotto pays out for all damages in a crash, passengers and everything and everybody outside of and below the aircraft.

    Win Win.

    And then there is India

    Africa

    And more.

  15. “And then there is India Africa And more” Perhaps as customers, but the local IQs are much too low to sustain an aircraft manufacturing industry. In the 70s for most of Africa, and only around 85 or so for India.

    Directorships are usually handed out as bribes, and most directors know nothing about the businesses they supervise. This is a problem for all Boards of Directors and Trustees. Viz. Oberlin. The Board of Trustees has had multiple spasms of wokeness, and they appointed four women, three of them women of color, to senior positions, and the WOC not surprisingly screwed up, costing Oberlin $25 million. That’s chicken feed against Oberlin’s $850 million endowment. And the WOC didn’t learn, couldn’t learn anything. They, themselves, are the true victims. And likely the BOT agrees.

  16. The company that runs Travelocity appointed Chelsea Clinton (yes, that Chelsea Clinton) as a well-paid Director. Need anyone say more?

    She’s on the board at IAC as well.

  17. I’m wondering if our illustrious host has seen this, as it seems to tie in to his MBA research

    I hadn’t, but I have now, thanks. Relevant indeed!

  18. This is not a recent phenomenon, although the particulars are different.
    History is littered with examples of successful companies being destroyed through bad management, often as the generation that drive the initial success are replaced by the “properly trained” next generation.
    I read a book in my 20s that covered this issue. Sorry but I can’t recall the title :-(. The British Landed gentry saw the rising class of inventors and married their daughters into it with the result the gentry maintained their wealth whilst the entrepreneur obtained cachet via entry into the upper classes. Their progeny soon learned to despise tradesmen like their ancestor but learned none of the engineering skills that had contributed to the family wealth. The cycle was the first generation made the money, the second consolidated, and the third pissed it away.

  19. The litigation scene for director performance failures looks like it may be taking a different turn. The German scene seems to be going down the path of internally driven litigation> It’s early days but the German experience could well be a sign of things to come elsewhere, where companies actually sue their own directors!

    The company would have to be squeaky clean to take litigation against their own directorate, which is a good thing although fraught with hazard for all.

    It would put a different slant on taking up a [position on the Board as a non-exec director. Are the bastards trying to set me up, which is the way that I would be looking on it before accepting a directorship. Then you would need more information on any proposed Board resolution, to protect your self as an individual.

    Bad move in my books.

    …………………………………………………………………

    Management liability today:
    What executives need to know

    The focus on personal accountability is notable in
    Germany, where regulators, prosecutors and companies
    have actively pursued individual directors for conduct or
    compliance failings.

    Corruption and bribery, together with competition and
    cartel investigations, have been some of the main causes
    of German management liability claims, where directors
    at some of the largest German companies have been sued.
    “If you are appointed to the board of a German company
    you should take a close look at how the organization
    approaches corporate governance and compliance,”
    says Martin Zschech, Regional Head Financial Lines
    Central & Eastern Europe, AGCS. “Executive liability in
    Germany often comes down to having the right controls
    and procedures in place.”

    Although executives can recover legal costs and
    settlements from insurers, legally they must carry a
    personal deductible of one-and-a-half times their salary.
    Most directors purchase their own insurance to cover the
    deductible and pay the premium out-of-pocket.

    Executives in Germany may also find they are held
    accountable by their own companies. The German market
    is typified by internal liability claims, where the company
    sues executives for wrongdoing or compliance failings.
    There has been a marked increase in such cases since
    the 1997 German Federal Court of Justice ruling in ARAG
    v Garmenbeck, which obliged German supervisory
    boards to pursue executives where fiduciary duty
    breaches occurred.

    For example, ThyssenKrupp was fined €200m by
    Germany’s competition watchdog for cartel allegations
    and the company sued, unsuccessfully, a director in a bid
    to recover the fine.

    The court held that a fine imposed against a company
    may not be recovered from an individual and that a fine
    against an individual may not exceed €1m, whereas
    against a company it may reach up to 10% of the annual
    turnover of its group. The court argued that it would
    undermine the legislative intent to fine individuals and
    companies differently if a company were able to recover
    its fine from an individual. In this regard, an appeal has
    been filed to the Federal Labor Court in Germany against
    this decision. The outcome will be closely monitored by
    the German D&O market.

    The increase in claims has been particularly pronounced
    in Germany – 20 years ago AGCS would have seen 40 to 50
    executive liability claims in Germany annually, now there
    are around 120, according to Stephan Kammertoens,
    Global Head of Financial Lines Claims, AGCS.

    The biggest exposures, and source of D&O claims, are in
    the US and Australia. Germany is another market where
    executive liability has increased. Twenty years ago there
    was little demand, but a changing regulatory and legal
    environment has seen an increase in executive exposure
    and D&O claims.

    “Germany, together with the US and Australia, is now
    the region with the most D&O claims in the world,”
    says Martin Zschech, Regional Head Financial Lines
    Central & Eastern Europe, AGCS.

    Germany

    In Germany, a number of large commercial executive
    liability claims have exceeded €1bn, although they often
    settle at much lower amounts. Large D&O claims of
    $100m or more include Daimler-Chrysler and Siemens.

    The focus on personal
    accountability is notable in
    Germany, where regulators,
    prosecutors and companies have
    been known to actively pursue
    individual directors for conduct
    or compliance failings. Corruption, and bribery, together
    with competition and cartel investigations, have been
    some of the main causes of German management
    liability claims, where directors at some of the largest
    German companies have been sued.

    Board members at companies in Germany should be
    cognizant of how the organization approaches corporate
    governance and compliance, as executive liability is all
    about having the right controls and procedures in place
    within the organizational culture. Executives in Germany
    may also find they are held accountable by their own
    companies. The German market is typified by internal
    liability claims, where the company sues executives for
    wrongdoing or compliance failings. Around 80% of German
    D&O claims seen annually by AGCS are for such cases.
    Meanwhile, collective redress is being used in Germany
    under the German Capital Markets Model Case Act,
    which enables similar securities lawsuits to be combined
    in a streamlined process.

    The law has not yet been widely tested, but that could
    change if large claims like that filed by Volkswagen
    investors make it to court. Hundreds of investors filed
    a suit in a German regional court seeking billions in
    damages for alleged breaches of stock market duty
    related to evading emissions tests

    https://www.agcs.allianz.com/content/dam/onemarketing/agcs/agcs/reports/AGCS-DO-Insurance-Guide.pdf

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