Ted S. Warren/AP Photo
From time to time, large airliners of different makes, models, and vintages crash—but, fortunately, not very often. It was an extraordinary event, therefore, when two brand-new, identical aircraft went down because of the same malfunction, with one Boeing 737 MAX 8 plunging into the sea off Indonesia on October 29, 2018, and another plummeting to the ground in Ethiopia less than five months later.
Our research, based on publicly available information, strongly suggests that the dedication of Boeing's senior executives to increasing their company's profits and stock yield—which also augmented their own compensation—resulted in management decisions that contributed to the two 737 MAX crashes. While much more information remains to be discovered, the reported evidence, still unfolding almost daily, points to executive culpability in the crashes that took the lives of 346 passengers and crew.
Boeing announced its intention to build the 737 MAX series in 2011 and made its first delivery in May 2017. By March 2019, 387 MAX planes had been delivered to airlines, with orders for another 4,625 on Boeing’s books. The 737 MAX is the most popular plane in the history of a company that dates back more than a century. By the end of 2012, Boeing had booked more than 2,500 MAX orders, worth an estimated $140 billion in future revenues. With years of cash flow apparently assured, in 2013 Boeing’s top management embarked on massive distributions to shareholders through dividends and, in far larger sums, stock buybacks.
From the first quarter of 2013 through the first quarter of 2019, Boeing paid out $17.4 billion in dividends, which represented 42 percent of its profits during that period, making it a “true dividend rockstar.” Boeing’s senior executives also spent an additional $43.1 billion on buybacks, carried out as open-market repurchases, equal to a further 104 percent of profits. Boeing had stopped doing buybacks during the financial crisis in 2009 and began again with $2.8 billion in 2013, which it increased to $6.0 billion in 2014 as it began milking its 737 MAX cash cow, extracting not only all of its current profits but also deposits on future deliveries. With buybacks escalating among large U.S. corporations generally, Boeing competed to boost its stock price with $6.8 billion in buybacks in 2015, $7.0 billion in 2016, $9.2 billion in 2017, and $9.0 billion in 2018 (see Figure 1).
Boeing's stock price increased by a multiple of 6.7 between January 1, 2013, and March 1, 2019, when, just ten days before the second crash, it hit a record high. As Figure 1 shows, Boeing's stock price began to take off during 2013 as the 737 MAX orders rolled in and the company began doing large-scale buybacks. But the stock price really soared from mid-2017. The Federal Aviation Administration (FAA) certified the 737 MAX in March of that year. The company then began delivering its new planes, and top management increased buybacks, which would average $9.1 billion over the years 2017 and 2018.
Sources: Boeing 10-Q and 10-K filings with the U.S. Securities and Exchange Commission, 2004–2019; Yahoo Finance! Boeing historical data
Boeing's management touted the company's stock-price performance, as shown in Figure 2, reproduced from the Boeing 2018 Annual Report (page 12).
On December 17, 2018, with the Lion Air crash less than two months in the past, the Boeing board of directors ratified a 20 percent rise in Boeing’s dividend, effective March 1, 2019. In addition, the board authorized a new stock-repurchase program of $20 billion, making it possible for the company’s CEO, Dennis A. Muilenburg, and his CFO, Gregory D. Smith, to execute, at their discretion, even greater amounts of buybacks in 2019 than the $9.1 billion annual average for the two previous years. In the first quarter of 2019, Boeing did $2.3 billion in buybacks, apparently all of them prior to the March 10 crash. Between December 17 and March 8, Boeing’s market capitalization increased by $56.5 billion—a head-turning 31 percent. But for the second disaster, Boeing might have bought back at least $10 billion over the course of 2019. On April 24, with the future of its 737 MAX revenues in doubt, the company announced a suspension of its buyback activity.
With its tens of billions of dollars in buybacks and dividends, Boeing is, in common parlance, “returning” cash to shareholders. But in its entire history, going back to its initial listing on the stock market in 1934, Boeing has actually raised only $911 million in 2018 dollars through public stock issues, with the last one, in the context of its 1997 merger with McDonnell Douglas, bringing in $335 million.
As these figures illustrate, it is a myth that public shareholders have been the primary investors in U.S. corporations. Far more important to Boeing has been funding from U.S. taxpayers of government investments in infrastructure and knowledge that the company has put to use, as well as other types of taxpayer-funded subsidies. And of most importance to Boeing are the investments made by the company’s employees, through their supply of value-creating skill and effort, in the productivity of Boeing’s processes and products.
In Boeing's case, its “returns” to shareholders were prompted not only by the promise of record profits from 737 MAX sales for years to come, but also by management's aggressive use of buybacks to give manipulative boosts to the company's stock price. It was only in 1982, when the U.S. Securities and Exchange Commission (SEC) promulgated a new rule greatly facilitating the open-market repurchase of corporate stock—effectively a “license to loot”—that publicly traded companies like Boeing could use buybacks to boost the price of their shares with immunity from charges of market manipulation. And, as shown in Figure 3, prime beneficiaries of buybacks are corporate executives through their realization of gains from stock-based compensation.
Source: S&P ExecuComp database and Boeing proxy statements, calculations by Matt Hopkins and Mustafa Erdem Sakinç, The Academic-Industry Research Network
Boeing CEO Muilenburg has benefited immensely from the company's soaring stock price (see Figure 3). From 2015 through 2018, as Boeing's chairman and chief executive officer, Muilenburg banked $95.9 million in gross pay, though his annual salary never exceeded $1.7 million. Of this total remuneration, 51 percent consisted of realized gains from exercising stock options and the vesting of stock awards. Another 34 percent was nonequity compensation, based in 2013–2016 on Boeing's profitability and in 2017–2018 on a more complicated set of financial metrics. Just ahead of Muilenburg's ascent to the top management position, the company notified its shareholders in its proxy statement that, for the first time, “beginning in 2014, a significant portion of our named executive officers' long-term incentive compensation will be tied to Boeing's total shareholder return as compared to a group of 24 peer companies.”
In 2018, CEO Muilenburg took home $31.3 million in total remuneration, of which 49 percent was realized gains from vested stock awards and another 42 percent from a nonequity bonus based on various financial metrics, while the other four highest-paid “named” executives at Boeing averaged $14.2 million in total remuneration, with 68 percent realized from stock-based pay and another 22 percent from nonequity bonuses (see Figure 4). As shown in Figure 3, Muilenburg's predecessor as chairman and CEO, W. James McNerney Jr., managed to collect remuneration of $242.5 million from 2005 through 2015, of which 39 percent was stock based and 35 percent profit based.
Source: S&P ExecuComp database and Boeing proxy statements, calculations by Matt Hopkins and Mustafa Erdem Sakinç, The Academic-Industry Research Network
IF AN AIRCRAFT manufacturer hopes to generate revenues, it must produce safe planes. The two crashes exposed a structural design flaw in the 737 MAX. This problem has its origins in the fact that Boeing’s 737 planes are built low to the ground because the development of the aircraft occurred in the 1960s, before the widespread use of jetways and other machinery for loading and unloading people and cargo. Boeing’s rival in the manufacture of commercial airliners, Airbus, by contrast, launched its A320 series in 1984, when these ground operations had been modernized, and its A320neo, which competes directly with the 737 MAX, is based on an architecture that provides more space between the wing and the ground.
In developing the 737NG (Next Generation)—the previous upgrade of the 737 series, launched in 1993—engineers made several design changes to accommodate larger engines without compromising the stability of the aircraft on the ground and in the air. With the upgrade to the 737 MAX, the use of even larger engines to achieve fuel efficiency required new engineering solutions to make the plane safe.
The CFM LEAP-1 engines on both the A320neo and the 737 MAX aircraft are larger than previous engines. Airbus is able to accommodate these engines within its pre-existing, higher-off-the-ground aircraft design. In contrast, in order to stick with the 737 architecture, Boeing created additional ground clearance by repositioning its two LEAP-1 engines. Under certain conditions in the ascent after takeoff, this reconfiguration and the larger surface of the LEAP-1 engines alter the aerodynamics of the plane in ways that increase the risk of an extreme nose-up incident. When this condition occurs, the aircraft's “angle of attack” (AoA)—the angle between the oncoming air and a reference line on the airplane—can increase to such an extent that there is insufficient aerodynamic lift to keep the plane in the air. To measure AoA, all 737 planes—including both NG and MAX models—have two AoA sensors, one on each side of the fuselage near the cockpit.
In August 2011, the company announced the 737 MAX as successor to the 737NG. Boeing could have elected to have an alternative engineering approach, which would have been to manufacture a “clean-sheet” (i.e., wholly redesigned) replacement for the 737NG, making use of advances in materials and avionics. Such a new plane would not have had the 737 MAX’s structural design flaw that causes extreme nose-up incidents. Indeed, part of Boeing’s Project Yellowstone 1, begun in 2005, was a clean-sheet replacement for the 737 to develop a wholly new plane to compete with Airbus 320neo. Had Boeing developed this new aircraft, its management could have rejected the alternative of the re-engined plane that became the 737 MAX.
In December 2010, when Airbus launched the A320neo as its new midrange narrow-body aircraft, Boeing came under intense pressure to introduce a plane that could compete in terms of fuel efficiency, flight range, and passenger capacity. In July 2011, Boeing was shocked when American Airlines, which had hitherto used only Boeing planes, ordered 260 narrow-body planes from Airbus, including 130 A320neos. Bringing even greater pressure on Boeing to introduce a new 737, American told Boeing that it would buy 100 737NGs and 100 re-engined 737s. Southwest Airlines, which was the launch customer for the 737 MAX and has been its largest purchaser, also wanted Boeing to upgrade the 737 series to enable the airline to save on pilot training costs and use its pilots interchangeably on the different 737 models in its fleet.
The cost of developing a clean-sheet replacement incorporating the latest technologies was estimated at $7 billion above that of going with a re-engined 737. That is about the same amount that, on average, Boeing has been spending on stock buybacks annually since 2013. Indeed, from 2004 through 2008, when the need for a new midrange narrow-body plane was clear, Boeing had thrown away $11.0 billion on buybacks while also giving shareholders ample dividends of $4.8 billion. If, with Airbus as its only competitor, Boeing had funded a well-planned and -executed investment in a wholly new aircraft, the company could have generated significant revenues and profits far into the future.
Did Boeing's top management in effect allocate the corporate cash that could have been used to put a clean-sheet replacement in the air to propping up the company's stock price instead? Why the clean-sheet replacement for the 737NG was a flight path not taken must be a subject for further investigation.
ONCE BOEING'S SENIOR executives made the decision in 2011 to go with the 737 MAX, its engineers had to figure out how to deal with the pitch instability caused by the size and placement of the LEAP-1 engines. In the aftermath of the Lion Air crash in October 2018, the world became aware of the engineering solution Boeing had devised, a software fix known as the Maneuvering Characteristics Augmentation System (MCAS), installed as standard on the 737 MAX. This software patch uses information from just one of the two AoA sensors in order to detect an extreme nose-up situation; when it does, it automatically causes the stabilizer on the tail to trim the nose down. MCAS does not take AoA readings from both of the sensors to determine whether one reading may be false.
As optional extras, Boeing offered a software supplement that compares the readings of the two AoA sensors as well as a “disagree” light on the flight deck that alerts pilots to significant differences between the two sensors’ AoA readings. As it turns out, even though Southwest and American purchased these additional options, Boeing deactivated them (unintentionally, the company says) on the planes it delivered. Lacking knowledge of the existence of MCAS when they purchased the 737 MAX, Lion Air and Ethiopian Airlines had not installed these safety features on the planes that crashed.
The two crashes occurred because the sensor used by MCAS misread both planes' angle of attack soon after takeoff, automatically activating MCAS. Rather than stabilize the planes, MCAS pushed them into nosedives that became fatal; competing with the faulty MCAS, the pilots were unable to stabilize their planes.
In fact, the Lion Air pilots had no idea that MCAS even existed, and hence could not know that it was the source of the plane's nose-down movement. Prior to the Lion Air crash, Boeing had not documented the functioning of MCAS in its 737 MAX flight manuals. It was only on November 6, eight days after the Lion Air crash, that Boeing released a “Flight Crew Operations Manual Bulletin” for the 737 MAX 8 and 9 on the subject “Uncommanded Nose Down Stabilizer Trim Due to Erroneous Angle of Attack (AOA) During Manual Flight Only.” The bulletin “directs flight crews to existing procedures to address this condition.”
This bulletin is Boeing's first known alert concerning the repeated nose-down trim commands and how pilots should respond to the problem. Reflecting Boeing's continued opacity concerning the software fix it had put in place, the bulletin makes no mention of MCAS, referring only to the “pitch trim system.”
It was the Allied Pilots Association of American Airlines that identified MCAS, after the airline secured more information from Boeing in the days following the November 6 bulletin. Pilot unions at Southwest Airlines and American Airlines stated that their members had not previously been informed about the very existence of MCAS, let alone its operation, or its potential for malfunction. After a special training session on the weekend of November 10–11, an anonymous American Airlines pilot wrote on the Pilots of America online forum: “What’s been frustrating to us is that we had no idea that this MCAS even existed. It was not mentioned in our manuals anywhere. I’ve been flying the Max 8 a couple of times per month for almost a year now and I’m sitting here thinking, ‘What the hell else don’t I know about this thing?’”
Once the Lion Air crash brought the existence of MCAS to light, Boeing's engineers began working with the FAA to correct the problem, even as, worldwide, the 737 MAX remained in the air and new planes were delivered to the airlines. When Ethiopian Airlines Flight 302 crashed on March 10, the plane was still using MCAS with a reading from just one sensor, without the disagree software or indicator, and the pilots had received neither adequate documentation of MCAS nor training in how to cope with an MCAS-destabilized plane.
Although Boeing, the FAA, and U.S. airlines had initially resisted taking the 737 MAX out of operation, on March 13 all 737 MAX planes worldwide were grounded. On April 4, CEO Muilenburg, speaking of “the erroneous activation of the MCAS function,” stated: “It’s our responsibility to eliminate this risk. We own it and we know how to do it.” Yet in later statements, including one made at Boeing’s annual meeting of shareholders on April 29, Muilenburg faulted the deceased pilots, stating that “procedures were not completely followed.”
IN THE MEDIA as well as at a U.S. Senate hearing, Boeing and, for its complicity, the FAA have been criticized for making the airlines pay extra for the software system that compares readings on both AoA sensors and for the flight-deck disagree light. Even when MCAS became known subsequent to the Lion Air crash, Boeing and the FAA failed to make the complete AoA detection system mandatory and to provide pilots with adequate instructions on how to recognize and respond to an erroneous MCAS activation.
In a document it released on April 17, 2019, Boeing provided an overview of the changes being made to upgrade the MCAS system so it provides “additional layers of protection”; to train pilots so that they have “an enhanced understanding of the 737 MAX Speed Trim System, including the MCAS function, associated existing crew procedures and related software changes”; and to provide data on flight-deck displays “in a way that is consistent with pilot training and the fundamental instrument scan pattern that pilots are trained to use.” With this press release, Boeing in effect admits that it delivered the 737 MAX planes without proper MCAS documentation and training, but it does not admit that the 737 MAX has a design flaw that, under certain conditions, makes the aircraft more unstable than it should be.
At a minimum, Boeing's failure to adopt the necessary MCAS documentation and training when it began delivering the 737 MAX in 2017 was the result of managerial incompetence. Another possibility is that Boeing management deliberately concealed the existence of MCAS—until forced to reveal it by the Lion Air crash—because it did not want to focus attention on the 737 MAX's structural design flaw. Be it incompetence, concealment, or some combination of the two, Muilenburg and his executive team should be held accountable for the two 737 MAX crashes that occurred.
There are two types of evidence now available that support the “concealment” hypothesis. The first type is that Boeing has consistently emphasized the commonalities between the 737NG and 737 MAX, both as it was keeping secret the existence of MCAS and even now that MCAS is out of the bag. The second type is that, almost on a daily basis, investigative reporters have been uncovering irregularities in the 737 MAX certification process that suggest that Boeing's management may have concealed information on the safety of the aircraft in the documentation provided to the FAA.
Boeing begins its release of April 17, 2019, by stating: “The Maneuvering Characteristics Augmentation System (MCAS) flight control law was designed and certified for the 737 MAX to enhance the pitch stability of the airplane – so that it feels and flies like other 737s.” This statement is consistent with Boeing's portrayal of the commonality of the 737 MAX and 737NG in the precertification years when orders were flying in for the re-engined plane.
In AERO, the company’s in-house magazine aimed at “operators of Boeing commercial airplanes,” Boeing featured two articles on the 737 MAX in 2014, the last year in which AERO was published. The first article, “New 737 MAX: Improved Fuel Efficiency and Performance,” in AERO QTR_1 2014, has the summary: “The 737 MAX extends the 737 family of airplanes by incorporating new features that improve fuel efficiency and operations for airlines. The airplane’s commonalities with previous 737 models will allow for easy integration into existing 737 fleets.” There is no mention of MCAS. Similarly, the second article, “737 MAX Advanced Onboard Network System,” in AERO QTR_3 2014, starts with the statement: “The new 737 MAX is designed to enhance and extend the Next-Generation 737 while maintaining commonality with the previous models.”
Currently, consistent with the notion that the 737 MAX “feels and flies like other 737s,”Boeing's “737 MAX By Design” website persists in advertising that the re-engined aircraft is just an easy upgrade: “As you build your 737 MAX fleet, millions of dollars will be saved because of its commonality with the Next-Generation 737, ease of maintenance, wide availability of 737 pilots, and the global infrastructure that supports the aircraft in operation.”
In March 2017, the FAA certified the 737 MAX as safe to fly. Opportunity for Boeing's misrepresentations or omissions in the certification process existed because of the FAA's long-standing practice of delegating the safety analyses required for aircraft certification to the manufacturer. Safety engineers employed by Boeing are supposed to report to the FAA, but reports from investigative journalists suggest that Boeing’s management exerted its power as employer to restrict the analysis process and short-circuit unfavorable information that emerged from it.
In a Seattle Times story published on March 17, 2019, Dominic Gates, the newspaper’s aviation expert, states that “the original safety analysis that Boeing delivered to the FAA for a new flight control system on the MAX—a report used to certify the plane as safe to fly—had several crucial flaws.” Based on his investigations using industry sources, Gates argues that the initial System Safety Analysis, first, understated by a factor of four the power of the MCAS on the 737 MAX “to swivel the horizontal tail to push the nose of the plane down to avert a stall”; second, did not warn that MCAS would reactivate each time a pilot sought to pull the plane out of a nosedive triggered by an erroneous MCAS reading, thus exacerbating instability; and third, assessed a potential failure of the MCAS system, based on readings from one sensor, as “hazardous” rather than “catastrophic.” Gates claims that as the testing of the 737 MAX progressed, Boeing failed to provide the FAA or, by extension, other aviation regulators around the world with the most up-to-date test results.
A Wall Street Journal article on the certification process contends that Boeing test pilots were left out of the safety analysis loop at its later stages. According to reporters Andrew Tangel and Andy Pasztor, their sources familiar with the matter said that “Boeing test pilots and senior pilots involved in the MAX’s development didn’t receive detailed briefings about how fast or steeply the automated system known as MCAS could push down a plane’s nose…. Nor were they informed that the system relied on a single sensor—rather than two—to verify the accuracy of incoming data about the angle of a plane’s nose.”
Further investigation of the certification process is needed to establish to what extent and in what ways faulty safety information—or Boeing's withholding of such information—led the FAA in March 2017 to certify the 737 MAX as safe to fly.
ONE OF THE 157 people killed in the Ethiopian Airlines disaster was Samya Stumo, a 24-year-old American woman working for a nonprofit health-care organization. One of her former professors at UMass Amherst described Stumo as “one of a kind” and “the sort of person who really makes a difference in the world.” In embarking on a career as a change agent for global health, Stumo had written that she was “passionate about resolving disconnects between policy and practice, making health care people-centered by nature, and inspired to impact change while rejecting the status quo in global health and development.”
Samya Stumo also was the grandniece of Ralph Nader, who for over half a century has led the fight to ensure that the products that we buy from corporations are safe. In 1965, Nader published his eye-opening Unsafe at Any Speed, exposing the deadly negligence of General Motors (GM) and the automobile establishment in building and selling unsafe and polluting cars. Five years later, consumer activists mounted “Campaign GM,” which included a shareholder proposal at GM’s annual meeting in May 1970 to have three “public interest” members on GM’s board of directors to advocate for safer and more fuel-efficient cars. The proposal garnered little shareholder support, but the very fact that GM’s management had been confronted with the need for change was enough to lead The New York Times Magazine to publish, in September 1970, an article by free-market economist Milton Friedman to counter the movement for corporate social responsibility.
In an introductory comment published with the article, “A Friedman Doctrine—The Social Responsibility of Business Is to Increase Its Profits,” a New York Times editor referred to the shareholders’ meeting in May 1970 and its aftermath, making absolutely clear why Friedman had written the article:
Representatives of Campaign G.M. demanded that G.M. name three new directors to represent “the public interest” and set up a committee to study the company's performance in such areas of public concern as safety and pollution. The stockholders defeated the proposals overwhelmingly, but management, apparently in response to the second demand, recently named five directors to a “public-policy committee.” The author [Milton Friedman] calls such drives for social responsibility in business “pure and unadulterated socialism,” adding: “Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of free society.”
Really? In retrospect, the demands of Campaign GM for safer and less-polluting cars were basically demands for GM to engage in automobile innovation. In the 1970s and beyond, the world leaders in producing these “socially responsible” cars would be Japanese and European companies, leaving the “profit-maximizing” General Motors lagging further and further behind. What Friedman called “pure and unadulterated socialism” proved to be the innovative future of the automobile industry.
The “Friedman Doctrine,” as annunciated in 1970, became the clarion call for companies to be operated to “maximize shareholder value.” On Main Street as well as Wall Street, stock yields, even more than profits, have become the almost unquestioned measure of corporate performance.
In the case of Boeing, the availability of the LEAP-1 engine enabled the company to offer a much more fuel-efficient plane, and with the 737 MAX's burgeoning sales its stock price soared, especially after the new plane was certified and delivered in 2017. Tens of millions of dollars in compensation ostensibly rewarded senior executives for the great job that they had done. Now in the wake of two plane crashes that have left 346 people dead, it seems clear that Muilenburg and his executive team have failed in their fundamental responsibility—to build and deliver a safe plane.
For this failure, Boeing's senior executives should be fired and the many millions they awarded themselves clawed back. The Boeing board should be replaced by directors who are able and willing to serve the public interest for safe, fuel-efficient, and cost-effective aircraft.
There is an urgent need to have corporate directors who will put people and safe products ahead of profits and stock prices. As proposed by U.S. Senator Tammy Baldwin in the Reward Work Act, all publicly listed U.S. corporations would make one-third of their board members the representatives of their workers. The act would also require the SEC to rescind Rule 10b-18, adopted in 1982, which encourages corporate executives to use buybacks to loot the business corporations they are supposed to be managing.
The stranglehold of corporate financialization on the U.S. economy has created an environment in which senior executives are enabled, lauded, and rewarded for their abuse of their control over corporate resource allocation. Boeing is one of many major U.S. corporations that use stock buybacks as a mode of “predatory value extraction,” contributing to extreme income inequality and loss of economic opportunity. The Boeing 737 MAX crashes, which in our globalized economy proved fatal for people from around the world, may demonstrate how a manipulated stock market can be hazardous to our collective health as well as to our common wealth.
This article has been updated.
