Letter to Chairman Clayton
June 27, 2019
Chairman Jay Clayton
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Dear Chairman Clayton,
Given the prominent media coverage and the class actions filed by shareholders of the Boeing Corporation regarding the effect of the 737 Max crashes in Indonesia and Ethiopia on the company’s share price, the SEC has directed increased attention to that company’s governance. On May 24, 2019 Bloomberg News reported:
The U.S. Securities and Exchange Commission is investigating whether Boeing Co. properly disclosed issues tied to the grounded 737 Max jetliner, according to people familiar with the matter, as regulators intensify their scrutiny of the company following two deadly crashes.
Officials in the SEC’s enforcement division are examining whether Boeing was adequately forthcoming to shareholders about material problems with the plane, said the people who asked not to be named because the probe isn’t public. The agency is also reviewing the aircraft manufacturer’s accounting to make sure its financial statements have appropriately reflected potential impacts from the problems, the people said.
An issue is deemed “material” if “there is a substantial likelihood that a reasonable investor would attach importance in determining whether to buy or sell securities.” The actions of Boeing’s management have clearly had a material impact on Boeing shareholders.
Since the Ethiopia Airlines crash, class action lawsuits have been filed against Boeing on behalf of investors. The first of these suits was filed in Chicago by Richard Seeks, a Boeing investor. The Washington Post reports Mr. Seeks claims that Boeing “‘effectively put profitability and growth ahead of airplane safety and honesty.’ The suit said investors suffered economic losses because of Boeing’s omissions and is seeking damages for alleged securities fraud violations.” The suit also alleges that Boeing “hid from investors and passengers that it prepared its own reports and statements to the FAA certifying its planes as safe to fly and that these statements and reports were undermined by Boeing’s conflicts of interest in having been delegated authority by the Federal Aviation Administration (FAA) to examine, test, and help certify its own planes and to provide the safety analysis for the 737 MAX.”
Additional lawsuits have been filed that “accuse Boeing of concealing the full extent of safety problems caused by the placement of larger engines on the 737 MAX that changed the handling characteristics from previous models. These handling characteristics included the danger of the increased pitch-up tendency of the aircraft, which required special safety features, some of which Boeing installed only as ‘extras.’”
Plaintiffs also claim that material omissions and false and misleading statements inflated the price of Boeing stock, so when the recent plane crashes brought the truth to light, Boeing’s investors suffered damages.
At the April 29, 2019 shareholders meeting, a resolution to separate the roles of CEO from Chairman of the Board received 34 percent of the vote. (Institutional Shareholder Services, a major shareholder advisor on corporate governance and responsible investment, urged Boeing to split the role of chairman and chief executive officer).
Presently, Dennis Muilenburg holds both positions – a dual role many corporate governance scholars and other experts view as seriously compromising the independence of the Board of Directors.
Indeed, Boeing’s governance is so compromised that the present Board could be described as a collection of highly paid rubberstamping puppets with each director receiving over $300,000 a year. Most of the members of the Board have no experience in commercial aviation. Many board members are chosen for their celebrity status and their malleability (See attached names of Boeing’s Board of Directors). As reported in the Washington Post, the proxy advisor Glass Lewis recommended, after the Ethiopia crash, replacing Audit Committee Chair Lawrence Kellner because he “should have taken a more proactive role in identifying the risks associated with the 737 Max 8 aircraft.” 
Boeing’s Board also approved a handsome bonus for the company’s CEO and approved an additional $20 billion of stock buybacks in December 2018, after the Lion Air crash. This decision was suspended after the Ethiopian Airlines 737 Max crash in March 2019.
Many questions about Boeing’s management are emerging in the press, and from Members of Congress, Congressional Committee staff, and investigators with the Department of Transportation’s Inspector General’s office. The Justice Department is conducting a criminal probe and has issued grand jury subpoenas. According to The Seattle Times, “after two fatal crashes of Boeing’s 737 MAX, a federal agent served a grand jury subpoena … seeking information from an aviation flight-controls expert and consultant as part of a sweeping and aggressive criminal investigation into the jet’s certification.”
If the members of Boeing’s Board were essentially kept in the dark by management — as were the pilots, airlines, FAA, and SEC, then the very well paid executive “hired hands” committed serious violations of the most basic principles of corporate governance.
If the members of Boeing’s Board were more fully informed than the above mentioned stakeholders in Boeing’s commercial and “regulatory” circles, and failed to act, the Board is complicit in acts that may give rise to charges of criminal negligence. Many indicators of negligence have been convincingly documented since the March 10, 2019 crash of Ethiopian Airlines Flight 302.
Amy C. Edmondson wrote in the Harvard Business Review:
In the aftermath of the two fatal accidents of Boeing 737 Max jets, tentatively blamed on the over-automation of Boeing’s flight systems, renewed attention to Boeing production facilities was perhaps inevitable. Evidence is now trickling out that workers in the troubled Boeing 787 Dreamliner plant in South Carolina were pushed to maintain an overly ambitious production schedule and fearful of losing their jobs if they raised concerns. This is a textbook case of how the absence of psychological safety – the assurance that one can speak up, offer ideas, point out problems, or deliver bad news without fear of retribution – can lead to disastrous results.
The accidents and the resulting media attention together create a real wake-up call for Boeing, which I expect will now embark on an examination of every aspect of its operations. What’s required, however, is more than operational fixes. It is nothing less than a full organizational culture change. But how telling it is that it takes a cataclysmic event (two, actually) for executives to take culture seriously? And yet, sadly, this is the way a thoroughgoing change in the culture of an organization happens most often: AFTER a big, visible failure or tragic event.
With the information already submitted by Boeing to the SEC, more than enough is publicly known to warrant additional steps be taken by the SEC. The following initiatives are merited given the importance of safety in the aviation industry and the significant role this industry plays in the U.S. economy. According to the Aerospace Industries Association (AIA), aerospace and defense “accounted for nine percent of all U.S. exports in domestic goods and is the nation’s third largest exporting industry.” And Boeing alone accounts for approximately 43 percent of global commercial airline industry revenues.
The SEC should:
- Hold a public forum to solicit comments from various stakeholders on the impact of stock buybacks on safety and the ultimate impact on investors;
- Solicit comments from airline safety organizations, pilot, flight attendant, corporate governance, institutional shareholder and other organizations on the benefits of creating independent board committees in the aviation industry to oversee safety issues; and
- Issue a “Concept Release” to solicit public input on the best corporate governance models to ensure that (a) aircraft safety is a priority for aviation companies (b) internal communication about safety is unfettered and if needed, reviewed at the board level, and (c) that whistleblower protections are meaningful.
All three of these initiatives will have an impact on future aviation safety and for shareholders and other stakeholders.
For the memory of 346 innocents – crew members and passengers – in the two Boeing 737 Max crashes and in the interest of truthful and full corporate disclosure beneficial to airline passenger safety and investor well-being, I have included the following materials for your review:
- Testimony of retired Captain Chesley “Sully” Sullenberger, before the House Transportation Committee, June 19, 2019;
- Make Passengers Safer? Boeing Just Made Shareholders Richer. By William Lazonick, American Prospect, June 25, 2018; and
- Boeing and the Importance of Encouraging Employees to Speak Up By Amy C. Edmondson, Harvard Business Review, May 1, 2019.
I look forward to your response regarding the SEC taking the above proposed actions and to the enclosed materials.
P.O. Box 19312
Washington, DC 20036
Commissioner Robert J. Jackson Jr.
Commissioner Hester M. Pierce
Commissioner Elad L. Roisman
 Benjamin Bain and Matt Robinson , “Boeing Faces SEC Investigation Into Its 737 Max Disclosures,” Bloomberg, May 24, 2019, https://www.bloomberg.com/news/articles/2019-05-24/boeing-faces-sec-probe-into-disclosures-about-737-max-troubles.
 See: Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)) (“[T]o fulfill the materiality requirement ‘there must be a substantial likelihood that the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.’”); see also 17 C.F.R. § 240.12b-2. For the purposes of this report, when we use the word “companies,” we are referring to those public companies subject to the registration and reporting requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934.”
 Hamza Shaban, “Boeing Shareholder Files Class-Action Lawsuit, Alleges Plane Maker Concealed 737 Max Safety Risks,” Washington Post, April 10, 2019, https://www.washingtonpost.com/business/2019/04/10/boeing-shareholder-files-class-action-lawsuit-alleges-plane-maker-concealed-max-safety-risks/?utm_term=.42ab8b0c040b.
 Steve Miletich, “Boeing Shareholder Files Class-Action Suit over Fallout from 737 MAX Crashes,” Seattle Times, April 10, 2019, https://www.seattletimes.com/business/boeing-aerospace/boeing-shareholder-files-class-action-suit-over-fallout-from-737-max-crashes/.
 Michael Katz, “Boeing Faces Slew of Class-Action Suits over 737 MAX Crashes,” Chief Investment Officer, May 30, 2019, https://www.ai-cio.com/news/boeing-faces-slew-class-action-suits-737-max-crashes/.
 Richard Seeks V. The Boeing Company, Dennis A. Muilenberg, and Gregory D. Smith, Case: 1.19-cv-02394,P.22 https://www.documentcloud.org/documents/5816608-Shareholder-Lawsuit.html
 Mark Matousek, “Boeing’s CEO Survived a Shareholder Vote Seeking to Prevent Him from Also Being the Company’s Board Chairman,” Business Insider, April 29, 2019, https://www.businessinsider.com/boeing-ceo-survives-shareholder-vote-to-strip-him-of-board-chairman-role-2019-4.
 Douglas MacMillan, “‘Safety Was Just a Given’: Inside Boeing’s Boardroom Amid the 737 Max Crisis,” Washington Post, May 5, 2019, https://www.washingtonpost.com/business/2019/05/06/safety-was-just-given-inside-boeings-boardroom-amid-max-crisis/?utm_term=.0ddd6745a3ac.
 Dominic Gates and Steve Miletich, “Grand Jury Subpoena Shows Sweep of Criminal Probe into Boeing’s 737 MAX Certification,” Seattle Times, April 1, 2019, https://www.seattletimes.com/business/boeing-aerospace/grand-jury-subpoena-shows-sweep-of-criminal-probe-into-boeings-737-max-certification/.
 Amy C. Edmondson, “Boeing and the Importance of Encouraging Employees to Speak Up,” Harvard Business Review, May 4, 2019, https://hbr.org/2019/05/boeing-and-the-importance-of-encouraging-employees-to-speak-up.
 “The Facts on Trade,” Aerospace Industries Association, https://www.aia-aerospace.org/research-center/statistics/industry-data/foreign-trade/.
 “How Will Boeing Gain Market Share?,” Forbes, February 21, 2019, https://www.forbes.com/sites/greatspeculations/2019/02/21/how-will-boeing-gain-market-share/#48d4e0641e9b.
 Concept Release. The Commission at times issues a “concept release” to seek public input to help identify theappropriate regulatory approach, if any, prior to issuing a rule proposal. In a concept release, SEC describes the area of interest and the Commission’s concerns; identifies different approaches to address the problem; and includes a series of questions that seek the views of the public on the issue. GAO Climate-Related Risks: SEC Has Taken Steps, GAO-18-188: Published: Feb 20, 2018. Publicly Released: Mar 22, 2018 https://www.gao.gov/products/GAO-18-188