When Governance Breaks Down: Boeing’s Lesson for ESG Investors
When a company becomes a convicted felon, it’s a clue that corporate governance may be a problem.
While the public often focuses on the “E” in ESG investing, good corporate governance (the “G”) is essential for companies to succeed. Corporate governance includes how board members, executives, and managers prioritize financial and cultural values at a firm. Governance may not be as sexy as fighting climate change, but aerospace company Boeing (NYSE: BA) is a clear example of what happens when governance goes completely off the rails.
How Boeing Went from Corporate Darling to a (Figurative) Orange Jumpsuit
Boeing is the world’s largest airplane manufacturer. The company employs more than 170,000 people across the U.S. and in 65 countries. While Boeing has dominated headlines for all the wrong reasons lately, it’s important to note just how critical the company has been to the U.S. economy over the past 100 years.
Boeing is currently one of the “Dow 30” companies that make up the Dow Jones Industrial Average (DJIA) and has consistently been the largest exporter in the U.S. In 2013, President Barack Obama joked that “I’m expecting a gold watch from Boeing at the end of my presidency because I know I’m on the list of top salesmen at Boeing.”
So, how did Boeing go from having Obama promote its planes from the Oval Office to pleading guilty to fraud charges roughly a decade later?
Journalist Peter Robison has written a compelling book called Flying Blind that discusses how Boeing’s unflinching drive for profits at all costs set the company up for catastrophe, particularly as Boeing sought to cut corners in developing and manufacturing its 737 MAX aircraft. Robison and other writers make a strong case that Boeing “sold its soul” by transforming its culture of prioritizing safety to focusing exclusively on financial goals, with literally deadly results.
Fatal and Illegal Governance Lapses
Boeing’s rush to sell its 737 MAX jets without investing in expensive and time-consuming training protocols led to two fatal crashes in the span of six months. In October 2018, Lion Air Flight 610 plunged into the Java Sea off the coast of Indonesia. Then, in March 2019, Ethiopian Airlines Flight 302 plummeted into a field in Ethiopia. In both cases, undisclosed software on the 737 MAX jets wrested control from the pilots soon after takeoff, leading to high-speed impacts. In total, 346 people died.
While initially deflecting blame for the accidents in 2021, Boeing settled with the U.S. government, agreeing to pay a $2.5 billion fine and admitting that the company had misled Federal Aviation Administration (FAA) investigators.
However, Boeing’s troubles extend far beyond the 737 MAX tragedies:
- In January 2024, a door plug blew out on a Boeing 737 MAX 9 on Alaska Airlines Flight 1282 from Portland, Oregon, leading to cabin decompression. The accident led to three injuries onboard, none of which were deemed serious. Soon after the incident, the Department of Justice launched a criminal investigation.
- In March 2024, a LATAM Airlines flight between Sydney, Australia and Auckland, New Zealand — on a Boeing 787-9 Dreamliner — plunged mid-flight, leading to more than 50 injuries and 12 people taken to the hospital.
- In June 2024, two American astronauts took a Boeing Starliner spacecraft to the International Space Station (ISS). However, malfunctions on the craft left two astronauts stranded in space, until 2025, even though the mission was originally supposed to last one week. The Starliner was deemed too risky for human flight by NASA, so the craft will return to earth unmanned.
- Several whistleblowers have come forward to reveal issues at Boeing, including widespread manufacturing problems and claims that Boeing has tried to hide broken or defective parts from regulators. Several of the whistleblowers were fired, and two have died. In June, Boeing’s (now former) CEO Dave Calhoun admitted to the U.S. Senate that Boeing had retaliated against whistleblowers. He resigned soon after his testimony.
All of these incidents culminated in July 2024. Boeing pled guilty to a criminal fraud conspiracy charge after the Justice Department found the company had failed to comply with the 2021 agreement related to the two fatal 737 MAX crashes. The company’s poor governance led to a rare corporate felony conviction, along with hundreds of millions of dollars in fines and the potential loss of its ability to sell to the Department of Defense.
The Investment Implications of Boeing’s Poor Governance
Financial markets have punished Boeing for its widespread problems. The company’s stock price has returned -32% year-to-date through August 31, 2024, compared with a +19% return for the SPDR S&P 500 ETF Trust (SPY) for the same time period. Over longer time periods, Boeing’s underperformance is even more pronounced. Boeing has returned -52% over the past five years, while SPY’s share price has more than doubled over that time period. Meanwhile, the share price for its chief competitor Airbus (AIR.PA) is flat for 2024 and has returned +17% over the past five years.
The financial pain extends to Boeing’s ability to borrow money. The company’s credit rating has been slashed to one notch above “junk” status, meaning that the company will have to pay higher interest rates on new debt. Meanwhile, Boeing’s heavy debt load led to a downgrade, by Wells Fargo with worries the company could struggle to finance the design and production of its next-generation planes. Ironically, concerns about how to fund the development of the 737 MAX while enhancing profitability at all costs led to Boeing’s problems in the first place.
Why ESG Matters for Investors
So, what does ESG have to do with investors trying to decipher Boeing’s stock performance? In the past several years, ESG investing has come under attack as “woke” and for a willingness to sacrifice returns in favor of feeling “good” about particular investments. Never mind that studies have shown that companies with strong ESG profiles tend to outperform over time.
In Boeing’s case, if analysts or investors had ignored the company’s woeful governance issues, they could be facing steep losses. Boeing’s ESG problems weren’t hidden. Boeing has a “High Risk” ESG rating from Sustainalytics, one of the industry’s leading ESG ratings agencies. (For comparison, Airbus has a rating of “Medium Risk” from Sustainalytics.) While ESG ratings shouldn’t always be taken as a complete view of a company’s governance or sustainability profile, investors who don’t pay attention to ESG issues (including ratings) may literally pay a price.
If investors had weighed Boeing’s massive governance issues, they could have avoided steep losses and potentially allocated capital to companies that were managed more effectively — and which could have generated better returns.
What’s Next?
Boeing has a long road ahead to restore its reputation. As a first step, outsider Kelly Ortberg became Boeing’s new CEO in August 2024, replacing the embattled Dave Calhoun. Ortberg will be based in Seattle — in close proximity to Boeing’s primary manufacturing facilities — and claims he will spend more time on the factory floor. It awaits to be seen whether or not he’ll be successful in turning around the company.
In the meantime, Boeing serves as a warning for companies, investors, and the public at large that ignoring good governance can lead to investment losses — and far more tragic consequences as well.
For more insights and guidance on navigating the evolving landscape of business governance and ESG investing, stay tuned to our blog for future updates and expert analyses.
And help us build a more sustainable and prosperous world through responsible investment practices by becoming a member of the Advance ESG community. It’s free to join and there are no future financial obligations. Together, we can make a difference in safeguarding our planet for future generations.
Green Quarter ESG – IMPACT ACTIONS
Safeguard Your Organization through Strong Governance
- Prioritize Safety and Compliance Over Profits
Transform your company culture to place safety and ethical compliance above short-term financial gains. Commit to transparent, robust safety protocols and regular, rigorous audits to ensure compliance, reinforcing that safety is a core value. - Invest in Governance Training for Leaders and Teams
Equip your board and executives with ongoing training in ESG principles, focusing on how strong governance directly impacts financial performance and organizational resilience. Educated leaders make more informed, ethical decisions. - Implement a Whistleblower Protection Policy
Encourage transparency by establishing and promoting a strong whistleblower policy that protects and empowers employees to report issues without fear of retaliation. This is essential to catch issues early and safeguard both employees and your company’s reputation. - Hold Regular Governance Audits
Schedule frequent, independent audits that assess your governance policies and practices. These audits help identify potential risks early and ensure that governance frameworks remain robust and adaptable to changes in regulatory and industry standards. - Align Company Goals with Long-term Value Creation
Shift the focus from short-term profitability to long-term value creation that encompasses stakeholder interests, including employee well-being, customer satisfaction, and regulatory compliance. This shift can protect your company from costly penalties and improve investor confidence. - Review and Strengthen Crisis Management Plans
Ensure your crisis management and communication strategies are prepared for quick, transparent responses to potential governance or operational failures. Having a well-structured crisis response plan minimizes impact and helps rebuild trust with the public and stakeholders. - Monitor ESG Ratings and Commit to Improvement
Regularly check your ESG ratings and seek continuous improvement. By proactively managing ESG metrics, you attract investors who prioritize sustainable and ethical business practices, enhancing your company’s resilience and growth potential.
