Tracking fraud in the 2008 crash, investigator Bill Black coined the term ‘criminogenic organisation’ to denote one whose management systems and incentives are arranged such that dodgy behaviour is inevitable. Set up a sales organisation, make people’s jobs or bonuses dependent on meeting unreasonable targets, turn a blind eye to their methods, and watch what happens. Nothing that people do may be illegal in itself, but how they do it irredeemably corrupts the overall performance – for which, and this is the beauty of it, no one is accountable.

Black was investigating a special case. But suppose that not just organisations but an entire economy can become criminogenic – that the overall system of incentives and management becomes self-reinforcing, so that bad behaviour happens even without fraudulent intent?

When in 1996 Boeing CEO Phil Condit decided to merge with smaller rival McDonnell Douglas and a few years later move the company HQ from Seattle, its historic base, to Chicago, he was upfront about the reason. He wanted to diminish the influence of Seattle’s powerful engineering function and free the financial team to run the company ‘like a business rather than a great engineering firm’.

That wasn’t fraudulent – better financial discipline wasn’t a stupid aim in an era of toughening competition. But those two symbolic steps are now universally seen as setting the company’s flight path to today’s ignominious real criminality: in July Boeing pleaded guilty to fraud and criminal conspiracy over the crashes of two 737 Max 8 aircraft in 2018 and 2019, killing 346 passengers, for which it has been fined $2.5bn. Now on probation, it is under investigation for the midair blowout of a door plug on a 737 Max 9 this January, and in April, five years after the fatal crashes, a whistleblower could still testify to Congress that ‘unless action is taken, and leaders are held accountable, every person stepping aboard a Boeing airplane is at risk’. 

Icon to pariah – it’s hard to overstate the depth of Boeing’s fall. (Only in this context would the well-publicised plight of two astronauts marooned in space because of a malfunctioning Boeing Starliner spacecraft rank as a mere PR setback.) Most people would say that Boeing richly deserves its punishment – except that as in most criminogenic outfits – that’s the point – the individuals most responsible will likely walk away richer and scot-free. And there is a co-culprit in the dock that bears an equal share of the blame. Boeing is a faithful proxy for the shareholder-primacy governance regime that, exactly like the faulty sensors and software that caused the 737 crashes, overrode all objections and forced the nosedive into fraud and possible ruin.

The 1996 Boeing-McDonnell Douglas merger was effectively a reverse takeover, with MDD’s financially-oriented brass moving into many of the top positions. One signifier of the new culture was the headquarters move to Chicago. Another was the replacement of quality and safety notices on the factory floor with a stock ticker and exhortations to keep the stock price in mind at all times. A cull of manufacturing jobs and the speeding up of production lines only reinforced the message.

With Wall Street plaudits ringing in their ears, executives pressed forward with their cost-cutting agenda even as warning signs began to appear. The outsourcing of development and manufacture of the 787 Dreamliner, Boeing’s last all-new design, launched in 2003, was a fresh slap in the face for in-house engineering and manufacturing. It backfired. Far from reducing cost, the complicated supply chain generated delays and huge cost overruns, while quality problems at the new non-unionised manufacturing plant in South Carolina, ignored at the time, continue to this day. Breakeven for the $33bn Dreamliner programme is still some way off.

But worse was to come. At least no 787 model has crashed. The horror show is the 737 Max – a monument to the fatal unintended consequences of unbridled shareholder capitalism and executive self-interest.

The Boeing 737, the industry’s best-selling short-haul workhorse, was born in the 1960s – pre-history in aviation terms – and through four generations the company has milked it, literally, to death. Proposals to replace it have come and gone, once in the early 2000s, and the second, fatefully, a decade later, when James McNerney, Boeing’s first CEO without an aviation background, once again opted to modify and reengine the 737 airframe, then more than 40 years old, rather than invest the $20bn it would take to develop a brand-new aircraft.

Lulled by this false economy and the deceptive early sales success of his new 737 variant, the 737 Max, McNerney increased Boeing’s dividend and initiated an extravagant programme of stock buybacks. All told, from 1998 to 2018, that is, the period of the new regime up to the first Max 8 crash, Boeing spent 82 per cent of its profits, a total of $61bn, on stock buybacks for the benefit of stockholders – enough to develop three entirely new aircraft from scratch. Including dividends, during that period Boeing shareholders were allotted an astounding 121 percent of its profits. 

Shareholders of course included Boeing’s senior executives, whose pay was and is substantially composed of incentive bonuses tied to shareholder returns. Unsurprisingly, the CEOs who presided over the illusion of success benefited hugely from the stock buybacks they authorised. According to one calculation, McNerney, the CEO who gave the go-ahead for the 737 Max, made $242.5m during his 10-year tenure, while from 2015 to 2018 successor Dennis Muilenberg, in charge during the recent disasters, made $93.5m, before leaving with an entitlement of another $62m. Current CEO Dave Calhoun received a 45 per cent pay increase this year and will depart at the end of 2024 with options worth up to $33m if the Boeing share price recovers. 

But back in the cockpit, there was a hidden snag, one directly related to the decision not to invest in an all-new aircraft. Fitting larger engines to the 737 airframe necessitated structural compromises that made the new plane more likely under certain conditions to stall. Boeing countered this tendency with a software fix. But that solution compromised the cost efficiency, deriving from commonality with the existing 737 fleet, that was key to the new plane’s commercial appeal: since flying a Max would be the same as flying any other 737, pilots weren’t supposed to need extra training nor airlines to update safety procedures. Shockingly, to square the circle, Boeing simply omitted to inform customers of the presence of the new software or, critically, the procedures pilots should adopt in case of malfunction.

Thereafter, there was no turning back. Modern aircraft are remarkably safe. There were no fatalities in 2017. For two catastrophic failures to occur to new planes in strikingly similar circumstances in the next 18 months was therefore doubly astonishing. Yet even after the second crash Boeing resisted grounding the Max, insisting that it was safe and hinting at pilot error or insufficient training. It wasn’t until China unilaterally halted flights that the US Federal Aviation Authority (FAA) followed suit and the whole sorry, indeed criminal, story emerged. Poor starting decisions followed by manufacturing and quality issues ignored or suppressed by management and the FAA, which allowed Boeing to self-certify its own aircraft, were compounded by deception and omission. In both crashes, a faulty sensor had caused the anti-stall software to malfunction, and without documentation or prior training, the unfortunate pilots had no way of overriding it. The terrifying but non-lethal blowout of a fuselage panel on an Alaska Airlines 737 Max 9 this year merely confirmed the obvious. Along with the grounding of the Max fleet, Boeing was ordered to reform its toxic culture of quality compromises, whistleblower harassment, and coverups.

The irony of the story, of course, is that the obsession with stock price is self-defeating. In Boeing’s case, having undermined the values that had been essential to its rise, it degenerated into negligence and deceit that in the last five years have wiped out half the company’s stockmarket value; the share price currently hovers barely above 2014 levels. Since 2020 Boeing has posted losses of $14.6bn and will likely burn through $8bn more this year. Order deliveries are running nearly 50 per cent below those of arch-rival Airbus.

Can Boeing recover? I doubt it. Important defence contracts probably preclude total disappearance. But the aerospace side is too corrupted to survive in present form. Changing the financial strategy is the least of it. Boeing’s proud engineering culture was shaped in a different age, long before the criminogenic incentives of late shareholder capitalism, let alone its turbocharged private-equity and hedge-fund variants, came into existence. After 25 years of indoctrination by executives who backed those incentives to the hilt – four out of five of them, incidentally, graduates of GE, another once-revered shareholder-driven company that has since imploded – it’s hard to see how that culture could be recreated fast enough to win back mass customer trust. Would you willingly pay to board a flight on a Boeing 737 Max 8 or 9 or Dreamliner today? To reverse the old catchphrase: sorry, if it’s Boeing, I ain’t going.

*****

PS: As I was saying…

A new wrinkle on the price scams I wrote about last time, from the September 2024 Which?: ‘It’s increasingly clear that if you’re not prepared to take out numerous retail memberships you will end up paying over the odds in supermarkets and pharmacies. Our latest investigation analyses almost 12,000 prices at Boots, Co-op, Morrisons, Sainsbury’s, Superdrug and Tesco, and reveals that many member “deals” are simply the going rate, leaving non-members with inflated costs at the checkout’.