Boeing : Board Failed to Challenge CEO on 737 MAX Safety, Lawsuit Says

By Andy Pasztor and Andrew Tangel

Boeing Co.'s board failed to challenge then-Chief Executive Dennis Muilenburg on the safety of the 737 MAX or his campaign to counter negative news reports between two fatal crashes that claimed 346 lives, according to newly released portions of a shareholders' lawsuit that cites internal company documents.

About two weeks after the initial crash in late 2018, Mr. Muilenburg devised "a public relations, investor relations and lobbying campaign," according to the lawsuit, partly designed to push back against the bad publicity and criticism by U.S. airline-pilot groups attacking Boeing's disclosures regarding the jet's design. He discussed the plan with then-lead director Kenneth Duberstein and board member David Calhoun, now Boeing's CEO, according to internal emails cited in the suit.

Around the same time, Boeing was publicly pointing to pilot and maintenance errors as important factors in the fatal plunge of Lion Air Flight 610 in Indonesia, even as it was privately beginning work on a fix to an automated flight-control system implicated in that crash. The system, called MCAS, later also led to a second MAX crash in early 2019 in Ethiopia.

The new details, contained in a recently amended version of a shareholder lawsuit filed against Boeing's board in Delaware's Court of Chancery, included inner-workings at the highest levels of the company as it became embroiled in one of the biggest corporate crises in modern American history. U.S. regulators late last year allowed the MAX to resume passenger flights, ending a nearly two-year grounding.

A Boeing spokesman on Monday said the company was seeking to dismiss the shareholders' suit, which he said lacked merit. He said Boeing was dedicated to safety, quality and integrity and that the company's senior management and board had engaged in "robust safety oversight," including extensive reviews of engineering, airplane-development and production processes. He said Boeing had improved safety, quality and compliance since the MAX crisis.

"It should come as no surprise that a filing by plaintiffs seeking to gain advantage in a lawsuit presents a misleading and incomplete picture of the activities of Boeing and its board of directors," the spokesman said. Mr. Muilenburg declined to comment. The company declined to make current executives and directors available. Former directors and executives either declined to comment or couldn't be reached. After the crashes, Boeing revamped its internal structure to give the board greater oversight of safety matters.

The Wall Street Journal previously reported on an earlier version of the suit that had been heavily blacked-out. The suit, which relies on a trove of internal Boeing documents, includes communications such as emails among executives and directors during the nearly five-month period between the two crashes and their aftermath. Previously redacted portions of the earlier version of the suit became public Monday, after the Journal asked the court to release the information.

Morgan Zurn, vice chancellor of the Delaware state court, said in her Feb. 1 order that Boeing's internal "communications are at the very heart of this board oversight case." Saying that little had been revealed about how Boeing's board responded to the MAX crashes, she added: "The public interest favors disclosure."

The lawsuit sheds light on a key period of Boeing's recent history that resulted in Mr. Calhoun, a director since 2009, becoming Mr. Muilenburg's successor as CEO. A former top executive at aircraft engine-maker General Electric Co., Mr. Calhoun became the board's chairman after the second MAX crash before directors ousted Mr. Muilenburg in December 2019.

After the Lion Air crash in October 2018, which was soon followed by the Federal Aviation Administration's conclusion that MCAS "posed an unacceptably high risk of catastrophic failure," the suit alleges directors didn't order an immediate safety investigation of the system or how it was approved by regulators or investigate its safety. Instead, according to the suit, "the board supported the public relations campaign" of Mr. Muilenburg "to attack accurate media coverage respecting the 737 MAX."

Among the news articles discussed inside the company was a Nov. 12, 2018, Journal article that said Boeing withheld information about the MAX's new flight-control feature from airline pilots. That feature was part of the FAA's initial safety certification.

The following day, according to the latest version of the suit, Mr. Muilenburg sent an update to the board calling the Journal article "categorically false."

By early December 2018, according to the suit, Mr. Muilenburg instructed Anne Toulouse, then the company's chief spokeswoman, to "keep pushing back" on coverage by the Journal, telling her "the only engineering and PR problem we have is the pseudo problem fabricated by the WSJ!"

A Journal spokesman said: "The Journal's reporting on Boeing has been fair, accurate, and we stand by our conclusions. We will continue to cover Boeing in the same responsible manner."

Earlier this year, Boeing struck a $2.5 billion deal with the U.S. Justice Department to settle a criminal investigation centered on two company employees who allegedly misled FAA training specialists about the suspect flight-control system. As part of that settlement, Boeing acknowledged that portions of its flight manuals gave pilots false, inaccurate and incomplete information.

In discussing an emergency safety bulletin the FAA issued after the Lion Air crash, the suit said that Mr. Muilenburg was more concerned with potential cash-flow disruptions than safety matters. "We need to be careful" that the FAA's interest in the contents of flight manuals, he wrote to Greg Smith, the company's chief financial officer, "doesn't turn into a compliance item that restricts near-term deliveries."

The risk-management update to the board after the first crash didn't include oversight of airplane safety, according to the suit, nor did safety issues surface as part of a December 2018 meeting of the board's audit committee.

The committee----then headed by director Larry Kellner, a former airline executive who is now Boeing's chairman----discussed a plan to further ramp up MAX production and supplier disruptions that affected aircraft deliveries, according to meeting materials cited by the suit.

Safety concerns gained prominence internally with the March 2019 crash of Ethiopian Airlines Flight 302. Just days later, Mr. Muilenburg's chief of staff, Ann Schmidt, urged the CEO to address safety problems objectively, telling him not to "drink [Boeing's] own bath water." The reputation of Boeing and the 737 "has been severely hit if not destroyed at this point when looked at from a flying public -- the passengers and voters -- point of view," she said in the March 14, 2019 note.

She encouraged Mr. Muilenburg to "start the journey to rebuilding our reputation -- which we will and have done before with real data and not based on our tendency to want to only see the good."

In a March 15, 2019, email exchange between board members Arthur Collins and Mr. Calhoun, Mr. Collins discussed how when he was CEO of Medtronic PLC, the medical device maker, every board meeting started with a product safety discussion. He suggested Boeing focus an entire board meeting on reviewing quality, according to an email cited in the suit.

Mr. Collins said: "I recognize this type of approach needs to be communicated carefully so as to not give the impression that the board has lost confidence in management (which we haven't) or that there is a systematic problem with quality throughout the corporation (which I don't believe there is)," Mr. Collins wrote to Mr. Calhoun, who previously served on Medtronic's board.

The lawsuit said Mr. Calhoun forwarded the emails to Mr. Muilenburg, who said he would address the issues in board materials.

In April 2019, vice presidents in charge of engineering and safety for the commercial aircraft unit provided their first report directly to the board, according to the suit: "The presentation opened with a primer entitled: 'What is Certification?'"

Alison Sider contributed to this article.

Write to Andy Pasztor at [e-mail] and Andrew Tangel at [e-mail]

(END) Dow Jones Newswires

02-08-21 2101ET