Relative to Airbus, Boeing was long accountants but short engineers

Duncan Sankey

Portfolio director and head of credit research

Cheyne Capital

A qualitative approach can help investors spot boards that are too focused on short-term returns

In his September 1970 New York Times article, Milton Friedman, academic paladin of free-market capitalism, dismissed people in business who sought a broader remit for corporations than maximising shareholder value as “preaching pure and unadulterated socialism”.

The discussion of social responsibilities in business, he said, were notable for “analytical looseness” and “a lack of rigour”. The role of corporate management was “to make as much money as possible while conforming to the basic rules of society”. It is this doctrine of corporate governance — not the concept of stewardship — which has been the lodestar of corporate managements during the neoliberal ascendancy that began in the late 1970s/early 1980s. As the tide of central bank largesse recedes, more shipwrecks of this doctrine will become visible. Let’s look at a recent case: Boeing.

Despite Boeing’s commitment in its mission statement “to… inspire the world through aerospace innovation”, its current predicament can be ascribed to the sacrifice of innovation to the maximisation of shareholder value. Rather than develop an entirely new aircraft to combat Airbus’s A320neo, it sought to save money by beefing up its existing B737 and adding a patch (the now infamous Manoeuvring Characteristics Augmentation System (MCAS)) to compensate for the impact of larger and repositioned engines on stability. The savings — and some additional debt — helped finance over USD 40bn in stock buybacks between 2013 and 2018. Management also took a scythe to R&D spend (reducing it to a considerably lower level relative to sales than that employed by Airbus), adopted a hostile position to labour, and sought to co-opt regulators. It also undermined the collegiate integrity of production processes by spinning out aerostructure manufacture into Spirit Aerospace, a move recently acknowledged by the company’s CFO, Brian West, as ill conceived. Spirit is now beset with quality control issues and financially strapped. Boeing is looking to reintegrate it.

It was not always this way. Boeing was an innovator (its B707 and B747 facilitated mass air travel) and a beacon of engineering excellence. It underwent a change of direction following its merger with McDonnell Douglas, whose culture elevated but also reified the concept of shareholder value, raising the accounting output of its activities above the core activity itself.

All other things being equal, in a financially sustainable company, growing shareholder value is an epiphenomenon of excellence both in its core business and in its relations with other stakeholders, and not an end in itself.

Trouble is, shareholder value growth can produce a short-term high that is very appealing to equity investors. Between 2013 and 2018, Boeing’s stock outperformed the S&P 500 and S&P Industrials by over 100%. It would have taken a brave portfolio manager to question the quality of Boeing’s earnings generation. Yet any equity investor who exited before the tragic downing of the two 737-MAXs did well. And other stakeholders have suffered: customers (some airlines have had to scale back capacity growth as B737 deliveries have slowed to a trickle), labour, communities, passengers, regulators. Looking forward, Boeing sits on a USD 52bn debt pile (Airbus is net cash) and arguably has a B757-shaped hole where a new aircraft should be competing with Airbus’s A321XLR. It will likely recover its former status, helped by the reality that the world needs more than one major airframe OEM, but it will be a hard climb.

We need to listen to other stakeholders

There are other Boeings waiting in the wings. Identifying them requires a more qualitative approach to the assessment of governance than is emerging from ESG. Here are a few openers. We need to look closely at board representation and experience. (Relative to Airbus, Boeing was long accountants but short engineers.) We need to consider executives’ prior roles. (Look out for the diaspora of ex-GE staffers and the culture they bring.) We need to triangulate what management tells us with the experience of other stakeholders: customers, regulators and — yes — unions. We need to look more closely at the appropriateness of executive remuneration, since, contrary to Friedman’s assertion that executives are just “… agent[s] of the individuals who own the corporation”, they are a special class with asymmetry of knowledge and power. Boeing’s previous CEO, David Calhoun, earned USD 60m between 2020 and 2022 despite Boeing underperforming the S&P 500 and S&P Industrials by over 60% during his tenure.

Finally, we need to take a step back from the financial models and tick-boxes to focus on the human actions that shape company output. To do otherwise would be to mimic the failings of shareholder value maximisation.

Short-cuts to share buybacks

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