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Case Studies in Bad Governance: Boeing and Wirecard

This week, we continue our conversation about corporate governance with some evidence about how bad governance can actually get.

Last week we reviewed several reasons why boards can be lacking when it comes to corporate governance; lack of challenge, group thinking, dominant leader etc. This week we will look at two case studies where poor board governance has led to dramatic and disastrous outcomes.

Case Study # 1: Boeing, accountability and risk

In February 2021, Boeing shareholders filed a lawsuit against the company’s board of directors. They argued the board had neglected their oversight duty, failing to hold Boeing accountable for safety before and after the crashes of two 737 MAX airplanes that killed 346 people in 2018 and 2019. “Safety was no longer a subject of Board discussion, and there was no mechanism within Boeing by which safety concerns respecting the 737 MAX were elevated to the Board or to any Board committee,” they wrote in the 120-page filing.

Boeing’s strategy was to minimize training costs in order to keep the overall cost of the aeroplane low. The real world cost was several hundred lives, billions of dollars in losses, and reputational damage that Boeing is still trying to recover. The shareholders suing Boeing argue the board could have prevented it.

Boeing’s fall from grace didn’t happen overnight. Rather, it occurred over time as the processes that made Boeing a trusted engineering company were eroded.

By the time of the crashes, the Boeing board was light on safety and engineering experts and heavy on former government officials. Four of the Boeing board members named in the suit were former government officials in positions unrelated to the aviation industry, including a former ambassador to the U.N. and a former White House chief of staff.

Moreover, out of its 13 members, three sat on the board of Caterpillar, and two on the board of Marriott. These inter-relationships increase the difficulty of getting an objective opinion and can foster sectionalism.

“Any cross relationship is a problem because it interferes with objectivity,” noted Charles Elson, professor of finance and former director of the Weinberg Centre for Corporate Governance at the University of Delaware.

The Boeing board had five committees (audit; finance; compensation; special programs; and governance, organization, and nominating). Audit oversaw risk, but its charter focused on financial risk, and it had no mandate to discuss safety.

Moreover, the committee had no mechanism for receiving alerts from whistleblowers. According to the lawsuit, this is at odds with the industry where several different airlines, including Southwest, JetBlue, and Delta have board committees specifically established to address safety.

Boeing didn’t establish a board committee to address safety until April 4, 2019, which was six months after the first crash in Indonesia, and nearly a month after the second crash in Ethiopia.

Instead, safety issues were reviewed by a “Safety Review Board” run by employees, which had neither a mandate nor a mechanism for reporting to the board. Meanwhile, the Boeing board was not even aware the Safety Review Board existed until after the 737 Max Jet had been grounded in 2019.

Despite CEO Muilenburg’s several missteps, from failing to ground the 737 Max jet immediately to insisting that the issue would be fixed with better training and a software upgrade, the board continued to back him up.

On November 5, 2019, Board Chairman David Calhoun told CNBC that the board believed Muilenburg had done “everything right.” Muilenburg wasn’t let go until December 22, 2019, and he left with an $80 million exit package even without severance. He was succeeded by Calhoun.

To add fuel to the fire, the shareholder lawsuit alleged the CEO exit package was allowed by the board to protect any exposure of the board.

By continuing to back the CEO and letting him walk away with nearly $80 million, the board sent the message that it condones his missteps, which inspires very little trust in them and their ability to right Boeing’s wrongs. It’s no surprise that the board is being sued.

Boeing’s board failed in many ways but buried in its failures are lessons other boards can learn.

As Professor Sandra Sucher and Shalene Guptat of Harvard Business School write “You can set yourselves up for success by ensuring you have the right members, are structured correctly, and are able to have intentional, open, honest, and timely conversations where issues of accountability can be fully addressed.”

(An interesting watch is the recently released Netflix documentary: Downfall - the case against boeing

Case Study #2: Wirecard and Fraud

Wirecard filed for insolvency in 2020. The former CEO, COO, two board members, and other executives have been arrested or otherwise implicated in criminal proceedings. In June 2020, the company announced that €1.9 billion in cash was missing. It owed €3.2 billion in debt.

Wirecard is one of Germany’s biggest postwar accounting frauds. The spectacular accounting scandal disgraced the country’s banks, investment funds, regulators, auditors and police.

Wirecard was worth €24bn at its peak. It turned out the CEO, Markus Braun and COO, Jan Marsalek, had hoodwinked auditors with forged documents, hounded critical journalists and investors, stifled internal investigations and fired whistleblowers for years.

The cause of Wirecard’s collapse was clear cut — half the group’s sales and €1.9bn of the cash on its balance sheet were fictional. In Munich, a team of more than 20 prosecutors and 100’s police officers spent 21 months grinding through the complex scandal, which involves dozens of suspects and companies in about 25 countries, including Singapore, the Philippines, Mauritius, Belarus and Russia.

German law enforcement held 450 interviews with witnesses and suspects, raided 40 properties and sent out 90 requests for co-operation to foreign colleagues. The indictment against CEO, Markus Braun, stretches to 474 pages.

The court documents and testimony reveal a company shaped by persistent mismanagement. Wirecard had presented itself as one of Germany’s rare technological success stories; but on the inside, it was a byzantine and ineffective organisation.

In subsequent investigations by the Financial Times, it was found that CEO Braun, had little, if any, tolerance for dissenting views and scolded fellow management board members raising them.

According to Robert Peres, the Head of the Minority Shareholders Initiative, the chief problem of German corporate governance is that shareholders lack the power to hold management accountable. Wirecard shareholders tried to question CEO Markus Braun at annual general meetings, but they did not have a chance to grill him as German law makes it easy for a company’s board members to evade awkward questions by talking in platitudes.

A related problem is that Germany’s two-tier system of a management board and a supervisory board does not produce the necessary stringent controls. Wirecard’s supervisory board say they did not have a clue about how executives were cooking the books.

Shareholders and other stakeholders suffered as legislation and the federal high court reduced their influence — already small by international comparison — to allow for rapid approval of mergers or capital increases.

The silencing of investors reflects the determination of German corporations to thwart active shareholders who like to ask questions. Lack of accountability created a breeding ground for large scale misconduct and the most skilled fraudsters take advantage of lax legislation.

Much work lies ahead in Germany to fix governance system and the laws that protect it. In the meantime, the Wirecard scandal offers a cautionary tale for outsiders willing to learn from Germany’s mistakes

Robert Peres recommends overhauling the corporate governance system and provide transparent accounting mechanisms. Good corporate governance requires effective means of private enforcement.

Peres points out that class action lawsuits and UK-style disclosures to investors are long overdue in Germany.  Those who seek compensation from German companies are also hampered by its 1879 civil procedure code, which forces claimants to litigate individually - with associated risks and clogs the justice system.

Interesting, Peres believes that protecting and strengthening the rights of investors is the surest way to promote corporate accountability.

Week 5 – key takeaways

  • The processes of governance should always be tailored to a board and its business.
  • Risk assessment is not just about the financial state of a business; risk should consider any event which could impact the business including regulatory, financially, and reputationally.
  • All board members should act independently and challenge actions they feel are wrong both ethically and for the business.
  • Board should be mindful of their stakeholders when making decisions including shareholders, employee, consumers and investors.
  • Dominant personalities on boards should be challenged to understand rationale for decisions, boards should use voting power where the majority disagree with a dominant member.
  • If a director is uncomfortable with decisions being made by the board they must declare this and, in some cases walk away. Directors must remember the jointly and severally liable for decisions made by the board.



The information included in this article is considered true and correct at the date of publication; changes to rules and regulation made after the time of publication may impact on the accuracy of the information referenced or inferred to in this article. The information in the article may change without notice and Martyn Fiddler Aviation is in no way liable for the accuracy of any information printed or stored or in any way interpreted and used by the user. This article or the information contained in it is not provided or intended to be used as advice of any form.
If you have any doubts or would like to discuss any aspect of this article, please do not hesitate to contact one of our experts who will be happy to discuss your individual circumstance.
About the author

Heather Gordon is Legal Director at Martyn Fiddler Aviation. Heather joined the team in 2013 having previously practiced within a leading Isle of Man law ...

Contact Heather Gordon
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