3 Takeaways - What Leaders and Corporate Boards Can Learn From Boeing’s Mistakes: Harvard Business School’s Sandra Sucher (#46)

Episode Date: June 22, 2021

Boeing’s fall from grace didn’t happen overnight. Sandra Sucher shares five key mistakes made by the CEO and the board of directors.

Welcome to the Three Takeaways podcast, which features short, memorable conversations with the world's best thinkers, business leaders, writers, politicians, scientists, and other newsmakers. Each episode ends with the three key takeaways that person has learned over their lives and their careers. And now your host and board member of schools at Harvard, Princeton, and Columbia, Lynn Thoman. Hi, everyone. It's Lynn Thoman. Welcome to another episode. Today, I'm excited to be here with Sandra Sucher. She's a Harvard Business School professor, co-author of the upcoming book, The Power of Trust.

She's also just written a fascinating Harvard Business Review article titled, What Corporate Boards Can Learn from Boeing's Mistakes. I had assumed that Boeing's failures were just CEO failures and was fascinated to discover that Boeing's failures were actually also board failures. I'm excited to find out the lessons we can learn from Boeing's mistakes and how Boeing went from one of the most respected companies in the world to the position that it is in today. Welcome, Sandra, and thanks so much for our conversation today. Thank you, Lynn. Thanks so much. My pleasure. As you talk about Sandra in your Harvard Business Review article, Boeing shareholders recently filed a lawsuit against the company's board of directors.

They argued that the board had neglected their oversight duty, failing to hold Boeing accountable for safety both before and after the crashes of the two 737 MAX airplanes, which killed 346 people. To quote the lawsuit, safety was no longer a subject of board discussion, and there was no mechanism within 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, unquote. Wow, Sandra, this is really shocking. Were you surprised by your findings? I was, you know, I'd spent a fair amount of time trying to understand Boeing and what went wrong. But my view of it was very much sort of CEO down. And I didn't give a moment's thought, quite honestly, to the role of the board until this lawsuit came out. And it was an astonishing that it's an extremely well written 120 page-page brief. It's actually really interesting, kind of a potboiler. And it just made me start to think about the role of corporate boards in helping companies become trusted and recover from trust breaches. And so this was both sort of a lesson about what Boeing did wrong and also opened up what for me is now a new line of research

around the role of corporate boards and trust and how the companies can earn it and regain it if they need to. You identified five main lessons from Boeing's failure. Can we talk about each of them? The first had to do with a selection of board members. Can you tell us about that? So on Boeing's board, they really were light on safety experts and industry experts. Instead, they had heavied up on former government officials, which was a problem because they didn't have anybody with an engineering background who was there to kind of say, you know, are we doing the right thing in the way that we're going about creating this airplane, the 737 MAX? The other thing that was true is that there were some

cross-memberships. So a couple of the board members were on a Marriott board, and they were on a different board, and that's called sectionalism. And the problem is that if I'm sitting on a board with people in company A and company B, we kind of get to know each other very well, and it becomes something that interferes with our objectivity. So we start having an affiliation to, I like the way Lynn thinks, and she had a great point of view at that last board meeting. And so I'm just going to sort of give her all of my attention when we go to the next meeting. And so what you want in a board, because of their fiduciary relationships, is a lot of, I would say, kind of collaborative but sparky people who can take each other on and say, well,

this is interesting, but what about this? And so the more that you have these cross relationships, the harder it is to manage that kind of a process. So one problem was expertise, and they didn't have enough of it. And the other is these cross-seating board members on different boards. And when you talk about expertise, you mentioned that they had several government officials on the board. Were these government officials in a related industry, say, senior members of the Air Force that were responsible for flying planes or purchasing planes? What kind of backgrounds did

these former government officials have? So it would be great if they had the kind of background you just described. We had, for example, Nikki Haley, who was an ambassador to the United Nations, as we know, a former governor. So exactly what she would bring to a discussion, I'm just using her as the first name that comes to mind, is an example of the fact that it wasn't as if they looked for former government officials in allied fields. They seem to have looked for who could we get the highest recognition for having this person on our board, kind of independent of the expertise that the person brings. I'm sure she's smart and able. That's not the point. It's that if I want people on a Boeing board, I want someone there, several people there to know about engineering,

plane manufacturing, and what happens when all of that doesn't go well. And your second finding had to do with the board structure and aligning with the company needs, which you're just talking about, the engineering and the manufacturing. Can you talk about Boeing's board structure? With Boeing, it had a very conventional structure of committees. Their committees were audit, finance, compensation, special programs, and then a committee that combined governance, organization, and nominating. Now, what's missing in all of that is any kind of a committee that's got a word like safety associated with it, right? And even when you go into the detail about the audit committee, which arguably is there to oversee risk, their mandate was entirely on financial risk. And it was not, in fact, within the purview of that committee to look at issues of manufacturing safety processes and all

of that. So what the Boeing board shows is that depending on the industry that you're in, you need to actually establish committee structures that reflect the needs of the kind of issues that you want to be supervising. And this was a huge mistake. And so it turned out that they didn't establish a committee on safety until a month after the second plane had gone down. Boeing itself had inside the corporation a committee whose job was to monitor safety, but no one on the board knew about that. And there was no mechanism, as there commonly is in audit and other places, for them to have a straight line reporting relationship where they share information of what they know into the board. None of that existed. How extraordinary that they didn't have a committee on safety until after the second crash. I'm also surprised that they didn't have any committee on strategy or on new products, because the product development is, I don't know,

a decade or so, and hundreds of millions of dollars or more. That's definitely true. And you're right that the long lead time would suggest that they had issues that they needed to talk about. And the most important strategic one here was, were they going to try to build a 737 based on an old design or create an entirely new plane from scratch. Obviously, the latter strategy would have been much more expensive, but the workarounds that they ended up needing to do because they were working with an old design is part of what led to the problems that they had. So you're right, without any visibility at the board level to second guess or to take a look at that strategy, there's no way for people to be talking about that hugely important issue. You also believe that boards should prepare for the worst case.

Can you talk about that? The preparing for the worst case is an idea that we came up with after trying to understand why it was that so many boards seem to perpetually underestimate the cost associated with scandal, the length of time it takes to recover. And we figured that there had to be some kind of a bias at work that was the beginning of understanding why you prepare for the worst case. Because it's one thing if you're sort of open to preparing for the worst case, but if there's a bias that is informing your thinking, making it hard to do that, that's a problem. And what we found was research around something called the normalcy bias. So this is a bias that occurs when people are faced with truly a

catastrophic situation that is out of their understanding, out of their purview. So if you're trapped at the World Trade Center and you're trying to figure out what's going on there, you have nothing to compare this to. And boards in this situation are kind of like that. They're looking at a situation where they don't really understand what is the scope of this? What's the scale of this?

And this bias suggests that we first default to saying the world is not that different, right? And what's not that different is that this kind of a situation, really, we can handle it the same way we do other things. And the bias here has you systematically underestimate how big these effects could be. And so there are things that you can do to master this, mitigate the effects of this bias. And a lot of it does have to do with how you prepare for the worst case. And so the first thing you could do as a board is you could systematically look at one or two examples, very detailed of scandals that have occurred,

problems that have occurred in your industry, and try to understand what are all the costs and problems that are associated with the company that did not manage those situations well. And so that's going to automatically put you in a business of trying to re-anchor some of your ideas about how much money, for example, this could cost. So Boeing, among the many costs that it incurred, had a $2.5 billion settlement with the U.S. government as part of this crash. So if I know that and I'm on a board, all of a sudden I have just re-anchored any estimate that I have about how much it's going to cost to recover. So we recommend really working at the level of doing scenario planning and saying, what did this situation look like? What might it look

like for us? And we think that that's a really important thing that could be done to help companies prepare for a worst case scenario and be able to mitigate the effects of this normalcy bias. So no one likes to be the bearer of bad news to the leadership of a company, whether it's the CEO or the board. How should companies manage for truth? What do they need to do to create an environment where people actually share the truth? This is probably the most important of the issues I've talked about. Because if you think about information flows, what you need at the board level is good information coming to you. And so it's very important, as you say, to create an environment

for that. There are things that boards can do that actually help them create an environment of truth and realism. The first is just how you respond to people who bring bad news, right? And so you can actually set a tone inside the boardroom for the fact my colleague Amy Edmondson talks about respecting and giving gratitude when people come in to alert you about a problem because they've just given you a favor. They've told you this is something that we see that could happen. So this is the opposite of shoot the messenger. It's really fights nature because no one likes to hear this stuff, but you have to actually discipline yourself to thank people who are doing that. There's a practice that came up post-ENRON,

truth and realism at the board level, which is to have regular meetings with the board without the CEO. And the purpose of that is that sometimes the CEO is part of a problem that you're investigating and it becomes very hard for the board, obviously, to talk about it with the CEO is part of a problem that you're investigating. And it becomes very hard for the board, obviously, to talk about it with the CEO present. Sometimes the relationships are such that you may need to use something like anonymous polling. Why don't people just put into X system your concerns about this, and then with no names attached, and we'll be able to see what's on people's minds. So boards are themselves a team. And if you think about it in that sense, it's a team with huge responsibilities, and it really owes it to itself to become a high-functioning team in the sense of one that

can actually manage conflict very openly and very effectively. Your final important finding is that boards need to practice accountability and punish wrongdoing. Did Boeing do that? Not really. So the CEO Mullenberg was dispatched from the firm. It wasn't until December of 2019. So if you go back, the first of the Boeing crashes was in October of 2018. The second was in March of 2019. It is, you know, recently as November of 2019, David Calhoun, who is now the CEO and was then the chair, said that he thought that Maddox Mullenberg had done a very good job. But then eventually on December 22nd, they did part company with him and he left the company with $80 million worth of exit compensation. They withheld severance, but in an $80 million package, you don't need to worry about severance. And this signal that they sent, which is not holding him responsible for all of what had occurred on his watch, and then handing him this extremely generous exit package, raises the kind of questions that people would have about who is this board? Who do they think they're representing? And what should they be doing about it? So, you know, this is why trusting companies, trusting boards, this is a

moral question. And when we see harm created, we want to see punishment occur, right? That doesn't make us bad people. It just means that we're following the course of justice in a sense of what is fair. And so in this case, they did not do a particularly good job. There is research that says that if you part company with a CEO who has not been helpful to you, meaning that they led the problem and they were in no part of helping the solution, that you actually gain expertise and people's respect and trust when you actually part company with a CEO has been problematic. So boards sometimes worry that if I do this, it looks like we were asleep at the switch. That may or may not be, but that doesn't mean that they can't make up some of

that by moving with some dispatch to really try to figure out what role did this person play. And so, you know, if the CEO had played a very active role in uncovering what had gone on and actually trying to mitigate the harm and creating a plan for what they were going to do about it, that's one kind of person that you would want to protect. But if you have a CEO who's denied all of that all along and who really hasn't helped in any part, that's not someone whose career you're going to reclaim because your responsibilities as a board are actually to the institution as a whole and not to the individual. And overall, Boeing did not take accountability. They didn't ground those

planes immediately? Correct. Right. And the United States didn't help. Our government didn't help because we were the last of all of the governments to ground the planes ourselves. And definitely Boeing didn't do that voluntarily. You know, they waited for each of the regulators in each of the countries to say, we're not going to let you fly your planes. And Boeing has continued to have manufacturing and safety issues with delays in grounding of the 737 again, as well as the 787 now for additional issues. Right. And so this does give the impression that it's hard to escape it, that they have not yet contended with the root causes of what led to the problem in the first place. And one of the things we found out about recovering lost trust is that there's this third stage of it where you have to say, what caused the problem and how can we fix it?

And it really does look as if they haven't gotten their arms around their manufacturing issues and their design issues. Can you give an example of a company that used truth to build trust after a fiasco? Let's think about a company like Nokia. We used to think a lot about Nokia far less recently. And Nokia had a terrible layoff in 2008 in Germany in a city called Bochum. And what they did is they managed this layoff so poorly with no advanced communication, no attempt to try. They'd been in this city for 30 years as a manufacturer. And they had a real business problem, which is that they were only 6% of the capacity

that they had, but they were actually 23% of their personnel costs. So Germany was a really expensive place for them to do business. And from a business standpoint, it was kind of a no-brainer. OK, I get it. We're going to have to close this factory, open up someplace else. It turns out that nobody in Germany thought that this was a particularly good idea because they felt like they hadn't done anything wrong. And this ended up being such a big deal that people started a campaign to send their phones back to Nokia, politicians got involved, and it ended up costing the company 80,000 euros per employee to close this factory down, right? And so when they found

themselves being out-competed in 2011 by Apple and Android with smartphones, they said, okay, we're going to have to do a major restructuring. And it ended up being about 18,000 people in 13 countries worldwide. And their watchword was not another bocum. You know, they had learned their lesson. They said, we have to find a new way to do this. And to your point about truth and realism, all of this was based around we're going to have a different approach to how it is that we are going to manage this layoff. And their approach was a big bet on trust. And the bet that they made was, if we tell you as an employee working for us at Nokia that your job is going to end at two years, but during those two years, we will help you find another job. Will you be willing to stay? And can we put in place a robust enough system of job support so that you know that when

your job comes to an end, you're actually going to be able to do something different and you won't be left hanging? So they were very transparent about this program. They asked the board for support because they knew it was so unusual to take this approach. And then they proceeded to come up with a wonderful plan where they offered people five different options to get a job. We'll help you get a job inside Nokia, outside Nokia. We'll give you money to start a new business. We'll give you money to fund your education. And we'll give you money if you can think of something we haven't offered. And so they did this. And the result was, at the end of the two years, 60% of 18,000 people across 13 countries knew their next step the day they left the firm. And whereas the enormous cost that they

had before, the cost of all of this was less than 4% of their restructuring charges. So they managed this with leaders who themselves were going to be losing their jobs. They tailored it to each of the countries where they did business. And what they proved is that you can not only regain lost trust, you can actually do something quite wonderful. But people don't think about trust as requiring innovation. But this is a huge example, a great example of the fact that if you want to be trusted, a lot of times that's going to be plowing new soil, right? Something you haven't thought of before in order to really manage very complex business situations. That is a wonderful example. And it's a wonderful example also that if you want to build

trust, you have to be trustworthy yourself. So Boeing denied there was a problem when there obviously was one. An extraordinary example to me of rebuilding trust is J&J after the Tylenol tampering. And that was a problem, unlike Boeing's, that Tylenol had nothing to do with. How did they regain trust so quickly and effectively? Johnson & Johnson had a process for managing that situation where from the start, James Burke, who was the CEO at the time, said, this is a public health problem. So he framed this problem, not as this is a company problem, this is a scandal for us, people are going to stop using our drug. He said from the start, this is a public health problem. He immediately made overtures to the press to get

people to help them get the word out as to which batches they felt were contaminated and what things people had to stay away from. He then led the effort across the industry to create this new kind of packaging, which we're now very familiar with and at times swear about, which has three seals in their case. And they said they knew that they couldn't make the actual pill itself tamper resistant. What they could do is they could make it tamper evident. And so that was the strategy that they followed. They said, we're going to help people understand if the bottle of pills that they've gotten have been tampered with. And so he got that new design up and running in six weeks and started giving people money to turn in their pills, the old packaging for new packaging.

So, you know, we think about Johnson & Johnson. It is that in that case, the gold standard of trust recovery, but it required a lot of innovation and a lot of strategic thinking about how it is that you could manage this situation. And James Burke said all the time that he had 100 years of people's faith in Johnson & Johnson that he could build on. He said, if it was the James E. Burke company that had this problem, not so clear what we could have done. And so for anybody who's listening, who's a CEO, you are building your trust record right now, right? This is what you're going to need to be relying on if something comes up in the future. And so the Tylenol situation is a great example

of why it helps to invest in becoming trusted as a company, because there will be times when you're going to need to rely on that history that people have with you, so that they cut you some slack as you try to recover. Before I ask for the three takeaways that you would like to leave the audience with today, Sandra, is there anything else you'd like to mention that you haven't already discussed? The other thing I'd like to mention is that the website for our book the power of trust book dot com is up and in it we have a form that people can fill out it's called join the trust conversation and we put that in the website because i'm so interested in people's stories about what's happening with trust in their organization, what lessons they've learned about it. And so I'm taking any advantage I can

to tell people, please fill that out, because as a researcher in this area, that's how we figure out who's worth studying, what problems we think we can really understand on other people's behalves. And what are the three takeaways you'd like to leave the audience with? The first takeaway is that trust is a relationship.

So we usually think about trust as kind of it's this glue. It holds us all together. A trust is actually a quite specific relationship of vulnerability to other people's actions and intentions. And so what we found is that the reason why it's useful to think about is that we understand what it means to manage relationships, right? We do that all the time. And a trust is just a very particular kind of dependence. There are three parts to it. There's the trusting party, the person who's supposed to be doing the trusting,

there's the party I'm trusting, and then there's the thing I'm trusting them to do. And trust works like that. It's quite specific. And so people sometimes say, well, isn't this like boiling the ocean? How can I ever get my arms around something as big as that? But it turns out that you fix trust, you work on trust, sort of one area, one kind of decision, one action, one set of stakeholders at a time. So my first lesson is just the notion that trust is a limited relationship, but it's a relationship that you have with stakeholders that you want to cultivate. Number two is that trust is built from within. So it's almost impossible to create an organization which deals in a trustworthy way with outsiders if the people

inside don't feel that they themselves are trusted and have a trusting environment. So if you're wondering, how can I start to get my arms around this? I'd start looking inside the organization and look for areas where people trust you and what you're doing there and areas where you can get some information that this might not be working so well. And the third takeaway is that lost trust can be regained. Most of us assume that trust is this fragile thing. And, you know, once it's done, game over, can't do anything about it. But because it's built by actions, it can be recovered by actions. Right. And so it really requires a certain way of understanding what you're doing, but it definitely can be recovered. And so I want to leave people with a sense of

kind of optimism about this and that this is an area to kind of get to know inside your organization, really understand how you can benefit yourselves and others by working on it. Thank you, Sandra. This has been terrific. I very much enjoyed your Harvard Business Review article and your book, The Power of Trust. Thank you. upcoming episodes, be sure to sign up for our newsletter at 3takeaways.com or follow us on Twitter, Instagram, Facebook, and LinkedIn. Note that 3takeaways.com is with the number three, three is not spelled out. For all social media and podcast links, go to 3takeaways.com.