Boeing needs a radical board shake-up to regain its altitude
It needs safety-focused employee representatives on its board now
efficiency improved? According to the World Bank, the ICOR is measured as the average real net fixed investments-to-NDP (net domestic product) ratio of two successive recent years divided by the real NDP growth rate of the current year. So, the average real net fixed investments-toGDP ratio for 2021-22 and 2022-23 divided by the real NDP growth in 2022-23 would provide the ICOR for 2022-23. Using this methodology, we find that India’s ICOR averaged 3.1x in the 2000s decade (2000-01 to 2009-10, excluding 2008-09), 3.7x in the decade after that (2010-11 to 2019-20, excluding 2019-20), and is estimated to have averaged 3.2x in 2022-23 and 2023-24 (estimate). The ICOR was 3.3x for 2022-23 (as per the first revised estimates) and calculated at 3.1x for 2023-24 (based on the second advance estimates and some assumptions). While the pandemic may have made an impact, recent figures are better than in the 2010s decade and comparable with the 2000s (though the ICOR averaged 3.3x if re-calculated on a 2011-12-series base).
If so, the economy needs real net fixed investment totalling 25-26% of NDP, which is higher than the average of 23.6% of NDP over 2022-23 and 2023-24, to achieve a real GDP growth of 8% per annum. Alternatively, investment efficiency needs to improve, with the ICOR falling to 3x (or lower), as was the case during 2003-04 to 2007-08 and 2014-15 to 2016-17. The overarching argument, thus, remains unchanged: even though real investments are growing at a much faster rate and the real investment ratio is higher than the nominal investment ratio, India must elevate the ratio by at least 2 percentage points to attain our
target of 8% real GDP growth per annum.
There is another point. The real investment ratio measures real investments (nominal level deflated by the investment deflator) as a proportion of real GDP/NDP (nominal figure deflated by the GDP/ NDP deflator). The GDP/NDP deflator is a composite of deflators for consumption, investments and foreign trade. Hence, a higher real investment ratio
the nominal ratio reflects an investment deflator growing at a slower pace than the GDP deflator, with consumption prices outpacing those of investment goods. For instance, during 2013-14 to 2022-23, while the GDP deflator reported a compound annual growth rate (CAGR) of 4.5%, the investment deflator posted a CAGR of 3.9%. Further, whether we take 2004-05 or 2011-12 base data, the gap between the real and nominal investment ratios widens as we move away from the base year. For the 2004-05 base, the difference between the real and nominal investment ratio was 3.3 and 4.1 percentage points respectively in 2010-11 and 2012-13. For the 2011-12 base, the difference widened to 3.5 percentage points between 2017-18 and 2019-20 and was unchanged in 2022-23 and 2023-24. The investment deflator increased at a slower pace than the GDP deflator, irrespective of whether the global (or India’s) investment cycle was very strong (between 2003-04 and 2012-13) or weak (from 2012-13 to 2021-22).
Clearly, more work needs to be done to understand the sustained gap between India’s real and nominal investment ratios. However, there is no doubt that India’s investment-to-GDP ratio needs to go up, along with an improvement in ICOR, for 8% real growth to become achievable.
Last fortnight, Boeing’s airline customers sent two clear messages when they asked to meet with the planemaker’s directors without its chief executive officer David Calhoun.
The first was that they had lost confidence in Calhoun and his deputies. No matter where you fall on the organization chart, it’s never a good sign when a client wants a tête-à-tête with your boss and doesn’t invite you along.
The board clearly received that message: Last Monday, Boeing said that Calhoun would exit by the end of the year and that Stan Deal, head of the commercial airplanes division, would retire immediately. The other big message had to do with the board itself. By summoning the company’s directors, the airline CEOs were signalling that at the heart of the Boeing mess they see a huge governance problem—that the company’s issues, whether quality or culture or strategy or leadership, all fall squarely on the board, which needs a meaningful overhaul.
Again, Boeing’s directors got the message. The company announced that Chairman Larry Kellner would not stand for re-election at its annual meeting in May. He will be succeeded by Steve Mollenkopf, the former Qualcomm CEO who joined the board in 2020, which gives him some distance from the 737 Max crashes in 2018 and 2019 that killed a total of 346 people.
Even the way the executive shuffle was handled showcased just how ill prepared, complacent and out of touch the board was. Despite all the scrutiny that the management team faced, the board did not have a successor ready to jump in for Calhoun or even for its troubled commercial unit. It pushed longtime executive Stephanie Pope into the unenviable job.
Governance issues are hard to fix. Boards are insular, entrenched and often reticent to create conflict among their members. PwC’s 2023 Annual Corporate Directors Survey found that 45% of directors think at least one member of their board should be replaced but only 11% said their board’s assessment processes led to the decision to not renominate a director. Few companies have term limits for board members, resulting in a paltry 7% turnover rate among directors of companies in the S&P 500.
The Boeing board had made some progress on the governance front since the 2018 and 2019 737 Max crashes. An analysis by found that the board lacked technical expertise at the time. With three of the company’s 13 board members also serving on the Caterpillar board and two on the Marriott board, Boeing’s directors at the very least had the appearance of the kind of cosy interpersonal relationships that make objectivity difficult. Meanwhile, the company’s audit committee was responsible for overseeing risk, but its remit was to oversee the financial kind rather than safety. The board has since set up a safety committee and refreshed its membership. Since the start of 2020, four board members with at least 11-year tenures have departed.
But whatever Boeing has done hasn’t been enough. Harvard Business School professor Sandra Sucher told me that given the colossal mess that Boeing is in, it has “permission to think quite differently.” Anything else will seem merely incremental.
One way for Boeing is to consider adding a union representative to its board, a request made by the International Association of Machinists District 751, which represents more than 30,000 Boeing workers. Doing this would give the board the voice of employees, many of whom have been sounding the alarm on Boeing’s safety and manufacturing shortcomings for years. It could also go a long way in restoring trust with the public, among which unions have historic levels of approval.
While rare, involving unions in corporate governance in the US is not unheard of, especially in the transportation industry during times of crisis. Both United Airlines and Chrysler added union members to their boards in the past. Former Labour Secretary Robert Reich argued recently on his blog that Boeing archrival “Airbus’s clear leadership over Boeing in matters of flight safety stems largely from differences in ownership and worker power.”
It is not a model that translates perfectly to the US, where a board’s duty is above all to the shareholders. Critics argue that it puts union representatives in an impossible position, likely raising conflicts of interest because their loyalty would be to their colleagues rather than shareholders.
But right now, putting safety first rather than cutting costs is in the best interest of all of Boeing’s stakeholders. It’s a culture change that its current directors have so far failed to execute. Opening up the boardroom to employee representation might seem radical, but radical is what Boeing needs now.