How the wrong side won at Boeing
backofmind.substack.com
backofmind.substack.com
The fundamental issue is simple: Mistaking side-effects of the system for the goals of the system. The goal of a company shouldn't be to make number-on-spreadsheet go up. The goal is to produce excess value, capture some amount of it, and pass the rest onto your customers. The amount that you capture will affect the spreadsheet, but the real goal of the organization must be to produce that excess value and pass on a meaningful portion of it to your customers!
The whole meme that companies exist to maximize shareholder value is just that: a meme, and a recent one at that. Boeing is the natural outcome of believing it like a zealot.
Admittedly I've only been in the workforce for a couple decades, but isn't this precisely what large, or at a minimum publicly traded, companies operate on?
I've worked for multiple public companies and this is a universal theme among any I've worked with or for. Legally they're even required to do what is best for shareholders, nothing more.
Meanwhile Costco views employee culture as not only the most important thing, but "the only thing" [1] that creates a strong business, and has a strong track record of growing employees internally: the current CEO started out as a forklift operator at the company, and the previous CEO started as a warehouse manager. This culture of strong employee growth and retention, in Costco's theory, creates a better business and is thus justifiable (and desirable) for shareholders as well.
1: https://www.inc.com/justin-bariso/in-a-world-dominated-by-am...
When was the last time you saw that phrase?
Nope:
* https://corpgov.law.harvard.edu/2012/06/26/the-shareholder-v...
Per the US Supreme Court:
> […] modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.
* https://caselaw.findlaw.com/court/us-supreme-court/13-354.ht...
Or, at the very least, you have to ask which shareholders:
> Serving shareholders’ “best interests” is not the same thing as either maximizing profits, or maximizing shareholder value. "Shareholder value," for one thing, is a vague objective: No single “shareholder value” can exist, because different shareholders have different values. Some are long-term investors planning to hold stock for years or decades; others are short-term speculators.
* https://www.nytimes.com/roomfordebate/2015/04/16/what-are-co...
The focus on shareholders mostly took hold in the 1970s (coïncidentally when folks like Milton Friedman became more popular, and the 1980s (Reagan, Thatcher)):
* https://en.wikipedia.org/wiki/Friedman_doctrine
and so to claim it is self-evident when there is decades of history for other views, is at least not accurate:
* https://www2.law.temple.edu/10q/purpose-corporation-brief-hi...
And contrary to what many people think, the shareholders are not the owners of a company.
* https://www.ippr.org/articles/who-owns-a-company
* https://hbr.org/2012/07/what-good-are-shareholders
* https://www.ft.com/content/7bd1b20a-879b-11e5-90de-f44762bf9...
* https://www.forbes.com/sites/petergeorgescu/2021/07/21/the-s...
Someone might be in the cusp of retirement and looking to cash in.
Someone might not have any children so passing on an inheritance could be moot.
At least in this specific company’s case though, if I were a Boeing shareholder, I’d want them to make good planes because I plain and simple fly a lot, and don’t want to end up a casualty.
If you're on the cusp of retirement (e.g. 65) you probably have another couple of decades to live, so you want companies to keep running things 'properly' for the long(ish)-term.
It's not like you retire and you convert your portfolio into a pile of cash: you still need some kind of returns if you want to not run out of money:
* https://en.wikipedia.org/wiki/William_Bengen#The_Four_Percen...
Been googling and it looks like that is not true.
At the very least, it should be obvious that "best for shareholders" can mean almost anything. Boeing's latest problems, Volkswagen's lying on emissions ... long term these have been decidedly bad for shareholders but probably some bean-counter though they would maximize profits at the time.
If I'm not mistaken, case law covers the basics like acting in good faith, trust, candor, etc but one of the biggest requirements is acting in the best financial interest of shareholders.
https://corpgov.law.harvard.edu/2022/11/29/understanding-the...
Here's a Cornell law school prof saying just this. https://www.nytimes.com/roomfordebate/2015/04/16/what-are-co...
"There is a common belief that corporate directors have a legal duty to maximize corporate profits and 'shareholder value' — even if this means skirting ethical rules, damaging the environment or harming employees. But this belief is utterly false. To quote the U.S. Supreme Court opinion in the recent Hobby Lobby case: 'Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.'"
"Serving shareholders’ 'best interests' is not the same thing as either maximizing profits, or maximizing shareholder value. 'Shareholder value,' for one thing, is a vague objective: No single 'shareholder value' can exist, because different shareholders have different values. Some are long-term investors planning to hold stock for years or decades; others are short-term speculators."
"More to the point, corporate directors are protected from most interference when it comes to running their business by a doctrine known as the business judgment rule. It says, in brief, that so long as a board of directors is not tainted by personal conflicts of interest and makes a reasonable effort to stay informed, courts will not second-guess the board’s decisions about what is best for the company — even when those decisions predictably reduce profits or share price."
In fact she (Lynn Stout) wrote an entire book on the subject:
* https://www.goodreads.com/book/show/13132729-the-shareholder...
Not really? Kind of?
Yes, directors have a "fiduciary duty to shareholders" but they also have a fiduciary duty to the corporation itself. § 102(b)(7):
* https://delcode.delaware.gov/title8/c001/sc01/
Further, you have to ask which shareholders:
> Serving shareholders’ “best interests” is not the same thing as either maximizing profits, or maximizing shareholder value. "Shareholder value," for one thing, is a vague objective: No single “shareholder value” can exist, because different shareholders have different values. Some are long-term investors planning to hold stock for years or decades; others are short-term speculators.
* https://www.nytimes.com/roomfordebate/2015/04/16/what-are-co...
That was actually my point in the GP comment, though I may not have phrased it clearly enough. The article and quotes linked earlier are just calling out that there's a debate as to how "best interests" is interpreted. Some may see that and consider short term profits, others may use it to justify focusing on long term profits and company health.
The debate is there for sure and the law is vague enough to allow many interpretations, but all interpretations still have to be based on the idea that leadership is doing what they believe is in the shareholders' best interests in one way or another.
>> I've worked for multiple public companies and this is a universal theme among any I've worked with or for. Legally they're even required to do what is best for shareholders, nothing more.
Yes, in the long term. Not in the short term. The problem becomes when corporate Managers go from being long term greedy to short term greedy.
I'll share a, perhaps, controversial opinion. Google and Facebook and OpenAI share and give away enormous excess value. Their give-aways help grow these companies in the long term and the strategy has been super-successful. Google and Meta and OpenAI are examples of good long-term shareholder value creation.
- Example look at the vast array of things Google gives away freely. Colab. Open source projects. Chrome. Transformer research. All of it eventually benefits Google but plenty is excess value given away and creates much downstream value.
- Look at the vast amount of software and AI research Meta gives away. My entire startup was based on their software. If I had relied on Matlab, I would have been fleeced of all my operating cash.
- Example, look at OpenAI giving away ChatGPT 3.5 for free. Yes, it is an act of long-term greed, but in the short term they are giving away huge value. Imagine how Oracle would have done this -- you would have started the login screen with a credit card entry.
The problem happens when you get short-term finalcial-engineering focused managers running a company. They try to juice remaining value, load up with debt, press on customers, squeeze workers, and eventually kill the company.
In the case of tech companies, I fully expect to see them shift heavily towards the short-term whenever the tides turn. VCs did it last year, as soon as money dried up and economic concerns rose VCs shifted from investing with a goal of say 1 in 20 companies succeeding to only investing money in companies that appeared to be a sure bet.
Once a company is traded publicly, the market, over a long time horizon [1], usually gives a good value estimate to the company. In the short-run you have to contend with the different ways to juke the price, such as share buybacks just before the CEO is to get a bonus etc. Heck, even in Boeing's case, the market corrected for the stock price (especially if you consider inflation) once planes started falling out of the sky, and the company started to change. Now only doors are falling out of the sky! It's still a price we shouldn't be willing to pay for a market correction - and that's where efficient regulation comes into play, itself a very fraught tool to get right. All in all, we suck at forecasting, understanding, and learning from outlier events. Maybe it's an inherent problem.
[1] with the usual caveat that the market can remain irrational longer than the plane can remain airborne
No they weren't, unless by "years" you men 2-3. Google, Facebook etc were expected to grow and they did grow to match those valuations, they weren't overvalued. When you know a market will grow then you price that in.
Some companies don't grow as expected, but most do, the market is usually pretty good at estimating.
I think you are totally right, but particularly nationally.
Ray Dalio's Principles of a changing world order explains the macro forces around Boeing. He predicts we are headed for civil unrest as the rich get richer and the poor get poorer, and that we are definitely creating the conditions for world war particularly with China.
This is Principles in video form (45min): https://www.youtube.com/watch?v=xguam0TKMw8
I find the video prescient and directly relevant to so many HN posts. I have found no video that better explains the general state of America.
Reminds me of the saying 'The purpose of a system is what it does'[1], which offers a viewpoint that if the side-effects and the goals conflict often, the side-effect itself should be considered as the goal.
[1]: https://en.wikipedia.org/wiki/The_purpose_of_a_system_is_wha...
Nah, stakeholder capitalism is a way more recent idea than shareholder primacy.
Prior to that, most businesses were owned and operated by the same people. Talk to any founder — especially familial legacy businesses - and you know they don’t run it purely to maximize “shareholder” value. Partly because it’s exceptionally hard to do without destroying the real company — the thing behind the spreadsheets.
For example: https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.
Consolidation in the aircraft industry has failed the country. We've got no other vendors.
I'll also admit to working for McDonnell Douglas Aerospace, 1984-86. Sandy McDonnell was CEO, and John McDonnell III had been an engineer in various divisions and disciplines for a while, and was waiting in the wings. McDonell Douglas was a family company. I had to get a manager's signature to get office supplies, Sandy was so thrifty. If, as this article claims, MD accounting based culture was the problem, it hadn't been in place too long before the 1997 Boeing acquisition.
Since then there has been a lot of consolidation of the suppliers of Boeing, to the point where Boeing has much less leverage than it once did and often has only one option left for many of the parts in needs. I'm not sure how much this has contributed to its current issues, but it seems a systematic issue that Boeing doesn't make its own planes anymore and has to rely on suppliers who are scraping every ounce of margin out of their production processes.
There must be counter examples but I can’t think of any.
Regulation can help, and it broke up the single telecom where I am and really improved things (just wondering if I can justify a 8gbps connection…).
I can name lots of examples. Before 1982 there were like 20+ companies who wanted to produce video game console.
Did we need 10 different commercial unixs.
Also, the consolidation results in companies that have the capital to invest. Having LM, MC, Boeing and Airbus all making widebodies didnt make sense and resulted in issues for both tri-jet producers. Airbus was the winner in that situation because neither company could invest in twin-jet widebody.
The idea that the economy would be awesome if there were only small companies doesnt really hold up.
So just saying consolidation bad 100% doesnt really hold up.
The telecom are special because they were all state owned then privatized, they are mostly not the result of consolidation.
I am now a dedicated credit union customer.
I almost get the impression that wants and needs are confused here... Some people didn't want 10 different commercial types of UNIX, but some people did need a specific type of UNIX.
That’s why many utility companies in the US are government sanctioned monopolies.
Get a bunch of yes men on the board regulating a utility, though, and all the sudden it's easy for them to just approve whatever the utility wants to do regardless of public comment.
This probably sounds woefully inefficient to the average American business mind, but it seemed to work great. Each sub-firm had their own way of doing things that was tailored to maximize efficiency on a local level. Sure, inter-division communication could be wonky sometimes, but eventually you learn how to iron out those wrinkles.
Sure, there's redundancy in some parts of the business. Those costs are easy to calculate. What's much harder to calculate is the cost of taking 14 manufacturing firms scattered 4 continents, stripping them of their current internal processes, and replacing them with a unified system.
Most things are just so short term focused these days that there are few incentives to build a slower, more stable business (or product, or government, or social network, or news media, etc)
Consolidating companies into a few massive corporations centralized power, but it also centralizes risk. They'd be more careful, and may even be unwilling to risk the treadmill of endless acquisitions if each addition adds more risk and liability.
https://govleaders.org/rickover.htm
Every paragraph is a bomb lobbed directly and accurately at Boeing. Almost every analysis of Boeing is directly spoken to by one of those paragraphs or something else Rickover has said.
> To maintain proper control one must have simple and direct means to find out what is going on. There are many ways of doing this; all involve constant drudgery. For this reason those in charge often create “management information systems” designed to extract from the operation the details a busy executive needs to know. Often the process is carried too far. The top official then loses touch with his people and with the work that is actually going on.
> ICI is not the only company for whom greater emphasis on corporate financial goals led to less success in achieving them. I once said that Boeing’s grip on the world civil aviation market made it the most powerful market leader in world business. Bill Allen was chief executive from 1945 to 1968, as the company created its dominant position. He said that his spirit and that of his colleagues was to eat, breathe, and sleep the world of aeronautics. “The greatest pleasure life has to offer is the satisfaction that flows from participating in a difficult and constructive undertaking,” he explained.
> Boeing’s 737, with almost 4,000 planes in the air, is the most successful commercial airliner in history. But the company’s largest and riskiest project was the development of the 747 jumbo jet. When a non-executive director asked about the expected return on investment, he was brushed off: there had been some studies, he was told, but the manager concerned couldn’t remember the results.
> It took only 10 years for Boeing to prove me wrong in asserting that its market position in civil aviation was impregnable. The decisive shift in corporate culture followed the acquisition of its principal US rival, McDonnell Douglas, in 1997. The transformation was exemplified by the CEO, Phil Condit. The company’s previous preoccupation with meeting “technological challenges of supreme magnitude” would, he told Business Week, now have to change. “We are going into a value-based environment where unit cost, return on investment and shareholder return are the measures by which you’ll be judged. That’s a big shift.”
> The company’s senior executives agreed to move from Seattle, where the main production facilities were located, to Chicago. More importantly, the more focused business reviewed risky investments in new civil projects with much greater scepticism. The strategic decision was to redirect resources towards projects for the US military that involved low financial risk. Chicago had the advantage of being nearer to Washington, where government funds were dispensed.
> So Boeing’s civil orderbook today lags that of Airbus, the European consortium whose aims were not initially commercial but which has, almost by chance, become a profitable business. And the strategy of getting close to the Pentagon proved counter- productive: the company got too close to the Pentagon, and faced allegations of corruption. And what was the market’s verdict on the company’s performance in terms of unit cost, return on investment and shareholder return? Boeing stock, $48 when Condit took over, rose to $70 as he affirmed the commitment to shareholder value; by the time of his enforced resignation in December 2003 it had fallen to $38.
> In my notes, there’s a phrase which really stuck in my mind – “understanding the numbers has to come from understanding the business. People go badly wrong when they try to do it the other way round”. But that’s what they do, far too often
> But when the McNamara discipline is applied too literally, the first step is to measure whatever can be easily measured. The second step is to disregard that which can't easily be measured or given a quantitative value. The third step is to presume that what can't be measured easily really isn't important. The fo[u]rth step is to say that what can't be easily measured really doesn't exist. This is suicide.
-- Daniel Yankelovich, "Interpreting the New Life Styles", Sales Management (1971)