Thursday, January 16, 2020

Of Utmost Importance

So I was clued into an interesting article about Boeing's recent woes by Joe Nocera in Bloomberg. The subtitle says it all: "Shareholder value eclipsed safety as a top priority, with catastrophic consequences." But then I started wondering if Boeing's apparent commitment to shareholder primacy was, in fact, the problem.

When one reads a statement like James Kee's: "If private property were truly respected, shareholder interest would be the primary, or even better, the sole purpose, of the corporation," it's not much of a stretch to see that as condoning any sort of corporate malfeasance, so long as the shareholder's interests were protected. But there's an assumption built into that, namely that the interests of shareholders aren't necessarily aligned with those of other stakeholders, such as employees, suppliers, local communities, creditors et cetera. But there's no reason why they shouldn't be, other than rent seeking. And so maybe that's the problem that we should be looking at.

Boeing was able to cut costs to the degree that it did not because of the fact that its top executives had managed to divorce themselves from Boeing's engineering culture, but because the Boeing Company had become, to borrow the old term "Too Big To Fail." It's the only aircraft maker of its sort in the United States; its collapse would mean that airlines would be obligated to buy planes from Airbus or other offshore manufacturers. It's a giant defense contractor and the United State's largest exporter. These things, taken together, mean that there is a degree to which many of Boeing's customers, not to mention the federal government, need Boeing as much as, or more than, Boeing needs them. Cue the rent-seeking.

Recently, Washington State governor and former Presidential candidate Jay Inslee put Boeing on notice that if they wanted to retain their generous tax status, that their next plane needed to be produced in Washington. We'll see if Boeing complies, or what happens if they don't. But the fact that Boeing felt free to move a number of jobs out of state even after winning the large concession from the state hints that the governor may have to back up what he says. But Boeing still has leverage.

Mainly because of a lack of domestic competition. And this insulates it from the complaints of many of its other stakeholders. Were McDonnell Douglas still an active player in the airliner market, customers could jump ship much more easily, meaning that Boeing would have to had paid more attention to their concerns.

Boeing has put a number of constituencies in a position where if Boeing goes down, they all go with it. That gives them more leverage than other companies might, in terms of being able to dictate the rules of engagement. It's not hard to imagine that the troubles with the 737 Max and the recent revelations of internal e-mails would have doomed other companies. That potential consequence, one expects, mitigates against ignoring everyone else's interests. But with Boeing being in the position of "what are they going to do?" the only needs it had to look out for were its own.

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