Boeing, Part II: The New Spending

Boeing reported second-quarter earnings today, which were predictably awful given the company’s safety and compliance lapses. So now seems like a good time to ponder the company’s recent promise to the Justice Department to increase spending on compliance efforts by $455 million over the next three years. What’s that all about? 

As you may recall, the $455 million spending package is part of a larger plea deal Boeing reached with the department earlier this month. The company must plead guilty to fraud charges, pay a $243.6 million criminal penalty, hire an independent compliance monitor, and go on corporate probation for three years. 

Boeing also needs to implement a long list of compliance program improvements, and the agreement expressly says the company must boost its compliance spending by $455 million over the course of its probation period. 

I have questions.

For example, why that specific amount? How does the plea agreement define what counts as an “investment” in new compliance efforts? What does this directive about increased compliance spending tell us about Boeing’s previous compliance spending? Which parts of Boeing’s compliance program are likely to benefit from all that spending? 

Let’s start with what the plea agreement actually says. It says (on Page 5, if you want to see for yourself) that Boeing must…

make a sustained monetary investment in its compliance and safety programs of at least $455,000,000, which, on an annualized basis, is an amount equal to at least approximately 75 percent more than the company’s expenditure on compliance in fiscal year 2024.

Now let’s do some math. If Boeing is supposed to spend $455 million over the course of its three-year probation period, that’s an average of $151.6 million per year. That $151.6 million, in turn, is 75 percent larger than Boeing’s previously planned compliance budget for 2024.

Well, if $151.6 million is 75 percent larger than Boeing’s original compliance budget, that implies an original budget of $86.6 million. 

Now let’s go back to those awful financial results Boeing posted earlier today. The company reported $33.43 billion for the first half of the year, down a painful 11 percent from the first half of 2023. If Boeing sees a similar 11 percent decline in the second half of this year, then 2024 revenue is likely to land at roughly $69.16 billion.  

If Boeing was planning to spend $86.6 million on compliance against $69.16 billion in sales, that means the company was devoting 0.12 percent of total revenue to its compliance program.

Is That a Decent Budget?

Honestly, I’m not sure; you compliance readers would know better than me. The 0.12 percent figure would be equivalent to a $1 billion revenue company spending $1.2 million on compliance. (I floated that calculation to one compliance officer I know in a highly regulated industry and he promptly shot back, “We’re $2 billion in revenue and under $1 million in budget, easy. Then again, my bosses hate compliance.”)

Plus, compliance budgets don’t follow a steadily increasing scale. The first million in spending is almost mandatory for every company regardless of size, just to establish the program; but larger companies do see savings since they can automate certain processes at scale. 

The better question to ask is how Boeing will allocate all this new spending. That’s where things get interesting. (If any Boeing employees out there want to share their thoughts confidentially, I’m at [email protected].) 

‘Compliance and Safety Programs’

Notice that our excerpt from the plea agreement says Boeing must devote that new spending to compliance and safety programs. In a second instance, the agreement says the $455 million goes to “compliance, quality, and safety programs.” 

For a business such as Boeing, where product quality and safety are fundamental to its operations, that’s a critical distinction. The $455 million isn’t gone solely to a “traditional” ethics and compliance program, with components such as due diligence screening, internal hotlines, data analytics, training, and the like. Yes, some of the spending will go to those things; but some of the money will go to other things — safety and product quality — that aren’t usually part of the compliance team’s purview.

Indeed, we should also note that Attachment C of the plea agreement, which spells out the compliance program reforms that Boeing must implement, says it wants to see this:

A commitment by the company to the integration of its ethics and compliance program with its safety and quality programs for the purpose of deterring violations of anti-fraud laws or policies. 

So when we talk about the boatloads of increased spending that Boeing has agreed to make, that’s really where the money is going: to integrating its ethics and compliance program with its safety and quality programs, into a single system that treats safety and quality issues (which were, let’s remember, what got Boeing into all this trouble in the first place) as defects in the corporate culture.

What will that look like in practice, I wonder? For example, prosecutors faulted Boeing for poor documentation of “out of sequence” assembly work, which is a big deal in aircraft manufacture. So will the company design better systems to document the progress of its work, so that auditors can more easily identify out-of-sequence work and analyze any potential safety risk? Will it somehow integrate the compliance team into safety risk assessments? (That was another sore point prosecutors had with Boeing’s efforts.)

On the other hand, Boeing must also assure “that mid-level management throughout its organization reinforce leadership’s commitment to compliance policies and principles and encourage employees to abide by them.” That sounds like one part management training; plus new policies and procedures to assure that middle managers have the proper incentives (read: compensation plans) to take ethics seriously.

What about that independent compliance monitor who is part of this agreement? Whoever that person is, he or she won’t come cheap. Will the monitor’s fees count as part of the increased spending? We don’t know.

Finally, remember that Boeing must work closely with regulators, suppliers, and airline customers alike on safety and quality issues — both systemic risks (“we found a flaw in how we make this part”) and product-specific risks (“that plane we delivered last week? It’s missing bolts for the door”). So that likely means even more attention to documentation, risk analysis, and risk reporting to outside parties. 

In other words, Boeing has a long journey ahead of it, and will probably need to spend every penny of that $455 million.