Why Boeing's Guilty Plea Barely Dents Its Reputation

 

"The taint of a corporate criminal conviction isn't what it used to be.

The accounting firm Arthur Andersen collapsed in 2002 after prosecutors indicted the company for shredding evidence related to its audits of failed energy conglomerate Enron. For years after Andersen's demise, prosecutors held back from indicting major corporations, fearing they would kill the firm in the process.

Boeing's agreement this month to plead guilty over two employees' misconduct in the run-up to two fatal crashes of 737 MAX planes shows how times have changed. A criminal conviction now matters less for big companies, which have proven able to mitigate the negative consequences and survive bad publicity. The company's guilty plea agreement was filed in a Fort Worth, Texas, federal court last week.

Banks, commodity trading firms and automakers have pleaded to crimes in the past decade -- and emerged without permanent scars.

"Simply being branded a 'felon' -- pursuant to a plea, without a trial -- does very little to the company," said Mihailis Diamantis, a law professor at the University of Iowa whose research focuses on corporate criminal justice. "Boeing has already done a spectacular job of trashing its own reputation over the last three years. That may be why the company was willing to take the conviction -- from rock bottom, you can only move sideways or up."

Boeing declined to comment.

For the better part of two decades, the Justice Department in many circumstances has allowed companies facing criminal charges to enter into settlements that defer potential prosecution -- or waive charges entirely -- as long as the offending business cooperated, cleaned up its act and paid financial penalties.

After corporate watchdogs criticized such agreements as being too soft, prosecutors over time have tried to make them tougher, including by charging the culpable employees. Practically, that has meant those settlements aren't that different from deals that require a guilty plea.

In 2021, prosecutors initially deferred a criminal charge alleging that Boeing deceived air-safety regulators, putting the company instead on a form of corporate probation. If Boeing had stayed out of trouble, the case would have eventually been dismissed. But the Justice Department said in May that Boeing had violated that agreement by falling short of its compliance commitments and needed to plead guilty.

As part of its earlier deal, Boeing was required to admit that its employees violated the law, and it agreed to pay $2.5 billion, including a $243 million criminal fine, $1.8 billion to airline customers and $500 million to the families of the people who perished in the MAX crashes.

Boeing's guilty plea triggers one potential consequence that its 2021 settlement didn't -- suspension, or debarment, as a federal contractor. Congress has written laws to exclude convicted companies and individuals from serving major federal programs such as Medicare and operating businesses that require trust, such as managing mutual funds.

But when suspension is a possibility for a big company, regulators often waive the potential aftershock. Boeing is a critical supplier of weapons and aircraft to the Defense Department, where it landed contracts last year valued at $22.8 billion, according to federal data. A Defense Department spokesman said last week that officials haven't decided on a waiver yet for Boeing.

"Our assumption is the company will reach some sort of accommodation with their defense customer regarding the plea," said Ben Tsocanos, aerospace director at S&P Global Ratings.

As for investors, customers and other stakeholders, they have mostly written off the stigma of a major company's conviction. Boeing's shares rose during the first trading day after investors learned it would plead guilty.

A conviction usually follows other problems that took a bigger toll on the company's finances and forced changes to its management team.

PG&E's guilty plea in March 2020 to state felony charges of involuntary manslaughter followed its entry into bankruptcy over liabilities stemming from its role in wildfires that killed more than 100 people and destroyed roughly 15,700 homes. It had agreed to pay $13.5 billion to victims of the wildfires before its guilty plea.

"For most corporations, criminal liability exposure is the final bad thing to happen," said Andrew Jennings, an Emory University professor specializing in corporate law and white-collar crime.

Consumers rarely hear about corporate convictions because firms don't have to publicize them.

Federal courts have occasionally made companies publish ads to disclose a conviction, but that punishment has been rarely used.

Boeing's guilty plea won't be more expensive than its first settlement with the Justice Department. If the court approves its plea, the corporation will pay an additional $244 million and agree to spend $455 million on safety and compliance.

Boeing admitted in January 2021 that two former employees misled the Federal Aviation Administration about a flight-control feature on the 737 MAX later blamed for the accidents.

The Justice Department wrote last week in a new court filing that Boeing didn't satisfy its agreement because its compliance systems didn't address fraud risks such as employees performing work out of order, removing parts without documentation and falsifying manufacturing records. Boeing disclosed to the Justice Department in April that workers at its plant in South Carolina falsely certified that all work on the 787 Dreamliner was done correctly, the filing says.

The families of the 737 MAX victims oppose the plea because it "unfairly makes concessions to Boeing that other criminal defendants would never receive," they said in a court filing earlier this month.

For Boeing, one difference between its plea and its earlier deferred-prosecution agreement is the requirement to hire an outside firm, known as a monitor, to grade its maze of systems for complying with federal laws and regulations.

That step is "a pretty strong signal that the firm cannot be relied upon, on its own, to ensure it complies with the law," said Jennifer Arlen, director of the corporate compliance and enforcement program at New York University Law School.

Arlen said there remains one powerful reason corporate executives still prefer their companies avoid a guilty plea: their legacies.

"A major executive of a publicly traded firm -- that is a very high-status job," Arlen said. "One is not going to want to be the executive of a firm that just pleaded guilty to a felony."" [1]

1. Why Boeing's Guilty Plea Barely Dents Its Reputation. Michaels, Dave.  Wall Street Journal, Eastern edition; New York, N.Y.. 31 July 2024: B.1.