By Dylan Tokar 

Boeing Co.'s $2.5 billion settlement with prosecutors last week underscores a continuing focus by prosecutors on ensuring that compliance programs are effectively structured and independent of certain business considerations, lawyers say.

The plane maker undertook a series of structural reforms in the run-up to its settlement with prosecutors over the company's interactions with regulators over a flight-control system on its 737 MAX airplane. It created a centralized team overseeing product safety, and reorganized its engineering function so that technical specialists report to a chief engineer, instead of the company's business units.

Such governance changes are often part of companies' efforts to fix the underlying issues that gave rise to a legal violation. Companies from a diverse range of industries, including Goldman Sachs Group Inc. and Volkswagen AG, have undertaken similar reforms in recent settlements with prosecutors.

The Boeing settlement shows the "importance of ensuring you have the appropriate structure in place," said Fiona Moran, a lawyer for Davis Polk & Wardwell LLP. It reflects prosecutors' view that companies "should be focused not just on stopping violations, but also on preventing similar violations in the future," she said.

A Boeing spokesman said the company was committed to continuous improvement of its compliance program.

"We have taken significant steps to further strengthen this program over the past year, including through organizational changes, enhanced compliance policies and training initiatives, and the creation of new mechanisms for reporting safety, quality, and compliance concerns across our company," the spokesman said in a statement.

The Justice Department often gives companies that proactively fix underlying issues -- a process known as remediation -- more lenient settlements and smaller penalties.

The investigation into Boeing centered on the role of two Boeing employees who prosecutors have alleged deceived Federal Aviation Administration training specialists about the functioning of a new flight-control system that led to two crashes and claimed 346 lives.

Prosecutors said they ultimately didn't find the misconduct to be pervasive or to involve senior management. But they credited Boeing for nevertheless undertaking broad structural reforms aimed at preventing similar misconduct in the future, saying it was one reason why the company wasn't required to hire an independent monitor to oversee its compliance reforms.

In addition to changing the reporting line for engineers and centralizing product safety, Boeing also created a permanent aerospace committee on its board of directors and made changes to the structure of its flight technical team.

The creation of a board-level committee is in line with language from Justice Department guidance highlighting the importance of having board-level oversight and involvement in compliance processes, said Andrew Wise, a lawyer at the firm Miller & Chevalier Chartered.

The changes in reporting lines reinforce principles from the same guidance related to ensuring that compliance functions remain independent from interference, he said. The guidance, which was released in 2017, contains the principles that prosecutors use when evaluating corporate compliance programs.

"The value of that improvement is that folks that have the technical knowledge and can spot issues have a centralized way they can report them, so that they are insulated from interference by business leaders who may be more swayed by economic or bottom-line considerations," Mr. Wise said.

Other companies have taken similar steps when confronted with compliance crises. Volkswagen AG, for example, created a management board position to supervise its legal and compliance functions after admitting to rigging its diesel vehicles to cheat emissions tests.

Goldman Sachs more recently promised greater scrutiny of top executives after it reached a $2.9 billion settlement last year to close the door on a probe into its role in a bribery scheme involving the Malaysian government fund known as 1MDB.

The investment bank created several firmwide committees to develop an employee conduct strategy and review sensitive transactions that might pose a reputational risk.

The question with such reforms is whether they will work. For Boeing, which has pledged to step up internal controls in prior settlements over the years, a breakdown in safeguards can have especially severe consequences. To monitor the changes, the Justice Department is requiring Boeing to meet with the prosecutors at least once a quarter and file work plans and status reports.

Roy Goldberg, an aviation lawyer at Stinson LLP, said the DOJ settlement was consistent with the approach taken by the FAA in recent years, which was to have a partnership relationship with aircraft manufacturers such as Boeing.

"The main thing going forward is to make sure that pilots and engineers know they can speak up," Mr. Goldberg said. "You have to separate out the business motive of Boeing and the safety. You can't have them tied together."

Write to Dylan Tokar at dylan.tokar@wsj.com

 

(END) Dow Jones Newswires

January 15, 2021 10:29 ET (15:29 GMT)

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