What do airplanes and the economy have in common?

Today’s economy reminds me of the days when I was working accident and incident investigations at a major commercial airplane manufacturer.

A series of events had to take place in just the right order for the accident to take place.

When a commercial airliner has an accident, both the National Transportation Safety Board (NTSB) and the airplane manufacturer initiate investigations into the crash and sift through debris to identify the cause of the accident.  If a design flaw is identified, the manufacturer denies responsibility, of course, and prompts the Federal Aviation Administration (FAA) to examine the underlying safety issues surrounding the cause of the accident, the adequacy of the existing regulations, the service history of airplanes certificated to these regulations, and existing maintenance practices.  The FAA may issue a Notice of Proposed Rulemaking (NPRM) to force manufacturers to make design changes to prevent another accident.  In some cases, the FAA will ground the worldwide fleet of aircraft until all aircraft are modified to prevent another accident.

In the latest financial crisis, speaking in general terms, who could blame homeowners for accepting (essentially) free money from the lenders?  Who knew financial firms were taking huge, reckless risks in pursuit of short-term profits and soaring bonuses.  Who knew the mortgage brokers were pushing sub-prime loans onto homeowners.  Who knew the investment community was purchasing bundled securities beyond their risk appetite.  Who knew the rating agencies would forgo due diligence in the pursuit of profits.  Who knew federal regulators would fail to recognize systemic risks and take appropriate action to prevent catastrophic failure.  Who knew accounting rules allowed banks to report loans as sold, and therefore did not require banks to hold sufficient capital.  Who knew creative financial products such as credit default swaps would have such a major impact in the marketplace.  How many really knew of Ponzi schemes operating for decades. Who knew the US Securities and Exchange Commission (SEC) would fail to act.  And who knew Congress was not sufficiently funding the SEC.

Does the airplane accident mean that the entire airline industry is flawed, probably not?  Does the accident mean that the airplane manufacturer was aware of the design flaw before the accident but decided not to take corrective actions that could have saved lives because it would have negatively impacted share value, possibly? Did the FAA fail to provide proper oversight of the manufacturing and testing of the airplane before it came into service, possibly?  Was the airline negligent in operating the airplane within the design limits of the aircraft, possibly?

There were many casualties in the latest financial crisis.  The question is, what needs to be done today to prevent another financial crisis?

To quote Dr. Andrew Clearfield who consults a number of the nation’s largest public pension funds, “What has taken a knock is confidence that business leaders usually know what is best for their companies. There have been a lot of spectacular failures, and these have made many investors wonder about the amount of discretion CEOs and boards should have.”

To restore “confidence that business leaders… know what is best for their companies:”

1.         Would it be advantageous to the Board of public companies to expand board-level reporting to include timely information about the business practices of the company and its executives from an independent third party, which could serve as a check and balance with disclosures made by outside auditors and consultants as well as management’s interpretation of what is really going on within the company?

2.         Would it be advantageous to the Board of public companies to expand board-level reporting to include timely information about the business practices of the company and its executives from an independent third party to lend credibility to management’s confidence in knowing what is best for their companies?

3.         Would it be advantageous to the Board of public companies to expand board-level reporting to include timely information about the business practices of the company and its executives from an independent third party if this information could be used effectively to reign in excessive risk taking in combination with excessive compensation?

4.         Would it be advantageous to the Board of public companies to embrace responsible scrutiny and welcome transparency, and in the process earn respect and trust at levels never before possible?

I’m not implying that transparency from an independent third party is the “holy grail.”  I’m simply suggesting that for public companies to improve transparency through an independent third party clearly demonstrates management’s willingness to make a valiant effort at restoring investor and public confidence.

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About zethics
CEO and founder of zEthics, Inc. Thirty years of experience with finance and accounting background in public private sectors.

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