From the apex of the aerospace industry, the American aircraft manufacturer landed itself a troubling safety record and felony charges with a nearly US$1 billion price tag Image: Shutterstock

In early 2024, the door panel blowout from a Boeing 737 MAX aircraft in mid-air shocked the world, less than five years since that model was grounded worldwide following two crashes that claimed 346 lives. The urgent question then was: How did that happen? But the more important question really is: Could these disasters have been prevented?   

From the apex of the aerospace industry, the American aircraft manufacturer landed itself a troubling safety record and felony charges with a nearly US$1 billion price tag. But Boeing is certainly not the first (and probably not the last) company to experience such a rude awakening. 

The 2008 financial crisis saw banks including Wells Fargo, Citigroup, Goldman Sachs and Bank of America being bailed out to prevent their failure from cascading into a global financial meltdown. More surprisingly, some bank executives whose unprecedented risk-taking led to the banks’ bailouts were quick to dispense lavish bonuses after receiving government money.

Are these corporate giants too big to fail – such that neither regulators nor markets have corrective power over them?

Anatomy of a man-made disaster

In our working paper “Icarus: On Operational Safety and Organisational Downfall”, we examined why and how performance – and in the case of Boeing, safety – gets eroded and what can be done to attenuate such disasters.Read More

Our findings underscore a general tendency for organisations to drift towards failure. Disasters are, in fact, avoidable. The genesis of a disaster and its prevention lies in day-to-day operations and accountability. Where accountability is concerned, governance and the operator-regulator relationship are key. When regulators do not pay sufficient attention to their operations, organisations may be tempted to take risks with the complicity of the regulator.

In the case of Boeing, as one of the only two major players in the commercial aircraft manufacturing space and an essential supplier to the United States defence services, it will not be allowed to fail. Even after it admitted to felony, the US government made it clear that it would continue to do business with the aircraft manufacturer. In the same vein, the state did not allow the aforementioned banks to fail during the 2008 crisis for “the greater good”.

Being too big to fail sparks a moral hazard. Executives tend to tolerate or gloss over transgressions, secure in the knowledge that the organisation will be bailed out or will suffer minimal consequences even if it underperforms. Clearly, being too big to fail can have a direct impact on quality and safety. 

However, earlier studies show that being too big to fail does not automatically lead to adverse consequences. That said, our study shows that it can intensify the harmful effects of the confidence trap.

Also read: Ajay Singh is a survivor. But can he turn around SpiceJet again?

Confidence trap meets “too big to fail”

When previous instances of risk-taking did not lead to failure, one may erroneously believe that continuing to take risks in the future will pay off – a phenomenon known as the “confidence trap”.

Our research indicates that top organisations often fall into the confidence trap, which could........

© Forbes India