Great Corporate Failures- Seven Corrective Habits for Board Risk Oversight

If learning from history can pave a path to the future, then corporate failures in risk oversight in the last two decades provide a roadmap for boards (and executive teams). Lehman Brothers, Volkswagen, Boeing and the Lac Megantic Train accident are key examples of catastrophic failures likely preventable had boards properly overseen risk. Of these failure it is interesting how the directors of Boeing have been tied directly into failures of the 737 Max aircraft. Each of these cases provide a cautionary tale on how directors can be held responsible for failure to oversee critical risks. In some failures, directors narrowly miss being implicated, while in other cases the courts are shifting liability directly to boards. This paper first examines four massive corporate failures, then presents seven “habits” to enhance board risk oversight to prevent meltdowns, and to contribute to the long-term sustainability of the organization.

According to Governancepedia in its paper “Famous Oversight Failures We can Learn From”(note 1), after facing its major emissions scandal, Volkswagen revamped its governance and risk management practices. The company now emphasizes a culture of integrity and accountability, with rigorous compliance checks and a whistleblower-friendly environment. Likewise, the Lehman Brothers’ collapse during the 2008 financial crisis highlighted the importance of effective risk oversight. The lack of robust financial oversight and unchecked risk exposure led to its downfall. This case serves as a reminder of the critical need for continuous risk monitoring and scenario planning (note 2).

(Lehman Brothers) serves as a reminder of the critical need for continuous risk monitoring and scenario planning

The 2013 Lac-Mégantic train accident, which tragically claimed 47 lives, led to much litigation and legal proceedings. Following the accident, Montreal Maine & Atlantic Railway (MMA), the company responsible for the runaway train, faced significant legal and financial consequences. A $200 million settlement was proposed in 2015 to compensate victims’ families and other affected parties (note 3).  In subsequent legal battles, Canadian Pacific Railway (CP), which had handed off the train to MMA, was found not liable for the disaster. Courts ruled that the primary responsibility lay with MMA and its employees, particularly the train’s engineer. “The responsibility rests primarily with the locomotive engineer and last driver of the train, Mr. Thomas Harding, and the company that employs him and was in charge of this train at the time of its derailment, the defendant Montreal Maine & Atlantic Railway Limited,” the judge wrote. Harding and two other MMA employees were later charged with criminal negligence causing death and were acquitted of all charges in January 2018 (note 4). MMA went bankrupt, leaving 24 other companies to participate in the $460 million compensation fund. The Court of Appeal confirmed the decision handed down in December 2022 by Superior Court Judge Martin Bureau. “In the end, the faults of (Thomas Harding, the Montreal Maine and Atlantic train operator) and MMA remain the only logical, direct and immediate cause of the disaster,” concluded the three-judge panel that heard the case. The trial lasted just over 60 days and involved 55 witnesses, 13 expert reports and thousands of exhibits (note 5). While the board of directors of Montreal Maine & Atlantic Railway (MMA) was not directly named as responsible for the Lac-Mégantic disaster because the investigation focused on operational failures, inadequate safety practices and the actions of employees, broader criticisms were directed at MMA’s corporate culture and management for prioritizing cost-cutting over safety measures. However, of interest to directors, in its summary of the case, the Transportation Safety Board of Canada (TSB) emphasized systemic issues, including regulatory gaps and insufficient oversight, as contributing factors (note 6).

(In Boeing) The Courts reinforced the importance of board oversight in managing “mission-critical” risks

But the Boeing case has led to precedent setting rulings against the board for failing to oversee safety risks of the 737 MAX aircraft. Boeing’s board of directors settled a derivative lawsuit with shareholders for $225 million. The settlement stemmed from claims that the board failed to oversee airplane safety risks, leading to the 737 MAX crashes (note 7). The Delaware Court of Chancery’s rulings in this case have reinforced the importance of board oversight in managing “mission-critical” risks. Directors are now more aware of the potential for personal liability if they neglect their oversight responsibilities (note 8). Since the ruling, to tighten board oversight and governance, Boeing has continued refining its Safety Management System (SMS) to ensure better risk monitoring at the board level, with SMS expertise now mandated at the board level. The company has also emphasized cultural changes, including stronger leadership engagement with factory workers and engineers. Per their 2024 Annual Report and following the 737-9 mid-exit door plug accident in January 2024, Boeing has been working under FAA oversight to improve safety and quality. The company has implemented new inspections, random quality audits, and enhanced training to address concerns about manufacturing defects (note 9).

Does Your Board Need Advice in Risk Oversight Best Practices? Contact Directors Global.

Overall, the Boeing litigation has sparked significant discussions about corporate governance in the aviation industry, particularly regarding the responsibilities of board directors. Here are some key impacts:

1. Increased Accountability– The case highlights the importance of board oversight in managing core risks, such as product safety. Directors now may face greater scrutiny and potential personal liability if they fail to establish effective compliance systems or address red flags (note 10);
2. Focus on Safety Oversight– Aviation companies may need to prioritize safety at the highest levels of governance. This could include creating dedicated committees for safety oversight and ensuring that safety issues are regularly discussed at board meetings (note 11);
3. Litigation Risks– The Boeing case demonstrated the growing litigation risks for directors who neglect their oversight duties. The $237.5 million settlement from the shareholder lawsuit underscored the financial consequences of governance failures (note 11);
4. Evolution of Governance and Communication Practices-The Boeing case has driven discussions about improving governance structures, ensuring proper communication between boards and management, and adopting checks and balances to prevent similar failures (note 11).

Seven Habits for Effective Board Risk Oversight

So what are the key best practices boards should follow to ensure that they properly oversee key risks, while leaving the “management of risk” to the executives? Directors Global sees opportunities for boards to improve in seven areas.

1. Deep Understanding of the Organization’s Risk Register– Don’t consider it “too in the weeds” by doing deep dives in one or several top, mission critical risk areas. Board members must actively learn about those key risks most likely to impact organizational objectives. These risks might be financial, operational, compliance-related, regulatory, HR, sales, or areas of concern highlighted by staying updated on industry trends, regulatory changes, and emerging risks;
2. Establishing a “Best Practices” risk management Culture– Leading by example, board members should promote a culture where risk management is integrated into decision-making processes across all levels of the organization. But too often risk management is left as a non-defined concept. Best practices in enterprise risk management which are unique to your industry and organization must be defined, highlighted, and promoted. This usually requires advice from inside or external experts;
3. Regular Collaboration with Management– Maintaining strong communication with the management team ensures that the board is well versed and understanding of how risks are being identified, assessed, mitigated, monitored, and reported ensuring that such activities are actualized according to Best Practices (see 2. above);
4. Board Risk Expertise, Critical Thinking, Challenging Assumptions– Effective board members do not take information at face value. They ask tough questions, analyze scenarios, and encourage a diverse range of viewpoints to uncover blind spots. In the field of risk oversight, the most equipped boards have seasoned experts on their slates who have experience as a chief risk officer, as an executive who has direct experience leading enterprise risk management initiatives, and how knows best practices in risk;
5. Monitoring Risk Metrics and Indicators– Keeping an eye on key risk indicators (KRIs) and aligning them with the organization’s objectives allows for proactive responses to risk events. Smart directors know that if a risk can’t be measured, it can’t be managed, hence ensuring that management has the proper metrics for monitoring and reporting purposes;
6. Continuous Education and Adaptability– Risks evolve and so should board members. Regularly attending training sessions, conferences, and seminars equips them to deal with emerging risks, like cybersecurity or climate-related issues;
7. Engagement in Scenario Planning– Participating in activities like stress testing, scenario analyses, and contingency planning helps board members understand the potential impact of risks and the organization’s preparedness. This can be done via workshops and special sessions coordinated by management on behalf of the board.

Summary – The Lehman Brothers, Volkswagen, MMA and Boeing cases highlight the growing emphasis on board accountability, and the need for improving best practices in board risk oversight. This paper presents seven habits recommended by Directors Global to enhance risk oversight and contribute to the long-term sustainability of the organization. For board members who embrace these seven habit best practices, adversity avoidance will be enhanced, as will corporate objectives be met with more certainty.

If you would like to explore any of these cases in more detail, CONTACT Directors Global.

Footnotes:

1. GovernancePedia, Famous Oversight Failures We can Learn From https://governancepedia.com/2024/11/15/famous-oversight-failures-and-what-we-can-learn-from-them/
2. GovernancePedia, Famous Oversight Failures We can Learn From, as above
3. CBC News, The Canadian Press, Jan 09, 2015, https://www.cbc.ca/news/canada/montreal/lac-m%C3%A9gantic-rail-disaster-200m-proposed-settlement-reached-1.2896250
4. Global News, December 15, 2022, https://globalnews.ca/news/9351376/quebec-canadian-pacific-railway-lac-megantic-ruling/
5. Montreal City News, The Canadian Press, February 26, 2025, https://montreal.citynews.ca/2025/02/26/lac-megantic-court-appeal-cp-railway-not-responsible/
6. Transportation Safety Board of Canada, 19 August 2014, https://www.tsb.gc.ca/eng/enquetes-investigations/rail/2013/R13D0054/r13d0054.html
7. Lowenstein Sandler LLP, 2022 A Lapse in Safety Can Lead to Lawsuits for Directors and Officers. Boeing’s Board Learned That Firsthand. https://www.lowenstein.com/news-insights/publications/articles/a-lapse-in-safety-can-lead-to-lawsuits-for-directors-and-officers-boeing-s-board-learned-that-firsthand-ken-rosen
8. Harvard Law School, Revisiting the Board’s Oversight Role After In re: Boeing Co. 2022, https://corpgov.law.harvard.edu/2022/06/01/revisiting-the-boards-oversight-role-after-in-re-boeing-co/
9. Boeing 2024 Annual Report. www.boeing.com/content/dam/boeing/boeingdotcom/company/annual-report/2024/2024-annual-report.pdf
10. Harvard Law School Boeing: Rejecting Early Dismissal of Claims Against Directors for Inadequate Risk Oversight, https://corpgov.law.harvard.edu/2021/10/21/boeing-rejecting-early-dismissal-of-claims-against-directors-for-inadequate-risk-oversight/
11. Business Law Today, Boeing and the Ongoing Evolution of Director Responsibilities, https://businesslawtoday.org/2021/12/boeing-and-director-responsibilities-ongoing-evolution-board-governance/