POP QUIZ

Brick-filled boxes, bogus receipts — retailers are inundated with fraudulent returns. How much merchandise is returned fraudulently every year? (The answer is at the bottom of this newsletter!)

IN THE NEWS

✈️ Boeing’s Latest Quality-Control Problems

You’ve probably heard about more quality-control trouble at Boeing. The latest issue from last weekend: a harrowing malfunction at 16,000 feet, when a door panel sheared off a new 737 Max 9 airliner.

The Max 9, one of Boeing’s best-selling models, has been grounded. Safety inspections are underway, and hundreds of flights have been canceled.

Stock in Boeing, a major defense contractor, is down about 11% this year. Shares had risen sharply since last October, when war began between Israel and Hamas. But they still haven’t come close to recovering from levels in 2019 after two deadly crashes involving its planes, both of which were linked to a malfunctioning computer system. Those planes were grounded worldwide for about two years.

More problems: This week’s trouble deepened after Alaska Airlines and United Airlines inspectors found loose bolts on some grounded 737 Boeing Max jetliners, one of the world’s best-selling aircraft models.

• It all adds to pressure on Boeing CEO David Calhoun, who told employees this week: “We’re going to approach this — No. 1 — acknowledging our mistake. We’re going to approach it with 100% and complete transparency every step of the way.”
• While fighting back tears, he added: “I’ve got kids, I’ve got grandkids and so do you. This stuff matters. Every detail matters.”

Inspectors (and investors) are concerned that Boeing’s safety issues have been lingering for years, specifically around its suppliers’ reliability. Nobody is pleased.

• “They’ve had quality control problems for a long time now, and this is just another manifestation of that,” Tim Clark, CEO of the Middle Eastern airline Emirates and a major plane buyer, told Bloomberg.

Why it matters:

Well, lives are at stake. But the issues also underscore the problem with a duopoly between Boeing and Airbus, its European rival. For many reasons — including stiff regulation and high barriers to entry — there aren’t that many airplane suppliers out there.

In the 1960s and 1970s, Boeing’s rise in commercial aviation inspired the phrase, “If it ain’t Boeing, I ain’t going.” But now, Bloomberg warns, the new phrase might be: “If it ain’t Airbus, the regular bus will do just fine.”

• Airbus excels over Boeing by virtually every metric, namely passenger safety, the most important. It’s also beating its competitor in deliveries, operating profit, and net cash/debt.

Reputational minefield: Boeing’s rough balance sheet has almost $17 billion in negative net assets and $39 billion of net indebtedness. But that might be the least of their worries.

• “We do see the latest incident as eroding the fragile confidence that has been built around the 737 Max franchise,” noted one Bank of America analyst. “In our view, Boeing needs to tread carefully and cautiously through this potential reputational minefield.”

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👀 Carta Crisis Spooks VC-Backed Companies

Sometimes, it’s just too tempting not to violate your users’ privacy. At least, that appears to be the takeaway for Carta, a company specializing in “capitalization (cap) table management software” for firms backed by venture capital investors.

In English: They help private companies track who owns their shares and how much they own.

• As companies raise funds externally from venture capitalists/angel investors and issue stock to employees, tracking ownership can become increasingly complicated.

Privacy lapse: It’s a useful service, but Carta users weren’t expecting their sensitive data to be exploited.

• See, because leading private companies like Stripe or SpaceX don’t trade their shares publicly, buying ownership stakes in them isn’t always a straightforward process.
• The lists of which investors own shares in these companies are very valuable, namely for other investors hoping to contact these shareholders and buy their stakes from them.

Side hustle trouble: Carta built a business on tracking investor ownership in the VC world, and then it launched another business unit for “secondary stock trading” of private companies’ shares.

These were supposed to be siloed given the intrinsic conflict of interest, where Carta would help investors trade shares in private companies and, to juice that business, it could benefit from violating its core users’ privacy as a cap table management software provider.

• Basically, it knows who invests in which companies, and that’s very useful as a stock trading broker. But acting on that information is unethical.
• However, with its 2% trading fees to both buyers and sellers, the allure of boosting its brokerage biz was compelling.

PR debacle: An angel investor in the software startup, Linear, who is “hardly online” — according to Linear’s CEO — and whose investment in the company wasn’t publicly disclosed, was contacted by Carta about an opportunity to sell their shares. That spurred a realization that Carta must be leveraging data from its core business to facilitate its private-market stock-broking operations.

• Linear’s CEO exposed the incident on social media, igniting a PR crisis for Carta. Carta’s CEO responded that the privacy violation “should never have happened” and claimed there was an internal breach of protocol.

Why it matters:

After the scandal eroded trust in Carta, used by most VC-backed startups in the U.S., the company’s CEO announced this week that it would close its secondary stock trading brokerage business that had created a conflict of interest.

Beyond trying to win back customers’ trust, the move makes sense because, without being able to exploit its insights into who owns shares in private companies, Carta no longer has any competitive advantage in acting as a private markets stock broker.

What’s next: For Carta, its $8.5 billion valuation — which presumably accounted for its brokering business — is now being called into question.

• Axios’ Dan Primack argues that Carta “still has some explaining to do.” Wondering, “Was this really just one rogue employee, or was there a systemic process of accessing cap table information?”

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💼 The Latest Dirty Word in Corporate America: ESG

BlackRock, the world’s largest asset manager, is laying off about 600 people, or 3% of its global workforce. Many work in its “ESG” division, part of a broader trend: Bye-bye, E-S-G.

OK, before you yawn, bear with us. Firms are basically done with investor backlash, political pressure, and legal threats over environmental, social, and governance efforts.

• ESG was once a corporate buzzword tossed around like confetti. Now, leaders are avoiding it altogether, stripping it from titles and replacing it with phrases like “responsible business.” Wall Street firms have closed once-popular ESG funds as interest fades.
• “ESG is complicated,” said a former Kraft Foods and Nabisco executive who runs a nonprofit of more than 200 companies focused on social impact.

The rise and fall of ESG: Devised about 20 years ago, ESG has been criticized for many reasons, whether it’s “woke capitalism” or for putting too much focus on measurement and disclosure requirements.

• Some executives say they’re still following sustainability commitments and will stop talking about them publicly.
• Executive coaches and PR firms tell leaders to go easy on the ESG stuff. Generally, they advise executives to say as little as possible to avoid regulatory scrutiny or political criticism.
• “We’ve seen a great deal of reframing and adjusting by CEOs in the ESG arena. Not only of what they say, but also where they say it and how they characterize it,” said one CEO consultant. “Most companies are moving forward operationally with their ESG programs, but not publicly touting them, or describing them in different ways.”

Why it matters:

ESG can be a fine line, especially after it became more politicized during the spat between Disney and Florida Governor Ron DeSantis. Many businesses fear similar bad PR around ESG.

The Disney-DeSantis feud coincided with a pullback in ESG investment by asset managers: Investors pulled over $14 billion from ESG funds in the first nine months of 2023. BlackRock and Fidelity have removed language about ESG impacts.

• Earnings calls also give the public a pulse of what’s on executives’ minds, and ESG is not top of mind. Mentions of ESG rose until 2021 and have been falling ever since.

In the fourth quarter of 2021, 155 companies in the S&P 500 mentioned ESG initiatives; by the second quarter of 2023, that had fallen to 61 mentions.

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TRIVIA ANSWER

$100 billion. That’s the approximate value of merchandise returned fraudulently in 2023 (nearly 14% of all returned merchandise.) That amount is more than double 2020 figures, according to a report from the National Retail Federation.