Introduction
The airline industry appears to be cyclical and this inevitably impacts on growth rates from year to year. Nevertheless the underlying trend has been one of declining but consistently good growth in demand. Most industries or businesses faced with continued and high growth of demand for their products or services would be basking in substantial profits. Not so the airlines. This is the paradox. The financial performance of the world’s airlines taken as a whole has been very marginal, even in the years when the industry was highly regulated and largely protected from internal competition. The traditional measure of profitability, namely the rate of return on assets employed, cannot be applied to the airline industry as a whole (Doganis 2002). Another measure of profitability commonly used among airlines is the operating ratio, which is the annual operating or net profit or loss expressed as a percentage of the total annual revenue. Four to five years of poor or bad performance are generally followed by an upturn and five or six years of improving results (Doganis 2002). The airline industry is has its own share of problems over the years, this does not mean that companies in this industry should be affected by such situation. To conquer the problems, the industry influences companies belonging to it alter their strategies and relate it to strategies used by other industries. Two companies that have altered their strategies includes British Airways and Cathay Pacific. This paper will discuss about British Airways and Cathay Pacific’s adoption of effective corporate governance systems and processes can affect company performance and conduct.
British Airways
.British Airways was formed in 1972 through a merger of two state-owned airlines, the short-haul British European Airways (BEA) and the long-distance operator, British Overseas Airways Corporation (BOAC). Its early years were unhappy ones. The organization was notoriously overstaffed; it was the largest airline in the world judged by number of employees. The company’s efficiency compared poorly with that of other international carriers, which were in turn mostly below the standards of US airlines. When recession hit both the British and international economies at the end of the 1970s, British Airways ran into heavy losses (Kay 1995). After creating changes in the management team, the company’s route network was cut back and manpower reduced substantially. With the assistance of economic recovery and substantial write-offs in the early years, financial performance improved considerably. Privatization was delayed by various factors, particularly litigation resulting from allegations that predatory activity by British Airways had contributed to the collapse of Laker Airways. After a substantial out-of-court settlement had disposed of this issue, the government sold British Airways to the public. British Airways is now easily the most successful of the major European airlines (Kay 1995). The company British Airway is one of the largest airline companies in Europe. This company was able to survive the changing environment through revising its strategies and improving the governing body of the organization. The company initiated reforms in the way the company is managed and which part of the organization creates decisions for the success of the firm.
Cathay Pacific
Cathay Pacific was generally seen as a quality airline, but one strongly associated with Hong Kong’s colonial past. A major challenge for the future was for Cathay Pacific to be perceived as more Asian rather than British/Asian in order to strengthen its market abilities in Asia including attracting a wider Asian customer base, as well as to reflect the changed political realities in Hong Kong. In short, the company needed to align its Conceived Identity with its new Identity. Cathay Pacific chose to undertake this identity realignment through a massive coordinated set of initiatives intended to transform the reality of the company to achieve the new perceptions that would reflect the new strategy and permit communications based on the substantive changes (Balmer & Greyser 2003). Cathay pacific is one of the most well known airline company in the world. It competes with different airline companies for prestige and notoriety in the airline industry. Recently the company underwent a change in image and strategies to counter the problems its industry has. It shifted the focus of its strategy into making sure that their will be an increase of clients who demanded their services, it also made sure that the services and technologies they use can be competitive to other airlines company. The company has taken advantage of the information technology revolution and updated it with their ticketing system and booking system. The company makes sure that whenever someone wants to have his/her flight booked the data they will share can be available within minutes and information can be easily found. The company’s system also makes it easier for a client to transact for tickets and acquire that ticket that will be used for the flight.
Corporate governance
Corporate governance has come to imply good, in the non-moral as well as the moral sense. Its non-moral applications include efficient decision making, appropriate resource allocation, strategic planning, and so on. In its moral sense good corporate governance has come to be seen as promoting an ethical climate that is both morally appropriate in itself, and consequentially appropriate in that ethical behavior in business is reflected in desirable commercial outcomes. Here the links are with due diligence, directors’ duties, and the general tightening of corporate responsibility. Middle and lower management find it hard to be ethical when it seems that the top of the corporate hierarchy have no commitment. The message of sincerity will always filter down, and no amount of deception will foster the view that a board is ethical when it plainly is not (Francis 2000).
The commitment to ethical corporate governance by a board will enhance the prospects of an ethical infrastructure within the organization. That ethical infrastructure is a manifestation of the commitment, a means of preventing and resolving ethical problems, and an impressive demonstration of sincerity. The notion of ethical corporate governance has a focus on leadership. Mergers, leaner organizations, and accountability have all had their impact (Francis 2000). Good corporate governance requires commercial insight and commercial courage; but no less than that it requires adherence to the principles of honesty and integrity. The overall significance of corporate governance is that ethics must start at the top, and be constantly fostered there. Without ethical leadership there will be no ethical following (Francis 2000). Corporate governance makes sure that an organization makes appropriate and justified decisions that will lead to success. It intends to use needed strategies to set good examples for the employees to do what should be done not only for the company but for the environment. Corporate governance changes the way a business performs and acts on certain issues that affects the company.
Corporate governance deals with issues like accountability wherein everyone should be held liable for his/her actions. It advocates a company’s use of policies to protect the shareholders and make sure that people in the organization will be of best behavior. Corporate governance makes use of strategies to make sure that British Airways will make optimum use of economic resources without causing additional problems to British Airways. The corporate governance enables Cathay Pacific to change its purpose. Corporate governance forces the company Cathay Pacific to desire for higher things. The change in the purpose is good for both companies a whole but it does not necessarily satisfy the needs of some segments of the two companies. As the direction of both companies’ changes, many things within it are altered to meet the demands of the change in the corporate governance. Some of the strategies used by the segments of the two companies can be changed due to the developments in corporate governance. The strategies in segments of the two companies are downgraded so that it will not clash with the developments in corporate governance.
Corporate Governance, Corporate Purpose and Business Ethics
Corporate Governance is the responsibility of senior management and the Board. The Board is usually made up of executive and non-executive members who have the overall duty for governance within any organization. The responsibilities of the Board include setting the company’s strategic aims, providing leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. They set financial policy and oversee implementation including the use of financial controls. The Board’s actions are subject to laws, regulations and the shareholders in general meeting. While Corporate Governance has long been recognized as essential to any enterprise, the new economy has given rise to a greater demand for vigilance against new risks (Anhal et al., 2003). Corporate governance is related to corporate purpose because it is the one that determines the best possible action for British Airways and Cathay Pacific to achieve their goal. Corporate governance sets the pace on how British Airways and Cathay Pacific will achieve its goal. It sets out the different factors that should be considered before making any attempt in reaching the two firm’s goal. Corporate governance and business ethics work together in making sure that British Airways and Cathay Pacific will have a good reputation towards the clients, the government and other sectors of society. Corporate governance intends to make use of ethical behavior and actions to make sure that their image remains acceptable to the internal and external environment. Corporate governance uses decision making skills to determine both organizations will conduct its operations within ethical limits.
Why does governance bring interest to stakeholder groups?
Stakeholders are those people affected by the actions of a public company, they have a strong interest in the company and their welfare and ideas should be the first ones to be heard and considered before the company does anything. Stakeholders are given the outmost authority in any business setting. Their power and importance is beginning to gain slighter advantage when compared to an organization’s management team. Their powers in a company are overwhelming because they contributed a certain amount that contributes to the financial resources of the company. Stakeholder’s impact on the governance of the firm is it affects the way the company is managed. It makes sure that the company performs well according to the stockholder’s standards. The representatives of the stakeholder in the firm belong to the management group. They make sure that the concerns and problems of the stakeholders are brought to the company’s attention. They are the ones that foresee if the company abides with the changes the stakeholder wants. The stakeholder has a right be informed about the changes in the economy, each member has the responsibility among themselves to maintain the investment they made in the company. Corporate governance contributes to making sure that British Airways and Cathay Pacific will have a good relationship with stakeholders. Corporate governance does the best it can to make sure that the number of stakeholders will increase so that the worth of British Airways and Cathay Pacific and its financial resources will increase. Corporate governance will be always monitored by the stakeholder because their interest lies in the result of the governance’s action.
Non Executive Directors
Non-executive directors (NEDs) are not employees of the company and are not involved in the daily management. They may be former senior executives of the company or they may be brought in from outside in order to provide an independent voice. A central figure in the market-based system of corporate governance that has emerged in the UK is the non-executive director. Best practice for the governance of public companies is that one-third of the board should comprise non-executive directors. Of these, the majority should be independent of management this means that, for example, they should not be former executive directors of the company and free from business or other relationships that could materially interfere with the exercise of their independent judgment. Non-executive directors are expected to discharge certain important functions in relation to the management of the companies to which they are appointed. These include, specifically, setting the remuneration of the executive directors and, more generally, monitoring the stewardship of the company’s affairs by its executive management including the executive directors.
The modern non-executive director of a public company is thus rather different from his historical counterpart. In the past a non-executive director might have been expected to do no more than to give the company the benefit of being associated with a person of his reputation and distinction but now they are expected to do rather more to justify their position. This creates a new context within which the general duty of care and skill operates and makes it appropriate to consider the effectiveness of that duty as a mechanism for holding non-executives themselves accountable. It also raises the question whether the role and function of the modern day non-executive director as perceived by market standards has had an impact on the content of that duty so as to make it more rigorous than it was when non-executive directors were simply figureheads.
The balance between the monitoring and strategic functions of the modern non-executive director is an issue that has important implications when a connection is made between market expectations with regard to the role of non-executive directors and their legal duty of care and skin: viewing non executive directors as monitors paves the way for laying blame and, potentially, legal responsibility for failure to detect and rectify underperformance or abuse by the executive management on them; but it is more difficult to say that the non-executive directors are responsible for the failings of their company when their role as strategists is emphasized in preference to their monitoring function. Non-executive directors tend to be drawn from a group comprised of persons who are themselves executive directors of other companies, or who otherwise have significant managerial experience. This has led some commentators to doubt whether, in view of the very likely professional and social contacts that potential non-executive directors have with the executive directors, as well as shared standards and perceptions of acceptable business practice, they can truly be regarded as independent. Non Executive Directors focus on the performance and the strategies used by the company assigned to them.
Role of Non executive directors
Non executive directors usually do not participate in incentive schemes involving share options and/or performance bonuses. In addition, they rarely own more than a few shares in the companies on whose behalf they act. The fact that a company’s non-executives will not usually be affected financially by changes in corporate performance is a cause of concern for some. The thinking is that an outside director will not have the drive required to take his duties seriously unless he has a stake in a company’s performance. This means that under the present system, non-executives will fail to be sufficiently vigilant in monitoring executive performance and in taking steps to deter self-serving managerial conduct. Linking pay to company performance is, however, a problematic strategy with non-executive directors (Cheffins1997). One consideration is that financial incentives may not be of substantial importance to the individuals who act in such a capacity. Non-executives often say they are keen to serve and carry out their duties because board appointments are prestigious, offer an intellectual challenge, and can yield potentially valuable business connections. To the extent that this is correct, tying director remuneration to corporate performance may simply duplicate the incentives which already exist (Cheffins1997).
The motivational effects which would arise if a strong connection were established could be counter-productive. If due to a company’s excellent recent performance a non-executive stands to be rewarded richly, he will be concerned about retaining his position so he can receive his lucrative remuneration. Another danger with providing performance-oriented incentives to non executive directors is that a company which does so could have difficulty recruiting suitable people to serve. Non-executive directors are also exposed to risk because their professional reputations are valuable to them (Cheffins1997). Companies ordinarily appoint outsiders to their board on the basis of past achievements, usually with other business enterprises but sometimes in relation to politics, the military, or another field. Consequently, outside directors will in most instances have established prior to their appointment a reputation for having good judgment, for possessing public relations skills, and for dealing successfully and prudently with complex and challenging matters. A non-executive will want to keep his track record intact as a matter of pride and because it will help him to obtain future board appointments and perhaps secure lucrative consultancy contracts (Cheffins1997).
Non Executive directors have the responsibility to constructively challenge and contribute to the development of a strategy. They are expected to assist the organization in making use of the best strategies. Non executive directors are also expected to observe and make comments on the performance of the management of the firm. NEDs are given the right to make comments on the company’s resources, appointments/structure and codes of conduct. Aside from the responsibility of NEDs, they observe the movements within and outside British Airways and Cathay Pacific so that any problems can be resolved and both companies can improve its competitive standing.
Examples of good practices
For British Airways its good practices focuses on making sure that the employees will be in an inclusive working environment wherein respect is valued and motivation is an important part of human resources strategy. The company makes sure that it has a diverse culture wherein race is not being looked upon as a hindrance for the applicant to be accepted in the company. The other good practice of the company concentrates on making sure that clients will be safe as they travel. For Cathay Pacific its good practices focuses on maintaining a good social relationship. Cathay Pacific makes sure that the service they offer and the technology they use to tender their services will be accepted by the public. The entertainment provided in flights will not contain anything that will cause ethical, moral and social problems with the passengers.
Examples of bad practices
For British airways its bad practices include its inability to make sure that luggages will not be lost or will be delayed. This gave the company the reputation as the worst airline for lost luggages. Another bad practice of the company is it having bad reputation regarding late arrivals and departures of short/long tem flight hauls. This gave the company a reputation as the worst airline for punctuality. For Cathay Pacific its bad practices includes the company’s tendency to dispose aircraft while such aircraft has still high resale value. The company fails to see the use of the aircraft that they may not need but can be sold to other organizations. The company is not able to see the capabilities of other things that the company deems as unusable.
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