Airline Governance

The Right Direction

Victor Hughes

• Editorial: Routledge
• Año: 2020
• ISBN:
  9780429879210
• Edición: 1
• Categoría: Business
• Categoría: Business General

Anyone becoming a company director faces a steep learning curve; this book will give every director and especially one joining the board of an airline, a head-start on the process. Airline Governance: The Right Direction will help existing directors, those who have been newly appointed and those 'in waiting' in a company's management. This book reviews the fundamentals of corporate governance and puts them into the context of guiding, directing and managing an airline, and also complements the discussion of accounting and finance in its sister book Airline Management Finance: The Essentials. The detailed review will give directors confidence to make decisions on governance matters, avoiding a 'tick the box' approach and focusing on what is important. This book not only gives directors a comprehensive introduction to good governance, but also discusses the application of the principles of governance for an airline at various stages of its development so any changes can be made at the right time.Understanding corporate governance not only helps directors, but also an airline's senior and junior management, because the considerations around matters such as 'conflict of interest' apply to all decision-makers in the organisation. Understanding and applying good governance does not guarantee success, but it surely helps in achieving it.

1Corporate governance and how it works

What ‘corporate governance’ means

‘Corporate governance’ is a term which is frequently used in news reports and conversations, so it may seem strange to start this book with a discussion of what the term means. There are a lot of definitions of corporate governance, all of which seek to describe it clearly. There are many eminent authors of definitions for ‘corporate governance’, including The World Bank, Organization for Economic Cooperation and Development, various Institutes of Directors, academics and government committees (e.g., the United Kingdom’s Cadbury Committee).

Producing one definition of corporate governance is difficult for two main reasons. Firstly, governing a company means people managing people, so it is a human activity and human beings are individuals and act and react in different ways. The second factor is that shareholders’ expectations of how a company should be managed are changing over time, frequently in response to some major commercial problem. In addition, society in general also has expectations of how companies should be managed and how interest groups are able to influence the thinking of governments on corporate governance. It follows that as the circumstances surrounding corporate governance are not fixed and there cannot be an absolutely complete, and etched in stone, final list of a director’s responsibilities. The best that can be produced is a list of what is currently accepted as being the responsibilities of directors. In such a fluid environment producing a definition (i.e., a clear complete statement of the meaning) for corporate governance, is difficult. For this book, the term ‘corporate governance’ will mean ‘the rules, laws, policies and practices which govern the operations of a company’.

Directors and shareholders

In a company the ownership and the operation of the company are separate. This separation is fundamental to the way in which most economies work in the world and arose from the landmark case of Salomon v. A Salomon & Co Ltd. (which was decided by the United Kingdom’s House of Lords on 16 November 1897 with the ruling that the creditors of an insolvent company could not sue the company’s shareholders to pay up outstanding debts owed). This case concluded that a limited company was a separate entity from its shareholders. Essentially the shareholders own the company, although even this statement can be debated because some lenders may have a prior charge over all or some of the company’s assets, and the shareholders appoint directors to run the company for them. This separation produces the need for an approach which allows shareholders to be assured that the company is being well run, however that is defined, and is meeting its objectives, all without the shareholders interfering with the day-to-day operations of the company. The solution to this need is the requirement that the company’s directors periodically and regularly report to the shareholders on the result of the company’s operations and the current financial and business position of the company. In addition, the directors are required to run the company for the benefit of the shareholders. In general, this means they must make decisions in the best interests of the company and exercise independent judgement. They must also use reasonable care, skill and diligence in all matters relating to the company. When someone is managing other people’s money, which is essentially what directors are doing, it is not unreasonable to expect them to exercise common sense and to periodically report on how the money has been used, what has been achieved with the money and what the future plans are. This duty to act in the best interests of someone else is often referred to as a ‘fiduciary duty’.

Fulfilling this fiduciary duty does not involve taking instructions from the shareholders or constantly wondering what the shareholders are thinking about the company, but managing the affairs of the company for the long-term benefit of the shareholders. Later there will be a discussion about the relationship between the Board of Directors of a company and the company’s stakeholders.

Directors and operations

The first question to answer is why is a Board of Directors needed at all? Adopting the approach of having a Board of Directors, which is really a committee charged with running the company on behalf of its shareholders, assumes that a committee of individuals, each of whom give independent advice based on their knowledge and experience, will make better decisions than one individual or a group who are involved in the ownership of the company.

Up to this point there has been mention of two groups involved in a company; the company’s shareholders and its Board of Directors. But the directors do not operate the company; they guide it strategically and monitor its financial and operating performance but others will actually operate the company day-by-day and do what is necessary to achieve the objectives set by the board. Clearly then there is a relationship between a company’s directors and the operating staff.

The directors are responsible for defining the company’s strategy and monitoring its operations, whilst the operating staff with their more detailed knowledge of the company’s operation are charged with implementing and achieving the strategy while following the policies agreed by the board. These two groups, the directors and the operators, need to work closely together and have a full understanding of each other’s responsibilities and problems if the company is to be a success. If the operating staff do not understand what the company’s strategy is and what the agreed tactics to achieve the strategy are, it is unlikely that the strategy will be achieved. Not understanding the strategy and tactics could mean that operating decisions actually make achieving the company’s goals more difficult. Similarly, the directors need to understand what operating resources are needed to achieve the strategy and any operating constraints that need to be overcome. There needs to be good communication between the board and the company’s operating management. To some extent the need to have good communication between the board and the company’s management is helped by including on the board one or more ‘executive directors’ (i.e., directors who have executive or management responsibilities within the company), but at best this can only be part of the communication process and is not a substitute for an established method of communication between the board and the company’s management.

There is a system of dual Boards of Directors which is used extensively in Europe and acknowledges the difference between direction and management. Under this organisation a company has two boards, a Supervisory Board and a Management Board. This arrangement is generally called a ‘bicameral’ board or system.

The Supervisory Board is responsible for:

•Agreeing strategy.

•Interrogating and approving plans produced by the Management Board.

•Deciding on company policies and good practices.

•Monitoring the performance of the company’s operation against approved plans and strategy.

•Maintaining relations and communication with shareholders and other parties.

The Management Board is charged with:

•running the company day-to-day using policies and good practices approved by the Supervisory Board.

•implementing the strategy agreed by the Supervisory Board.

•preparing short- and long-term plans to be reviewed by the Supervisory Board.

•reporting on progress to the Supervisory Board.

Other responsibilities may be added to the mandate of either board.

The bicameral board has its advantages and disadvantages, but as a generalisation most economies prefer companies to have just one Board of Directors. This is particularly so in most Common Law jurisdictions where companies have a ‘unitary board’ with all of the responsibilities resting with one group; the Board of Directors. Even with a unitary board it is not uncommon for a company to have a Management or Executive Committee comprised of executive directors and senior managers who are charged with similar tasks to the more formally titled Management Board. With this approach the responsibilities of the company’s Executive Committee are defined and formally delegated by the board to the committee.

Perhaps the clearest statement of the allocation of duties between a Board of Directors and a company’s Executive Committee can be found in the agreements between the shareholders of a joint-venture between two or more companies. Each party in the joint-venture wants to be clear who does what and to have clarity on where the limits of authority are for decisions on such matters as capital expenditure, executive remuneration, buying and selling investments and all the other key matters.

When these three layers are looked at together, they link the shareholders to the operation of the company. Whichever approach is taken, the Board of Directors (or Supervisory Board) remains responsible to the shareholders for the governance of the company.

The role and duties of a Board of Directors and an individual director

Having established that the directors are responsible for a company’s corporate governance, it is appropriate to discuss the role of the Board of Directors and the duties of a director.

Given the discussions and thought applied to corporate governance over many years, it might be assumed there would be a generally accepted complete list of duties for the board, but this is not the case. The essential problem is that while the general scope of the role and duties of a Board of Directors can be reduced to writing, the definition of just what each duty means is liable to develop and change. Ten or twenty years ago some matters which now are high on a board’s list of considerations were probably seen as less important such as, for example, the possible effects on a business of artificial intelligence, or the need to protect personal data, and there are many more.

A useful general description of what the Board of Directors has to achieve is ‘to run the operations of the company for the best interests of the shareholders’. This is such a general statement that most directors, not unreasonably, require some further idea of what their responsibilities are. This could be to:

•determine and agree a long-term strategy for the company and to define each element of the strategy so that progress towards achieving them can be measured and monitored.

•establish operating tactics designed to achieve the agreed strategy, monitor their effectiveness and modify as necessary.

•identify, secure and allocate the resources (e.g., staff, funding), needed to achieve the long-term goal.

•agree the way the company should be organised, review the performance of the organisation and agree changes as necessary, including the appointment of the senior executives.

•establish sets of values to guide the organisation in its day-to-day operations.

•agree a clear definition of the duties of the company’s management.

•regularly monitor the company’s financial and operating performance and the progress towards achieving the company’s strategy, comparing the outcome with past results, approved plans, competitor’s results and market conditions.

•identify the risks facing the company which might frustrate the achievement of the company’s strategy and ensure plans are developed to handle the risks.

•regularly report to shareholders and stakeholders on the state of the company and its progress on reaching its strategy.

•ensure there are procedures in place which confirm that the company complies with all legal requirements.

•monitor the company’s cash position to ensure the company remains ‘solvent’. That is, able to pay its debts when they fall due for payment, not all debts at one time – just those which are due. This is a very significant duty and one which is well documented. Failure to ensure a company remains solvent significantly changes a director’s duties and focus. When a company is insolvent the directors have a duty to put the creditors’ interests first and to seek to remedy the situation. If the directors permit a company to continue to operate knowing that it is insolvent, the directors may not only become personally liable for the debts incurred, but be prohibited from being directors now and in the future. If it appears that the company will become insolvent the directors should get professional advice very quickly.

Each of these elements can further be broken down into greater guidance, and into more detail, but even this list will not be fully complete and final, because the law does not have a fully comprehensive definition of a director’s duties. Guiding and monitoring the operation of a company is essentially a human activity and this makes it difficult to define and regulate. Whenever there is a major business collapse or commercial disaster, there will be questions as to the extent to which there was some fault or problem in the business’ corporate governance. The conclusion and lessons learnt from the problem generally produce a further clarification of a Board of Directors’ role. The definition is a continuing process. Some people see this lack of definition as a major risk to themselves and their reputation hence decline to become directors. Although there are very few cases brought against directors for failure in their duties, some people still see the risk to their reputation as significant. Being a director does involve accepting significant responsibilities.

To fully understand what is expected of them when they join any Board of Directors, a director should get a copy of the latest guidance from their local Institute of Directors and study it, then read books on corporate governance in general. Fortified with this accumulation of knowledge and opinion a director will have a better understanding of what is required of them.

The duties of ...