The boards of Air New Zealand and the New Zealand Rugby Football Union (NZRFU) behaved perfectly legally in the lead up to their respective corporate failures. The NZRFU observed fiduciary responsibility to the total exclusion of strategic governance, while Brierley Investments (BIL) through Air New Zealand, attempted high-risk exit strategy also to the detriment of strategic governance.
The NZRFU’s board was convinced by its CEO that it was not in the organisation’s best financial interests to participate in sub-hosting the Rugby World Cup (RWC). The outcome – the complete loss of hosting rights to Australia – was therefore entirely predictable.
By contrast, the board of Air New Zealand proceeded, with almost heedless disregard, to attempt to influence share prices so that BIL could extract its investment from an organisation not capable of providing the desired level of returns. Attempts by the management of Air New Zealand to ameliorate critical decisions, notably the purchase of the remaining 50 percent of Ansett Australia, were ignored.
The directors of Air New Zealand lost sight of the purpose of the organisation, that is, it simply became an investment vehicle upon which totally unrealistic demands were placed. Its eventual collapse – saved only by government intervention – was also predictable.
The NZRFU’s failure to retain the rights to sub-host the RWC 2003 resulted from management’s conviction – and ability to influence the board – that holding the tournament was not in the organisation’s best interest. Again the organisation’s purpose – serving the needs of New Zealand rugby – was shown near total disregard. As with Enron and WorldCom, no wrongdoing in legal sense was done, yet preventable failures resulted.
The traditional practice of governance in New Zealand is almost entirely related to compliance – reinforced by the abundance of lawyers, financiers and accountants (47 percent of all directors) on the boards of New Zealand’s publicly listed companies. And yet even more compliance is being ‘imposed’ on boards through initiatives such as the Sarbanes-Oxley Act, the King Report, the Higgs Report, and in New Zealand recommendations from the New Zealand stock exchange (NZX) on appropriate board architecture and reporting standards.
There is however, growing support for the view that the board’s contribution is strategic: “Governance is strategy orientated whereas management is task orientated.” Yet the typical lists of directors’ duties are still compliance related and largely ignore strategy.
A board must be equipped with the competencies to conduct strategic governance in tandem with fulfilling compliance requirements. The call from legislators and regulatory authorities for increased compliance will force the focus away from strategy even further, and have the opposite effect from that intended.
Air New Zealand
The purpose of Air New Zealand’s earlier incarnation, TEAL, (Tasman Empire Airways), was to “meet the needs of the people of New Zealand for air services between New Zealand and other territories, and to assist in the promotion of New Zealand’s export trade and tourism”. TEAL remained profit-oriented however. After difficult period in the late 1970s – rising fuel costs, devalued New Zealand dollar, deregulation of the US airline industry, the grounding of the company’s DC 10 fleet and the Mt Erebus air disaster in 1979 – by 1984, then still wholly government-owned Air New Zealand was achieving annual profits of some $80 million per annum.
In 1986, and under the Closer Economic Relations (CER) agreement with Australia, the New Zealand government removed foreign ownership restrictions from the Air Licensing Act opening domestic routes to foreign competition, position not reciprocated by the Australian government.
Within two months Ansett Airlines owned by Ansett Australia (50 percent), Brierley Investments (BIL) (27.5 percent) and the Newmans Group (22.5 percent) was operating flights on the trunk route of Auckland, Wellington and Christchurch in competition with Air New Zealand. Within seven months of establishment Ansett had purchased the outstanding 50 percent from BIL and Newmans. Air New Zealand reacted competitively reducing fares, enhancing onboard services, and investing in terminal facilities. Ansett’s first year in New Zealand closed with $30-million loss, and BIL was reported losing some $14 million on its investment.
In 1989 the government floated Air New Zealand for $660 million to consortium led by BIL (35 percent), the New Zealand public (30 percent), Qantas (19.99 percent), Japan Airlines (7.5 percent), and American Airlines (7.5 percent). The New Zealand government retained ‘Kiwi Share’ enabling government to control changes in the capital structure, classes and transfers of shares, and board composition. The Kiwi Share also appears to have ensured the continuation of non-profitable domestic routes.
In 1994 the Australian government prepared to open its domestic market to New Zealand airlines through an ‘open skies agreement’ to create single Australian-New Zealand aviation market. Due to the potentially adverse impact on recently privatised Qantas it reneged only days before Air New Zealand was due to be granted access to the Australian market.
Air New Zealand was then left with the only option for gaining access to the Australian market being the purchase of 50 percent of Ansett Australia from TNT Holdings for A$465 million. Approval for the purchase was granted by the New Zealand Commerce Commission in June 1996. The acquisition created 50:50 partnership between Air New Zealand and the remaining shareholder, News Corporation. Air New Zealand also gained pre-emptive rights to the remaining 50 percent of Ansett Australia.
Benefits from the acquisition appear to have been realised almost immediately. In successive years both Air New Zealand’s chairman and CEO reported that sound progress was being made in integrating systems, reducing costs, market development and the integration of routes between the two airlines.
At the same time Air New Zealand, with Ansett Australia, joined the Star Alliance alongside Singapore Airlines (SIA), United and Air Canada – an expansion strategy that was consistent with the stated policy of pursuing relatively low-risk commercial opportunities.
To fund the purchase the board raised new equity through 3:11 rights issue, drew down cash reserves of $350 million, and used $190 million of existing credit facilities. The net effect of prudent financing and sound management ensured that Air New Zealand’s balance sheet remained sound and the airline continued to provide returns above the industry average.
In December 1998 BIL began implementing its business plan of increasing representation on the boards of strategic investments and taking more active participation in management. BIL increased its representation on the Air New Zealand board from two of eight directors to four of 10, including the chairmanship. At that time BIL also realised that the return it expected from this investment – 20 percent ROI – was not going to be forthcoming. The only exit strategy available to it was via the sale of shares to more benevolent owner. This it thought it had found in the form of Singapore International Airlines (SIA).
In March 1999, SIA conducted its third attempt to buy into the Australian market, this time through the acquisition of News Corporation’s 50 percent share of Ansett Australia (previous attempts were in 1991 with Ansett, and 1994 with Qantas). In order to ‘block’ SIA’s entry, and force it to enter the Australian airline market via its own airline, the Air New Zealand board dominated by BIL’s representatives, exercised its pre-emptive rights and acquired the remaining 50 percent of Ansett. Air New Zealand purchased the remaining 50 percent shareholding (A$580 million) in June 2000 with debt capital, increasing its debt to asset from 51.5 to 82 percen
