It is unlikely that Air New Zealand’s 39,468 domestic and foreign shareholders who subscribed total of $284 million to assist with the company’s full acquisition of Ansett Australia last November thought much about Sir Adrian’s comments when they did the deal. It is even less likely that its board, management or shareholders were, at the time contemplating the relevance of Greek mythology. It might just have been useful had they done so. But I suspect, that even today, the relevance or irony of the mythological character Icarus would escape them.
All stakeholders in Air New Zealand will now be acutely aware of the importance of adequate and measured risk management and corporate governance practices and the widespread effect failure to execute these practices can have on an organisation with large and diverse groups of stakeholders.
Greek mythology reveals that Daedalus used his skill to build wings for himself and his son Icarus. Daedalus then advised his son to fly at medium altitude and not to over extend his capability and skills by flying too high.
Time and again history delivers tragic examples of airlines that, possessing the power of flight, attempt to moderate the common sense and practicality of Daedalus’ centuries-old advice. When ignoring advice they cite the strategic and commercial imperatives of the modern aviation industry. But like the constant rays of sun that melted Icarus’ wings the unforgiving economics of the international aviation industry claims another victim. Like Icarus, who felt exhilaration and power spreading his wings and soaring through the sky on his way to freedom from his remote island prison, Air New Zealand attempted to fly higher and higher. What the company found at the higher altitude was more rarefied operational and financial atmosphere which was the domain of the larger “world carriers”.
Air New Zealand, with its responsibility to many stakeholders, should have differed from Icarus in its decision-making processes and behavioural controls. It should have avoided the fate of the youthful Greek with newly minted wings. Icarus could, perhaps, be excused for ignoring wiser counsel and the basic fundamentals of the activity he embarked upon. He was, after all, responsible only to himself, had no passengers, no employees, no creditor banks and owned 100 percent of his own equity. An argument could also be made that he had only the benefit of one wise father to counsel him. Their excursion into the aviation business was also totally unknown to both of them.
Air New Zealand has now experienced the ultimate process and control systems failure an enterprise can inflict upon all its stakeholders. It has failed them by neglecting the fundamental principles of business stewardship and management – sound corporate governance.
Reiterating the rules
High standards of corporate governance are essential prerequisites to any nation or enterprise seeking to justify the support and participation of varying stakeholder groups – especially capital providers and investors. Corporate governance systems are not phenomena of the 20th century and significantly pre-date the advent of flight. Systems of corporate governance have evolved over centuries, ironically often in response to company failures or systemic crises.
Active enforcement of law and regulations has created culture of compliance that shapes business practice and the management ethos of most international firms. For enterprises domiciled in small capital markets, such as New Zealand, an ability to demonstrate robust corporate governance practices is essential when competing for investment and financing on the international financial markets.
Corporate governance requires both an effective oversight by boards of directors and robust enforcement by the legal system and capital markets.
Corporate governance rules are continually developed, refined and codified. In the UK, where New Zealand still looks for legislative and regulatory precedents, the Thatcher government and the London Stock Exchange formally examined corporate governance in the early 1990s. In December 1992 the Cadbury Committee’s Report on the subject was published and focused on the role of corporate directors, both as unified board and individually, emphasising the need to implement rigorous reporting and control measures. Although risk management was not explicitly highlighted as one of the directors’ official concerns, the requirement for them to make formal statement on compliance with the Cadbury Committee’s Code of Best Practice raised the profile of risk management.
The recommendations of the Cadbury Committee are not mandatory, but all financial statements of publicly listed companies in the UK must clearly state whether or not The Code has been followed. Importantly, if The Code is not followed explanations must be given as to why.
The International Monetary Fund, the OECD and the World Bank have also analysed and investigated appropriate acceptable corporate governance principles and standards. The conclusions and recommendations developed provide succinct, yet comprehensive framework, for rigorous and robust corporate governance system.
Recognised basic principles
Drawing on the experiences of its constituent membership the OECD Business Sector Advisory Group on Corporate Governance identified five basic principles. They are:
1 The rights of shareholders
Corporate governance frameworks should protect all shareholders’ rights.
2 The equitable treatment of shareholders
Frameworks should recognise shareholders’ legal rights and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
3 The role of stakeholders in corporate governance
The framework should be similar to that for shareholders above.
4 Disclosure and transparency
Ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.
5 The responsibilities of the board
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
Board members should act on fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders.
There is good deal more detail spelled out on the responsibilities and rights under each of the categories which space does not allow me to elaborate on here but even on cursory review of the framework it is apparent that principle after principle has been either seriously or totally neglected by the Air New Zealand board and its two major shareholders.
It is difficult to escape the conclusion that there has been failure of responsibility and duty by Air New Zealand’s directors but analysing and assessing the nature and degree of these failures, either in isolation or collectively, is currently task being undertaken by the Australian Securities and Investments Commission, The New Zealand Securities Commission and The New Zealand Stock Exchange.
Air New Zealand’s shareholders and other stakeholders eager for some form of accountability need explanations, which must be forthcoming from Air New Zealand’s directors. If the directors are to adequately honour any duty they owe or at least should feel to the shareholders they must account for their actions, or lack thereof. Shareholders want, and are entitled to, explanations from the directors collectively and individually in their varying roles as representatives of major shareholders or independent directors as stewards of all shareholders’ interests.
In fact, investors and the international capital markets have already delivered their own conclusions and judgements both on