Corporate Governance and Corporate Social Responsibility at British Airways - Assignment Example

Running Header: Corporate Governance Student’s Name: Instructor’s Name: Course Code: Date of Submission: Title Assessment Report Corporate Governance and Corporate Social Responsibility Case of: British Airways Table of Contents Table of Contents 3 1.0 Introduction 4 2.0 Theoretical background 6 2.0.1 Stakeholder theory 6 2.0.2 Resource Dependency theories 7 2.0.3 Economy theory 8 2.1 Governance Theories 9 2.1.1 Agency theory 9 2.1.2 Stewardship theory 9 2.2 Ethical leadership theories 10 2.2.1 Transformation leadership 10 3.0 Corporate Governance 12 3.1 Conformance at BA 14 3.2 Performance (KPIs) 15 4.0 Review of the organization’s CSR position 16 4.1 Philanthropic CSR 16 4.2 Ethical CSR 16 4.3 Legal CSR 17 4.4 Economic CSR 18 5.0 Governance arrangement 19 5.1 ethical Leadership 19 5.2 Effectiveness 19 5.3 Accountability 20 5.4 Remuneration of board 20 5.5 Relation with shareholder 20 6.0 Conclusion 21 7.0 Recommendation 22 References 22 1.0 Introduction The company has been in operation for over nine decades now. The company can be traced as back as the commencement of the aviation industry. Even though the operating environment has been challenging, the company has been equally up to the task. The company is based in the United Kingdom where it’s headquartered next to the city of London. The company is established in its own town which is self-sufficient in terms of social services and infrastructure. There enough shops and restaurants and concert hall within the town. The company infrastructure is well connected with good communication systems that use post-modern technology. British Airways (BA), over years has continued to enjoy greater presence across the globe and more especially in Europe. BA is a very strong brand and is recognized by air travelers across the world. This has real boosted the company business and consequently better returns on the owners’ investments (Corporate social responsibility report 2011). The company’s policy is to remain committed to attaining high levels of standards of corporate. More importantly, the company board of directors is answerable to the company stakeholders with regard to governance. As part of ensuring that the company is effective in its corporate governance, it has adopted an Act which provides the list of what is expected of each stakeholder and more especially the company board of directors. According to the Act, the company is expected to account on how it utilizes the Combined Code of the Act and at the same time ensure that it is applying the provisions of the Code. In addition, the Board is expected to provide good governance by demonstrating high of competence in entrepreneurial leadership within the provided framework and internal controls (Podsakoff & Bachrach 2000). More important, at BA, stakeholder engaged is highly recognized given the role it plays in realizing the long-term goals of the company. A good example is demonstrated from the company’s regular contact with other larger institutions through the investor relationships where the executives of respective companies meet to discuss on important business. These forums also provide room for comparison of different ideas on which good corporate governance and leadership can be realized within an organizational setting (Corporate governance statement 2009). With regard to Ethics and Corporate Social Responsibility (CSR), the company appreciates that this is the most important consideration that must be taken into the business plan. Even though there have been economic challenges for the company, the company is committed to securely some of its resources for utilization in CSR. Important point is that BA has been on the forefront among the airline companies in developing very ambitious plans with regard to CRS and more especially in managing carbon emissions and ensuring effectiveness in its reduction. The company is also geared towards managing and reducing noise pollution and recycling of used gadgets in order to minimize their disposal to the environment. In general, the company’s CSR approach is based on environmental management and it’s aimed at minimizing the impacts of the business to the environment. The key CSR for the company is to make sure that the company is able to attain of level of management in climate change, waste management, air quality and aircraft noise as well as fuel efficiency. In addition, the company CSR is interested in providing humanitarian and financial support to different community initiative programmes both within and outside the country. The other aspects of CSR that the company has continued are in relation to marketplace and workplace management (Corporate governance statement 2009). 2.0 Theoretical background 2.0.1 Stakeholder theory Stakeholder theory as used in corporate governance and leadership has been on existence for over four decades now. This theory was developed by Freeman in 1984 in order to incorporate corporate accountability and more especially on the area of stakeholders. This theory is a combination sociological and organization aspects. The stakeholder is more of broad research practice that makes use of incorporation philosophies, business ethics, political theories, and economics as well as organizational science rather than single formal unified theory. In other words, the theory seeks to explain the tendency and practice of each stakeholder in realizing corporate accountability (Podsakoff & Bachrach 2000). The stakeholder theory can be defined by taking into consideration the role of different groups or individuals in influencing the performance of the organization. In this theory, the managers are expected to work and serve the interests of the company stakeholders. According to the developers of this theory, the company managers have a very complex network of relationship to attend to. This network comprises the company suppliers, customers, owners, employees and other business partners. These groups in one way or the other participate in company business in order to realize goo results and therefore need to be given attention by the managers. The objective of the company is to create wealth for its stakeholders. According to Freeman, stakeholder participation affects decision making process at all levels and therefore the company results must be stakeholder based. According to Rubin (2006) the stakeholder theory puts more emphasis on managerial decisions and how they seek to address the stakeholders’ interests in terms of value and that no single interest should dominate the other. 2.0.2 Resource Dependency theories This theory seeks to explain the role of the Board Directors in mobilizing the necessary resources that are required by the company. While ensuring that the enough resources are secured for the company use, the directors are expected to create the links with the external environment and more especially where the resources exist. Johnson et al (1996), agrees with the resource dependency theorists that the companies are expected to choose their directors based on their capabilities in enabling the company access important resources for its operations. For instance, those directors who work for the legal firms may prove very critical in the company more especially when legal advice is required. They are expected to advice on such matters while on the board meetings. This is very critical in saving those resources may otherwise have been used to secure those services. The developers of this theory argue that provision of enough resources facilitate proper functioning of the business and thereby enhancing performance and survival in a competitive environment. Apart from sourcing physical resources for the company, the directors are also expected to search for other resources such as information and skills by liaising with other partners such as suppliers, customers, the policy makers and the social groups as well as the legitimacy (Rubin et al 2006). This theory identifies the directors in four main categories namely the insiders, business professionals and the support specialists as well as the community specialists. The insiders comprise the existing and former company executives and they are expected to provide expertise in certain areas such as finance and legal for general company strategy development. The business expertise comprises the current and past company executives. Their role is to advise on general company strategy. They are also expected to assist in decision making and issue solving. On the other hand, the support specialists comprise lawyers, bankers, the representatives of insurance companies and the public relations professionals. The work of this group is to provide support on specialized areas. Finally, the community influentials comprise the political class, the clergy members and the leaders of the community organizations. Their work is to advise on social matters (Judge and Gerhardt 2002). 2.0.3 Economy theory The economic theory in corporate governance explains how resources are allocated for different operations of the firm. The theory demands prioritized allocation of resources based on available information. Proper predictions need to be done in order to determine whether a certain venture is what investing. In corporate governance, the managers are expected to make good use of the available resource for the benefit of the stakeholders (Rubin et al 2006). 2.1 Governance Theories 2.1.1 Agency theory Agency theory is built on three basic assumptions namely: bounded rationality, opportunism and information asymmetry. This theory places more focus on the relationship and goal inconsistencies that exist between the company managers and its stockbrokers. The agency relationship comes into existence when the one party to the transaction and in this case the principle gives some authority to the other party-the agent and consequently affecting the principle’s choices based on the agent’s decisions (Rubin et al 2006). In general the theory talks about how the delegation of authority from the principle to the agents becomes problematic. This is because: the interests of the agent and the principle do not always coincide; second the principle is not always able to monitor and control the actions of the agent costlessly; third, the principle cannot easily monitor and control the information that is available or accessed by the agent without incurring the cost. 2.1.2 Stewardship theory The stewardship theory is founded on psychology and sociology aspects. The work of the steward in corporate governance is to protect and maximize the shareholder’s wealth by ensuring good organizational performance. In this case therefore, the company managers and other executives are expected to work towards protecting and making good profits for the company stakeholders. Unlike the other theories and more especially the agency theory, the stewardship theory does not emphasize on individualism but rather on the work of the top management to work as good stewards of the company resources by making sure that all company goals are well integrated (Resick & Mitchelson 2006). The developers of the steward theory argue that the managers are more satisfied and motivated when the company objectives are achieved. In addition, the stewardship theory proposes on the need to unify the functions of the CEO and the company chairman so as to ensure that agency costs are reduced and significantly allow for greater role in the company’s stewardship. 2.2 Ethical leadership theories The ethical leadership theories as used in corporate governance, seek to inspire transparency and accountability to avoid the occurrence of organizational related scandals. Before understanding what is expected, the leadership must first understand what ethical leadership is and what it implies. The ethical leadership theories within an organization seek to explain how the company leadership is supposed to behave. The theorists of ethical leadership in corporate governance emphasizes on personal integrity as a very important attribute in providing good leadership (Podsakoff & Bachrach 2000). 2.2.1 Transformation leadership The transformational leadership theory is considered ethical or moral since it allows the leaders in companies to take the lead and inspire the other team members so as to think beyond personal interests in order to realize the common objective. However, in the contemporary business society, this theory of transformational leadership has caused a series of debates among the scholars who are challenging the motive behind it. Kanungo and Mendoca (1996), argue that unlike transactional leadership. Transformational leadership is very conspicuous on ethical influence. On the other hand, Bass (1985) argues that for transformational leadership to be ethical, it depends on the motivation behind it. According to this theory, the transformational leaders are perceived to be moral leaders who embrace honesty; fairness and justice at work and who at all cost are ready to stand against coercion and other manipulative influence. Both Transformational leadership and ethical leadership focus on personal characteristics. In this case the leadership is expected to care for others. For instance the ethical leaders are expected to influence the ethical conduct of the other employees (Resick & Mitchelson 2006). 2.2.2 Authentic leadership theory This theory explains that the leaders are expected to be fully of how they think and act and at the same time to be perceived by others as people who are totally aware of their own and about others. The authentic leadership need to address issues such as values, knowledge and strengths alongside being aware of which context they are operating in. authentic leadership is also expected to be confidents, hopeful and optimistic as well as resilience in their operations. In addition, they are expected to demonstrate high level of moral character in their leadership. Some scholars argue that authentic leadership provides good foundation for that could easily incorporate all other aspects of leadership such as charisma, transformation and ethical leadership. Such elements as openness, self awareness and transparency as well as consistence are all attributes of authentic leadership as argued by (Rubin et al 2006). 2.2.3 Spiritual leadership Spiritual leadership is composed of values, attitudes and actions that are very critical in influencing the individual motivation and that of others who feel part and parcel of a certain grouping. Spiritual leadership is also inclusive of religious ethics and values that are leadership based. This type of leadership, many leaders draw it from spiritual values such as integrity and honesty as well as humility which are particularly important in creating trust in leadership. This means that the authentic leaders can be relied on. Authentic leadership can also be demonstrated through behaviors either in practice or ethical consideration and treatment of others. The vision explains the company’s objective and its identity. Faith or hope is used to reflect on the confidence that individuals have that the stated vision will be realized. Finally, altruistic comes into existence based on the care and reservation of the working environment as argued by Judge and Bono (2000) 3.0 Corporate Governance Corporate governance concept in the recent past has seen a lot of recognition in the world of business. This is particularly because of its role in creating value for the money invested in business by the owners. Corporate governance is described as the process in which the power of an organization is used in running the affairs o the company. This is more particularly with management of company assets and resources with the primary aim of creating term value for the shareholder’s interest. Corporate governance is sought to make sure that the company managers act on the best interest of the organization and its owners. Good corporate governance is very critical in enhancing the company’s competitiveness and effectiveness as well as sustainability (Resick & Mitchelson 2006). At BA corporate governance, has been given due regard starting from how the company has restructured its leadership. The company has persistently embarked on re-inventing on different working ways in the country. The company is working on creating the leaner organization by encouraging a culture of high performance. Creating a leaner organization is expected to make the company the most competitive in the industry. The company is encouraging interaction between different key stakeholders in order to be able to measure individual performance with regard to the overall performance of the company (Conyon and Murphy 2000). The company is also committed towards protecting the environment from pollution related to the company activities. As part of the company governance, the company has embarked on a long-term change strategy and thus this has necessitated for the need to have a leaner and more agile company structure. In 2008 for example three managers had left the company under the voluntary severance programme. In addition, the company redesigning, is aimed at ensuring that the customer has been served well through good leadership and governance. Restructuring has also been used as part of the company governance strategy to work towards realizing high level of efficiency in its operations. The company recognizes that leadership performance is of great importance and that it has gone further to introduce a High Performance Leadership (HPL) programme in 2011. This system was introduced to create a link between different business strategies, help in formulating the company objectives, assessing performance and employee development and rewarding. The HPL was especially targeted at identifying talented leaders and how they can be provided with appropriate tools for the development of the company. The company leadership has defined the role of communication and measurement of individual performance which include: communication of common vision, agreeing on accountabilities and motivating and inspiring the followers. 3.1 Conformance at BA The BA Company has made tremendous steps in realizing high performance. This is based on the company strategies that have been used to work on creating change in the company’s structure and leadership. First and foremost, the BA Company has conformed in corporate governance by transforming the way people work at the company. This has helped the company in creating a diverse, motivating and rewarding environment. The company leadership has managed to make important strides in making each and every person at the company feel part of the company management process. In the rewarding systems, the company management to introduce two pension schemes namely: the Airways Pension Scheme (APS) and the New Airways Pension Scheme (NAPS). These schemes were put in place to make sure that the employees were allowed to make the employees make pay their pension contributions using more efficient tax systems. The company has also managed to conform to its governance by taking into consideration the relative importance of allowing the employees join the trade unions. This is particularly important in making sure that the employees are addressed by solving issues that are related to industrial relations (Zhou 2000). The company continues to work hard towards fostering good relations with the representatives of the employees. Establishing good working relations is important in managing new and ever evolving challenges of governance. Through industrial relations, the company is engaged in consultations with different groups as part of the process of ensuring efficiency in the company’s performance. The areas affected by the company’s governance include customer relations, Gatwick ramp, British Airways World Cargo, Glasgow cabin crew and Manchester engineering base. The company has entirely changed on the organization of its human resources and through the Business Partners the company is focusing on good employee relationship management. For example in 2010, the company had introduced what is called the ‘Engagement Index,’ that was aimed at encouraging different groups to speak on results. This was primary used to identify the degree of engagement by the employees according to corporate social responsibility report (2011). 3.2 Performance (KPIs) Performance is particularly important in determining whether the earlier stated objectives have been achieved or not. In the case of corporate governance using different performance measures create a platform for determining whether efficiency has been realized and if the shareholder’s invested has been added value. With the British several Key Performance Indicators (KPIs), have been used to measure the company’s performance with regard to corporate governance. First and foremost risk management and more especially from the side of the supplier is very critical. At BA, the company is engaged at collecting and recording team data for measurement across all the suppliers. This performance indicator is used to determine if the overall cost of buying important services has been reduced significantly by entering into business with suppliers who are affordable. Payment performance is also another performance indicator at BA. This indicator is used to determine if the company is reliable and effective in making its payments. For example according to 2011 company’s report, 90% of the payments were made on time. Decline in the cost of operations is also used as an important indicator to tell about the company’s performance. The company despite of the economic challenges has managed to control its costs at a manageable level. Finally, the other performance indicator is the decline in the occurrence of industrial actions. Since the company embarked on restructuring its governance, it has managed to reduce significantly employee strikes as a result of workplace issues (Corporate social responsibility report 2011). 4.0 Review of the organization’s CSR position 4.1 Philanthropic CSR The company has got a very long history of sponsoring community projects that are aimed at improving the livelihood of the community by engaging in humanitarian activities. For instance in the financial year 2008/09, the company had supported over 120 community programs. The company for example is working with other community institutions in Heathrow and UK in order to educate and develop the youth. The company’s Community’s Learning Centre near the company’s headquarters has welcomed over 50,000 youths and other adult learners in order to undertake various educational programmes. In its partnership with UNICEF, the company in 2009 on its campaign Change for Good, managed raise offer £3 million towards the UNICEF’s move to help the vulnerable children in the society. During the same time, the company’s both retired and working employees, managed to raise over £630,000 from the payroll towards supporting organizations in the society and more especially the children in need. In last, BA through the Fun Run, managed raise over £75,000 towards Cancer Research UK. During the same period over 95 tones of gifts were collected and donated to the society (Corporate social responsibility report 2011). 4.2 Ethical CSR In general, the BA Company has embarked on ensuring good business practices that are accepted across the board. The company is practicing good strategies that are aimed at ensuring safety and proper service delivery to the market alongside being responsible from the protection of the environment and ensuring creation of a conducive working place. The company’s target on climate change is interested in reducing the company’s net carbon dioxide emissions by over 50% in the next years. Under the Carbon Offsetting Scheme, the passengers are also involved in offsetting some of the carbon when they do their bookings. In 2009, for instance, 150,000 passengers helped offset over 55,000 tones of carbon dioxide which was seen a great contribution to the UN’s initiative towards saving and protecting the environment. In managing waste, the company embarks on continuous recycling of waste so as to reduce the pollution on the environment. In the financial year 2010/11, the company managed to recycle over 40% of its waste from 35% in the previous year (Corporate social responsibility report 2011). 4.3 Legal CSR The legal aspects of CSR seek to address issues that are related to the company’s obligations by the law. First and foremost, at BA, employee relations are given due considerations. This has been from enacting workplace principles that all for consultations with employees through their union representatives. At the company, the trade union has been allowed to exist on the ground that it’s used to negotiate on collective issues that affect the employees. The company is committed to creating high performance leadership culture. The company has been working on strengthening the bahaviours of the leaders and at the same time ensures good leadership in future. The company leadership programmes are aimed at promoting and developing professional leaders by engaging in open communications with people who work for the company (Rubin et al 2006). Litigation is an important aspect of the company as it’s used to make sure that transparency, accountability and justice are adhered to. For example, it’s the responsibility of the company to respect the state laws by playing its rightful role. The company has never, to submit its complete tax returns as required by the law. In addition, as part of legal CSR, the company has embraced the diversity and inclusion strategy. This has sought to address the discrimination legislation which is aimed at supporting the company managers by providing them with adequate training. The promotion inclusion at the British Airways has been used to make sure talented pool is developed and at the same time ensure outcomes and trends are well monitored. Finally, the company has promoted dignity at work which has enabled people feel valued. Bullying and harassment of any sort has been done away by the company (Judge and Gerhardt 2002). 4.4 Economic CSR Economic management is a very important aspect of the business corporate social responsibility. As the company seeks to empower the community in which it’s operating in, it’s also expected that the company creates value for the stakeholders’ investment. Following the global economic challenges the company has not been performing very well. For instance in the financial year 2009/10 the company had posted an operational loss of £220 million. This was particularly motivated by the company’s move to introduce the premium business which did not attract the business as was earlier predicted. This implies that shareholder return has not been taken care of. Dividends on shares have also been paid since the company started posting losses. In terms of risk and management, the company the company is experiencing operational complexities in its business (May & Pauli 2002). Because of the complexity, nature and competition that exist in the airline industry, the company is exposed to a number of risks. The major risks arise from the enactment of government laws, terrorism attacks and pandemics. Even though these risks have received attention from the company’s strategic management team, this has only been to some level as some of them are beyond the company’s management. In order to effectively manage the company’s risks, the company has put in place a programme to identify, asses and effectively manage the risks. The work of risk management is being carried out by the Risk Group. The group is expected to review all the risks in the company’s register and at the same evaluate and manage all other emerging risks (Luthans & Avolio 2003). 5.0 Governance arrangement 5.1 ethical Leadership The companies ethical leadership is build on the company’s code which is set in the company’s practice Section 1 which is about the Combined Code. This code is amended from time to time and posted on the Listing Rules which guide the company’s corporate governance. According to this code, all the directors have a responsibility in developing the company’s strategy. The code also demands that board members meet frequently to review and monitor the overall control of the company as demonstrated by Holliday and Pepper (2001). 5.2 Effectiveness In ensuring effectiveness, the company maintains a regular contact with larger institutional stakeholders. This is done through the investor relationships where the company executives meet during the annual events. The purpose is to share notes and review on issues that affect the general performance of the business (Fenn and Liang 2000). 5.3 Accountability At BA, accountability is enhanced by providing board members with the views of the stakeholders on a regular basis. This is to ensure that the board is bale to take into consideration all the views of the company stakeholders more especially those that talk about financial performance and employee relations. In addition, the organizational structure of the company clearly outlines the duties and responsibilities of each stakeholder. The structure also advocates for professionalism, integrity and competence among all staff as illustrated by Denis and Kruse (2000). 5.4 Remuneration of board At the BA, the Remuneration Committee is responsible on deciding on the remuneration packages for the directors. The remuneration package for the Executive Directors consist of the base salary and other benefits in kind which include private healthcare, car and fuel as well non-contractual travel agreements. The other things included in the remuneration package are pension, annual bonus scheme and full participation in the Performance Share Plan according to Marcus & Schuler (2004). 5.5 Relation with shareholder The British Airways Company maintains embarks on sustaining regular contact with other major institutional shareholders. This is done through events where the executives of different companies meet. The presentations from these shareholders are also made available for the private shareholders. The private shareholders are entitled to the company shareholder magazine which is issued twice a year. This is to keep the company shareholders on important matters regarding their investment (Reave 2005). 6.0 Conclusion This review of corporate governance and corporate social responsibility has made use British Airways Company. The company’s corporate approach is well aligned with the issues of performance and conformance. This is because apart from embarking on creating shareholder value, the company is also interested on improving the welfare of the society under which it operates. For example the company is sponsoring community events alongside supporting the less privileged in the society. The company has been in operation for over nine decades now. The company can be traced as back as the commencement of the aviation industry. Even though the operating environment has remained challenging, the company has been equally up to the task. BA is a very large company that operates in several countries. The company is a government entity that operates in the London stock exchange. The shareholders include the government, institutions and the private investors. Given the nature and the state of the environment under which the business operates, the undertaking is very complex as it involves several risks both local and international which it must overcome for compete effectively. The company‘s CSR, takes into consideration all business aspects including the environment, the employees, the customer and the market and the general welfare of the community. The company’ leadership approach is very strong given the fact it has managed to address the issues related to employee relations, integrity, transparency and accountability. 7.0 Recommendation The accident scare of 17th January 2012 was one such issue that raised the issue of corporate governance leadership about the company. Even though the accident did not occur, there was an error in Crash Warning. The passengers who were in the British Airways Flight 206 and who had already travelled for about three hours received an emergency message in order to prepare for the emergency landing on water. The flight was from Miami to London. The message came as a scare for many as it was played at around 3 a.m. the cabin was in total panic as the passengers woke up for this shocking news. A minute later, the announcement came telling the passengers to ignore the earlier warning as it was an error. Later on after landing, the company apologized to the passengers for the mistake that had happened. For corporate governance this was not good show for the company as the public was more wary on how the company manages its flight operations and the safety of the passengers. The same situation had occurred in august 2010 when 275 passengers were travelling from London to Hong Kong (Katie 2012). What is happening in these two cases is about corporate governance and how the company is handling issues that relate to communication with the public and more especially the travelers. To manage this situation, I do believe that establish a flight management team under the leadership of the director of flight operations which is independent will be able to address the specific issues that lead to occurrence of such errors. This will even make it easier to hold someone responsible for such mistakes. References Conyon, MJ and Murphy KJ 2000, ‘The Prince and the Pauper? CEO Pay in the US and UK’, Economic Journal, Vol. 110, pp. 640-671. 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