International Corporate Governance - Case Study Example

Corporate Governance: A Case of Qantas Airways Student’s Name Institutional Affiliation Course Name Date of Submission Corporate Governance: A Case of Qantas Airways Introduction Corporate governance has become an important part of a business plan. Initially, companies did not take corporate governance with the seriousness it deserves until the 2000s following the corporate scandals that brought many big companies to their knees. In particular, the fall of former giant firms, such as Enron, WorldCom and Adelphia, which also rendered its employees and shareholders bankrupt has demonstrated the importance of corporate governance. The aim of corporate governance is to promote accountability in a firm as well as prevent the occurrence of disasters that might prove costly to an organization. This document will explain the concept of corporate governance and proceed to highlight the features of Qantas Airway’s corporate governance framework. The discussion will also delve into how Australia’s corporate governance system impacts Qantas Airways. The Corporate Governance Framework Mallin (2012, p. 6) argues that management and governance goes hand in hand. As such, the two must be balanced to ensure effective operation of a company. Although corporate governance has for many years been ignored by companies, the concept is gaining immense recognition in the present day businesses. This follows the lessons learned in the 2000s after the collapse of many big companies due to poor management and corporate scandals. The concept of corporate governance, however, is defined differently by different organizations and scholars. Traditionally, corporate governance was taken to mean the way firms are managed and directed. However, in recent times, the concept of corporate governance is used to mean a framework of rules; guidelines that companies are expected to follow in making decisions and how managers are held accountable for them (Mallin 2012, p. 5). In other words, corporate governance is the rules and procedures that guide the conduct of executives of a company in their management process to ensure accountability and protection of stakeholders’ interests. Accordingly, corporate governance framework defines the relationship between a firm and its stakeholders, including customers, investors, suppliers, employees, government and the community. Agency Approach to Corporate Governance Agency theory has a role in the corporate governance of a company. The Agency theory explains the relationship between the principal and agent. According to the agency theory, the agent must represent the principal’s best interest by doing that which is required by the principal instead of pursuing self interest (Kaler 2002, p. 13). The failure by the agent to represent the interest of the principle by pursuing self-interest usually results in conflict between the principal and agent. Accordingly, because executives act as agents of shareholders in a company, they are expected to serve the best interest of shareholders by striving to maximize value through effective management. Therefore, to avoid a conflict from arising in a company between the agents and the principals, a company should consider creating a corporate policy. Additionally, corporate governance can be utilized to change the rules used by the agent to ensure that the interest of the principal is restored. From Stakeholder Approach Stakeholders play a key role in the success of a company. Some of the key stakeholders of a company include shareholders, customers, suppliers, employees, government and the community. These stakeholders have diverse interests in a company. Therefore, to ensure success, a company should strive to ensure that the interest of these stakeholders is protected through corporate governance. Shareholders usually form a critical shareholder of a company since they invest their money in a company and expect good return on their investment (Solomon 2007, p. 56). Therefore, shareholders expect executives to adopt good corporate governance to ensure that the company is properly managed to ensure high profitability so that they can get good returns from their investments. Most companies also have the tendency of ignoring small shareholders in crucial decision making by only serving the interest of majority shareholders. However, good corporate governance seeks to ensure that the interest of all shareholders are served without discrimination by ensuring that even the small shareholders are given a chance to air their views during general meetings (Kaler 2002, p. 26). Additionally, according the corporate governance principle, a company should ensure that the interest of stakeholders are recognized and satisfied. For instance, it has been shown that addressing the interest of non-shareholder stakeholders such as employees, customers, and suppliers can create a positive relationship between a company and the community, as well as the press. To protect and satisfy the interests of stakeholders, a company must ensure that there is transparency in business practices, and financial records, as well as ensure that the executives pursue the objectives for which they are hired. Corporate Governance Issues Corporate governance is currently recognized as key to the success of a company since it ensures accountability and the protection of stakeholder interests. However, corporate governance is characterized by many issues that companies need to solve to ensure effective operation of a company and success. The first major corporate governance issue has to do with the increased pressure on the boards to focus on the short-term results instead of long-term success. Gregory (2014) noted that, for many years now, the managements have been experiencing increased pressure from the institutional investors who are forcing the management to focus mainly on the short-term results instead of long-term success. The pressure is also increased by the increased dependence on stock-based remuneration for executives. 2006 estimates indicate that the stock-based compensations have increased three times since 1990s from 20% to 60% (Solomon 2007, p. 99). However, as much as the board is expected to support the management in pursuing long-term success, and assist the management in balancing the competing interests, they are also facing pressure from investors who want them to pursue short-term results. The composition and diversity of the board is another corporate governance issue seen in most companies throughout the world. The composition of the board is expected to change as a company and business environment change. Additionally, company stakeholders are increasingly demanding to see a company and the board become as diverse as possible by ensuring that people from different gender and racial backgrounds are incorporate in strategic decision makings. Unfortunately, Gregory (2014) showed that most companies lack women directors and minority directors. Therefore, to promote good corporate governance, boards are advised to become sensitive to composition by ensuring that minority races and the female gender are given a chance to form part of the board. The other corporate governance issues have been to do with the increased pressure from the shareholders to have the board leadership structure changed. In the U.S. shareholders have been pushing to have the position of CEO and chairman separated to ensure greater accountability. In 2011, for instance, more than four companies in the U.S. accepted the shareholders proposal to have an independent chair. Currently, about 41% of S&P 500 boards have and independent char and CEO (Kaler 2002, p. 34). Corporate social responsibility is another corporate governance issue in most companies today. With the increased negative impact of companies on the environment, shareholders are increasingly calling managements to take measures to mitigate negative environmental impacts, as well as give back to the society through CSR (Solomon 2007, p. 102). As such, boards and management are currently expected to disclose to the shareholders the company impact on the natural environment, such as water, air and measures the company has undertaken to ensure sustainability. Australia’s Corporate Governance Systems Australia being one of the countries that has been hit by many corporate scandals has over the past years established a corporate governance system that aims to protect stakeholder interests in a company. Idowu, and Caliyurt (2014, p. 160) note that Australia’s corporate governance system for many years has been associated with outsider management and control system similar to that of the U.S. and the U.K. However, closer analysis of Australia’s corporate governance system shows that it is more of an insider than an outsider system. In an insider system of corporate governance, conflict usually arises between the majority shareholders and the weak minority shareholders. There are a number of evidences that shows that Australia’s corporate governance system is indeed an insider system. Firstly, the institutional investors in Australia are generally powerless (Merrett 2002, p. 56). Secondly, the controlling shareholders in Australian companies usually involve in private rent extraction. Thirdly, there is a demonstrated close ties between the majority shareholders and management, which creates weak market for company control (Clarke 2007, p. 145; Dignam and Galanis 2004, p. 24). Additionally, the persistent weakness in private and public securities regulations in Australia has made it possible for the perpetuation of fundamental blocks to the flow of information, notes Flemin (2003, p. 66). Overview of Qantas Airways Qantas is the second oldest airline in the world. The airline was founded in 1920 in Australia and has since grown to become a global airline flying in more than 180 destinations in more than 40 countries across the globe (Qantas 2014). The airline’s headquarters is based in Mascot, Australia and is the leading airline in Australia. Qantas has hubs in major towns like Melbourne and Sydney and continues to expand its reach both in Australia and other destinations in the world. The airline is a major employer in Australia where it employs close to 30,000 people. As a result, the airline contributes greatly to the economy of Australia. Key Features of Qantas’ Corporate Governance Corporate governance is part of Qantas business plan. According to the airline’s corporate governance statement of 2014, the airline has adopted an effective corporate governance framework that ensures the protection and the maximization of shareholder value. Qantas corporate governance framework has major features that has ensured the safeguard and enhancement of value to shareholders and improved the airline’s brand image. The first key feature of Qantas corporate governance has to do with respect for diversity (Qantas 2014). Qantas understands that the world has become a global village and that embracing diversity is key to the success of its business activities. The company’s respect for diversity is reflected in the composition of its board, which has board men and women, as well as the minority groups. Additionally, Qantas has a very diverse workforce, which has helped it gain a competitive advantage as it has enabled the airline acquire diverse talents. The airline promote diversity in its workforce through a number of strategies, including leadership and talent development, recruitment, as well as offering flexible work schedule for its staff (Qantas 2014). The second feature of Qantas corporate governance framework has to do with the promotion of ethical and responsible decision making. According to the airline’s corporate governance statement, the airline has undertaken a raft of measures to promote ethical and responsible decision making. These include the creation of Non-Negotiable Business Principles and Group Policies (Qantas 2014). Additionally, the airline has an ethical code of conduct that executives and management are required to abide by to ensure accountability and responsible decision making. The other feature of Qantas corporate governance has to do with the promotion of health and safety of workers and the community. In this regard, the management of Qantas has ensured that the health and safety of its passengers assured through effective risk management initiatives (Qantas 2014). Additionally, the company has engaged in different environmental initiatives that are aimed to minimize environmental degradation and protect the community from pollution. Engagement with Other Stakeholders Effective engagement with the stakeholders is a critical feature of corporate governance. Qantas airline understands that engaging with stakeholders is fundamental to its success. Accordingly, the airline has come up with a Shareholder Communication Policy which encourages two-way communication not only with the shareholders, but also with the entire investment community. The airline also engages with stakeholders by encouraging the participation of shareholders at general meeting. The airline has also created an electronic system which it uses to share information with the shareholders. Qantas also has an efficient public relations team that ensures that stakeholder issues are addressed effectively and on time (Qantas 2014). The airline also uses a variety of technologies to engage with its stakeholders, including social media, e-mail and phone among others. Further, the airline also introduced flexible work schedule that allow its staff time to participate on personal issues. Ethical Challenges Qantas, like most other airlines is facing a number of ethical challenges even as it tries to protect and maximize shareholder value. The first major ethical issue that the airline faces is whether to continue participating in corporate social responsibility or provide shareholders with high returns. Because of the high profits that Qantas has been posting over the years, the company has always been able to fulfill its corporate governance responsibility of enhancing shareholder value through high dividends, as well as participate in CSR initiatives (James 2010, p. 109). However, the recent decline in profits has put the company in an ethical dilemma of deciding whether or not to continue participating in CSR initiatives at the expense of maximizing shareholder value. The other ethical issue that Qantas currently faces has to do with mistreating employees. This is quite absurd considering that the airline has always maintained that it endeavors to treat its workers fairly and with respect. This is after the airline was found guilty recently of mistreating an aircraft engineer, which resulted in the company being fined $15,500 (Guest 2012). Qantas also faces an ethical issue that revolves around Qantas ownership. The airline is currently facing a dilemma as to whether it should under control local investors or give up its ownership to foreign investors (Qantas 2014). Additionally, the airline has also faced criticisms for its failure to take appropriate measures to mitigate environmental degradation caused by its business activities. Comment on Issues Qantas Airways acts as a classical example of an airline that understands the value to corporate governance in promoting the success of a company. The company has established an effective corporate governance framework that has not only promoting good performance, but also ensured that shareholder value is enhanced. Corporate governance has also been of benefit to Qantas by ensuring enhanced accountability by board, and management. Additionally, the corporate governance has enabled the airline promote ethical behavior, thereby preventing incidences of fraud, corruption and embezzlement. Nevertheless, it has emerged that the airline still faces some ethical challenges, such as mistreatments of employees, failing to protect the environment, as well as not participating in CSR initiatives. However, these issues are hurting to the airline as they bring bad image to a company. According to stakeholder theory, a company has a responsibility to ensure that the interests of its stakeholders are protected (Sternberg 1997, p. 132). Therefore, to gain a competitive advantage, Qantas should consider revising its corporate governance framework to ensure that all the issues affecting the airline are addressed adequately. Conclusion Corporate governance is a critical initiative that a company must promote to ensure success. The corporate scandals of 2000s that brought companies giant companies, such as Enron, WorldCom and Adelphia to their knees are a clear testimony of the importance of corporate governance. As elaborated in the literature, good corporate governance encourages accountability, and ethical behaviors among company executives and boards. It also ensures that the interest of stakeholders is protected and shareholder value maximized. Qantas Airways is a classic example whose good performance is linked to good corporate governance framework. However, the airline still needs to address the issues of employee mistreatment, CSR and environmental degradation issues that the airline faces to help protect its reputation. References Clarke, T 2007, International corporate governance: A comparative approach. Routledge, London. Dignam, A. J., & Galanis, M 2004, “Australia inside/out: The corporate governance system of the Australian Listed Market.” Melbourne University Law Review, vol. 28, no. 3, pp. 1-29. Flemin, G 2003, “Corporate governance in Australia.” Agenda, vol. 10, no. 3, pp. 195-212. Gregory, H J 2014, Corporate governance issues for 2015, viewed 18 August 2015 http://corpgov.law.harvard.edu/2014/12/12/corporate-governance-issues-for-2015/ Guest, A 2012, Qantas fined $15,500 for mistreating worker, viewed 18 August 2015 http://www.abc.net.au/news/2012-08-15/qantas-ruling-a-warning-to-bullies/4201296/ Idowu, S. O., & Caliyurt, K. T 2014, Corporate Governance: An International Perspective. 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