01.Applicable corporate governance
theory in Airline Industry
There have several
corporate governance theories and basically following corporate governance
theories can be identified with the Airline industry.
·
Agency theory
·
Stakeholder theory
·
Team production theory
Agency theory
Agency theory concern
about maximizing the wealth of the shareholders, or in other words agency
theory concern about satisfying investors’ requirements in a productive way. In
the Airline industry also the governing party always try to maximize the
investors’ funds and perform operations according to the best interest of the
owners.
E.G- Investors invest in Sri Lankan Airline
and Mihin Lanka Airline and they appoint Board of Directors (BOD) to act in
best interest of the investors. BOD form strategies to satisfy the investors’
requirements in efficient way.
Stakeholder theory
It can see the
stakeholder theory also in the Airline industry. Stakeholder theory means,
satisfy all the interest parties other than satisfying shareholders.
Employees- Ensure job
security, higher wages and salaries
Customers – Quality
service, low cost service
Suppliers – Supplier
development, settle credits of suppliers
Most of the organizations are engaging in the
CSR on different sectors like health, education and youth empowerment,
scholarship, seminars and workshops in order to satisfy all other parties in
the society.
02.01.
Corporate Governance issues in
Airline Industry
02.01.1. Poor strategic
decision making
Most of the corporate governance
collapses in the Airline industry was caused because of the mismanagement of
the agents and their poor strategic decision making process. And they have not
clearly understood about their key responsibilities towards the success of the
organization.
Sri Lankan Airline had
to bear hugh loss because of the A350 Aircraft incident. Because of BOD poor
performance and negligent it had to pay USD 17.7 Million as debt servicing
charges in order to cancellation for one A350 Aircraft which was bought beyond
the requirements.
Mihin Lanka also failed when they making
strategic decisions. They failed to follow a proper cost –benefit analysis of
projects and proposals also. Even they provide budget service package, they
failed to manage the cost of service as suitable and appropriate to their
package.
Not only that, they
have diverted from their main purpose of providing a profitable service to
investing on other sources. Their investments on other different sources has
increased by 208.46% within a one year.
Further their sales and
marketing expenses has raised by 120% within one year. It implies that they
have failed to build a good reputation among customers and society because of
their poor strategies even though they provide a low cost service. So they have
spent owner’s thousands of rupees for advertising purposes other than making a
good reputation.
02.01.2. Influence of
the Government
Government act as the
major shareholder of both Mihin Lanka and Sri Lankan Airline (In SriLankan
Airline government hold 51.06%) and they influence unnecessarily on the
performance of the Airline Industry. As the main shareholder, government can
influence on these organizations for the better performance and shareholder
monitoring can be considered as a better external corporate governance
mechanism. But the government pay attention only to maximize their
self-interest than interest of overall stakeholders.
02.01.3. Agency problem
Agency problem occurred when the management
try to increase their benefits without improving productivity of the Airline
industry. Or in other words, Board of Directors try to get financial benefits
by misusing owner’s funds.
Audit committee of
Mihin Lanka recommended “criminal investigation” into instances of alleged
corruption which includes reflecting process with brand new aircraft costing
USD 2.3 Billion. And also in 2010, Mihin Lanka’s Director emoluments has
increased suddenly by 10 times than 2009. This incremental is suspicious as it
does not further explained in the accounting notes.
Further both Mihin
Lanka and Sri Lankan airline has failed to disclose about their direct and
indirect directors separately in the annual report. This is a serious issue and
the external auditor of Mihin Lanka has clearly mentioned about this failure in
their audit report.
- Mihin
Lanka failed to disclose their executive and non-executive directors
clearly
- SriLankan Airline also failed to mention the
executive and non-executive directors clearly.
02.01.4. Conflict of
Interest
The former CEO of the
SriLankan airline Mr.Nishantha Wickramasinghe was act as the CEO of the Mihin
Lanka also. This showed a conflict of interest because of the two airline
organizations started with separate strategic direction and with separate
target market segment. One argument was that the CEO will bring synergy of both
companies together.
And also CEO transferred lots of
money from SriLankan Airline to Mihin Lanka and bought catering items from the
SriLankan Airline. Most of these transactions were major transactions. So it
necessarily created a conflict of interest because Mihin Lanka failed to find a
better supplier to buy catering items at low cost.
Suggestions to improve level of
corporate governance within the Airline industry
01.
In order to minimize the agency problem,
and examine the director board activities and board composition within
corporates which are government hold share ownership, it can appoint an
independent committee which accountable to reveal perfo0rmance of these
corporations to parliament and public.
02.
Promote and motivate internal and
external mechanisms of corporate governance in order to maintain proper
governance.
e.g- By improving proper labor market,
poorly performing directors would not be able to re-elect in same position in
another corporate.
03.
Lack of strategic decisions are mainly
caused by lack of commercial sense in the business and their inefficiency of the operations.
By implementing a system more focus on business process re-engineering,
organizational restructuring or reforming.
04.
Establish a system to collect customer
feedback on the service they received and set strategies as the overall
performance increase, properly audit internal control system and the behavior
of the directors.
References
01. Annual report SriLankan Airline 2014-15
02. Annual report Mihin Lanka
03. SriLankan Airline news
