Research Paper on "British Airways Strategic Governance and Ethics"

Research Paper 5 pages (1700 words) Sources: 4

[EXCERPT] . . . .

British Airways Strategic Governance and Ethics

Agency Theory and Agency Problems

The last several years, have meant that British Airways (BA) is facing an increasing number of challenges. As they are wrestling with: labor problems, increasing fuel prices and low cost carriers (which are squeezing their profit margins). At the same time, they have to comply with various regulatory issues such as: the Companies (Audit, Investigations and Community Enterprise) Act of 2004. These different elements are important, because they are showing how the airline is facing number of challenges in addressing these problems. As they must wrestle with the pressures from: increasing competition and volatility in the energy markets (which are a burden on labor costs as well as employee benefits). ("Three Cheers for Sarbanes-Oxley," 2006) (Young, 2010) When you put these different factors together, it is showing how the company is facing a number of challenges in tackling: these issues and ensuring that they are following the parameters of the law. To fully understand the overall scope of what is taking place requires comparing BA's practices with: the Companies (Audit, Investigations and Community Enterprise) Act of 2004 to that of Continental Airlines and the Sarbanes-Oxley Act of 2002. To achieve this objective, means taking into account: corporate governance principals, shareholder / versus stakeholder perspectives and the overall ethics strategy they are using (through a comparison of the two airlines). Once this occurs, it will provide the greatest insights as to how the company is adapting to the underlying challenges that they are facing.

Corporate Governance: Principals and Mechanisms

To govern the airlines there are two different laws that apply these include: the Companies (Audit, Investigations and Community Enterprise) Act of 2004 and Sarbanes-Oxley Act of 2002. The Companies (Audit, Investigations and Community Enterprise) Act of 2004 applies to all UK-based corporations. As this law was implemented in response to different accounting scandals that occurred in 2001 and 2002. At the heart of this regulation, are the overall liabilities that apply to: directors and officers of a corporation. As they are responsible for preparing various financial statements that are considered to be accurate. Under the current law some of the provisions expose these individuals to the possibility of shareholders law suits (most notably: sections 19 and 20 of the Act). This is important, because it shows the basic legal mechanism that British Airways must follow is: the Companies (Audit, Investigations and Community Enterprise) Act of 2004. As this is providing the company; with a foundation for disclosing the most accurate information to: investors and regulators. This is significant, because it is showing how these basic standards, will help the company to address any kind material changes in their underlying financial condition quickly. ("Guidance on Companies," 2010)

The Sarbanes-Oxley Act of 2002 was created, to address the specific loopholes in the law that corporations were using, in an effort to avoid various disclosure requirements (during the wake of: the Enron and World Com scandals). There were several different provisions that were designed to deal with these issues to include: the establishment of public accounting oversight board, improved financial disclosures for off the books limited partnerships / stock options and the CEO attesting under the law that the information is correct. This is important, because it shows how a similar kind of mechanism is in place, to address the various loops holes in securities regulations. However, within the law there has been some confusion surrounding certain provisions. An example of this can be seen in section 404. This is where there are no specific directions, as to what type of accounting standard should be used in internal and external audits. This is problematic, because this means that corporations could have to spend a larger portion of their budget (to ensure that they are in compliance with these different standards). What this shows, is the basic mechanism (that is used by Continental), to report changes to their balance sheet (from a host of business transactions). As they must disclose, any adverse changes to: regulators in the various filings that they are submitting. (Feeny, 2007)

When you compare the two laws with one another, it is clear that the basic provisions will punish corporate officers and directors. This takes places, either through different forms of civil and criminal litigation. While Sarbanes-Oxley, will require them following changing provisions to the law from: the public accounting oversight board. In the case of BA, this means that their directors and officers will be exposed to possible civil lawsuits. As they have to follow a standard set of regulations without as much oversight. While Continental, must ensure that they follow the provisions in the law and the new changes from the accounting oversight board. This is will have direct impact upon the underlying costs that the company is spending on maintain these different legal requirements.

Shareholder vs. Stakeholder Perspective

To address the provisions in the Companies (Audit, Investigations and Community Enterprise) Act of 2004, BA has implemented a number of different policies. To include: better internal controls, greater board independence, risk management and improve auditor independence. From the shareholders perspective, this is helping to improve transparency by holding everyone accountable to a higher standard. Yet, beneath the surface greater amounts of transparency can be introduced, as the company could use two different independent auditors, in an effort to provide more effective oversight. From the stakeholders perspective the various provisions in the law have meant that there is greater transparency in the organization. As the company can be able to more effectively account for: risks and other external challenges. However, the different provisions of the law have meant that numerous procedures have been implemented (which are increasing costs). This is important, because it shows the overall conflict within the company itself, as the shareholders want greater amounts of transparency. Yet, the stakeholders want to see these different regulations are watered down. As a result, BA is constantly facing a struggle between the two sides. ("Corporate Governance," 2009)

In the case of Sarbanes-Oxley, Continental follows the various provisions of the law by: ensuring that they are disclosing the different pieces of financial information to investors. A good example of this can be seen, with the CEO attesting that the financial information provided is accurate. This is important, because inside the company's policy, this law is having an impact upon the way there are operating. As far as shareholders are concerned, this means that the company is providing them with more accurate information about their overall financial results. In the case of stakeholders, these different changes mean that the airline will have to spend more money, on trying to implement these policies. This is significant, because it shows how there is a constant struggle that the airline will face, in trying to balance the interests of shareholders and stakeholders.

When you step back and analyze these different laws in comparison with the two airlines, it is clear that they are providing a foundation for disclosing how this information should be reported to: regulators and the general public. Yet, beyond this issue, both airlines are facing the battle between shareholders (who want increased amounts of transparency) and stakeholders (who want to reduce the impact of these regulations). As a result, this means that there is the constant struggle at both carriers to keep this within balance. In many ways, one could argue that this is one the biggest ethical challenges that the two airlines are constantly wrestling with. As the increasing pressures from the industry; are forcing them to find ways to reduce costs (while the regulatory issues are increasing them). Once this takes place, it means that there will be a constant struggle to find some kind of balance between these different objectives. The biggest challenge going forward, is maintaining this in their different policies and procedures. ("Continental Airlines," 2010)

Ethics and Strategy

To address the various moral conflicts that could occur inside both companies, they have implemented various ethical strategies. In the case of BA, their policy is one that encourages the individual to take responsibility that will go above and beyond various regulations. As it is embracing a number of different principals the most notable include: conflicts of interest, fair dealings with everyone, compliance with the various laws / regulations and company standards. This is important, because this policy is allowing BA to be able to ensure, that they are in compliance with the Companies (Audit, Investigations and Community Enterprise) Act of 2004. ("British Airways Standing Instructions," 2010)

In the case of Continental, they are using their ethical policy to guide everyone, towards the most appropriate actions at all times. A few of the most notable elements that they discuss include: avoiding conflicts of interest, competing fairly and working together. This is important, because it is showing how they work in conjunction with the different laws (to ensure that the company is in compliance). ("Continental's Ethics," 2010)

When you step back and analyze the different polices for the two… READ MORE

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