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Requirement
Question : Prepare a corporate governance research report about the UK or the US publicly listed firm focusing on the following three aspects:
(i) Ownership structure. Describe the firm’s ownership structure. Discuss potential problems that might arise because of the separation of ownership and control. Discuss the role and relevance within the firm of different types of owners (e.g., family owners, institutional investors). You may find information about the firm’s ownership structure on Yahoo! Finance or the Fame database, for instance.
(ii) Board of directors. Present the firm’s board of directors focusing on the board’s structure, the composition of the board (executive, non-executive and independent non-executive directors) and its key sub-committees. Provide a detailed analysis of the board’s structure (size, interlocks, etc.) and diversity (age, gender, expertise, knowledge, ethnicity, etc.) detailing the strengths and weaknesses you have identified. Suggest solutions to improve the board’s effectiveness and diversity. You may find information about the corporate governance of the firm from the company web page and the firm’s last report on corporate governance.
(iii) Executive compensation. Discuss the firm’s executive compensation, focusing on aspects such as the level of pay, the strength of incentives, etc. Highlight potential advantages and drawbacks. You may find information on executive compensation from the company web page and the firm’s last report on corporate governance.
Solution
Easy Jet plc is a British Airline Holding Company as well as a parent company of Pan-European LCC. It was founded in 1995 as a part of the EasyGroup Conglomerate. It has two subsidiary airlines, namely: Easy Jet (100%, since 1995) and Easy Jet Switzerland (49%, since March 1998) of Easy Jet operate within an extensive network of low cost services across Europe from its largest hub at London Gatwick Airport.
1. Ownership Structure
The fundamental ownership structure of Easy Jet consists of The Board, Executive Management Team, Shareholders and Investors.
Board: The role of the Board is to provide the leadership and direction for the company and its employees. It is collectively responsible for the long-term success as far as company’s success is concerned. Among various functions, the Board is also responsible for providing the entrepreneurial leadership of the company with the help of a specified framework of prudent as well as effective controls in order to assess the risk and management. However, its primary role is to set the company’s strategic objectives along with reviewing the management performance. Not only this, the board also ensures that the company’s values and standards are intact as well as its obligations to shareholders and other stakeholders are fully understood and met(Anon, 2015).
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Shareholding: as per the records of financial year 2014, the total numbers of passengers that flew in Easy Jet were 64.8 million – 4 million more than the previous year (2013), thereby a revenue growth from 4,258 pounds to 4,527 pounds, i.e; 6.3% growth. Total revenue per seat grew by 1.2% to £63.31. At constant currency, revenue per seat grew by 1.9%. In terms of earnings per share and dividends per share, the basic earnings per share is increased by 13.0% to 114.5 pence, driven by the increase in profit after tax from £398 million to £450 million. Also, there was a recommendation on the part of the Board being given, that an ordinary dividend of 180 million pounds which amounted to 45.4 pence per share. Moreover, Return on capital employed (ROCE) and capital structurefor the year was 20.5%, an improvement of 3.1 percentage points from prior year driven by the increase in profit for the year, partly offset by a 2% increase in average adjusted capital employed.
Taking the view of ownership structure, the separation of ownership from control gives rise a condition where the interests of owners and of ultimate manager may, and often do, diverge, as well as where many of the checks that formerly operated to limit the use of power disappear(Anon, 2015). Therefore, hierarchy notwithstanding, the CEO and the various other managers as well as stakeholders also have power for exercising their control over the resources of the company.
2. Board of Directors
The experienced and balanced Board of Directors of Easy Jet has the following members:
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I. John Barton – Non-Executive Chairman
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II. Charles Gurassa – Non-Executive Deputy Chairman and Senior Independent Director
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III.Caroline MccallObe – Chief Executive
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IV. Andrew Findlay- Chief Financial Officer
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V. Adele Anderson – Independent Non-Executive Director
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VI.Dr. Andreas Bierwirth - Independent Non-Executive Director
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VII.John Browett - Independent Non-Executive Director
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VIII.Keith Hamill Obe - Independent Non-Executive Director
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IX.Andy Martin - Independent Non-Executive Director
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X.Francois Rubichon – Independent Non-Executive Director
As discussed above, the basic roles and responsibilities of the Board includes: a) providing the leadership and direction to Easy Jet, b) full filling strategic aims, c) Assessing risks, and d) ensuring values and standards. However, there is a proper procedure to appoint the board members as the operating procedure of the Board falls within the terms of its written authorities and also delegate’s authority to Committees of the Board for assisting in meeting its objectives at the same time ensuring a sound system of internal control and risk management.
Board Appointment Process
The process starts with the formation of committee which adopts a formal and transparent procedure in order to appoint new directors to the board. The Board incorporates the practice of utilizing the services from external recruitment consultants for appointing the Directors and therefore certain terms were negotiated with the JCA Group Limited. It helps in appointing the new chief financial officer on the basis of being briefed of the desired candidate profile. A list of potential candidates is being assessed as per the specified criteria fixed by the committee(Anon, 2015). However, on certain occasions, individual with particular relevant qualifications is identified as a potential candidate to join the Board as a Non-Executive Director. This was the case with Chris Browne and therefore no external search consultancy or open advertising was used.
Board Committees
According to the Corporate Governance Report, the different committees form the basis for core activities of the Board. The various Board Committees are:
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a) Safety Committee: it has continued its effective performance which now is in its third year along with making a difference to the efficient safety oversight vis-à-vis the board. Its key responsibilities include monitoring and reporting the safety incidents and ensure that the proper action is being taken by the concerned department. It reviews and oversee the implementation of the company’s annual safety plan. The committee also reviews relevant reports published by the UK Air Accident Investigation Branch. For example, Major incidents that have affected other operators, such as the incidents suffered by Air Asia and German wings in the year 2014. Members of the committee are: Professor RigasDoganis (Chair), Keith Hamill, Dr Andreas Bierwirth
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b) Remuneration Committee: it assesses and makes recommendations to the board on the policies for the remuneration for each of the Executive Directors and the Chairman. The remuneration policy has been designed to be straightforward and transparent, in alignment with the Company’s principle of having a simple and cost-effective approach. Members of the committee are: Charles Gurassa (Chair), John Browett, François Rubichon
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c) Audit Committee: it plays a vital role as it provides a wide range of financial and commercial expertise which is necessary to fulfill the Committee’s duties and the responsibilities. The other duties of the Audit Committee are annual review of the terms of reference, assessment of potential conflicts of interests among the Directors on behalf of the Board(Easyjet and Ryanair flying high on the Southwest model, 2006). Also, providing advice on the request by the Board, as to whether the annual report and accounts are fair, balanced and understandable. Members of the committee are: Adèle Anderson (Chair), Keith Hamill, Andy Martin
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d) Nominations Committee: its Key responsibilities are: a) Keeping under review the composition, structure and size of, and succession to, the Board and its Committees. b) Succession planning for senior executives and the Board. c) Identifying and nominating, for the approval of the Board, candidates to fill Board vacancies as and when they arise. B) Evaluation of the balance of skills, knowledge, experience and diversity on the Board.Members of the committee are: John Barton (appointed Chair effective from 1 December 2014), Charles Gurassa, François Rubichon.
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e) Finance committee: the key responsibilities of this committee include providing an independent oversight over the governance and controls relating to the IT business area. Also, it monitors the strategic direction of the IT program, reviews the risks and controls associated with IT strategy, monitoring and implementation of IT strategy as well as providing the financial oversight.
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Place Your OrderSolutions for improving Board’s effectiveness and diversity:
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I. As we know that the effectiveness of the Board as well as its Committees is extremely vital for the success of the Company, therefore, a lot of care is always needed to be taken through the nomination committee in order to recruit and appoint various Directors who would take responsibility of smoothly providing and maintaining an appropriate balance skills, experience, independence, knowledge and diversity.
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II. The Board is required to be committed for devoting sufficient time to the company’s business. It is advisable that the Non-Executive Directors should fulfill their roles and commitments. Also, the Executive Directors should be encouraged to take non-executive positions in other companies in order to widen their experience.
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III. The Directors should take special care as well as special attention to address conflicts or potential conflicts of interests at each Board meeting. The decision to authorize a conflict should only be made by non-conflicted Directors.
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IV. The Chairman is required to ensure that the induction and the training programs are effectively provided. In order to ensure the developmental path, all the Directors are kept informed of changes in the relevant legislations as well as regulations for changing financial and commercial risks by taking the assistance of the Company’s legal advisors and auditor where it is appropriate and necessary(Rae, 2001).
3. Executive Compensation
As per the Company’s statistics, the Chief Executive of Easy Jet, Carolyn McCall was paid whopping 7.7 million Pounds in 2013. While, more than 7 million Pounds came in the form of bonuses. Next to her, Chris Kennedy, Chief Financial Officer, had been paid just over 4 million Pounds in the same year. Sir Stelios Haji-Ioannou, being the founder of Easy Jet, is the biggest shareholder of the Company. As per the sources, the remuneration policy of Easy Jet for its Directors is heavily weighted towards variable pay which is more often than not dependent on the performance. So, the idea is to ensure that there is a clear link between the value created for the shareholders and the amount paid to the Directors. By, incorporating such a strategy, the passengers have also benefited by the attenuated average fares year on year along with on-time performance of 85% for arrivals within 15 minutes.
Taking the view of remuneration and executive compensation, the earnings of CEO and higher echelons of the company pretty much reflect the Easy Jet’s record profits, returns and share price as well. However, the compensation policy is constantly reviewed to make sure that it is in perfect alignment with the Easy Jet’s principles as well as with the institutional investors’ finest practice expectations. The annual report of the Company also suggests that Chris Kennedy’s potential bonuses have been enhanced keeping in mind the fact that his remuneration is falling well below comparable market benchmarks in terms overall pay(Topham, 2014). Therefore, an extensive dialog with the company’s major shareholders was followed and then decision was taken by the advisory bodies regarding the issue. According to the statement made by the Chair of remuneration committee, Charles Gurassa, the changes made to the remuneration arrangements of Chris Kennedy, are going to ensure that his remuneration package is likely to be more market competitive, subject to accomplishing the board’s performance objectives. Therefore the overall approach remains consistent with the overall philosophy of operating with the below-market fixed levels of pay.
Moreover, as per the industry sources, shareholders would be asked to vote on the changes made to the remuneration policy. As a matter of fact, the shareholders of the larger companies voted on the remuneration that outlines the pay deals for three years. However, for the first time, this year, the remuneration report is covering pay in the most recent financial year.
Advantages of Executive Compensation
Obviously, a company with a clear vision, unique ideas, or a novel product has a much better chance of attracting the best candidates at all levels. Therefore in order to keep the momentum going, it is also important to secure top talent at the executive level because in today’s job market, the qualified candidates have a clear edge to enjoy more negotiating power more than ever. Since candidates know they can command a high salary, extra incentives can make the difference in an executive’s decision to join a company(Bebchuk, Fried and Walker, 2002).
Drawbacks of Executive Compensation
For the executive, the significant disadvantage of Executive Compensation is the required current recognition of income. Although the income tax liability on the growth realized in the cash value is deferred, the executive is required to recognize current income equal to the bonus premium payment each year.
For the employer disadvantage of executive compensation plans relates to its general tax inappropriateness for sole proprietors or owners of S corporationsas well as their inability to provide for employer cost recovery.
References
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Anon, (2015). Directors’ and corporate governance report. [online] Available at: http://www.firstgroupplc.com/~/media/files/f/firstgroup-plc/indexed-pdfs/52-directors-and-corporate-governance-report.pdf [Accessed 13 May 2016].
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Anon, (2015). how 2o years have flown. [online] Available at: http://corporate.easyjet.com/~/media/Files/E/Easyjet-Plc-V2/pdf/investors/result-center-investor/annual-report-2015.pdf [Accessed 13 May 2016].
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Anon, (2015). Making travel easy and affordable. [online] Available at: http://corporate.easyjet.com/~/media/Files/E/Easyjet-Plc-V2/pdf/investors/result-center-investor/annual-report-2014.pdf [Accessed 13 May 2016].
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Bebchuk, L., Fried, J. and Walker, D. (2002). Managerial Power and Rent Extraction in the Design of Executive Compensation. The University of Chicago Law Review, 69(3), p.751.
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Easyjet and Ryanair flying high on the Southwest model. (2006). Strategic Direction, 22(6), pp.18-21.
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Rae, D. (2001). EasyJet: a case of entrepreneurial management?. Strat. Change, 10(6), pp.325-336.
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Topham, G. (2014). EasyJet CEO Carolyn McCall received more than £7m last year. [online] the Guardian. Available at: https://www.theguardian.com/business/2014/dec/05/easyjet-ceo-carolyn-mccall-7m-bonus [Accessed 13 May 2016].
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