Corporate Governance and Accountability in an Aeronautical Company
Since the aeronautical company last received a corporate governance consultant’s guidance, it has experienced other issues. The company is based in Connecticut. Although the aeronautical company has been majoring in local flights, it recently decided to invest in the international market. In the past few years, the company has faced stiff competition from local and global companies such as Airbus, Boeing, and Lockheed-Martin. It has dropped its position in terms of market-specific revenue from the 11th to 27th position. The company faces stiff competition from major aerospace providers, with one of its rivals being located in New York and the other in the United Kingdom (U.K.). The company’s current concern is based on how to maintain and increase its market share. The Board of Directors and CEO have determined they have to consider more than 50 rivals in the industry from the company’s market research. This signature assignment proposes a plan to address governance and accountability that affords a competitive advantage to the aeronautical company.
Corporate governance theories and model
Different theoretical underpinnings affect corporate governance. The two most outstanding ones include stakeholder and stewardship theories.
Stakeholder theory
The stakeholder perspective requires that company directors operate organizational units in an approach that matches the needs of all the business’s stakeholders (Chibarinya, 2014). Moreover, the theory postulates that thorough corporate governance should detect effective utilization of resources, economic constraints for the business in competitive market shares, and the Board’s accountability to shareholders. The stakeholder theory does not have detailed backing from the legislative restrains. Instead, the theory receives its support from different company laws such as environmental, health and safety, and employment regulation (Chibarinya, 2014).
The stakeholder theory ensures that organizations remain accountable to their stakeholders. According to Freeman et al. (2010), the theory is affected by three factors: descriptive accuracy, instrumental power, and normative validity. Descriptive accuracy is concerned with an entity’s behavior, instrumental power fashions a rough draft upon which the company evaluates the correlation between corporate success and stakeholder management, and normative validity establishes its purpose. The stakeholder approach stresses all members’ underlying capacity, and it underpins fairness for all the people engaged with the organization. The theory is crucial as it allows clients, workers, banks, and suppliers to directly influence organizational performance through their input. Be that as it may, stakeholder theory may burden the firm since it furnishes the general public with the ability to delineate corporate achievement (Ambler & Wilson, 1995). Also, it is hard for the business to single out the distinctive outside groups it indirectly influences through its activities.
The aeronautical company should integrate stakeholder theory into its operations. The approach does not solely attend to the needs of the shareholders but also those of the clients, suppliers, and neighboring communities. These stakeholders can be affected by the entity’s failure or success. Freeman et al. (2010) highlight that stakeholder theory advocates for corporate social responsibility, and the company has an obligation to ethical behavior. It means that the aeronautical company should engage in projects that promote sustainability for the surrounding societies.
Stewardship theory
The aeronautical company’s governance will also benefit from stewardship theory. McGregor’s “Theory Y influences this theoretical foundation.” According to theory Y, corporate managers’ inspiration does not rely upon the outside scrutiny of the board but instead on the managers’ self-determination (Madhani, 2017). Per the stewardship hypothesis, the CEO can also work as the chairperson of the board. These jobs’ duality creates harmony between the investors, the executives, and the board. All in all, the stewardship principle accepts that managers are dependable and do not want to spoil their reputations (Madhani, 2017).
The approach is suitable for the aeronautical company because both the stewards (executives) and the owners (shareholders) share similar objectives. When the company’s Board of Directors empowers the executives, it increases the likelihood for higher organizational performance. Madhani (2017) notes that relationships between the board and management are accentuated by shared decision making, training, and mentorship. The stewards maximize investors’ wealth through organizational performance. The aeronautical company should create an atmosphere where employees are accountable for their roles and work meticulously.
Governance model
The company has been operating based on the traditional or North American model. In this approach, the shareholders are responsible for selecting the Board, and the Board selects the executive, which is believed to make decisions that maximize shares’ value (Essawi & Brezeanu, 2011). This model is aligned with the agency theory of governance and it might be negatively impacting the aeronautical company because managers have to be constantly monitored by the Board.
The aeronautical company should consider the co-determination model of corporate governance. The approach will be best suited for the U.K. because of its wide use in West European nations. According to Essawi and Brezeanu (2011), the co-determination model is advantageous because it presents an approach of participative management founded upon the supposition that business risk is lower for the shareholders as opposed to that of the employees given the impracticality of diversifying investment portfolios from the employee’s view. Also, there is a superior council between the shareholders and the management, and it advocates for both the shareholders and the employers.
Proposed strategic goals
Technology Innovation
The aeronautical company aims to create revolutionary technology and the accompanying solutions to support new system capabilities. The specific objective: Integrate revolutionary technology to explore new system capabilities within the next five years. Also, the company hopes that the new capabilities will be integrated into flight within 15 years. The company’s engineering team will constantly work with flight attendants, clients, shareholders, and the management to ensure they design competitive products that align with all stakeholders’ needs. Once the revolutionary products are finished, the company will organize regular training within three months. The marketing team will also reach out to various stakeholders to receive their feedback on areas that need further improvements. In designing the new system capabilities, the R&D department will be extensively involved, and the engineering team will engage in regular tests to ensure everything works as desired. The tests will be conducted throughout the product development life cycle and executed in the laboratory and the real-world settings.
Foster a culture of innovation
In the aeronautical company, all the members have a vital role in ensuring that the organizational vision is delivered. However, the only way to achieve maximum creativity and innovativeness among all the workers is by adapting transformational changes in the next 12 months. The company wishes to deliver top-notch services to its end-users in its various airports. As such, initiatives will be planned with the aim of encouraging a true culture of innovation across all units of the aeronautical company. The management will challenge all the employees to identify new and advanced ways to execute their daily routines. A culture of creativity will ensure that the aeronautical company serves its customers and stakeholders in sophisticated ways.
Maintain competitive cost for every enplaned passenger
The company is facing stiff competition from large international and local airlines that offer competitive prices. Among many factors, airline cost per every enplaned passenger is a crucial metric that airlines consider while engaging in route and service decisions. It, therefore, implies that the aeronautical company should ensure that both its international and local charges remain competitive and affordable. The aeronautical company will plan various initiatives to strategically manage the cost per enplaned passenger through operation and maintenance cost control, airline base cost allocations, and lease necessities.
How to overcome barriers to Corporate Governance and Accountability
The obstructions to powerful corporate administration emerge from different perspectives. For example, business connections, regulatory climate, and information processing. Business connections specify that investors are roused to procure a benefit on their investments in the organization. David and Kochhar (1996) highlight that some part of the shares owned by institutions is dependent on economic exchanges with the company, in a separate parameter from the investment income based on their shareholder percentage. An entity’s capacity to impact the company will be restricted by its reliance on the firm’s business activities. A few supervisors may exploit such conflicts of interest with the expectation of maintaining dominance. For example, the executives may corrupt the voting ability of board members.
Conflicts of interest can result in many policy implications for the voting system. The aeronautical company should devise ways to improve the voting system to lower managerial dominance risks (David & Kochhar, 1996). For instance, the company can provide confidential voting for all shareholders to ensure that the investors vote without losing business.
The regulatory climate also influences successful corporate governance and accountability. Institutional investors have the fiduciary incentive to present their defense to safeguard their ventures (David & Kochhar, 1996). Notwithstanding, administrative measures may restrict them. As indicated by (David & Kochhar, 1996), regulatory barriers limit an organization’s ownership stakes in specific organizations and place hindrances against coordination among groups of institutional investors. In nations where there is no exacting rule on the degree of influence the investors can have on the administration, the board can fire executive leaders. Be that as it may, this is impossible in nations with exacting corporate governance guidelines. For example, in Germany, the Deutsche Bank recruited another management team after management crises confronted the Daimler Benz automotive company (David & Kochhar, 1996).
The investors of the aeronautical company can overcome regulation barriers through institutional activism. Although company guidelines might prevent the shareholders from directly influencing the management team, activism will ensure that complacent managers improve their performance. For instance, in General Motors, the investors continued to publicly pressurize the board to dismiss CEO Stempel because of his slowness in executing changes (David & Kochhar, 1996).
Information processing may likewise obstruct efforts directed to effective corporate governance. Corporate governance is liable for giving a warning framework to recovering the company before the issues bubble over crises (David & Kochhar, 1996). If corporate governance was effective in the aeronautical company, it should have identified that the financial problems would result from poor management. Institutional investors should have a comprehensive record in their portfolios to promote necessary changes (David & Kochhar, 1996). The pay for top managers might also be an issue because various stakeholders presuppose that executives receive unnecessarily large paychecks. The aeronautical company should practice openness in disclosing the compensation for top executives.
Board structure can also obstruct effective corporate governance and accountability. Some boards consist of members who act as shareholders’ representatives. According to Bajpai (2016), some shareholders might dictate how the board operates by nominating board directors to manipulate for their gain. The aeronautical company can overcome this challenge by ensuring that there are clear guidelines that separate the board’s role from the investors and management.
Ethical practices
Exemplary ethical behavior can lower transaction, contracting, enforcement, and policy costs through the use of contracts and policies that support honesty. The senior management should engage in good decision-making processes because employee satisfaction is not based on the rewards they receive but rather on the executives’ conduct (Arce, 2004). Although employees might directly benefit from management’s unethical partaking, they are likely to experience low employee satisfaction levels because they are aware of the flaws in the decision-making process.
The aeronautical company can promote its competitive advantage by engaging in socially responsible activities. Successful companies should have a moral obligation to the neighboring communities. Contemporary society pays close attention to how a company is involved with the community and its environmental sustainability efforts. The aeronautical company should design products that do not emit toxic gases into the atmosphere. Also, the company can encourage its employee to volunteer in community activities.
The company should also assess sale techniques that might discourage consumers from using its products. Consumers are bound to react negatively if they realize that the company might be charging its regular site visitors more than first-time users of its website. Arce (2004) argues that rather than discriminate against regular users, companies can promote their products through fair practices such as quantity discounts. Clients will readily accept quantity discounts if there are major market differences. Overall, the aeronautical company should practice fairness and transparency throughout its operation.
Best practices in governance and accountability
There are five principles of best practices in organizational governance. They include: Build a strong, qualified board of directors and evaluate performance; Define roles and responsibilities; Emphasize integrity and ethical dealing; Evaluate performance and make principled compensation decisions; and Engage in effective risk management (McInnes Cooper, 2014). All of the best practices are suitable for the aeronautical company.
Recommendations to implement the best practices:
- Ensure that the majority of directors are independent. Duality in roles can interfere with board members’ judgment.
- The company should frequently review Board mandates to evaluate whether the directors are excelling in their job.
- The aeronautical company should create a written guideline that outlines job descriptions for the Board Chair, CEO, and Board committees (McInnes Cooper, 2014).
- The business should develop a conflict of interest policy to ensure there are no overlaps in a certain group of stakeholders’ interests over another’s (McInnes Cooper, 2014).
- The company should establish a compensation committee that consists of independent directors to develop and direct executives’ compensation plans (McInnes Cooper, 2014).
- The company should regularly assess its financial, legal, industry-related, operational, and environmental risks. According to McInnes Cooper (2014), the board is responsible for creating a business’s risk tolerance and the required accountabilities for managing the risks.
Conclusion
In conclusion, effective corporate governance will benefit the aeronautical company. Stakeholder theory will ensure that the management acts in the interest of all the company’s stakeholders. For instance, by engaging in corporate social responsibility, the surrounding communities will increase their trust in the organization. Consequently, they will market the company’s products to their friends and families. The stewardship theory is best suited to the aeronautical company because it stipulates that executives are motivated to act in ways that benefit the shareholders. The traditional model of corporate governance will be best suited to local airlines where the key focus will be in the financial markets within the U.S. The co-determination model will be used in the global platform because it promotes participative management.
