Airline in the dock

Friday 21st September 2001

In the court of public opinion Air New Zealand's directors have already been convicted but the jury is still out. DEBORAH HILL CONE looks at the arguments on both sides

For the prosecution

In our submission the board was negligent and failed the test of good corporate governance, its actions directly bringing the airline to its knees and causing the collapse of its Ansett subsidiary.

The evidence is clear

Paying too much: The board paid far too much for the second half of Ansett - and admitted it later. Former chairman Sir Selwyn Cushing said this, and while he could be applauded for honesty, he lost all brownie points when he later denied it was what he meant. On Tuesday acting chairman Jim Farmer QC said the $744 million price "was a bit more than it might have been."
Due diligence: There is no doubt full due diligence was not carried out on Ansett. On one recent corporate takeover in New Zealand the buyer had 80 advisers working round the clock for three months checking over every inch of the company - where was that care here? No wonder once Air New Zealand took over management of Ansett last year they were gobsmacked at the state of the books: "There were only draft accounts and no CEO or CFO to take responsibility for them," Dr Farmer said.
CEO vacuum: This could possibly be the biggest stuff-up the board made. For more than seven months after acquiring Ansett and the sudden departure of then chief executive Jim McCrea, it did not ensure there was a full time chief executive of the airline. Those months were clearly the most crucial time after an acquisition. Air New Zealand insiders say "softer issues," like trying to bring together the different cultures of the two airlines and dealing with remarkably strong Anzac rivalry, played a bigger role than people realise in causing the mess. Air New Zealand staff resented becoming a smaller part of the company and Ansett staff resented being taken over by Kiwis. Those issues may have been able to be resolved with a leader in place but they sure weren't going to be without one. And the board has to take some responsibility for the sudden scarpering of Mr McCrea after apparently offering him a one (rather than five) year contract. No CEO worth their salt would want to take on such a massive challenge when they were basically being heaved out of office. And the board ought to have foreseen that rival Qantas would try and hang on to Gary Toomey as long as it possibly could.
Chairman's commitments: Sir Selwyn was running Air New Zealand for about seven months from last July. At the same time he was chairman of BIL and chairman or director of nine other companies. Those commitments raised conflict of interest issues as well as whether 64-year-sold Sir Selwyn, no spring chicken and recently recovered from a major heart operation, had the time or energy to do the Air New Zealand job properly.
Airline experience: Sir Selwyn didn't have any airline experience and neither did most of the board. The rule of the thumb is that a board should have between a third to a half of its members with industry experience, especially in an industry where there is a great deal of technical knowledge such as aviation.
Disclosure: The board's disclosure of what was really happening did not measure up to standards of good corporate governance. It did not come clean about Ansett's situation until forced to - even then it is only now that the administrator is revealing the true extent of the airline's debts. No wonder the airline scored bottom of the barrel with Fletcher Forests in a July Corporate Confidence Index of local companies put out by Australian firm Ross Carmichael Singer.
Timing: The board did not act quickly enough when it realised the parlous state of Ansett. There are valid questions still unanswered about whether they allowed it to continue trading while insolvent.

For these reasons the board should be found guilty of corporate mismanagement and negligence which led directly to the airline's crisis and the Ansett collapse.

For the defence:

In our submission the board has been the victim of a convergence of unfortunate circumstances including the falls of the New Zealand and Australian dollars, the rise in fuel prices, increased competition and changes to the accounting for flights. Grabbing a headline for political reasons is a million miles from establishing any legal liability. In fact most of the opinions of Joe Blow shareholders on talkback radio have no substance in fact - just look at the zany claims Air New Zealand was unscrewing engines from Ansett planes and taking them over to this country before the airline collapsed. And there are valid explanations for the board's apparent failures:

Paying too much: The Air New Zealand board - or more exactly Sir Selwyn Cushing - might have paid too much for Ansett but no board of directors is expected to get all business decisions 100% right. The price paid should be judged against market conditions at the time of purchase and what was then known about prospects for the aviation industry, not with the benefit of 20/20 hindsight. And at least when the board realised the situation it came clean and admitted it (Okay, apart from Sir Selwyn backtracking later and saying it wasn't what he meant).
Due diligence: The company only had 30 days to do due diligence on Ansett and during that time it set up a data room and had staff working long hours on the task. Air New Zealand, like any company, had to rely on reports and advice provided by outside advisers. You can't later blame it if for adverse outcomes if there was no reason to believe at the time the advice was suspect or wrong.
CEO vacuum: The departure of Jim McCrea could not have been predicted - when the board offered him a one-year contract it must have thought he would be happy to take it, giving it time to find a replacement. It was also not to be foreseen that Qantas would hang on to Gary Toomey for three months of "gardening leave" after he had been headhunted for the Air New Zealand job. Many corporates whisk their departing CEOs out of the building at the announcement they are off to the competitor and aren't keen to keep paying them for longer than they have to.
Chairman's commitments: Most directors have a portfolio of commitments and Sir Selwyn has been recognised at being "good at restructuring" in past roles.
Airline experience: A good company director requires generic business skills - industry skills are not mandatory. Good directors are routinely headhunted across industry sectors. Anyway former engineer Jim McCrea and two of the SIA-appointed directors did have specialist knowledge, giving the board three members out of 13 (before Mr McCrea left) with an industry background.
Disclosure: Air New Zealand has made moves to rehabilitate its perception of being arrogant and not keeping shareholders and the market informed. It recently hired new investor relations manager Stephen Jones who in his previous role did a good job keeping Fletcher Energy shareholders in touch during that company's sell off. Air New Zealand had also put out two profit warnings clearly flagging to the market last week's poor result.
Timing: Directors are not personally liable for company debts. Personal liability only arises if directors fail to properly carry out strategic oversight of company operations and coordination of company policy - in this case the Air New Zealand board carried out its obligations to the best of its ability.

In the board's defence, every nation sees businesses collapse - look at HIH Insurance and OneTel in Australia. Failure must be accepted as part of the business cycle and the local business community encouraged to jettison its naïve conviction of world perfectability.

The world is not fair, but that is not necessarily anyone's fault - acting robustly in response to rapidly changing market conditions should not be confused with incompetence. An obsessive hunt for villains is counter productive.

The defence rests.

The verdict:

Investors have already voted with their shares - pushing the shares to a new low this week. At presstime both the unrestricted A shares and B shares were trading at $0.34c.

Comments from our readers

No comments yet