Comair incident demonstrates the importance of corporate governance: IoDSA

Comair returned to the headlines by advising on 1 June that it was voluntarily suspending its flights until the funding necessary to resume operations had been secured. What has got customers hot under the collar, though, is that it had advertised a one-day sale on the previous day (31 May). While one has to have sympathy for Comair as it struggles to recover from the pandemic and the recent suspension of its licence in March, this “perfect storm” points to some governance lessons, argues Parmi Natesan, CEO, Institute of Directors in South Africa (IoDSA).

“At this stage, it is not clear whether this was simply a disastrous example of the left and right hands not knowing what either was doing or an indication of a more serious ethical breach. But either way, irate customers are putting the blame on the board and the CEO,” she says.

Scenario 1—perhaps the most likely—is that the operational teams, such as marketing and sales, introduced the sale to try to get more passengers back into their planes to make up for revenue lost during the suspension of the airline’s licence in March. Because the CEO and his or her executive team are responsible for day-to-day operations, the board would probably not have known the specifics (like the date of the sale) of this operational activity. However, it should have foreseen that, at a time of financial instability, the relevant operational decision-makers were properly briefed. Senior management, serving as the link between the Board and the company’s operations, should certainly have been extra vigilant at this time.

“King IV[1] clearly states that ´The CEO should be responsible for leading the implementation and execution of approved strategy, policy and operational planning, and should serve as the chief link between management and the governing body’ (Recommended Practice 77),” she notes. “At the same time, the board has an overall responsibility to govern risk (Principle 11) and, knowing that funding was an issue, should have ensured that operational actions and decisions were informed by an understanding of the current financial risk.”

The less likely second scenario, in which the board did know that a sale was planned and cynically allowed it to go ahead, presumably in order to take in some much-needed cash, would imply a serious breach of ethics. King IV is clear that ethics is at the centre of good corporate governance, as shown by the fact that ethics are the subject of Principles 1 and 2. It further makes the point that ethical leadership specifically “involves the anticipation and prevention, or otherwise amelioration, of the negative consequences of the organisation’s activities and outputs on the economy, society and the environment and the capitals that it uses and affects” (King IV, p 20).  

Another important point made by King IV is that the organisation receives its social licence to operate from its internal and external stakeholders and society at large. This licence is thus a direct by-product of how good a corporate citizen it is.

“Already on social media one can see people questioning the ability of Comair to operate successfully again,” Ms Natesan observes. “Whatever the truth of the matter, one thing is clear: Comair has aggravated one of its most important stakeholder groups—its clients—and if it does return to service, the board will have its work cut out to repair a severely damaged reputation alongside all the other challenges it faces.”

[1]IoDSA, Report on corporate governance for South Africa 2016, available at https://www.iodsa.co.za/page/king-iv. 

ENDS

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