According to Okoth (n. d. ), independence of non-executive directors means that they do not have any conflicts of interest within and beyond the company. Thus, they monitor and are able to resolve conflicts of interest which affect the wider company, for instance, directors’ remunerations and successions in the board (Higgs 2002, p. 4). The European Commission is of the view that the independent nature and experience of non-executive directors is able to resolve conflicts of interest arising among executives, e. g. , remuneration and the audit of company accounts.
Further, the commission recommends that independence must address “interlocking directorships” and mandates (European Commission 2004, p. 2). Because they do not participate in the day to day running of the company, they are de-linked from executive responsibility; consequently, they monitor performance and improve accountability (Higgs 2002, p. 1), set strategy, policy, and financial goals (Okoth n. d. ). These attributes of independence are appropriately expressed at British Airways. The non-executive directors monitor finances and manage risk.
They determine the remuneration of executive directors and have access to company information, customers, employees, and shareholders (British Airways 2010, p. 56). In addition, non-executive directors and the chairman meet without the presence of executive directors. To curb impartiality, they are re-elected every three years and an external financial audit is conducted every year. However, the management board conducts regular audits based on reports from internal and external auditors (British Airways 2010, p.
58). Thus, the audit committee synthesizes its operations with the board and management, allowing for transparency. The nominations committee, comprised of the chairman and non-executive directors, evaluates the performance of board members. Such evaluations take place without the board member present (British Airways 2010, p. 57). Further, the compensation of non-executive directors is determined by executive directors and vice versa, and the board must first approve external directorships (British Airways 2010, p.
65). British Airways has addressed the danger that conflicts of interest pose to organizations, and a perusal of the composition of the non-executive board provides evidence. The chairman, Martin Broughton, has met independence criteria according to the 2006 “Combined Code on Corporate Governance (British Airways 2010, p. 54). Further, none of the other non-executive directors has conflicting directorships. In addition, they each have enormous experience and contribute their skills in different areas of the company.
Jim Lawrence serves on the remunerations committee and is the chief financial officer for Unilever, and Martin Van der Bergh is the deputy chairman of BT group and a member of the audit, nominations, and remunerations committee (British Airways 2010, p. 54). He is also in charge of the chairman’s appointment and performance criteria (British Airways 2010, p. 56). Chumpol Nalampieng is a member of the audit committee and a non-executive director of companies in unrelated industries, for instance, Siam Cement Co.
Ltd, Singapore Telecommunications, and Siam Commercial Bank, and Dr. Martin Reed is the chairman of the remunerations committee and a board member of unrelated companies (British Airways 2010, p. 54). Both Alison Reed and Ken Smart bring a wealth of experience to the company. The former is the chairman of the audit committee, a chartered accountant by profession, and the previous chief financial officer for Standard Life Plc. , and Marks & Spencer. The latter serves on the safety review committee which is appropriate since he is the chairman of the “U. K.
Aviation and Maritime Industries Confidential Human Factors Incident Reporting Programme” and a member of “Flight Safety Foundation Board” (British Airways 2010, p. 54). Further, Baroness Symons is on the audit and safety review committee and does not have any conflicting directorships. Thus, non executives are appropriately independent because they meet the criteria for independence. All the members have wide experience and do not have conflicting directorships. They all come from backgrounds which add an element of expertise to the board. Further, executive board members vet their salaries.
Precautionary measures have also been added to complement their independence and effectiveness. Their memberships to the various committees, for instance safety, audit, and remuneration, ensure that management is regularly monitored and guided. Of Significance is the requirement that the chairman is also periodically evaluated for performance and the post vetted for appointment by the board headed by the vice chairman At Lufthansa Airlines, the composition of the non-executives is referred to as a supervisory board and is comprised of an equal number of employees and shareholders in order to ensure inclusiveness.
The chief executive officer reports to the supervisory board which approves decisions with regard to new business ventures, the issuance of bonds, agreements on joint ventures, and leasing of aircraft over long periods (Lufthansa 2010, p. 38). Further, supervisory board members are elected at annual general meetings based on recommendations from the nominating committee. They are liable to breach of confidentiality and responsibility, and trading of shares, options, or derivatives by them or their acquaintances is closely monitored when it exceeds 5,000 Euros (Lufthansa 2010, p.
39). Supervisory board members supervise and appoint the executive board whose mandate is to manage the company and devise strategy. They are required to comply with statutory regulations and the German Corporate Governance Code, but unlike the non-executive directors at British Airways, they receive fixed benefits and a payment linked to dividends (Lufthansa 2010, p. 39). The main difference between the role of non executive directors at British Airways and supervisory board members at Lufthansa is their impact on company strategy.
At British Airways, this role is pronounced and non executive directors are mandated to take the lead in formulating and directing company strategy. At Lufthansa, supervisory board members monitor the activities of management who are required to formulate and carry out company strategy. Part B: According to Tilling (n. d. ), an entity achieves organizational legitimacy when its activities are accepted within the wider social system of which they form a part. Thus, organizations seek to minimize the disparity between activities and the community (Tiling n.
d. , p. 4), and aim to ensure that its operations are accepted by outside parties (Khor n. d. , p. 4). British Airways sought to legitimize a pre-tax loss of GBP 401 Million in its annual report by placing the blame on the global economic crisis. According to the company’s chief executive, businesses were affected all over the world. Further, the value of the sterling was down, there were high oil prices, a credit squeeze, and repercussions that had affected their most valuable client, the financial services sector.
However, the company survived because it was financially sound (British Airways 2010, p. 9). A loss of profit is a blow to any company and attributing it to the global recession implies that the company has sufficient reason to fail. However, by further positing that the company survived despite the downturn lends a certain amount of credence to continued company activities in the ayes of stakeholders and customers. In other words, the company was legitimizing its continued operations despite the loss of profit.
Further, the company reported that most businesses all over the world suffered as a consequence of the downturn. This is a statement meant to seek consolation from shareholders and draw them in to the company plight, which is further explicated by more revelations, e. g. , higher oil prices, the negative effects in the financial services sector, and the credit squeeze. The information has been presented to minimize its negative effect by ending with the implication that the company’s sound financial footing has been responsible for its survival during the crisis.
Thus, the executive delivered bad news that was legitimized by unavoidable external factors. Environmental reporting at British Airways is also presented as good news to legitimize and influence stakeholder perception of the company’s activities. According to its 2009 annual report, the company has a policy to reduce emissions, offset carbon, increase fuel efficiency, and promote scientific research (British Airways 2010, p. 50). Consequently, the company intends to cut CO2 emissions by 50 percent by 2050, a strategy that will require funding in new technology and sustainable bio-jet fuels.
According to the annual report, customers offset 50,000 tones of CO2 in 2008 as part of an online facility for passengers to add a carbon offset. This scheme has met the standards of the “U. K. Government’s Quality Assurance Scheme for Carbon Offsetting” (British Airways 2010, p. 50). In 2008, the airline “recycled 35 percent of dry waste at Heathrow and Gatwick”, an increase of 30 percent from 2007 (see Table 1, Appendix). Further, the company aims to reach 50 percent by 2050 (British Airways 2010, p. 50). In addition, the company is investing in quieter aircraft that will reduce noise by 15 percent within five years.
Consequently, noise at Heathrow has reduced. The noise levels were attributed to aircraft delays in take off. However, the company failed to report other bad news that was related to the environment. For instance, in 2008 the chief executive associated reduced carbon emissions with the construction of a new runway at Heathrow, implying that the government had endorsed the plan for its sound environmental impact. However, Britain’s Department o Transport was of the view that emissions would increase by 2. 6 Million tones yearly because of the thousands of additional flights.
The airline’s claim received a severe reprimand from the “Advertising Standards Authority”; a reprimand that was among a host of others in the past (British Airways Reprimanded over Emissions Claims 2008). Thus, airlines like British Airways use annual reports to provide a picture that will appeal to stakeholders. They deliberately avoid bad news that they are not able to legitimize, such as the reprimand from the advertising authority. The news did not contain, nor could the company find, any piece of evidence that would provide the premise for legitimacy.
Further, bad news such as the loss in profits can be confidently reported because other sectors of the economy went through a similar period of economic decline. Therefore, for a company like British Airways which depends to a large extent on image and goodwill, legitimacy of its operations is paramount in the eyes of the public. It is vital, however, to offer a balanced view in its annual reports so that stakeholders, especially the shareholders, can subscribe better suggestions that will benefit company operations.
Part C: Requirement 1: SRI and Ethical Investment Socially responsible investment (SRI) is used where an organization is responsive to the needs of the community and environment in a fashion that will generate financial or other positive returns. This type of investment is therefore tactical and strategic in nature. A company wishing to engage in SRI will usually do so to avoid costly environmental impacts in the future, or to enhance its corporate image in the community and among investors.
Further, investors consider a company’s track record on environmental and community concerns. Consequently, organizations are increasingly engaging in socially responsible investments in order to attract funds and maintain congruence with the needs of society. In contrast, ethical investment is “principled” by nature. For instance, it addresses the wider community concerns, environmental issues, workers rights, and shareholder rights without specific regard for a return in profit or image.
Ethical investment is therefore considered the “right” thing to do. Examples of ethical investments may include, but not limited to; making available to employees loans at no interest; building a school for the community; reducing the organization’s carbon footprint beyond the statutory level; and distributing dividends to shareholders, timely and regularly. Thus, because SRI is strategic in nature, its scope and timing may change. Ethical investment, on the other hand, is a commitment that an organization sustains despite the cost.
I agree with socially responsible investment because it addresses the needs of investors, stakeholders, and communities. Ethical investment is expensive and may be unsustainable in the long run. It requires a commitment that can only be sustained by not-for- profit organizations such as religious bodies, NGO’S, and government agencies. These do not normally have shareholders who expect a return on their investment in monetary terms or other means. SRI is therefore effective in companies which need a return and need to address the needs of the wider community and regulatory bodies. Requirement 2:
There are difficulties and problems associated with coming to an agreed definition of socially responsible investment and ethical investment because the two terms are commonly used interchangeably (The Ethics of Socially Responsible Investment 2010, p. 7). Ethical investment is considered older in origin and SRI is a term which encompasses a broader meaning. The former is usually associated with non profit organizations, while the latter with socially responsible investment that produces a return. Consequently, the former is investing with a conscience (The Ethics of Socially Responsible Investment 2010, p. 7). Kawamura (n.
d. ) further posits that SRI is now understood as “the process of promoting investment in companies that meet some form of criteria for corporate social responsibility”. However, SRI has its origins at the beginning of the 20th century when certain churches withheld and discouraged investments in companies that had links with tobacco, alcohol, and gambling (Kawamura n. d. , p. 13); later including other social and environmental issues. According to Segrado (2005, p. 3), Islamic finance also shares some of the principles of SRI such as community concerns, the environment, human rights, and equality, and in the U.
K. SRI is now increasingly linked to commitment of funds by investment institutions (Jayne & Skerratt, p. 1). By the end of 2000, there were a total of 230 SRI funds with an investment of $153 Billion in the U. S. (Schroder 2003, p. 2). Requirement 3: The Winslow Green Growth Fund attracts investments focused on long term solutions for the green economy. The fund is concerned with the rapidly depleting sources of fossil fuels and is consequently inclined to renewable sources and more efficient technologies.
It buys shares in companies with a market capitalization between $ 50 Million and $ 2 Billion, using the Russell 2000 Index as a benchmark (Winslow Green Growth Fund 2010). Green Century Equity Fund uses the KLD 400 Index to identify social and environmentally inclined organizations. It focuses on companies with good records in the disposal of waste, low emissions, and recycling. Further, it does not accept applications from companies with links to firearms and weapons, nuclear power, gambling and alcohol.
Advocacy groups run the fund and all profits are channeled to advocacy interests such as “The Citizen Lobby of New Jersey, and the Massachusetts Public Interest Research Group” (Green Century Equity Fund 2010). Domini Social Investments screens organizations against its social and environmental standards which extend to relationships with communities, workers, investors, and stakeholders. Currently, the social issues they focus on are the environment, human rights, employment, stakeholder involvement, products and services; all these must be areas where companies provide evidence of high accomplishment (Domini Social Investments 2010).
Socially responsible investment and ethical investment can thus be placed in organizations according to their role. SRI is essential for companies which need a constant return on investment because the available funds belong to shareholders who expect a return However, SRI is advantageous for companies because increasingly, available funding requires screening for environmental and community performance. Organizations which do not embrace the new trend in investment funds cannot expand because of the need for sustainable operations and products demanded by the civil society and government regulations.
Ethical investment, however, is most effective for not for profit organizations because they can sustain an agenda of concern for the community, environment, and various other issues that are best addressed by entities which do not seek monetary returns. These are church based organizations, philanthropic organizations, and non governmental organizations. Their role is crucial and serves as a bench mark for other profit seeking companies to follow.
However, because socially responsible funding is increasingly placing an emphasis on sustainability and accountability, the role of organizations must focus more and more toward products that meet the criteria and benefit society. These include more efficient means of production that have a low carbon footprint, and a social consciousness that has regard for human rights. The role of non executive directors in environment disclosure and formulating the right sort of investment, ethical or socially responsible investment.
At British Airways, it is vital that that non executives take the lead when addressing the needs of the community, customers, employees, and environment, and ensure that their investment choices and reporting of news, either bad or good, is balanced and objective and meets a criteria that does not legitimize events at all costs. They formulate strategy and guide and monitor events at the organization. Therefore, their voice supersedes all others. Further, all investment decisions must take cognizant of investor and shareholder wishes.
In the German example, Lufthansa employees are actively involved in decision making by inclusion in relevant committees along with other stakeholders. British Airways should thus borrow from Lufthansa and incorporate employees and shareholders in some of their committees in order to ensure that all sectors are heard and contribute to the growth of the company. Reference List Australian Government n. d. , Socially Responsible Investment, viewed 16 May, 2010, <http://www. environment. gov. au/sustainability/industry/publications/pubs/respon-investment. pdf>
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