Braniff International Airlines: "Mini Case Study" From the Bankers' and Regulators' Perspectives

Braniff International Airlines

Summary (from the Bankers ’and Regulators’ perspective):

We break this up into three periods. Period 1: 1965-1970 (“Initial”), Period 2: 1970-1978 (“Profitability”) and 1979-1982 (“Decline of CEO”).

Bankers- In period 1 Bankers were wise to invest in Braniff because of: a) History of success of Harding Lawrence at Continental,  b) Braniff was seen as “reasonable risk” c) Airiline industry was in good shape.

                In period 2, Braniff proved it was profitable and with ROE of 18.2% (1974) and 19.6% ( 1978), it was a leader in the industry,

                In period 3, the question is, WHO are the Bankers that decided to invest in Braniff? Were they budies with H.L? Or were they people who were prone on taking unnecessary or excessive risk (as we’ve seen with Bankers and financiers during the Great Recession)??

Regulators:

CAB: The CAB was seen as complacent and bureaucratic during the 1960s and 1970s.

·      Regulation generally harmful to the macroeconomy because of limits on competition and competitive pricing (argue DWL and loss of economic output when there is strict regulation; ex. Monopoly, oligopoly, Tariff regulations)

·      Cite economic argument for inefficiency of regulation in Airline industry

·      Cite Jimmy Carter’s bid for reelection and attempt to increase economic output, thus advised by economist to deregulate Airline industry.

·      Cite the 10+ years it took for route to get approved; thus less people traveled, thus less business (be careful to mention that many new routes that Braniff took were poor and bad investments because they were “dry markets.

·      Lawrence: Applied for too many new routes (300+) without having enough resources!

·      End with quote by:

In 2011, Supreme Court Justice Stephen Breyer (who worked with Senator Kennedy on airline deregulation in the 1970s) wrote:

“What does the industry's history tell us? Was this effort worthwhile? Certainly it shows that every major reform brings about new, sometimes unforeseen, problems. No one foresaw the industry's spectacular growth, with the number of air passengers increasing from 207.5 million in 1974 to 721.1 million last year. As a result, no one foresaw the extent to which new bottlenecks would develop: a flight-choked Northeast corridor, overcrowded airports, delays, and terrorist risks consequently making air travel increasingly difficult. Nor did anyone foresee the extent to which change might unfairly harm workers in the industry. Still, fares have come down. Airline revenue per passenger mile has declined from an inflation-adjusted 33.3 cents in 1974, to 13 cents in the first half of 2010. In 1974 the cheapest round-trip New York-Los Angeles flight (in inflation-adjusted dollars) that regulators would allow: $1,442. Today one can fly that same route for $268. That is why the number of travelers has gone way up. So we sit in crowded planes, munch potato chips, flare up when the loudspeaker announces yet another flight delay. But how many now will vote to go back to the "good old days" of paying high, regulated prices for better service? Even among business travelers, who wants to pay "full fare for the briefcase?"[5]

Question that  remain:

1.     Why should the CEO not take full responsibility? The article we read implies that H.L  gained the full trust of the Board and Bankers so that he could freely do as he saw fit in exchange for him taking full responsibility of the risks involved.

2.     What are H.L past relations? He is described as a man who could persuade others to do anything? More research needs to be made to see which Bankers he persuaded to provide him loans in period 3.

3.     Can Bankers have the power to reign in spending. More research needs to be made to see what the terms of the loans were when they were made?

a.     Argue volatility: Did Bankers who made this bad loans have a history of taking on highly volatile projects?

b.     Argue that maybe the Bankers felt that their losses were so much that they decided to “ride the waves.” Ex. If one invests 10,000$ in a mining company today, and tomorrow one loses 90% of her investment, she is left with $1,000. Is it more rational for that person to sell her stock right away and take the $1,000 to cut her losses short, or wait out the volatility and hope that the stock rises to recover her losses? Arguments can be made for both.

c.      Metrics- The metrics were good until period 3. Again, which Bankers invested in period three is a critical question!

d.     CEO wasteful and spendthrifter; Board rubber stamp approval machine; can’t blame regulators when governances is a complete joke. Cite CEO of Continental “caution and prudent approach.”

4.     Lawrence not necessarily a “Marketing Genius,” relied on Wells, Rich, and Greene Co that his wife ran for marketing aide. Also, overpaid artist to paint his planes during the “End of the Plain Plane” era.

 Word Count: 803

Corporate Governance System(s) Revisited--And the Case for a Dual Board

§     III.        Question  5:  Corporate Governance System(s) Revisited

References:    Brickly, Bhagat, and Lease:  “The Impact of Long- Range Managerial Compensation Plans on Shareholder Wealth,” 1985

                   Lorsch, “The Future of Boards,” HBS 2010

                Mallin, “Corporate Governance” 2010

                Vishny and Schleifer, “A Survey of Corporate Governance,” 1997

                   Moran and Beggs, Various Articles and In Class Discussions on Corporate Governance, Harvard, 2013.

                  Various in class articles and discussions, Harvard, 2013.

(Part a)      The governance rules and standards discussed in class, in our various readings in both the articles and in Mallin, and in section that I find most effective are the Blair reform proposals, the Sarbanes-Oxley Law, the NYSE Corporation practice law, and the Code of Best Conduct and Cadbury Code. These laws are most effective because a.) they increase transparency within management and in the board room, hold executives accountable for the roles that they are assigned (and ensure that they have the proper credentials, such as CEO/CFO certification of finance), and ensure that those responsible are held accountable for their actions (such as taking inordinate risk. Additionally, they aim to make sure that the Board is aware that they are agents to the shareholders and as such must aim to increase shareholder value, and that the Board and Management are responsible for all stakeholders. In particular, what sticks out to me is: Blair Reform: One share-one vote (so all shareholders have at least some say), majority vote to change state of incorporation and majority vote of share for issues regarding directors and shareholders. When it comes to the Sarbanes-Oxley Law, which was very prominently featured in class and is provides standards for corporate governance today, I find the real time disclosure of material events, independent audit and nomination committees, private public oversight of accounting professions, and the fact that counsels must report violations, as the most effective standards. Lastly, the NYSE Corporation Practices of Director independence, proper accreditation of senior management and mandatory sessions and shareholder approval as most effective in protecting both shareholders and stakeholders. I think that to be most effective, a corporate governance system should also make the standard, by law, of a requirement of a supervisory board (within a dual board) as discussed below in part b and all throughout the summer.

(Part b)

In addition to the corporate governance rules that I find effective from the course—including but not limited to The Code of Best Practice, the OECD codes for protecting shareholders and stakeholders, Sarbanes-Oxley Law, Cadbury Code (1992), and the NYSE Corporations Practices as detailed in (Part a)— I believe, as discussed in class with others, that a required by law Dual Board in the U.S. (and abroad either by law or convergence) is, in the long run more effective. The Dual Board will implement the aforementioned rules standards from the codes / laws listed, such as transparent accounting and compensation systems, ensuring effective and qualified, by law, individuals in management (qualified CFO/CEO), independent external committees etc. Such implementations will ensure that the corporate governance of the board will a. have a clear and distinct separation of ownership and management, and b. should be implemented by properly defining the CEO’s role and ensuring that the Board of Directors have proper channels of communication with management. I believe that if the Dual Board is implemented, disastrous outcomes are more likely to be avoided (Moran, 2013).

The Dual Board consist of two parts: first, one should be comprised of management-type individuals aim to abide by the Code of Best Practice (1992). The rules and standards that I find that the Dual board will be able to effectively implement also come from the Sarbanes-Oxley Law: real time Disclosure of materials events, independent audit committee and Auditors, and both private and public oversight of accounting professions (I’m thinking of avoiding an Enron scandal here). (Mallin, Moran, 2013). The other board should be the Supervisory Board. This would be compromised of individuals who are independent of the company’s interest, as much as possible in application. The Supervisory Board members should also be members of an internal audit committee (to independently audit company reports and management’s actions) and Finance Committee (to independently audit the financials). This comes straight from Code of Best Conduct, Sarbanes-Oxley law, and the NYSE Corporate Practices (Mallin, et., al, 2013). There also be an independent external audit committee. There should not be an executive committee as already discussed in class, in that it fosters exclusion.

The Dual Board should have the management board report to the supervisory board.  Corporate Governance should implement Code of Best Practice, ethical agreements, and have the audit committee address the need of social responsibilities outlined in Sarbanes-Oxley, the roles of individuals, both directors and management should be properly defined. Also the leader of the management board should be held responsible for calling meetings and ensuring that the directors themselves have the necessary information at that moment; and the Chairman of the Supervisory Board should be accountable for members of the Supervisory Board to communicate with themselves and with others. The Dual Board should not micromanage the CEO, CFO, COO and other senior management, but instead embrace them after having executed a clearly defined process of selecting the CEO that included listening to shareholders/stakeholders concerns either during a shareholder’s meeting or shareholder’s voting event. There should be no Executive Committee, at least not one vested with a lot of power, because it creates an atmosphere of exclusion and poor transparency.

(Conclusion)

            In my mind such a Dual Board will be more effective at ensuring the important outcomes of increasing shareholder values (accountability to shareholders) and addressing the concerns of other stakeholders (responsibility to stakeholders). In addition, the Management Board should personally hold the CEO and senior management responsible for their actions. Through not micromanaging they enable the CEO to have the ability to act and to avoid disasters before they happen (given they act properly).  Through intervention, when Board members know there is a problem they should hold the CEO accountable for her actions and replace her with someone they and the Supervisory Board can agree on after doing their due diligence in research. In short, my view of Corporate Governance comes down to this: have a dual Board-Supervisory and Management-with independent committees, ensure the Dual Board selects qualified and communicative management, ensure the Dual Board doesn’t micromanage, ensure the Dual Board holds senior management personally responsible for their actions, and ensure that the Dual Board is confident that management is acting not in its own interests, but in preserving and creating shareholder value and in effectively addressing the concerns of other stakeholders, from employees to environmentalists and regulators.

Word Count: 1,107 

Why Tim Cook II: Using Lorsch's the Future of Boards and Other Sources on the Succession Question

•       Renumeration: In early 2012, he was awarded compensation of 1 million shares, vesting in 2016 and 2021, by Apple's Board of Directors.[5] As of 2012, Cook's total compensation package of US$378 million makes him the highest paid CEO in the world.[6]

•       Tim Cook is focused on products. He is not focused on stock price, at least not short term.

•       Tim Cook is adaptable. Knows the business; meticulous, has said “running apple is like running a dairy farm, if something goes bad you throw it out and make sell something new and fresh).

•       Apple is facing great competition, primarily from the Android Operating System, and from Samsung, with which it has a symbiotic relationship (needs samsung parts for its devices and Samsung needs apple for its own products and devices. But both are undergoing litigation against each other.

•       Other sources of competition: Nokia (new Nokia Lumia design offered through Verizon is cheaper priced at $99. To some extent possibly from Blackberry, but that’s a long shot for now).

•       In short, management is competent and one could ask for no better exec as Tim Cook. The problem, well again, remember Harding Lawrence(?) risk of arrogance, and overreaching power of CEO may be detrimental, however, it’s unlikely here, at least forseably.

•       We see it’s unlikely because Tim Cook is open to change, and learned it best from Jobs.

Word Count: 228

Why Tim Cook: Using Lorsch's the Future of Boards and Other Sources on the Succession Question

Why Tim Cook:

•       Insider (Lorsch). Cook being described as “groomed” by Jobs. According to the Future of Boards, Insiders fare better as CEOs because they know the business, than outsiders (20% better score on average).

•       Cook served as COO of Intelligent Electronics; 12 years as senior exec at IBM, VP at Compaq

•       Apple: hired in 1998, numerous senior positions including senior VP for worldwide operations. His mandate was to clean up the atrocious state of Apple's manufacturing, distribution, and supply apparatus. Cook is credited with pulling Apple out of manufacturing by closing factories and warehouses around the world.

•       This helped the company reduce "inventory levels and streamline its supply chain to reach high efficiency, dramatically increasing margins. These initiatives have proven key to Apple's success in unveiling next-generation products, keeping them secret until they are ready for distribution to retail, forecasting demand and executing against that forecast. Cook has been quoted as saying "You kind of want to manage it like you're in the dairy business. If it gets past its freshness date, you have a problem."

•       In January 2007, Cook was promoted to COO, NIKE and NFL.

•       Remuneration: In early 2012, he was awarded compensation of 1 million shares, vesting in 2016 and 2021, by Apple's Board of Directors.[5] As of 2012, Cook's total compensation package of US$378 million makes him the highest paid CEO in the world

Was the only person who dared to challenge Steve’s ideologies (could essentially have played a part in the creation of iPod, iPhone, iPad. Challenging ideas stimulates creativity)

Oversaw the release of the iPhone 5 (best debut sales of all predecessors)

•       In the tradition of Jobs? ‘Benevolent Dictator’

Word Count: 276