easyJet Plc’s Governance Disclosures: A Critical Evaluation
1. Introduction
The concept of corporate governance has gained considerable significance since the collapse of a series of corporate giants including banks worldwide followed by the global financial crisis 2008-09. The global financial crisis led to huge financial losses and massive job cuts across the globe, particularly in United States and United Kingdom. Official investigations following the crisis revealed that accounting fraud and other top management malpractices contributed notably to high-profile corporate scandals. In response to these reports, the UK government designed and enacted the UK Corporate Governance Code that specifies different corporate governance principles and policies in detail. Hence, every corporation in UK is required to comply with the policies and procedures described in the UK Corporate Governance Code. Apart from the legal requirements, today large corporations in UK take initiative to disclose their different crucial aspects of corporate governance to stakeholders. This paper will critically analyse the corporate governance disclosures of EasyJet, an FTSE 100 company, and the extent to which the firm’s corporate governance mechanisms are adequate and effective. In addition, the EasyJet’s corporate governance disclosures will be compared with the codes of practice and report such as Cadbury report, Higgs Report, and Tyson report.
2. Overview of the company
Founded in 1995, EasyJet is a British low-cost airline carrier operating under the parent company EasyJet plc. The company is headquartered in the London Luton Airport, Luton, United Kingdom. EasyJet is ranked as the largest airline service in UK in terms of passengers carried. The company has a strong presence in domestic and international air travel sectors operating 700 routes in 32 countries. Being an FTSE100 company, EasyJet is listed on the London Stock Exchange. The organization employs roughly 11,000 people throughout its destinations in Europe. Although the company was founded in 1995 only, it achieved a rapid market expansion over the years through a series of acquisitions and base openings. In addition, the growing urge for low-cost airline travel also significantly contributed to the rapid expansion of EasyJet in the air travel industry. Currently, the organisation operates 24 bases across Europe. In 2014, EasyJet achieved the position of second-largest airline in Europe by carrying over 65 million passengers. It is identified that great innovativeness is the major strength of the company that benefited it to become one of the top leading low-cost airline services in Europe within a relatively short span of time. For instance, the company has recently introduced services like EasyJet Train, EasyJet Reward Card, and EasyJet Hotel so as to add value to customer convenience.
3. Disclosures on governance
It is identified that the EasyJet gives particular emphasis to disclosures about corporate governance because the company wants to increase the transparency and accountability of its market operations. In the 2015 governance report, EasyJet’s non-executive chairman John Barton states that the company is always committed to maintaining high standards of corporate governance so as to enhance the overall organisational performance and add notably to shareholder values (easyJet plc Annual report and accounts 2015). The firm’s top management wants to convince the shareholders about the appropriateness and viability of its strategic priorities (Ibid). In the governance report 2015, the company gives information about top managerial personnel resigned or retired from the EasyJet during the current year. Each year, EasyJet performs formal evaluation of its Board effectiveness so as to identify whether the current managerial policies and operations are appropriate and effective to accomplish the stated goals of the organization. The organization releases the outcomes of this formal evaluation performed by an external agency in its governance report. In addition, the firm’s governance report 2015 provides comprehensive information about its various Board Committees that were appointed to assume some of the responsibilities of the Board and to enhance the overall operational efficiency of the company. The major objective of the EasyJet’s corporate governance report is to give shareholders great understanding of the firm’s corporate governance arrangements and how they performed over the last year. In its governance report, the company discloses information about its board of directors who are in charge of the top level management of the organisation. The report gives detailed information on the roles and responsibilities of each director board members in the company and their career history. Similarly, the report provides a great deal of information regarding the firm’s executive management team and the detailed career history of each team member.
Similarly, EasyJet’s disclosures about corporate governance give specific emphasis to different board committees organised under the Board of Directors. These committees include safety committee, remuneration committee, audit committee, nominations committee, finance committee, and IT governance and oversight committee. In the governance report 2015, the responsibilities of each of these committees are described in detail and their adherence to the established laws and policies. In addition, the report assists the EasyJet stakeholders to obtain some valuable insights into the risk management and internal control activities of the organisation. This corporate governance report includes the Director’s remuneration report that explains how the organisation works to align its remuneration policy with the company principles. The remuneration report also gives the details of the firm’s remuneration policy for the 2016 fiscal year. Since directors’ remuneration has been a major source of fraud in the corporate world for many years, the EasyJet’s corporate governance report discloses each and every aspect of its executive remuneration to the stockholders. The governance report 2015 also comprises a director’s report that provides a range of useful information regarding the firm’s financial risk management, greenhouse gas emissions, new membership of Board, employee involvement, and employee quality and diversity (easyJet plc Annual report and accounts 2015). In addition, it also gives detailed statement of directors’ responsibilities so as to keep stockholders informed of what roles the directors are expected to perform. In EasyJet, the major responsibilities of the directors include preparation of annual reports, directors’ remuneration report, and accounts in compliance with laws and regulations in force (Ibid). The EasyJet’s most important disclosure with regard to corporate governance is that it includes an ‘independent auditors’ report to the members of EasyJet’ in its governance report 2015. There is no doubt that this practice is really beneficial for the stakeholders to ensure that the firm’s books of accounts represent a true and fair view of the state of affairs of the business.
4. Analysis of disclosures about governance
In order to form good understanding of the disclosures about EasyJet’s corporate governance practices, it is vital to critically analyze the various aspects of the firm’s corporate governance structure. The following part evaluates some critical disclosures about EasyJet’s corporate governance.
4.1 Board of directors
As noted already, the company’s governance report 2015 provides detailed profile of each member of the Board of Directors. Hence, a stakeholder can easily understand the skills and competencies of each Director Board member and thereby evaluate the potentiality of the firm’s Board. This disclosure seems to be really relevant for investors who risk their money with the company, because various decisions of the Board of Directors can greatly affect investors’ rates of return on their investment. In other words, the detailed disclosure of information about the company’s Board of Directors can assist investors and current stockholders to make well-informed investment decisions.
4.2 Safety committee
Chaired by Professor RigasDoganis, the key responsibility of the safety committee is to monitor and respond to the safety incidents reported to the Board and thereby make certain that those reports have been properly addressed by the authorities concerned. (easyJet plc Annual report and accounts 2015). In addition, the committee constantly reviews the actions taken by various departments on safety incidents reported and the organisation’s annual safety plan. The safety committee reviews reports published by UK Air Accident Investigation Branch and other relevant authorities on safety incidents so as to identify various technical and other factors leading to air accidents (Ibid). Undoubtedly, the operations of the safety committee really assist the organisation to eliminate the probability of air safety incidents in future and thereby enhance passenger safety.
4.3 Remuneration committee
It is clear that remuneration policy is of great significance for a low-cost airline career like EasyJet because it cannot offer low prices for passengers unless it is able to cut down its operating costs. The EasyJet’s remuneration committee performs this role efficiently. Currently, the remuneration committee strives to integrate a sensible long-term incentive plan into the firm’s remuneration policy (Ibid). The most notable aspect of the remuneration committee performance is that it greatly benefits the organisation to design a straightforward and transparent remuneration policy, which is in line with the company principles and shareholder values.
4.4 Audit committee
In the context of an uncertain global economic environment, the EasyJet’s market operations are appreciably backed by the audit committee, which is chaired by Adele Anderson. The audit committee plays a significant role in reviewing the efficiency of the firm’s risk management mechanism, internal control system, and the financial reporting system. Identifying some internal flaws in the EasyJet’s financial reporting system, the audit committee has recently recommended the Board to reappoint PwC LLP as the firm’s prime auditors. The audit committee aids the organisation to ensure that its operations are in alignment with the Financial Reporting Council’s guidelines on risk management, internal control, and business reporting (easyJet plc Annual report and accounts 2015).
4.5 Nominations committee
With regards to the nomination committee, the EasyJet discloses the committee’s efforts to deal with the succession planning of the organisation. Chaired by John Barton, the major responsibility of the nominations committee is to size, composition, and structure of the Board and its committees (Ibid). In the governance report, the EasyJet reveals the efforts taken by the nominations committee to identify and promote talented and senior executives to apex management positions. By evaluating the report, a reader can understand the initiatives taken by the nominations committee to improve “the balance of skills, knowledge, experience, and diversity on the Board” (Ibid).
4.6 Finance committee
The finance committee is also chaired by Adele Anderson. In terms of disclosures, the report gives a great deal of information about the finance committee’s operations with respect to the management of the firm’s funding policies and activities (Ibid). In the report, it is described that how the finance committee works to make sure that the organisation does not take undesired levels of risk. In addition, the finance committee plays an inevitable role in ensuring that the organisation’s treasury activities are in alignment with its stated finance management policies.
4.7 IT governance and oversight committee
Chaired by John Browett, the IT governance and oversight committee is charged with the responsibility of supervising and co-ordinating the governance activities of the organisation. In the 2015 governance report, the EasyJet discloses how its IT governance and oversight committee managed the strategic direction of the IT programmes so as to fit the long-term goals of the company to its strategic framework (Easyjet Annual report, 2015). In addition, it seems that this committee strives to identify the risks associated with the firm’s IT strategy and hence mitigate the impacts of unintended outcomes during the implementation process.
4.8 Directors’ remuneration report
Directors’ remuneration has become a major point of discussion since the Enron scandal, which was characterised with payment of unreasonably high executive compensation. Hence, the EasyJet pays particular focus to communicating the detailed aspects of directors’ remuneration to the stockholders. The company’s governance report specifically reflects the link between the value created for shareholders by executives and their remuneration. The report explains the criteria used for compensating directors in the fiscal year 2015. It is certain that stakeholders will be interested to know how the firm’s directors are paid, because the Board of Directors constitutes the supreme authority in the organisation.
4.9 Statement of directors’ responsibilities
Similarly, the organisation wants to communicate to its stakeholders about the roles the directors are supposed to perform in favour of them. While analysing the statement of directors’ responsibilities in the governance report, a stakeholder can understand that directors are obliged to maintain proper accounting records that are sufficient to support the firm’s transactions. Another key disclosure with regard to this section is that directors are responsible for maintaining the credibility of financial and corporate governance information provided on the firm’s official website and press releases (Easyjet Annual report 2015). Hence, stakeholders are well-informed of what type of services they are entitled to receive from the Board of Directors.
4.10 Independent auditors’ report to the members of EasyJet
Finally, the independent auditors’ report to the stakeholders seems to be the most interesting aspect of EasyJet’s disclosures about corporate governance. In the governance report 2015, the auditors state that the firm’s books of accounts represent a fair and true view of the current state of affairs of the business. It is obvious that an independent auditors’ report on the company affairs may be more credible and reliable for stakeholders than a report prepared by the Board of Directors. By including the independent auditors’ opinion in its governance report, the EasyJet management is able to convince its stakeholders that the organisation maintains a greater level of transparency in operations.
5. Comparison with the codes of practice and report
While comparing the EasyJet’s corporate governance disclosures in the light of Cadbury report, Higgs report, and Tyson report; it seems that the organisation performs outstandingly with respect to disclosing various aspects of corporate governance to stakeholders. One of the major recommendations of the Cadbury report is to include non-executive directors in the Board of Directors so as to enhance the transparency of Board operations. The Cadbury report also recommends that it is better to include more non-executive directors in different Board Committees too (The Cadbury Report, n.d.). It is identified that EasyJet encourages the involvement of non-executive directors in its Board and Committees with intent to increase the accountability and transparency of the firm’s top management activities. Similarly, the major purpose of the Higgs report was to review the role and effectiveness of non-executive directors and audit committee. A major suggestion of the Higgs report is ‘comply or explain’, which requires companies either to comply with the existing code of practices or to explain why they failed to comply with the codes and policies (Dunne & Morris, 2009, p.215). It seems that the EasyJet gives particular emphasis to this recommendation of the Higgs report as the company takes all possible efforts to comply with the existing corporate governance principles and policies and to explain stakeholders why it did not abide by some policies if any. In addition, the Higgs report specifically suggested the critical assessment of individual directors. As noted already, the EasyJet gives comprehensive information about individual directors in its corporate governance report so as to provide stakeholders with an opportunity to evaluate the roles and efficiency of individual directors. The organisation’s corporate governance report is prepared in strict adherence to other provisions of the Higgs report too. The Tyson report also particularly advises companies to recruit and develop non-executive directors so as to promote the transparent running of the business and to gain stakeholder trust. The Tyson report argues that appointment of non-executive directors is a key strategy to reduce the chances of fraud and managerial malpractices in a corporate organisation because they are not a part of the executive management team. While evaluating the corporate governance report 2015 of the EasyJet, it is obvious that the company pays particular focus to appointing and developing non-executive directors who are capable of handling the daily affairs of the business. This approach greatly helps the organisation to convince its stakeholders about the credibility and efficiency of the firm’s supply chain activities and market operations.
6. Conclusion
Bibliography
Annual report 2015. [online] available at: http://corporate.easyjet.com/investors/reports-and-accounts.aspx?sc_lang=en [accessed 16 March 2016].
The Cadbury Report. (n.d.). University of Cambridge. [online] available at: http://cadbury.cjbs.archios.info/report [accessed 16 March 2016].
Dunne, P & Morris, G. D. (2009) Non-Executive Director's Handbook: US: Elsevier.
easyJet plc Annual report and accounts 2015. Chairman’s statement on corporate governance. [online] available at: http://corporate.easyjet.com/~/media/Files/E/Easyjet-Plc-V2/pdf/investors/content/ar2015-governance.pdf [accessed 16 March 2016].
