Well-publicised governance issues at Qantas are a timely reminder of the value that can be lost when a company loses sight of its longer-term strategic priorities, writes Tony Boyd.
In my view, the root cause of the strategic failure at Qantas was a poorly designed remuneration scheme. The remuneration policies failed to strike the right balance between incentivising CEO Alan Joyce and his executive to pursue profits and ensuring the long-term sustainability of the business, in particular through fair treatment of customers and staff.
The Qantas situation bears some resemblance to the governance crisis at professional services company PwC. The accounting firm’s consulting division put profit ahead of ethical considerations and was dragged kicking and screaming toward transparency and accountability.
Qantas has had its share of lapses. It sacked almost 1700 baggage handlers and fought them all the way to the High Court, only to be found to have acted unlawfully to avoid future industrial action. The compensation bill could top $200m.
Questions about the airline’s corporate culture also arose when the Australian Competition and Consumer Commission (ACCC) alleged that Qantas engaged in false, misleading or deceptive conduct, by advertising tickets for more than 8000 flights that it had already cancelled, but had not removed from sale. The penalty bill for this could be as much as $250m.
When you add the potential $450m cost of the breaches of the Fair Work Act 2009 (Cth) and Australian Consumer Law to the customer repair bill (which is now $230m), the price for the board’s strategic failures is approaching $700m.
Counting the cost
That helps explain why Qantas lost about $3b in market capitalisation between August and around mid-October (approximately a quarter of its equity value). The market realises shareholders will pay a hefty price to win back the trust of customers and repair the damage to the Qantas brand.
Qantas is now in the midst of a significant change in strategy. This has not been announced with a full explanation and mea culpa at a strategy day, as would normally happen with a top 100 company changing direction. Instead, it has been communicated through a somewhat inconspicuous note in the annual report and a “market update” released in late September by Joyce’s successor, Vanessa Hudson.
In that announcement, Qantas stated it would spend $230m on customer “pain points” through improvements like “contact centre resourcing and training, an increase in the number of seats that can be redeemed with Frequent Flyer points, more generous recovery support when operational issues arise, a review of longstanding policies for fairness and improvements to the quality of inflight catering”. This might be seen as a last-ditch attempt to meet community expectations.
As Australia’s most complained-about company, according to data collected by the ACCC, Qantas had to do something about its method of communicating with customers. Hudson is learning the hard way that call centres staffed by people in offshore locations cannot match the performance of those in Australia. Telstra discovered this fact years ago after COVID-19 exposed systemic problems with its contact centres. Since bringing its call centres home, its net promoter scores have risen substantially as has its corporate reputation (measured by RepTrak).
In October, Qantas announced chair Richard Goyder AO FAICD would retire from the board prior to the 2024 AGM, and members of the remuneration committee would retire at half-year results in February 2024.
Goyder’s first move toward a change in strategy was a note in the remuneration report that there would be an equal rating for short-term bonus entitlements of 40 per cent for group financial targets and 40 per cent for customer satisfaction. This represents a doubling of the weighting to customer satisfaction.
These changes mark a shift in strategy away from the focus on profits and cost cutting under Joyce, who linked the choices to the pandemic at a Senate Select Committee in August. “We had to make tough decisions to survive, and we’re acutely aware of the impact that that had on individuals.”
The changes bring the Qantas bonus weighting for profit measures into line with those applied at the Commonwealth Bank of Australia, which suffered its own governance crisis in 2017. The CBA, however, differs from Qantas in one important way. It puts a 15 per cent weighting on the customer and 15 per cent on people and leadership and — of greatest relevance to Qantas — a 30 per cent weighting on “strategy execution”. This last measure is all about long-term thinking, something that has arguably been undervalued at Qantas.
Accountability has, you might say, been lukewarm. While Joyce brought forward his retirement by two months and will potentially lose longer-term share awards, the directors all got pay rises. Over the past six months, Qantas has displayed the sort of aloofness associated with previous corporate governance oversights in banking and insurance. The airline’s attitude was summed up in the decision to ban copies of the Australian Financial Review from the exclusive Chairman’s Lounge. Hudson has lifted the AFR ban.
My view is that Qantas put too much emphasis on short-term profit maximisation. For FY23, Qantas reported $2.47b underlying profit before tax. But it has come at the detriment of the company’s longer-term interests because of the failure to focus sufficient attention on customer service and employee engagement.
Righting Qantas should be positive for the broader economy. That is one conclusion that can be drawn from the analysis of the benefits of well- designed corporate governance by the Organization for Economic Cooperation and Development. The latest OECD Principles of Corporate Governance say that well-governed companies enjoy access to competitively priced capital because investors regard good governance as an assurance that they can participate and share in the company’s value creation on fair and equitable terms. The OECD notes that when boards are transparent and accountable to shareholders, it helps build trust in markets — something that has been in very short supply at Qantas.
Tony Boyd is a contributing editor for the Australian Financial Review and a former Chanticleer columnist.
This article first appeared under the headline 'Long-term Lessons’ in the November 2023 issue of Company Director magazine.
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