Delta Airlines: Corporate Governance and Leadership Issues

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Delta Airlines is regarded as the fastest-growing international carrier in the United States founded in the year 1924, with its first flight operated in the year 1929. The mission of Delta Airlines is to build on its traditions and to meet the customers’ expectations at all times. During the period 2001-2003, Delta was carrying an accumulated loss of $ 3.3 billion, with the total loss of the industry at $ 21 billion. The Airline had to lay off more than 16,000 employees and reduced its capacity by 16%. To improve the revenues, the company made strategic alliances with regional connection carriers and became a member of SkyTeam. The company strengthened its technological capabilities through its Delta Nervous System (DNS). This enabled the company to cut costs and improve productivity. Further to meet the competition from the low-cost carriers, the Airline, launched ‘Song’ as its low-cost subsidiary in select routes and to selected destinations. Consequent to these efforts and revival of the industry, as of August 2009 the Airlines through its hubs located in the United States and Europe along with its Northwest Subsidiary and Delta Connection carriers connect 376 destinations worldwide. The airline operates in 67 countries serving over 170 million passengers each year. The company has more than 70,000 employees working across the world [1]. Delta by acquiring Northwest Airlines for $ 2.8 billion in October 2008 became the world’s largest airline. The airline along with its regional carriers maintains a fleet of about 775 carriers. Delta is also part of the SkyTeam marketing and code-sharing alliance along with other major airlines such as Air France and KLM [2]. The company’s total revenue for the year 2008 was US $ 22,697 million, with a gross profit margin of 39.5%.

“Corporate governance is the set of institutional arrangements affecting corporate decision making and deals with the relationship among various participants in determining the direction and performance of corporations.”[3] To ensure that the company follows best corporate governance practices, the company reviews the corporate governance principles on an annual basis or when necessary even at more frequent intervals. An elected board of directors governs the business of Delta Airlines. The shareholders elect the members of the board to represent their interest in maximizing their wealth and improving the efficiency in the operations of the company. The board of directors has initiated well-organized corporate governance practices, as the board felt that it is only sound corporate governance policies and practices that would help them meet the expectations of not only the shareholders but all other stakeholders of the company, such as employees, customers, suppliers, government and the community at large. The board is mandated to look after the management of the company and monitor its performance to ensure that it adheres to the best corporate governance standards.

The company first adopted formal corporate governance practices in the year 1998. The board must assess the effectiveness of the corporate governance principles periodically. The board evaluates the corporate governance initiatives based on objective criteria. The assessment is carried out by the board reviewing and approving the one-year business plan of Delta as well as its long-term strategic plan. Such review also includes assessing the aircraft fleet plan and the financial goals established by the company for achieving short-term and long-term success. Each member of the board is given the responsibility to make a written assessment of the performance of the board in respect of specific functional areas such as fiduciary oversight. As a part of good corporate governance, the board is entrusted with the responsibility of nominating the directors for various committees. The issues of succession planning and development are reviewed and appropriate decisions are taken every year, with the inputs of the Chief Executive Officer. The governance principles also encompass the structure of the board and detailed guidelines on the operation of the board [4].

The board of directors has implemented a new corporate governance policy which makes the approval of the shareholders mandatory for any severance packages to the senior executives in some cases that the company has to enter in the future. This change was brought during December 2003 to enable Delta to meet with the federal and New York Stock Exchange guidelines. The change in the governance policy makes it compulsory for the company to obtain the approval of the shareholders for awarding any severance packages to the senior executives and officers of the company in cases where such compensation exceeds 2.99 times the salary and bonus. Several other changes have been made to the corporate governance policies especially in the areas of “establishing independence standards for members of the board for adopting revised corporate governance principles relating to the board compensation, function, structure and responsibilities and electing presiding director to chair executive sessions of the board”. [5] The issue of benefits to senior executives at the company has been a significant issue that needed to be resolved for some time, as the company was contemplating introducing deep wage cuts to fight the industry recession during 2001-2003.

Corporate scandals such as Enron, Worldcom, Tyco, and the like have led to the introduction of several legislations to prevent the occurrence of such corporate frauds in the future. Most of these legislations were aimed at improving corporate governance measures and practices. One of the most common features of these initiatives was the implementation of the guidelines governing the constitution and function of the board of directors, insisting on more independence for the board members. The Sarbanes – Oxley (SOX) 2002 contained a provision that all the members of an audit committee formed out of the board shall be independent. Following this mandate, the New York Stock Exchange and NASDAQ Stock Market insisted that all the listed companies should have a majority of independent directors on the board.

Further SOX and the listing requirements of stock exchanges have imposed additional responsibilities on the directors to convene regular meetings of the independent directors, the nominations of directors by the independent directors, and approval and fixation of the compensation payable to the CEP also by the independent directors. This has made the role of independent directors significant in the governing process of the conduct of the business by the board.

In the pre-Enron period, the need for corporate governance was felt because of the following pressing reasons.

Fundamental accountability of the corporations could be improved by close monitoring of a strong and independent board of directors
Because a traditional board consisting mostly of insiders was found to be unable to effectively monitor the performance of management, there was the need to compose the board with more non-management directors who are independent
The concept of independence was to be refined by identifying those people who possessed an independent state of mind rather than those who did not have a significant business relationship with the corporation. In effect, the board members were expected to have a state of mind to act independently not influenced by the management of the corporation
Even though a majority of the public companies, by the listing requirements of the major stock exchanges, the committees were ineffective because of the constitution of such committees with members who were not independent of the corporations. Moreover, the audit committees did not possess the authority to engage or disengage external auditors.
Similarly, the compensation committee was also proved to be ineffective in monitoring the compensation to the senior management because of its composition.

All these reasons coupled with the after-effects of corporate frauds like Enron contributed to the evolution of new thinking towards strengthening the role of the board in monitoring the management of the corporations. The objective of the passing of Sarbanes – Oxley was to completely ignore the existing best practice notions of corporate governance and rely on a different model to control specific types of management opportunism in the corporations. Accordingly, SOX provides for the following:

It prohibits the making of any loan by publicly held companies to any of its directors or officers. This restriction is applied on an outright basis.
The CEO and CFO are obligated to reimburse the corporation for any bonus received or profits realized from the sale of stocks of the company during the 12 months following the filing of an inaccurate financial statement by the publicly held corporations. This provision is applicable when there is a default due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws”
The CEO and CFO are under an obligation to certify that all the financial statements filed by the publicly held corporations with the SEC are a fair representation of the financial status of the respective corporations and there are no material misstatements. ‘SOX’ has also made such certification a federal crime if the financial statements contain any material misstatements affecting the financial conditions of the corporation.
SOX prohibits the selling of the stocks of the corporation by the directors and executives during benefit plan ‘blackout periods’.
It is made unlawful by the SOX legislation for any of the officers or directors to take any action which has the intention of “fraudulently influence, coerce, manipulate or mislead” the auditor of the corporation.

In addition, SOX has made elaborate provisions on the constitution of audit committees including that the committee should comprise only of independent directors. The Act has made the compliance of the provisions mandatory by requiring SEC and other stock exchanges to prohibit the listing of a corporation unless it complies with the requirements as per the Act. The Act has also increased criminal penalties for many of the exiting financial crimes in addition to creating new crimes.

Delta airlines have claimed in its corporate governance report, that the company believes in adopting sound corporate governance principles to gain the trust of shareholders, customers, employees, and other internal and external stakeholders. The company strives to operate under transparent governance practices which are appropriate for the airline industry. The board of directors of the company consists of a substantial majority of directors who are operating independently. The board has established committees such as Audit Committee, Corporate Governance Committee, and Personnel & Compensation Committee to share the responsibilities of the board and guide the board in its functioning. Even before the passing of the Sarbanes – Oxley Act, the company has limited the membership of these committees to independent directors only. These committees have been made to operate under separate charters framed to monitor the functioning of these committees. Since the year 1998, there have been established corporate governance principles under which the board and the committees have been operating. These principles have guided the composition and operation of these committees.

To ensure that Delta maintains up-to-date corporate governance practices which are by the requirements of Sarbanes – Oxley Act and the listing standards of NYSC, the board reviews the corporate governance practices of the company at regular intervals. The following are some of the actions taken by the company to keep the governance practices in line with SOX requirements.

The company revised its previously adopted standards of director independence to keep in line with the NYSC listing requirements.
An email address has been posted to the website of the company to enable the stakeholders to communicate with the independent directors
The company has adopted an information disclosure policy and guidelines to ensure that there is a fair disclosure to investors by the prevailing securities laws
The company changed some of its senior executive compensation policies to meet the regulatory standards in this respect [6].

The Audit, Corporate Governance, and Personnel & Compensation Committees have been formed with directors who are entirely non-employee directors as defined by the NYSC listing standards. The members of the Audit Committee also satisfy the additional independence requirements set forth under the Securities Exchange Act, 1934. Audit Committee also consists of independent financial experts to guide the board in matters relating to financial reporting and transparency of such reports.

To guide the directors in recognizing and dealing with ethical issues and for providing proper mechanisms to report possible unethical conduct, the board has adopted a Code of Business Conduct and Ethics (the Code). The directors who also function as officers of the company are also expected to follow the Code. As per the Code, all the directors are expected to avoid conflicts of interest between them and the company. The directors are expected to report to the Chairman of the Audit Committee, about any possible conflicts of interest arising in the course of conduct of the business of the company. The Code also defines the scope of the relationship of the directors with third parties by prohibiting the acceptance of any compensation from third parties for services rendered to the company or any gifts from persons or entities dealing with the company. The directors are expected to oversee the proper utilization of the assets of the company [7].

Executive compensation has been one of the governance issues in Delta with its CEO Leo Mullin in the year 1997 receiving a large amount of pay and allowances which almost doubled to $ 13.8 million when the company was running at a loss of $ 1.8 billion [8]. After the workers made a bitter complaint about the exorbitant pay rise, Leo Mullin accepted a pay cut of $ 9.1 million. Even with his abrupt retirement, he was entitled to a retirement package of about $ 16 million. This incident has led to the adoption of stricter government policies concerning executive compensation. A charter for the Personnel and Compensation Committee of the board of directors enables the committee members to perform an annual performance evaluation of the CEO, and to discharge the responsibilities of the board in respect of executive compensation. The charter also provides for the preparation of an annual report on executive compensation to be included in the proxy statement of the company following the regulations of the SEC.

The Airline has taken several initiatives to prove its social responsibility by helping those in need through Delta Force for Global Good. In the year 2007, Delta has built Habitat for Humanity homes in West Africa and India. The company has raised more than $ 1 million for the Breast Cancer Research Foundation. The company along with its employees has contributed to cancer research initiatives, apart from being the largest corporate donor of blood. The company has well-defined diversity policies concerning its dealings with employees, customers, communities, and the partnerships Delta builds with others.

From the foregoing discussion, it can reasonably be stated that Delta Airlines has adopted well-defined corporate governance practices and policies with its different charters on personnel compensation, a charter on audit, a charter on code of ethics, and directors’ independence. The company has also through its experience over the period has improved upon the governance practices to meet the requirements of the Sarbanes – Oxley Act and the listing requirements of NYSC. This has led the company to achieve greater independence among the members of the board of directors and the committees formed thereunder. The company has also based on its past performance in respect of executive compensation has formulated defined policies concerning compensating the senior executives including the CEO and the policies also relate to the severance and retirement packages so that such compensation is not unduly high and are well within the industry standards. The company has formulated its own ethical and social responsibility policies to maintain good governance standards. Except for the executive compensation the company has no record of any governance scandal which needs to be commented upon. The independence of directors is one of the governance issues that have been taken on priority by the company.

References

Form8-K. (2009). Delta Airlines. Retrieved from SEC Filing.

Hoovers.com. (2009). Delta Airlines Company Description.

Monks, R., & Minnow, N. (1995). Corporate Governance. Oxford UK: Blackwell Publishing.

Delta.com. (2007). Investor Relations.

AssoicatedPress. (2003). Delta Alters Corporate Governance Policies.

DeltaAirlinesInc. (2005). Notice of Annual Meeting. Web.

DeltaCodeofEthics. (2007). Directors’ Code of Ethics and Business Conduct. Web.

FreeLibrary. (2004). Clipped wings: CEOs may not be able to save the traditional major airlines as low-cost challengers win the battle of the skies. Web.

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Delta Airlines: Corporate Governance and Leadership Issues

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