Essay: Ryanair analysis

In recent years Ryanair have gained the reputation for poor corporate governance within their organization. An issue in rostering for pilot’s holidays and poor working conditions for staff caused strikes in summer 2017. Nearly 100 pilots participated in the strikes. In total Ryanair cancelled 600 flights, wish resulted in 100,000 passengers having to find alternative travel or accept a full refund, (The Independent,2018). A number of other issues in Ryanair’s corporate governance have been the cause of continuing negative publicity. This essay will discuss the ineffective leadership within Ryanair, the issues with the independence of their board and elements of the corporate governance code to support the argument that the board of Ryanair is not truly independent. A second issue that this essay will review is the current strategy in Ryanair, where there is a large focus on bottom line maximum returns, which has had effects on the welfare of staff and in addition this essay will discuss the agency vs stakeholder debate, it will include elements on the role of shareholders and how they should be active as part of the organisation.
Ryanair is Europe’s largest budget airline with operations in over 270 airports in 37 countries and employs 14,500 people. The Ryanair headquarters are in Dublin. Ryanair launched in 1985 providing a service between Waterford and Gatwick. In November 1996, an American investment group led by David Bonderman bought 20% of the airline. In a series of complex transactions, Ryanair Holdings Plc was formed. The following year it was listed on the London, Dublin and New York (Nasdaq) stock exchanges. The largest shareholding of Ryanair is by Harris Associates with 4.04% of all shares. The CEO Michael O’Leary is the second largest shareholder in the company with 3.89% of all shares. (Ryanair, 2018)
Alongside the criticisms of the board independence there are a number of other scandals that have made the news. It has become public knowledge that CEO, Michael O’Leary’s prime objective is to make money regardless of the consequences. He also regards publicity as a positive driving force behind the success of his business, regarding any press as good press; “Short of committing murder, bad publicity sells more seats” (Campaignlive, 2013). This bureaucratic management style has certainly had a knock-on effect on the treatment and welfare of Ryanair staff. O’Leary’s penny pinching management style is depicted by recruits having pay for their own uniforms and are charged a fee if they quit and also employees must be available for standby days where they are paid £3.75 per hour – less than half the minimum wage. In addition to this O’Leary openly admitted that he” messed up in the planning of pilot holidays”. This was caused “by a shift from counting crew flying hours over a calendar year, instead of its fiscal year from April to March” (Financial Times, 2017).
The First issue with the corporate governance in Ryanair is that there is a large focus on bottom line and maximising returns to shareholders. This strategy of making money as the main objective has not worked in Ryanair’s favour. Agency theory can be used to describe the current relationship in Ryanair between the CEO Michael O’Leary and the shareholders. The agency theory model is considered as one of the oldest theory’s in the literature of the management (Daily, Dalton, & Rajagopalan, 2003). Ryanair’s poor strategy of maximising shareholder returns has had a negative effect on employees in the company as O’Leary’s unilateral train of thought that money is everything has led to issues with staff welfare. Agency theory suggests that there is governance relationship often viewed as a contract between the director and the shareholder, where the director performs a service on behalf of the shareholders. Jensen and Meckling define an agency relationship as a contract were one or multiple people (the principal) engage another person (the agent) who is usually a company executive, to perform some type of service on their behalf which often involves giving some, if not all decision-making authority to the agent. (Jensen and Meckling, 1976).
In the case of Ryanair, the board gives shareholders a minimal say in how the company is run. All shareholders are entitled to a vote however the board keeps shareholders the dark. In 2017 there was a shareholder revolt at the annual meeting, an influential trio of advisers, Institutional Shareholder Services, Glass Lewis and Pirc recommended that investors should vote against the company’s advisory pay report, they flagged concerns about bonus payments and poor disclosure. Intuitional shareholder services and Pirc also advised against the re-election of Mr Bonderman, blaming the chairman for corporate governance failures at the Dublin-based carrier. (Finical Times, 2017). Nearly 30% of shareholders voted against the re-election David Bonderman, however he survived the rebellion and still currently sits as chair. International Transport Workers’ Federation president Paddy Crumlin said “Ryanair needs a chair who works in the interests of all the company’s stakeholders – workers, passengers and investors and doesn’t just prop up a cosy management club”. In response to this revolt about pay structures in Ryanair O’Leary said, “My view of shareholders voting against my pay package is, if you don’t like it, don’t vote against it sell your shares” (Financial Times, 2017). Many stakeholders do not agree with O’Leary’s motives, for example how he is only motivated by making money and disregards corporate social responsibility, this is when an agency dilemma arises. An agency dilemma is a conflict of interest in any relationship where one party is expected to act in another party’s best interests. “Agency theory has been singled out as the theoretical and ideological bedrock of corporate cultures that foster large-scale scandals” (Ghoshal, 2005).
In the case of Ryanair Michael O’Leary’s has unilateral train of thought to make money, means that he disregards all other aspects of the business, to a certain extent even passenger safety, the airline has often been criticised for only putting the bare minimum fuel needed into planes. “Ryanair lost a libel battle against an investigative documentary that claimed pilots were put under high pressure to reduce the amount of fuel their aircraft carried.” (Jon U. Thomas,2015). It is this ruthless attitude O’Leary holds to making money that has led to the low-level of managerial discretion within the organisation.  This is where there is a conflict of interest between the shareholders and the agent.
Although O’Leary acts in his own self-interest there is not a case of managerial opportunism within Ryanair. Managerial opportunism suggests a conflict of interests can occur when individuals (principles) are contracted to act in the economic interests of the firm however they are still motivated to reach decisions that will maximize their own economic interests. (Rutledge and Karim, 1999). This is when agency costs occur, Jensen and Mekling (1976) refer to agency costs as social and private costs of an agent’s actions due to the incomplete alignment of the agent’s and owner’s interests. When agency theory is applied to an economic setting, an agent’s preferences and beliefs often regard an extreme and immediate self-interest and selfish character. (Rutledge and Karim, 1999). According to the work of Jensen and Mekling agency costs are the sum of three things – “The monitoring expenditures of the principle, the bonding expenditures by the agent and the residual loss” (Jensen and Meckling,1976, p. 308). Monitoring refers to the shareholders monitoring the actions on the management and directors. Bonding costs refer to costs in the management to assure shareholders that the management are working in their best interest. Residual loss refers to loss incurred “by the principal” because the agent’s decisions do not serve its interests. The agency problem in Ryanair was that staff did not agree with the CEO’s methods, staff wanted shorter working hours and better working conditions however O’Leary was not willing to meet these demands. Another agency problem in Ryanair was that shareholders were not happy with the reputation of the company being unethical.
O’Leary’s penny picking self-interest which lead to strikes had a negative impact on shareholders in the form of the share price. The strikes were the cause of an 8% drop in share price. Along with the share price the strikes were a result of a 12% drop in yearly profit to the organisation, the airline cut their profit forecast for full-year profits between £978million and £1billion, compared with previous guidance of £1.1billion to 1.2billion. This is an example of how poor cooperate governance, were an agent is acting in their own self-interest, can have an impact on company results.
Ryanair would be of great benefit if Michael O’Leary applied stakeholder theory to the business. Stakeholder theory implies that the purpose of a business is to create as much value as possible for stakeholders, and ultimately if stakeholders are happy it will often lead to longer sustainable returns. R Edward Freeman suggest that stakeholder theory is an idea about how business really works. He says that in order for a business to be successful it needs to create value for its suppliers, employees, customers, shareholders, communities and financiers, banks and others that have money. Freeman states that you can’t look at any one of a company’s stakeholders in isolation. Their interest has to go together, therefor the job of a manager is to work out how the interest of suppliers, customers, financers and employees go in the same direction (Freeman, 1984). Stakeholder theorists argue that a company owes a duty to all those effected by their behaviour. R. Edward Freeman suggests that Managers must “develop relationships, inspire their stakeholders, and create communities where everyone strives to give their best to deliver the value the firm promises” (Freeman, p364,2004) this active approach can be referred to as corporate social responsibility. CSR is a concept where organisations consider the interests of society by taking accepting responsibility for their effect on customers, employees, shareholders, communities and the environment in all aspects of their organisation. Carrol (1979) suggested that company’s responsibilities can be broken down into four groups, Economic responsibilities, legal responsibility’s, ethical responsibility’s and discretionary responsibilities. In order for a business to have high levels of CSR it must meet each of these four categories. In a business operating a stakeholder theory approach stakeholders may bring action against the directors for the failure to perform their duty that is required (Freeman, 2001).
Stakeholder theory would benefit Ryanair as the stakeholders would be able to challenge the board and in particular on low levels of CSR in the company. Allowing stakeholders to have more engagement in the running of the business may better the corporate image of the company and change the way people see Ryanair as being an unethical company. A greater emphasis on increasing CSR in Ryanair is needed. Research suggests that obstructions to employee engagement may stem from a lack of CSR embedded in everyday life of an organisation (Collier and Esteban 2007). Poor communication to employees regarding the value of CSR to the organisation and themselves as employees (Arvidsson, 2010, Duarte, 2010) often creates a low level of shared organisational and personal values towards CSR (Slack et al. 2013)
It is the board that needs to consider changing the businesses strategy to focus more on employee engagement and apply stakeholder theory to aid this. However, the current board of directors in Ryanair is ineffective and the true independence of the board can be questioned. Ryanair has 12 members, the company state that 11 of these are independent and 10 are non-executives. The UK corporate governance code has some principles to ensure a company’s board is effective. The Code is a guide to key components of effective board practice. It is based on the underlying principles of all good governance, probity, accountability, focus and on the continued success of a company over a long period of time (UK Corporate Governance Code, 2016).
The reason Ryanair are able to class these directors as independent is due to the codes comply or explain policy. The Code is not a rigid set of rules. It consists of and provisions. The Listing Rules require companies to apply the Main Principles and inform shareholders on how they have done this (UK Corporate Governance Code, 2016). When the company inform the shareholders of this they are required to provide an explanation on how good cooperate governance will be an outcome of the other mean’s, the company should aim to illustrate how its actual practices are consistent with the principle to which the particular provision relates, contribute to good governance and promote delivery of business objectives (UK Corporate Governance Code, 2016). However, the cooperate governance in Ryanair is poor, there are issues with treatment of staff, cooperate image and poor service. Therefor Ryanair should not be able to use an alternative to follow the provisions of the code and ultimately not be able to class these NED’s as independent. The Irish times published that “It doesn’t matter what Ryanair says under the barmy “comply or explain” doublespeak, its board looks about as independent of the company’s executive as the tides are of the moon.” (Irish Times, 2017).
The UK corporate governance code suggests that the role of the board is to set the company’s standards and values and to make sure that the company’s obligations to its shareholders and others are understood and met (UK Corporate Governance Code, 2016). To do this effectively it is important to have an appropriate mix of executive directors and in particular non-executive’s, this is to ensure that no small group or individual can dominate the board’s decision making. The financial reporting council suggest that an effective board is made up of four things, they suggest that an effective board should “provide direction for management, demonstrate ethical leadership, displaying and promoting throughout the company behaviours consistent with the culture and values it has defined for the organisation, create a performance culture that drives value creation without exposing the company to excessive risk of value destruction and make well informed and high quality decisions based on a clear line of sight into the business” (Financial Reporting Council, 2011). The UK corporate governance code states that an independent NED must not only have the necessary independence of character and judgment but also be free of any connections that may lead to conflicts of interest (UK Corporate Governance Code, 2016).
One reason why Ryanair’s board of independence is questioned is that the chairman David Bonderman has been in position for 21 years, he also has a significant shareholding in the company of €130 million euro. The code makes it clear that a director will not be classed as independent if they represent a significant shareholder. With a shareholding, this large Bonderman himself would be classed as a significant shareholder. The code also states that a director is not independent if they have served in the board for more than 9 years, David Bonderman has served on the board of Ryanair for over 20 years. Another independent director, Kyran McLaughlin, is the deputy chairman of the company’s house broker, has been an adviser to O’Leary for two decades and has also served on the board for more than 9 years. His role as Deputy Chairman at Davy Stockbrokers is a question of his independence. Fees have been paid to Davy Stockbrokers for these services. Louise Phelan the Vice President Global Operations at PayPal, she also serves as an independent NED for Ryanair’s nomination committee. PayPal is one of Ryanair’s payment service providers. It is clearly stated in the governance code that a director cannot be classed as independent if they have a material business relationship with the company including a senior director of a major supplier or customer interest (UK Corporate Governance Code, 2016). This is clear proof that that some of the board members should not be classed as independent. Christopher pass states that NED’s are needed because commercially and legally they are seen as an important guarantee of integrity and accountability of companies (Pass, 2004). However, the board on Ryanair do not display integrity due to their lack of independence. Ryanair would benefit from having a member of staff sit on their board, this staff member would represent the employees of the business and would be able to voice employee opinion in board meetings.
To conclude, there are a number of various governance issues present in Ryanair. Michael O’Leary’s narrow-minded attitude towards public image and cooperate social responsibility has had a massive negative impact on the airline in the form of strikes and cancelled flights. O’Leary acting in his own penny picking self-interest has led to issues with staff welfare in the organisation. The strategy that the company follows of maximising returns for shareholders, has led to the disregard for treatment of staff and has caused conflict between stakeholders and O’Leary. Ryanair would benefit from increasing employee engagement and following the stakeholder theory. Another issue with the governance in Ryanair is the ineffectiveness of the board of directors. A number of directors are classed as independent; however, Ryanair have not followed the cooperate governance codes principles in the decision to class these directors as independent. Ryanair would benefit from having a board that is balanced between members that are truly independent and company executives that are not independent. This way a group of board members would not be able to influence the boards decisions.
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