British Airways Strategic Governance and Ethics

Agency Theory and Competitive Pressures

In recent years, British Airways (BA) has faced an increasing number of challenges, including labor problems, rising fuel prices, and competitive pressure from low-cost carriers that have squeezed profit margins. At the same time, the company must comply with various regulatory requirements, such as the Companies (Audit, Investigations and Community Enterprise) Act of 2004. These challenges are significant because they demonstrate how BA must address multiple pressures simultaneously: increasing competition, volatility in energy markets affecting labor costs and employee benefits, and regulatory obligations. When these factors are considered together, it becomes clear that the company faces substantial challenges in managing these competing demands while remaining compliant with legal requirements (Three Cheers for Sarbanes Oxley, 2006; Young, 2010).

To fully understand BA's position requires comparing its practices with those of Continental Airlines and examining the two primary regulatory regimes that govern them: the Companies (Audit, Investigations and Community Enterprise) Act of 2004 (UK) and the Sarbanes Oxley Act of 2002 (US). This comparison reveals how corporate governance principles, shareholder versus stakeholder perspectives, and ethical strategies differ between the two airlines and their respective legal frameworks. Through this analysis, it becomes possible to identify how both companies adapt to the underlying challenges they face.

Corporate Governance: Legal Frameworks and Mechanisms

British Airways operates under the Companies (Audit, Investigations and Community Enterprise) Act of 2004, which applies to all UK-based corporations. This law was implemented in response to accounting scandals that occurred in 2001 and 2002. At its core, the regulation establishes liabilities for company directors and officers, who are responsible for preparing accurate financial statements. Certain provisions of the act—notably sections 19 and 20—expose these individuals to the possibility of shareholder lawsuits. This legal framework provides BA with a foundation for disclosing accurate information to investors and regulators, enabling the company to address material changes in financial condition promptly (Guidance on Companies, 2010).

The Sarbanes Oxley Act of 2002 was created to address loopholes that corporations exploited to avoid disclosure requirements, particularly in the wake of the Enron and WorldCom scandals. The law established several key provisions, including the creation of a public accounting oversight board, improved financial disclosures for off-the-books partnerships and stock options, and the requirement that the CEO attest to the accuracy of disclosed information. These mechanisms address gaps in securities regulations that companies had previously exploited. However, Section 404 has generated confusion because it provides no specific guidance on which accounting standards should be used in internal and external audits. This ambiguity means that corporations must potentially allocate larger portions of their budgets to ensure compliance with various standards (Feeny, 2007).

When comparing the two laws, the differences in enforcement and compliance mechanisms become apparent. The Companies Act exposes BA's directors and officers to civil lawsuits and requires adherence to a standard set of regulations, but with limited ongoing oversight from a regulatory board. In contrast, the Sarbanes Oxley Act requires Continental Airlines to follow not only the initial provisions but also changing requirements issued by the public accounting oversight board. This ongoing regulatory evolution directly impacts the costs that Continental must incur to maintain legal compliance.

Shareholder versus Stakeholder Perspectives

In response to the Companies (Audit, Investigations and Community Enterprise) Act of 2004, BA has implemented several governance improvements, including better internal controls, greater board independence, enhanced risk management, and improved auditor independence. From the shareholder perspective, these measures improve transparency and accountability. However, shareholders could potentially benefit from even greater oversight—for example, through the use of two independent auditors. From the stakeholder perspective (including employees and operational stakeholders), the regulations have increased transparency and enabled more effective risk accounting. Yet the implementation of numerous new procedures has increased operational costs, creating a fundamental tension: shareholders desire greater transparency, while stakeholders seek to minimize the regulatory burden and associated costs. BA thus faces a constant struggle to balance these competing interests (Corporate Governance, 2009).

Continental Airlines follows the Sarbanes Oxley requirements by disclosing financial information to investors, with the CEO personally attesting to the accuracy of reported results. For Continental's shareholders, this requirement provides greater confidence in financial reporting. For the company's stakeholders, however, these compliance obligations require significant expenditure, forcing the airline to balance shareholder interests in accuracy against stakeholder concerns about operational costs. Like BA, Continental faces a constant challenge in trying to equilibrate these competing demands.

When both airlines are examined comparatively, it is clear that both regulatory frameworks provide a foundation for standardized reporting to regulators and the public. Yet both airlines confront the fundamental tension between shareholders (who demand increased transparency) and stakeholders (who seek to reduce regulatory burden). This ongoing struggle to maintain balance—while industry pressures force cost reduction and regulatory requirements increase costs—represents one of the most significant ethical challenges facing both carriers. The central strategic problem is maintaining this balance in policies and procedures going forward.