Archive for September, 2017|Monthly archive page

British Airways loses IT – a case study

British Airways (BA) used to be called ‘the worlds favourite airline.’  Not any more.   On May 27 2017, a world-wide systems failure grounded all BA flights.  Check-in desks at London’s Heathrow and Gatwick and other airports around the world were unable to access passenger details.  470 flights were cancelled in London and a further 183 on the following day, with many more flights stranded around the world. Tens of thousands of passengers were left standing around for hours with no information, until being told to ‘come back tomorrow’.  BA airport staff seemed unprepared for the huge numbers of stranded passengers. BA web sites and inquiry operators had little information, other than that all flights had been cancelled. Passenger baggage piled up and did not reach them for days.  Compensation claims for delays and lost baggage were estimated at over £100 million.   The reputation loss for BA was immeasurable.

Although some immediately thought this must be a cyber attack, it was not.  BA’s initial explanation for the systems breakdown was loss of power to servers on the central reservation system. Other systems reliant on access to passenger data, including the flight loading system and the baggage handling system, then shut down.

IT experts suggested that with such sophisticated systems, BA must have included back-up power supplies.  Indeed they had, but it emerged that the power had failed totally because a maintenance worker had turned it off.  The back-up systems, a generator and batteries were working perfectly.  Then, once power was restored, efforts to re-boot the systems were bungled.

Some BA ex-employees, who had been laid off as a result of a head office cost cutting drive, suggested that the heart of the problem was a decision to out-source IT work to an Indian company.  ‘The BA system is a legacy system that has evolved over generations of equipment and software changes,’ they said. ‘The inter-relatedness of the systems and the complexity of the data is immense.  BA needed people who had grown up with the system.  This is not the first time the system has failed this year.’  BA denied this suggestion.

British Airways, once the country’s flag-carrier, is now a subsidiary of the International Airline Group (IAG), a Spanish company, which also owns Iberia, the Spanish airline.  IAG’s shares had risen significantly in the previous year and suffered only a small fall following the BA systems saga.

The CEO of IAG, Willie Walsh (who had previously headed BA) did not appear during the crisis, leaving the situation to be handled by BA’s CEO, Alex Cruz.  They were both criticised for delays in offering explanations or apologies.  An official raised a storm by suggesting that passengers would receive full refunds on their tickets, but BA would not pay for the cost of missed connecting flights, alternative travel arrangements, or accommodation.

Subsequently, BA apologised to its customers and commissioned an independent inquiry.  The British airlines’ regulator, the Civil Aviation Authority, was also called on to examine the case.

At the previous AGM of IAG, shareholders had received a letter from a corporate governance advisory group that ‘the board should consider bolstering the IT experience of its non-executive cohort: only one of the serving non-executive directors has IT experience.’

 

Discussion questions:

  1.  Who was responsible for this debacle?
  2. How might such a situation have been avoided?
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New Developments in UK Corporate Governance

New Developments in UK Corporate Governance

In previous blogs, I discussed the Department for Business, Energy & Industrial Strategy (BEIS) Green Paper on Corporate Governance Reform issued in November 2016 and the BEIS report which detailed its recommendations and conclusions based on the consultation of this Green Paper.  On 29th August 2017, the UK Government published ‘Corporate Governance Reform, The Government Response to the Green Paper Consultation’, available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/640631/corporate-governance-reform-government-response.pdf

In the Executive Summary, it states that ‘The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of a company. It involves a framework of legislation, codes and voluntary practices.  A key element is protecting the interests of shareholders where they are distant from the directors running a company. It also involves having regard to the interests of employees, customers, suppliers and others with a direct interest in the performance of a company. Good corporate governance provides confidence that a company is being well run and supports better access to external finance and investment.’

The Executive Summary goes on to say that there are nine headline proposals for reform across the three specific aspects of corporate governance on which they consulted, ‘these being executive pay;  strengthening the employee, customer and supplier voice; and corporate governance in large privately-held businesses. It also takes into account the need for effective enforcement of the corporate governance framework.’

Of particular note are that all listed companies will have to reveal the pay ratio between bosses and workers; all listed companies with significant shareholder opposition to executive pay packages will have their names published on a new public register;  and new measures will seek to ensure employee voice is heard in the boardroom.

https://www.gov.uk/government/news/world-leading-package-of-corporate-governance-reforms-announced-to-increase-boardroom-accountability-and-enhance-trust-in-business

 

George Parker highlighted the emphasis on boardroom pay in his article ‘May maintains focus on boardroom pay’ (Financial Times, 26th/27th August 2017, page 2). The High Pay Centre welcomes the requirement for all listed companies to publish their pay ratios ‘Most significant of all, from our point of view, was the announcement that the pay ratio between the CEO and the average UK employee will now have to be published by every listed company. We have never claimed that this measure will solve the problem of excessive pay at the top, nor that it will suddenly halt and reverse a trend that has developed over 20 years and more. Unfair or misleading comparisons between pay ratios in very different businesses or organisations should not be made. But finally we will have a meaningful way of tracking the gap in pay between the top and the average employee. Shareholders and other stakeholders will be able to scrutinise these gaps and apply pressure to close them. And this can be done, of course, not just by restraining pay at the top but raising pay for those lower down the scale.’ (Stefan Stern September Update, High Pay Centre).

The Financial Reporting Council (FRC) will be undertaking a consultation on a fundamental review of the UK Corporate Governance Code later this year as the 25th anniversary of the UK Corporate Governance Code approaches later in 2017.

 

Chris Mallin

September 2017