Hiltzik: Where was the Southwest board?

Southwest Airlines’ flight schedule is returning to normal, its top executives have issued their ritual apologies and promises to do better, and those front-line workers who bore the brunt of customer fury during the ‘last week they are recovering (we hope) their mentality and emotional balance.

That leaves one set of Southwest figures who have so far avoided finger-pointing in the wake of the airline’s epic meltdown: the board of directors.

That’s a shame, because the airline’s 11 outside directors are arguably the most culpable of the culprits in the company’s recent fiasco, the most deserving of a block.

Operational mishaps and technology shortfalls happen all too often… flight attendants are often stuck next to Southwest customers without information.

– Southwest Flight Attendants Union

These are the people who have presided over the airline’s evolution from a company respected for its dedication to customer service to one that demands respect because it “returns value to shareholders” through generous dividends and share buybacks.

It’s true that bad weather caused the airline’s service to collapse, but that’s not much of an excuse.

Other major airlines recovered quickly, but not Southwest. Its complex flight map may also have contributed, but that’s because Southwest hadn’t kept its scheduling technology up to speed with its challenges.

During the airline crisis, which began in December. On the 22nd, more than 15,000 flights were cancelled. The cancellations kept millions of would-be passengers from their holiday getaways, stranded legions in airport terminals with no hope of quick rescheduling, and separated untold numbers of travelers from their luggage.

If all of this takes a favorable turn, your board’s role may be receiving some long-overdue scrutiny.

The big question should be: What do these people do to earn compensation that, according to the company’s most recent proxy statement, averaged more than $284,000 in 2021?

Where were they during the years when employees and their unions continually warned that Southwest’s crew and aircraft scheduling technology was hopelessly out of date?

Why the board didn’t take matters into its own hands when Southwest’s on-time performance imploded in 2014 due to poor planning and an effort to expand its service on the cheap without adding planes to its fleet or improve your antiquated reservation system? Or in June or October 2021, when the airline had to cancel thousands of flights due to technological problems?

As the Christmas crisis continued to unfold, CEO Bob Jordan issued a video mea culpa to airline employees in which he acknowledged that “we’ve talked a lot about modernizing the operation and the need to do that.”

Any self-respecting corporate director would take that as a slap in the face and a wake-up call. It is the board’s job to ensure that senior management translates talk into action.

Boards of directors are generally the least covered components of corporate governance, in part because boards are often insular and secretive bodies, whose members are rarely exposed to media scrutiny.

However, its role should not be overlooked. Whenever a company falls into dysfunction, there is often a do-nothing board at the top. Directors are supposed to be independent of management, but they are usually the cat’s paws of the top executives who appoint them and ask shareholders to vote them into office.

Although pressure on American companies to diversify their board of directors has increased in recent years, it is a slow and uncertain process. Directors are typically very similar to executives in experience and general outlook.

Board members rarely take a strong stand against management unless a top executive is embroiled in a major public scandal. If there is significant disagreement on a corporate board, it is usually taken as a sign of board dysfunction.

The Southwest board doesn’t look on the surface much different than standard issue, not worse, but not better. The board has a modicum of diversity in the areas that garner the most public attention: Its 11 members β€” not counting insiders Jordan and his predecessor, Gary Kelly, who rules as executive chairman β€” include three who tick the boxes of the diversity of gender and race.

In terms of experience and outlook, however, the board is as homogenous as they come. There are four former CEOs of other companies, three former corporate lobbyists, a current and former business professor, a director of an executive search firm, and a board member of several nonprofit organizations.

According to Southwest’s latest proxy statement, issued in April, “the Board of Directors unanimously recommends a vote for the election of each of the director nominees.” Since only one of the nominees was joining the board for the first time, this meant that the directors were unanimously recommending votes for themselves.

As my mother might have said, this could be translated as, “I like, who do you like?” Unlike other companies, particularly in the oil and gas business, where insurgent shareholders appointed their own slates of directors (and sometimes succeeded in ousting board members), no such proposal entered on the agenda for Southwest’s annual meeting last year.

The proxy explains to the corporate table why each director should be re-elected, generally because their experience and knowledge allows them to “significantly contribute” to the board, etc., etc.

Absent from these mini-bios is any familiarity with Southwest’s customer experience or workforce issues, which might have prompted, if there had been, a board discussion about when the company would leave to talk about modernizing their system and it would start, you know, modernizing.

Certainly none of the directors have a background in consumer advocacy that would cause them to raise management questions about how they serve anyone but shareholders.

Even if judging by the company’s recent performance alone that as a group they have been in place too long, their length of service would tell the story.

Senior Outside Director William H. Cunningham has served on the board for 22 years. Seven have served for more than a decade. In other words, they’ve stayed put, holding onto their seats with what George Orwell called “prehensile bottoms,” during the company’s period of declining customer service and its programming disaster.

The average age of directors, excluding inside directors Jordan and Kelly (the current and former CEO, respectively), is 72 years. Their average compensation in 2021 was more than $284,000, with Cunningham topping the list at $314,000.

No one would argue that this compensation recognized the enormous burden on directors’ time. During 2021, the board held seven meetings, some of which lasted two days. Each of the directors attended “at least 75%” of the meetings, the representative says, or at least five of those meetings.

As I reported earlier, Southwest’s problems are emblematic of a corporate culture that has forgotten why a corporation exists. Revered management expert Peter Drucker was always very clear about this: the purpose of a corporation, he said, is to create and maintain customers by providing value.

After that, and after serving the employees so that they are in a position to deliver that value, the shareholders are entitled to a share of what is left. If the company has managed these first imperatives well, there should be plenty of value for shareholders.

Like many American companies, Southwest turned these imperatives on their head. In May 2019, then-CEO Kelly issued a press release detailing all the benefits the company had provided to its shareholders.

It had just increased its quarterly dividend to 18 cents per share: “the 171St consecutive quarterly dividend”, the company had declared. Southwest also instituted a new $2 billion share buyback plan to follow an earlier $2 billion buyback.

Over the previous decade, Kelly said, Southwest had “returned more than $11 billion in value to shareholders through share buybacks and dividends.” Among its financial priorities were β€œto grow earnings, margins and return on capital; and maintain a healthy return for the shareholder.”

What was missing from that statement was any reference to Southwest’s operational performance, for example, reducing flight delays and cancellations. What was not recognized was that increasing profits, expanding profit margins and maintaining healthy returns for shareholders are always in tension with the costs of service delivery. The more revenue Southwest devoted to raising cash from shareholders, the less it had left to keep its planes flying on schedule.

As it happens, Southwest was the first major airline to reinstate its dividend after the pandemic, announcing it in December. 7 which would resume its quarterly payment of 18 cents per share this month. That will cost $107 million in the quarter, money that won’t be available to “modernize.”

The growing technology deficit at Southwest could not have been a secret to its directors, or it would not have been a secret if any of them had been paying attention.

The Transport Workers Union representing Southwest flight attendants warned at least as far back as 2018 that its systems were leaving its workers exhausted and discouraged.

“Operational mishaps and technology shortfalls occur all too often,” the union said. When flights are delayed or canceled, the union observed, “flight attendants are often stuck next to Southwest customers without information.”

The pandemic, the union warned, had made conditions immeasurably worse. Southwest suffered a sharp slowdown in business during the pandemic, but received $7.2 billion in grants and loans from the federal government.

Transportation Secretary Pete Buttigieg has warned Southwest that he will be watching closely to make sure the airline meets its legal obligations to affected passengers, but he could take a firmer stance, questioning whether executives and members of the airline’s board of directors are fit to continue in their roles. not that he has the legal authority to force them out).

The power to force change lies with the shareholders. They may have enjoyed receiving value through dividends and share buybacks, but the cost of recovery for Southwest will be high. The airline will have to spend billions of dollars to compensate passengers and billions more to carry out technology upgrades it has been putting off for years.

PR types say the memories of Southwest’s crisis will soon fade, but that may not be so certain. For many affected passengers, this was a cataclysmic failure that appeared on the front pages of the nation’s newspapers and on breaking cable news. It won’t soon be forgotten.

This year, as every year, shareholders will have the opportunity to hold board members to account for their inaction. They should take the opportunity to do so.

Leave a Reply

Your email address will not be published. Required fields are marked *