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Factors Influencing Corporate Disclosure Transparency

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Question:

Discuss about the Factors Influencing Corporate Disclosure Transparency.
 
 

Answer:

Introduction

Qantas Airways Limited popularly known as ‘The Flying Kangaroo’ was established in the year 1920 and is the largest airline in the present scenario when it comes to the fleet size, as well as international destinations. Qantas has reached a great height owing to the strong staff and the manner in which it had managed to associate with its customers. The strong business and the remuneration have led to a big improvement in the overall business thereby providing a strong competition to the Air New Zealand Ltd and Virgin Blue Airlines Pty Ltd. In the report, the major emphasis will be on the concept of executive remuneration followed by a discussion on the global financial crisis.

It can be seen from the annual report of Qantas Ltd that the managers and executives’ remuneration is being disclosed in the Remuneration Report together with the processes of analyzing their performances. Further, the non-executive directors are allowed travel and superannuation entitlements that are regarded as standard and reasonable in nature. Besides, unlike managers and executives, such non-executive directors do not receive any remuneration based on performance (Titman et. al, 2016). Besides, since 2015 and 2016 was a fabulous year for the company, it endeavored in enhancing the customers’ experiences. This can be proved by the fact that under the Qantas Transformation Program, the company surpassed its commitments and has obtained a phenomenal financial outcome wherein over $1 billion was returned to the shareholders (Qantas, 2016). This, in turn, resulted in an increment in both the fixed and variable remuneration outcomes of the company. Moreover, in relation to such variable remuneration, the remuneration outcomes of such managers and executives clearly align with that of the company’s performance and the establishment of shareholder value (Bushman & Piotroski, 2006). Owing to their contribution in attaining such outcomes, the company also paid annual incentives to the executive management and the CEO. This is further evaluated based on the STIP (Short-term Incentive Plan) report card of their non-financial and financial performance targets. The Board played a vital role in this regard, as it attempted in evaluating and reviewing the performance of the managers and executives and thereafter, concluded that their actions were relevant in the attainment of such maximized targets.

 

Nonetheless, the remuneration of the CEO is directly associated with the company’ performance under both long-term incentive and annual incentive plans. However, in Qantas, annual incentives are only provided based on the Board’s observation that the company and its executives have performed effectively in the market. In contrast to this, long-term incentives are only provided to the managers and executives when the financial performance of the company has been effectively strong and three-year performance challenges are adequately met. This is clearly observable from the Remuneration Outcome History of the CEO (Qantas, 2016). Further, in relation to indicators that allow the Board in determining the remuneration of managers and executives, it attracts, retains, and awards the capable team of executives, encourages them to address the unique challenges encountered by the company, and thereafter, link their remuneration with that of their own performance and company’s performance as a whole (Davies  & Crawford, 2012). Further, in order to achieve this, the remuneration of executives is set in relation to the nature and size of their roles and their individual performances in such role. These indicators assist the company in rewarding the executives based on their performances. Since, the reward of executives is directly associated with the financial performance, business motives, and executives’ performance as a whole, the system of such remuneration cannot be held as unreasonable. Further, this system of remuneration allows the company to assist a culture of shared ownership of executives and align the interests of such executives with that of the shareholders. For instance, if the non-cyclical income of the company had not enhanced because of its loyalty diversification measure, a healthy profit could not be gained and that would have directly prevented in awarding the executives and managers.

The performance of Qantas is provided in the annual report and along with that, the incentives of the executives have been clearly laid down indicating a string transparency in the payments. The main aim of the framework of the executive compensation is to attract, retain and reward the team for the performance. It is clearly indicated that the pay opportunity is in tune with the performance of Qantas.

 

Global Financial crisis

The GFC happened to owe to innumerable flaws and deficiencies on the internal control and weak management system. The event leads to bankruptcy and eroded the wealth of the investors. There were various complications that played a vital role in the crisis. The issue of incentives, improper details, interest conflict, etc were the paramount ones. Further, the other factor like unethical behavior and incentive were the major ones in enhancing the risk.

Firstly, the major problem occurred is in tune to the executive compensation. This system along with the accounting rules of the bank played a major role in providing data that were misguiding in nature. Further, the executives those are paid through stock options have an incentive to increase the market value of the share by increasing the profits that are reported instead of increasing the true profits (Bajaj, 2008).  There was a wrong offset when it came to stock options and ultimately leads to worsening of the issue.

Secondly, securitization was a major problem in this regard. The sub-prime mortgage leads to heavy concerns in the system of information where the mortgages were taken by the investment banks and then sold to other banks and the remaining is left to operate on the balance sheet (Barrell & Davies, 2008). In totality, the complications of the product lead to a huge problem in the due course of time.

There was widespread impact on the overall economy and the GFC led to serious trouble in various manners. The risk spread to various other countries and the major impact was observed on the banks. The spread that was created by the banks on the swaps showcased a significant fall. Secondly, the crisis led to a huge liquidity issue and was an eye opener on the part of the authorities. The investors invested huge sums in the illiquid market during heavy volatility (Coy, 2016). However, low level of liquidity can raise the huge issue and is a potential risk to the overall system. Therefore, the GFC brought the liquidity issue to the forefront and the investors faced a potential problem in this regard.  In totality, the demand for goods and services led to a huge decline. Moreover, there was a strong decline in the oil prices from US$ 147/b to US$42.95/b. Therefore, the GFC led to a negative trend in the economies of various countries and the GDP rate fell considerably (Giles, 2009). Overall, the stock market plunged to a huge low creating liquidity issues and huge losses for the investors.

 

Linking executive remuneration contribute to the Global Financial Crisis

When it comes to Qantas, it has massive advances in the area pertaining to economic and technology. Such areas have been responded in a fair manner through adaptation and setting up of a milestone for the industry.  Qantas has taken a strong stand in terms of sustainability by looking after the environment, enhancing the shareholder value and looking after the community. The investment of Qantas in digital and data capability has created Better Avenue for the customers through the process of personalization and influencing the efficiencies in the operations. Further, it has broadened the earnings of the group beyond the area of aviation (Samaha & Dahaway, 2010).

The practice of aligning executive remuneration in the United States played a key role in the emergence of global financial crisis. The major suspect in this regard can be attributed to the fact that such remuneration policies incentivized the top executives of the United States in taking excessive risks, thereby enabling them to precipitate the collapse of the entire financial system. Further, according to an article in 1990, it was shown that the major trouble with that of the American corporate is that the remuneration system of the top executives is entirely independent of performance. In simple words, the CEO’s of America were paid on a huge scale that clearly granted them the position of bureaucrats. This means that instead of taking steps to enhance goodwill and value-maximization in the market, the CEO’s clearly took advantage of such remuneration system and as a result, disturbed the entire economical system of U.S. The linkage of executive remuneration played a major role in encouraging the stipulation of misguiding information. Further, in 1990, stock options became the major component in relation to remuneration of executives. Such executives who attained remuneration through stock options obtained the incentive to maximize the value of market shares by enhancing the reported incomes instead of enhancing the real income. Moreover, even though the Sarbanes-Oxley Act assisted in addressing some concerns, yet the stock option concerns were not adequately addressed (Coy, 2016). Hence, the inaccurate offset of stock options played a vital role in an inappropriate enlightenment of costs to their shareholders. This further provides strong incentives to the executives in spending unreasonable remuneration through the scheme of stock options, but in reality, this practice also resulted in the motivation of immoral accounting policies within the United States.

Besides, this policy also enables the executives in involving only in the profits and discarding the losses. Therefore, this results in the provision of incentives to such executives in the maximum adoption of risks. Nevertheless, this may have assisted the companies in the US in gathering more revenues in the short-run but major losses had to be encountered by many others. On a whole, the practice of accounting framework and maximum risk within the remuneration policy in the United States worsened the entire financial system, thereby resulted in the emergence of global financial crisis (Coy, 2016). Companies like CitiGroup and JP Morgan Chase are some of the banks that became entirely affected because of the emergence of the financial crisis. Furthermore, sometimes it is also argued that the pay formulas in the United States are highly dependent on fairness and morality. This means that the remuneration system of US have been criticized because of such grounds that the system is impartial in nature. On a whole, it has also been argued that the pay system of executives was framed to provide incentives to the executives that were in turn taken undue advantage of, and as a result, the economic scenario of the US was badly affected.

Qantas in their operations is using the concept of predictive analytics to enhance the efficiency of the fuel through 4D flight planning and to end the passengers differences in a rapid manner.  For the customer, the company is investing in a booking, travel and a customer support that is enabled digitally and leads to better customization.  Further, the enhance the operations the company is launching in new business like financial services, health so that it can cater to a variety of the customer needs (Zeff, 2007).

Qantas has undertaken measures to lessen the resources use and focus on the concept of Qantas Future Planet that is a big landmark. It needs to be noted that it is the largest airline to undertake the voluntary carbon offset program in the world.  Moreover, Qantas offset all the business travel of the employee and emissions. As a matter of fact, every passenger has the option to join and offset the flight emission. This mitigates climate change, protection of wildlife and environment benefit (Qantas, 2016).    It has set a target of 20% reduction in the use of water by 2020 that stress upon the sustainability performance of the company. Further, as a sustainable concept, it has targeted a reduction in the waste to landfill of 30% and even decreasing the electricity by 2030. However, when it comes to beyond 2030 the target stretches to carbon-neutral growth and aims to lessen the emission by 50% by 2050 in contrast to the levels of 2005 (Qantas, 2016).

 


When it comes to Qantas, it has been a major challenge for the company because it operates under huge pressure and external scenario. Going by the target of 20 years it can be said that the company is more inclined towards sustainability and positioning itself towards the benefit of the entire environment (Spiceland et. al, 2011).

Going by the sustainability of Qantas, it can be commented that the company has paid heed to the concept of sustainability in a serious manner. The disclosures regarding the environmental safety and other initiatives by the organization clearly project the big role played by Qantas in the safeguard of the organization. The sustainability report provides immense information in terms of their role, plans and the future course of action (Choi & Meek, 2011). Hence, the sustainability program of the company is laid in an effective manner and clearly emphasizes that the company is not greedy for reaping profits rather its stress upon the safety of the environment.

The overall discussion provides a glimpse that the company is highly active in the remuneration set up and the sustainability issue. It has played a dominating role in providing a strong support to the environment and the people at large. This indicates that Qantas not only hunts for the wealth but also look towards the benefit of the masses. Further, the global financial crisis was an eye-opener and it indicates that the companies and the economy must be careful in the financial dealings. A strong corporate governance along with an internal control mechanism should be the need of the hour. This will help in the prevention of any problem or issue that may arise in the course of action. Further, it needs to be noted that the economy should always have a strong planning to ward off any financial crunch.

Conclusion

The overall report sheds light on the performance of Qantas and indicates that the company has strong rules for executive remuneration. The fundamentals of the company are strong and that the company has contributed in a huge way to the concept of sustainability. This reflects that the company is not greedy for wealth rather it has strong urge for providing benefits to the society at large. Moreover, the concept of global financial crisis is studied in an in-depth manner that indicates the  economy must be strong and should be ready to avert any situation that has adverse effects.

 

References

Bajaj, V 2008,  Financial Crisis Enters New Phase, viewed 26 September 2017, https://www.nytimes.com/2008/09/18/business/18markets.html

Barrell, R. & Davies, P. E 2008, ‘The Evolution of the Financial Crisis 2007-8’, National Institute Economic Review, vol. 12,  no. 206,  pp 5-14.

Bushman, R & Piotroski, R 2006, ‘Financial reporting incentives for conservative accounting: The influence of legal and political institutions’, Journal of Accounting and Economics, vol. 42, pp. 107-148.

Choi, R.D & Meek, G.K 2011, International accounting,  Pearson.

Coy, P 2016, Where the Next Crisis Will Come From, viewed 26 September 2017, https://www.bloomberg.com/news/articles/2016-10-20/where-the-next-crisis-will-come-from

Davies, T & Crawford, I 2012, Financial accounting, Harlow, England: Pearson.

Giles, C 2009, Recession to leave permanent scars, viewed 26 September 2017, https://www.ft.com/content/9cedc026-d858-11de-b63a-00144feabdc0

Qantas 2016, Qantas 2016 Annual report & accounts, viewed 12 August 2017, https://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf

Samaha, K. & Dahaway, K 2010, ‘Factors influencing corporate disclosure transparency, in the active share trading firms: An Explanatory study’, Research in Emerging Economies, vol.  10, pp. 87-118.

Spiceland, J, Thomas, W & Herrmann, D 2011,  Financial accounting, New York: McGraw-Hill/Irwin,University Press.

Titman, S, Martin, T, Keown, AJ & Martin, JD 2016, Financial management: principles and applications, 7th edn, Pearson Australia, Vic.

Zeff, S.A. 2007, ‘Some obstacles to global financial reporting comparability and convergence at a high level of quality’, The British Accounting Review, vol. 39, pp. 290–302

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