Comair, which operates low-cost carrier kulula.com and British Airways under licence in Southern Africa, has become the poster child for resilience in SA’s fiercely competitive aviation industry.
Comair hasn’t made a loss for 73 years – something it loves to remind investors – even though it doesn’t have unfettered access to state coffers in the form of government bailouts. By comparison, government-owned South African Airways (SAA) has relied on more than R40-billion in taxpayer funds since 1999 to remain airborne. And because SAA is bankrupt, it has been placed under business rescue, a Companies Act process to save companies that are financially distressed by restructuring their operations.
Before the government placed SAA into business rescue, the airline paid no taxes to the fiscus in about 23 years but guzzled taxpayer funds. Meanwhile, Comair paid R206-million in taxes on its profits during its 2019 financial year.
Although the fortunes of SAA and Comair are worlds apart, both companies have something in common. They have been beset by corporate governance issues – but SAA’s are far worse.
While many investors were taking their working caps off to hit the beach in December 2019, a shake-up of the Comair board was gathering momentum. On 3 December 2019, Dr. Peter Welgemoed resigned as an independent non-executive director “with immediate” effect. At noon on New Year’s Eve, Comair announced the resignation of independent non-executive director Rodney Sacks “with immediate effect”. On 2 January, Comair announced the resignation of Martin Moritz, the non-executive director, and deputy chairman.
Other resignations have followed in the new year: former board chair and “lead” independent director Pieter van Hoven and company secretary Derek Borer.
Since the beginning of 2019, about eight people have resigned from Comair’s board. This threatened the ability of Comair’s board to form a quorum under the company’s memorandum of incorporation (MOI), a Companies Act-governed document that outlines the roles and fiduciary duties of directors and executives.
Independence of directors questioned
No reasons were given for all the director resignations. But most of them have served on Comair’s board long before the company branched into commercial domestic routes in 1992. Until last year, Van Hoven was on the board for 46 years, Moritz (40 years), Sacks (39 years), Welgemoed (25 years), and Borer (more than 20 years). Every year, they would be re-elected on the board, with few shareholders raising concerns about their re-election.
But in recent years, Comair has come under fire for the composition of its board, with some directors overstaying their welcome, which compromised their independence.
At Comair’s AGM in October 2019, Bidvest CEO and incoming Comair board chair, Lindsay Ralphs, faced tough questions from a minority shareholder, Danny Tuckwood, about the independence of long-serving board members.
Bidvest, which is Comair’s 27% shareholder, expressed concerns about the lack of independence among some Comair board members, Ralphs reportedly told shareholders at the AGM, promising a board shakeup. This has happened.
Tuckwood, who is a director of leadership development firm Metaco, which was acquired by Comair in August 2018 and disposed of by the company less than a year later, told Business Maverick that he welcomes the resignation of board members. But Metaco remains concerned about the lack of disclosure by Comair on the reason(s) for the mass resignations.
Ralphs and Comair didn’t respond to Business Maverick’s questions about how the aviation company was allowed to operate for many years with board members whose independence was questionable. But Tuckwood has a possible theory.
“Given the player that Comair is in the local market, its board governance issues were not in the public and have not been on the radar of shareholders because the company was profitable unlike SAA,” said Tuckwood. In other words, Comair was given a free pass.
But Comair’s profitability is coming under pressure, threatening its unparalleled run of profits. On 4 December 2019, Comair issued a trading statement, warning that profits for the six to December 2019 would be at least 20% lower than the prior year.
King IV failures
About the dangers of not having independent board members, Theo Botha, a shareholder activist at Proxy View, said: “once you have the same directors on the board for more than 15 years, they build strong relationships with each other. Once you have someone who has been there for a long time, they start to become a dominant role player on the board.”
Then a network of friends on the board is created, making it difficult for any new board member to ask tough questions and hold fellow board collogues accountable about the company decisions they make. This was what probably happened at accounting fraud-hit Steinhoff and Tongaat Hulett.
Botha said lax corporate governance standards, mainly King IV, paves the way for directors to stay too long on boards. King IV requires the independence of directors to be reviewed after they serve for nine years by the company or externally by a governance expert. The findings of the expert can be ignored.
A resolution was passed at Comair’s AGM, whereby the company’s MOI was changed, paving the way for a non-executive director – with more than nine years’ service – to automatically stand for re-election every year.
Botha believes after nine years, a director would lose their independence. “But we, as Proxy View, would say that after 15 years, which is a long time, a director should not be on the board. That would be a fair enough time for an individual to serve on a board.” BM