Governance and Sustainability Assignment Reports

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Governance and Sustainability
Student’s Name
Institutional Affiliation

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Introduction
Thomas Cook Group plc was one of the global leaders in vacation travel industry, with its
headquarters located in London, UK. The organization was running a number of airlines sublets
that served destinations across Europe, North and South America, Africa and Asia. On 20th
September 2019, the company reported a number of discussions with various stakeholders and
lending institutions in order to establish recapitalization as well as reorganization. However, the
discussion failed to produce tangible solutions. As a result, the company boards of directors
concluded that they didn’t have any other option but to enter into mandatory insolvency
(Sharma, 2013). Thomas Cook confirmed on 30th September 2019, that all of the UK
subsidiaries have ceased trading, including Thomas Cook Airlines. However, the management
indicated that some of the sublets would continue operations. This included Thomas Cook
Airlines Balearics whose operations have been under the German carrier. However, Ving group,
another subsidiary of Thomas cook detached from the insolvent main company and its operations
have been normal up to date.
Question 2: Failure of corporate governance
A number of corporate governance failures can be attributed to the collapse of
Thomas cook. Unfitted authority of the management was a huge problem , and is one that
characterized Thomas Cook management. In addition , there were multiple illustrations of
unethical activities within the company that continued to reveal themselves after the
collapse . Overall, corporate governance at Thomas Cook was weak in numerous aspects .
This is due to the fact that the board of directors was comprised of several individuals who
lacked moral character (Council, 2010) . In addition , they were ready to engage themselves in

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fraudulent activities .This was the clearest basis of the corporation’s corporate governance
failure (Kumar, & Singh, 2013).
With the collapse of Thomas Cook , it is evident that its corporate governance
frameworks were ineffective . Between 2014 and 2018 , the stakeholders approved the payment
of its directors more than £ 20m. The company CEO received £8million . At the moment ,
Thomas cook had employed two CFOs who also received a combined £ 7 million while other
non-executive directors were given £4 million.
In addition , Thomas cook was operating in a highly competitive environment that
required close emphasis on its tight profit margins . This is due to the fact that the rise of online
travel companies were a great threat to the traditional street operators such as Thomas cook and
others . As a result, the huge payment to the company executive led to the company to operate at
a deficit . This revealed how weak the association between performance and pay led to the
company collapse (Haspeslagh, 2010).
Earlier in July 2019, the company had reported that it was in closed discussions for an
approximate of £800 million recapitalization effort financed by Fosun . However , it was noticed
that the amount necessary to bail out the company had been inflated .In addition much has been
made of the £ 20 million that the executive received over the past six years , indicating that the
unwarranted salaries resulted to the decline of the organization (Aduda, Chogii, & Magutu,
2013).
Research had indeed revealed that such huge pay packages can result into bad financial
report and possibly corporate failure. However , it’s the structure of the payments that really
matters and not necessarily the topline renumeration numbers . £20 million or the average of

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about £ 2 million for every manager per year was a very small percentage if the amount that the
company needed to keep it operating was put into consideration (Leepsa, & Mishra, 2012).
Therefore , it is important to scrutinize whether incompetent pay structure , rather than the levels
of payments denoted the collapse of the organization. In addition, there were other factors such
as bad managerial decisions , an ineffective board member failing of the stakeholders and lack of
engagement among the key members . Therefore , it is important that the investigations focused
on these causes and this does not begin from the pre-conception that one culprit was the only one
that was to blame (Agyei, & Owusu, 2014).
Question 2: Recommendations
Whatever the cause might have led to the demise , it is a reminder to all organization that
sticking to a singular model , failure of adapting to the technological changes in the consumer
habits might lead to financial distress and ultimately failing. Thomas Cook had the thought that
the bail out from the key shareholder Fosun would rescue the company from its fall .
Nevertheless, this never stopped the company’s liquidation . What is evident from these cases is
that , it is important to ensure that the customer behavior as well as market trend are aligned as
they would help the business adapt to all the new developments. Failure to consider and
responding to changes , resulted to the collapse and liquidation of the company (Norwani, Zam,
& Chek, 2011).
It is important to note that the goals of the executive is not just about avoidance of media
backlash , but actively creating positive value for the society . This can only be achieved through
risk taking while implementing innovative new products that change the lives of their customers
for the better while at the same time preserving the environment . If the organization failed to
take such necessary actions , substantial opportunity to grow the pie for both the key

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stakeholders and the shareholder are lost. Therefore, it is important to ensure that innovation is
made a major priority (Sun, Mellahi, & Liu, 2011).
All companies have risks managers and audit committees that would ensure that there is
decreased downside risk . However , a good corporate governance is always about creating value
on the upside . One of the fundamental actions that could have been employed by Thomas cook
is the creation of an innovation committee . This would have ensured that the company invested
enough financial resources into long-term innovative projects. Equally important is the creation
of a culture that encourages incorporation of ideas from the workforce. This would be a shift
from micro management as well as hierarchy that typifies tolerance towards failure and
embracing risk taking (Babić, Nikolić, & Erić, 2011). With regard to policy making , reforms in
corporate governance ought not to have only prevented failure through complacency but also
encourage innovation .
It is important for companies such as Thomas cook to be comfortable with the fact that
failing through trying new things as this an inevitably positive strategy that shows a governance
regime that embracing the culture of taking risks. This could have involved , the establishment of
new laws which may encourage more innovation through responsible development and the
creation of long-term value of the society .The responsibilities of the board have increased in
companies around the world have increased (Somathilake, & Udaya Kumara, 2015). Therefore ,
Thomas cook ought to understand that the expectations of the customers , its investors and the
general public . In this case , it was evident that over boarding was a big issue . Thomas Cook
ought to take a number of roles to which they would be fully involved and for which all the
employees are well are well paid. The board had a stewardship obligation . This would have
ensured that the executive renumerations were properly signed off . It would have further helped

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the management to identify the risks and manage them properly . The renumeration committee is
obliged to establish transparent practices that are aligned to the strategies and company
performance (McGee, 2009).
Question 3: main mechanisms of corporate governance.
One important mechanism is inducing managers to carry out well-organized management
by directly aligning the managerial interests with those of the key stakeholders . For instance, in
this case, the executive compensation plans could have been done with the consideration of the
shareholders in mind . Afsharipour, (2009) supports this by indicating that , one of the
fundamental issues related to corporate governance in the placement of key interests of the
stakeholders with those of the executive management . Normally this is accomplished through a
compensation plan that awards the executive management for having great financial
performance.
Performance-based salaries usually in the form of share options has been supported by
multiple scholars around the world as an appropriate means of making parallel the stakeholders
interests and those of the executive management .Other recent corporate scandals have raised
multiple concerns regarding the design of performance-based executive salaries as well as the
extent to which share options clearly align to the interests of the executive management together
with the stakeholders. Therefore, it is imperative to have changes in the interior governance
levels of an organization in order to align with the interest of the stakeholders (Erkens, Hung, &
Matos, 2012).
Another mechanism is strengthening the rights of the shareholders in order to ensure that
they have both larger incentives as well as the capability to monitor the activities of the executive

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management. This mechanism enhances the investors’ rights through the legal safeguards from
expropriation by the management . A good example is the establishment of laws that restrict
against self-dealings . This can take multiple forms other than just hefty renumerations but also is
such ways as the sale of assets below the market cap. When implementing this mechanism , the
manager’s objective and the investors are closer together towards the improvement of business
efficacy (Walton, 2009). As observed from Thomas Cook company , there are multiple factors
that affect managerial expropriation and they always have some freedom with them. However,
they ought to be provided with the necessary space for them to improve . In the contemporary
technological world as well as the quality of information is focusing on what helps in reducing
the problem associated with corporate governance thus making the system much better and more
transparent (Aguilera, & Jackson, 2010) .
Another mechanism is the application of indirect means of corporate control such as
those offered by the capital markets , take-overs among others. The market for corporate control
is simply defined as the market for acquisition where there is competitions for control rights. In
this mechanism , all the conducts of the management as well as the accompanying rewards are
internal control frameworks that can be used to reduce the agency costs (Scholtz, 2009). The
opposing view indicates that corporate control or regulation cannot alone resolve the problems of
principle -agent. On the contrary , mergers are a manifestation of acting on agency that can
exacerbate the difference between stakeholders and management . The establishment of any
organization necessitates that all the international organizations be established in compliance
with the contemporary legal frameworks . This implies that , company laws across the world
ought to take the principle similar to “separation of three power” requiring the companies with
power should have common restriction (Cornett, McNutt, & Tehranian, 2009). Of these , the

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general shareholder’s meeting is of the highest importance in order to have a collective power to
determine most matters , thus engaging stakeholders among other important issues. The board of
directors have the power to decide on matters and at the same time it engages the managers to
conduct daily operations management . When the managerial supervisory is concerned , these
legal frameworks do have a lot in common (Walton, 2010).
Conclusion
In this paper , we have analyzed the corporate governance failures that Thomas Cook
Company . Such control framework include management regulations and how the management
makes sure that the company thrives . We have provided the necessary recommendations that the
company could have considered to avert the situation . In addition , we analyzed the key
mechanism of corporate governance through legal approach where managers have the
opportunity to decide the right direction that the company ought to take . As we have noticed ,
there can never be a perfect system , nevertheless the best we can is improving the contemporary
corporate world .The important question posed , with regard to executive payment is not how it
should be , but how the renumeration for companies such as Thomas Cool align with the interest
of the shareholders as well executive management . The answer is in the best -practice
safeguards discussed in this paper . The main objective of the executive management ought to be
managing a company affair towards enhancing the prosperity of the organization as well as
corporate accountability. Share option as part of executive salary ought to be properly managed
to allow executive management and create a long-term value for the organization.

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