The beleaguered airline owes its recent delisting and state buyout to the way it handled two major crises this year. Can other Asian listed companies learn from its mistakes?
Early in the morning of 13 July this year, when travelling on Malaysia Airlines (MAS) Flight MH2 from Kuala Lumpur to London, I switched on the flight tracker at the precise moment the plane was cruising 30,000 feet above eastern Ukraine. Four days later, following a very similar International Civil Aviation Organisation (ICAO)-approved flight path, MAS Flight MH17 was shot down by ‘rogue elements’ near the Ukraine-Russia border, killing all 283 passengers and 15 crew on board.
Malaysia Airlines was struggling financially even before it faced two of the most significant crises involving the aviation industry in recent memory. The disappearance of Flight MH370, followed by the shooting down of Flight MH17, have perhaps accelerated a decline in the company’s share value. They have also highlighted serious flaws in the company’s crisis management capability, as well as broader imbalance in shareholder relations across Asia as a whole.
In the days following the Flight MH17 tragedy, Malaysia’s national flag-carrier was heavily criticised for a series of errors of judgement in the way it responded to the crisis. This included the speed and manner in which it dealt with bereaved families, as well as its bizarre decision, just three days later, to fly over war-torn Syria.
As I sought clarity on flight paths – with my return leg in mind – MAS defended its Syrian diversion by announcing (with no hint of irony) that the route had been ‘declared safe by the ICAO’.
‘There are probably many investors who have left markets in Western countries and are now investing in Asia hoping that they get a higher and faster return [...] Therefore they often have more experience of financial markets than listed companies in this region’
Managing Partner HJM Asia Law & Co;
Senior Vice-Chair, IBA Asia Pacific
This response seems to reveal an organisation struggling to implement disaster recovery and business continuity plans. This would be a little more understandable had the airline not been through an equally tragic ordeal a little over four months earlier, when Flight MH370 went missing on 8 March while en route from Kuala Lumpur to Beijing.
The mysterious disappearance of MH370, which prompted a massive search and rescue operation that continues to this day, costing millions of dollars, led to a high number of cancellations and considerable reputational damage. This included a 60 per cent drop in sales from China. Among the accusations levied at MAS was that it released imprecise, incomplete and sometimes inaccurate information to bereaved families.
The subsequent 40 per cent drop in valuation of the world’s most distressed airline was only arrested on 8 August, when the carrier’s majority owner, Malaysian sovereign wealth fund Khazanah Nasional, announced a planned buyout of minority shareholders. Shares in MAS rose by more than ten per cent on news of the US$438m deal, which will see Khazanah increase its stake from 69.37 per cent to full ownership. Khazanah has since announced a significant restructuring plan, which will include delisting.
Guangzhou-based HJM Asia Law & Co Managing Partner Caroline Berube, who is Senior Vice-Chair of the IBA Asia Pacific Regional Forum, says that delisting is a wise decision in the short-term. ‘Remaining listed is about the likelihood of seducing the market. Getting delisted is right when the market for MAS is totally flat. It is healthy to delist for the short-term under these circumstances and pending any additional information from MAS.’
Although it could be argued that, as a state-owned entity, Khazanah’s behaviour may not be typical of a traditional investment firm (the Malaysian Government ordered it to look into saving MAS as early as February this year), its proposals have received the backing of the investment community – with firms such as Aberdeen Asset Management publicly supporting the strategy.
But does a loss in market value alone justify the intervention of shareholders? There have, after all, been plenty of cases in the past where reputational damage has led to a nosedive in share price. Consider the impact of the UK phone hacking scandal on News Corporation’s share price, or poor supply chain management on several food retailers, most recently McDonald’s.
What sets this case apart is the way in which Malaysia Airlines reacted to the crises it faced – in particular its failure to learn from the first crisis when dealing with the second. It did nothing to dispel fears that, should it prove remarkably unlucky and face another crisis, it would handle that one any more effectively. Shareholders must have feared the decline in share price that this inability to deal with reputational damage would bring about: in this context intervention is understandable.
Berube says that the management of MAS should have worked more closely with crisis management firms, lawyers and PR specialists. ‘Some communications may have legal consequences, in particular for listed companies. Such communications are regulated, as they impact market value and the investment decisions of third parties.’
She adds: ‘In this case, [poor crisis management] could have made the situation worse for the victims and for MAS. Insurance companies for MAS and the victims will certainly be very sensitive to all of the information being reported.”
The move by Khazanah and the Malaysian government to intervene in the affairs of the company they own is not unprecedented: shareholder activism is gaining momentum, having increased globally by 88 per cent since 2010. Research commissioned by UK magic circle firm Linklaters shows that activists are launching more campaigns, setting their sights on larger companies and targeting more varied industries. While listed companies in Asia may have rehearsed how to deal with a takeover offer, few are prepared for an activist approach. In fact in many cases their shareholders may know more about the process than they do.
‘There are probably many investors who have left markets in Western countries and are now investing in Asia hoping that they get a higher and faster return,’ says Berube. ‘Therefore they often have more experience of financial markets than listed companies in this region.’
Berube argues that although listed companies in Asia should consider hiring senior management from the West who have experience in crisis management, and shareholder engagement more widely, it is also the responsibility of regulators to rule on activism, to ensure it does not work against public companies.
‘Going public is for levying funds, not to kill companies and gamble,’ she adds. ‘Asia-listed companies cannot control the eagerness of investors to make their money in Asia, while markets in the West are still weak.’
Lessons for Asia
Although Japan has a long history of shareholder activism, elsewhere in Asia it is in its infancy. This is partly because courts have not been accustomed to recognising shareholder rights, and partly because the costs for legally enforcing shareholder rights are high. Before this influx in Western investors, therefore, there has been little incentive for shareholders to engage with the companies they own.
‘Going public is for levying funds, not to kill companies and gamble. Asia-listed companies cannot control the eagerness of investors to make their money in Asia, while markets in the West are still weak’
Managing Partner HJM Asia Law & Co;
Senior Vice-Chair, IBA Asia Pacific
Berube believes that Asia can learn from the US experience of shareholder activism. ‘This is especially true with communicating to the market,’ she says. ‘Given the fact that investors are usually less experienced in developing countries, they tend to pull out faster, which then shakes the market and makes it more vulnerable.’
The key, adds Berube, is for markets in Asia to balance the financial needs of companies with the interests of both minority shareholders and majority shareholders. ‘New financial markets should bear in mind that a return on investment for investors on the capital markets is not everything,’ she says. ‘Sometimes the continuing efforts of a company’s investors and employees are not [directly] equal to the company’s share value on the capital markets. Asian markets should therefore adopt a long-term approach, as markets have done in the West.’
Stephen Mulrenan is managing editor of Compliance Insider at The Red Flag Group (HK) Limited. He can be contacted at email@example.com