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As if the nation’s airlines didn’t have enough to worry about, the problems roiling the beleaguered industry are generating new concern about carriers’ corporate governance. Already stung by billions in losses and a public that has stubbornly refused to return to the skies since Sept. 11, constituents including creditors, workers and investors are now looking hard at board oversight of airlines. Since April charges of faulty governance have been made against American Airlines, Hawaiian Airlines Inc. and Continental Airlines Inc. And considering the climate of the industry right now, there could be more to come. Charles Elson, director of the Center for Corporate Governance at the University of Delaware, said the poor financial performance of airlines in recent years is enough to stir investor gadflies and other interested parties to scrutinize carrier boards and their relationship to management. “Governance issues might be real in most industries, but in industries that have performed poorly those issues tend to get more focus,” Elson said. “Typically, governance issues are ignored when things are going well, but are intensified when things are not going well.” Airline industry critics have found plenty to grouse about of late. In April a deal between American Airlines parent AMR Corp. and its employees that would save the company $1.8 billion annually was almost derailed due to an 11th-hour revelation that chairman and CEO Donald Carty had hid from workers an executive pension trust and bonus package. Although AMR’s directors claimed Carty, who has since resigned, led them to believe the unions were aware of the executive perks, the episode underscored the apparent lack of managerial checks and balances in place at American that should have prevented such mistakes. Bankrupt Hawaiian Airlines, meanwhile, is under pressure from lead creditor Boeing Capital over the self-serving way the airline’s management has conducted business. Hawaiian authorized a $25 million buyback of its thinly traded stock at a premium over market rates while demanding $20 million in concessions from Boeing that it said was needed to avoid a reorganization. Hawaiian has offered to have its chairman and CEO, John Adams, and four directors resign in return for Boeing dropping its demand that the court appoint a trustee to oversee the bankruptcy. At Continental, board member David Bonderman last week was accused by employees of failing to fulfill his responsibilities as director. Bonderman, through his private equity firm Texas Pacific Group, has been rumored to be considering investing in Continental rivals United Airlines or Air Canada Inc., both of which are bankrupt. “Our directors are duty bound to look after the best interests of Continental shareholders, not the shareholders of other companies,” Rodney Rhodes, a Continental mechanic and president of the Teamsters local that represents ground workers at the Houston-based airline, said in a statement. Texas Pacific helped Continental out of bankruptcy a decade ago and once held a controlling interest in the company. The union said it is worried that Bonderman’s place on the airline’s board gives him access to privileged information that he could potentially share with Continental’s competition should Texas Pacific invest in another airline. Continental responded in a statement saying that it has seen “absolutely no legal conflict of interest in dealings with any board members.” Yet the airline added that its corporate governance committee is implementing a formal process to ensure that there are no conflicts between the airline and its directors in the future. Elson said labor at Continental has a valid argument. “A director is supposed to be loyal to the company, and if someone is involved in multiple companies, there is a question of where your loyalty lies,” he said. “They raise a fair issue, and it is probably a situation that should be avoided if at all possible.” Another airline with governance issues is Alaska Air Group Inc., where a group of dissident shareholders, including one of the airline’s pilots, has presented a series of proposals for consideration at the company’s annual meeting. These include asking the company to unstagger its board, eliminate its poison pill, name an independent chairman and consider a sale. The group also has nominated three candidates for Alaska Air’s board of directors. Shareholders are scheduled to vote on the proposals on Tuesday. Richard Foley, one of the dissident nominees, said he is concerned that management is not communicating well with employees. “Our philosophy is that there should be a natural partnership between workers in the company who are investors and shareholders in general,” he said. “We don’t think management isolating itself above its employees or shareholders is the right thing to do.” An Alaska Air source said the company believes it has been forthcoming with employees, even setting up a separate Web site to help keep workers informed. Its board is opposing the dissidents’ proposals. Copyright �2003 TDD, LLC. All rights reserved.

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