Business and Management - OU Community Online

Following a very successful career that saw him lead a number of well-known business ventures, including as PizzaExpress and bookshop chain Borders, Luke Johnson became chairman of Channel 4 Television Corporation in January 2004.

In this presentation, during The Open University Business School Annual Lecture 2009 at Chatham House on 2 April and entitled Every Cloud has a Silver Lining - Luke Johnson draws on his own experience as an entrepreneur to discuss the business of risk. How does risk affect us today in our lives?

During a podcast of the event, hear from the man who has ridden through his fair share of storms in the business world and who has lived through them to tell the tale. The ups, the downs, Johnson is qualified more than most to tell you how it feels to sink or swim and to reveal which risks to take or to avoid. His insight is strikingly appropriate for the current economic climate and the daunting financial times we find ourselves in.

Click here to listen to the podcast.

Useful links

• Open University Business School
• Luke Johnson

Devendra Kodwani, Lecturer in Finance at the OU´s Business School, explains the wider implications of price fixing with four British Airways executives due to appear in court on price-fixing charges.

They are alleged to have colluded with their counterparts at Virgin Atlantic concerning fuel surcharges on long-haul flights. But with the trial being delayed, Devendra also explains what mechanics of corporate governance could have highlighted this kind of business practice.

BA and Virgin violated the Enterprise Act by entering into a cartel to fix the prices of air tickets. This was an anticompetitive trade practice which, when disclosed by Virgin Atlantic, resulted in the Office of Fair Trading launching an investigation. Following which a considerable penalty was served on BA (£270m), law suits were issued in the US, refunds were granted to affected passengers and now the BA executives involved will be standing trial.

The main issue here is the fact that anticompetitive practices have been entered into by both parties. The wider implications are not only the financial loss to passengers but also to the air cargo customers who would be mostly business enterprises using services of BA / Virgin Atlantic, causing an increase in the logistiical cost of shipping goods which will ultimately be passed on by businesses to its customers. The implications of unfair trade practices by airlines impact both the travelling passengers and ordinary consumers buying goods that are transported by airlines.

Prevention better than cure

Not only does this case lead to a debate on anticompetitive trade practices but also the effectiveness, or otherwise, of the corporate governance mechanisms.

All publicly traded companies in the UK are expected to abide by corporate governance codes. Both BA and Virgin Atlantic have corporate governance mechanisms in place, but an important element of effective corporate governance are internal controls and checking systems that are meant to prevent unethical and illegal business practices. The Audit Committee comprises of non-executive directors and is usually tasked with ensuring companies comply with laws of the land but also to provide the opportunity for ´whistle blowing´ in cases where an employee wants to report any illegal activity.

The cartels and other anticompetitive activities therefore raise the need for more effective internal controls and checks within organisations. The Audit Committee, or whoever is in charge of the internal control system, need to detect and prevent such behaviour. It is expected to protect not only the consumers but also the investors in the companies as the reputation risk and consequent impact on share prices will result in a heavy loss to investors. Ultimately ethical and responsible business practices need to protect the interests of multiple stakeholders.

The Prisoner´s Dilemma

Markets such as the airline industry, where there are a few large players, are known as oligopolies. In such markets, the limited number of players means there’s an opportunity – and temptation – for firms to formally or informally agree to increase the prices of the services they provide, operating what is known as a cartel. Game theory can help us understand this behaviour, and the choices made.

The Prisoner’s Dilemma is a classic game devised in the late 1940s by John Nash (the subject of the movie A Beautiful Mind) to teach the conflict between group and individual rationality.

Consider a crime drama where two partners are arrested. Both are being separately interrogated by a clever inspector who offers them this deal:

• If one implicates the other, he may get parole while the other will get 20 years in jail
• If neither implicates the other, both will get two years in jail
• If both implicate each other, both will get ten years in jail

However, cartels aren’t a recent phenomenon. Adam Smith, the father of modern economics, warned of such possibilities over three hundred years ago in Wealth of Nations, when he wrote, ´people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.´

Fearing this, many countries have created regulators to curb anti-competitive behaviour. But would Smith have approved of regulatory interventions to prevent anti-competitive practices in a free market? The answer would appear to be no, as he went on to say, ´it is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.´

Useful links

• Study with the OU - Issues in international finance and investment
• BA´s price-fix fine reaches £270m