Southwest Airlines CEO Bob Jordan
Many pundits predicted that Southwest’s epic 17,000 cancelled-flight, $825 million meltdown would serve as a lasting example of tech neglect’s severe consequences to boards and C-suites.
That’s quickly proven to be untrue.
There were no executive ousters and little change to Southwest’s board.
CEO Bob Jordan was spared the spectacle of congressional testimony, as COO Andrew Watterson appeared before the U.S. Senate Commerce Committee to offer the airline’s pro-forma mea culpas.
Most interestingly, speaking unscripted to the press during a testimony break, Watterson pledged, “Executive bonuses for 2022 will be reduced because of this.”
Ultimately that wasn’t his decision. Southwest’s recent SEC filings show that Jordan’s overall compensation increased by 75% to $5.3 million last year. While the bump can be partially attributed to his 2022 promotion, notably, his cash bonus jumped 89%.
With the stock down 40% from its 52-week high and customers still miffed about upended travel, the pay hike will temporarily grab headlines and rile politicians. However, a closer look at Southwest’s post-crisis governance inaction holds the real lessons for boards and senior executives wrestling digital era risk.
Grounded
Post-crisis, Southwest could not simply remain silent. It launched a massive PR campaign, extended unprecedented customer awards and announced over $1.2 billion in IT investment and deferred maintenance spending.
Further, it engaged consulting firm Oliver Wyman to assess the crisis, identify its root causes and determine a remediation plan. A publicly-shared summary pinpointed three overarching, rudimentary concerns:
- Southwest had “insufficient winter infrastructure and equipment in key airport locations and faced [related] staffing challenges.”
- “The pace and volume of cancellations forced our aircraft and crew scheduling teams to rely on time-consuming manual processes that could not keep pace.”
- “Compartmentalized communications and gaps in our process between important operational workgroups resulted in bottlenecks.”
Not surprisingly, the resulting action items are all operationally-focused. The only governance suggestion is the formation a board-level “operations review committee to oversee management’s review of the disruption and action planning.” The language implies a short-lived and narrow focus.
Omitted from the press release, but included in the proxy statement, is that incumbent director Ron Ricks, Southwest’s former legal and regulatory chief, will serve as committee chair — signaling its likely aim and attention.
Boards struggle to act strategically when burdened with operational oversight, as such myopic distractions undermine today’s increasingly complex governance needs.
Southwest had far better governance reboot options – it chose none of them. Jordan told The Dallas Morning News, “To me, job one is ensuring our future for a long time at Love Field. Past that, we have a duty to our customers, we have a duty to our shareholders to keep growing here. We’ll look at all options."
Turbulence ahead
As discussed in a previous article, the airline’s meltdown was precipitated by commonly overlooked digital era governance gaps: (1) leaders underestimate the real business cost of technical debt; (2) “trust, but don’t verify” management weakens business resilience; and (3) executive resistance to bad news is most enterprises’ fatal flaw. None is addressed by the operational plan and rubber-stamped leadership renewal.
Here are four proxy statement findings that portend upped digital era danger:
First, technology is central to strategy acceleration. Many boards are adding younger members with credible tech-era leadership experience. Even with the addition of three new board members, the average age of Southwest’s board will be over 68. Six directors have served for over a decade, including its chair, former CEO Gary Kelly.
It was Kelly, in an October 2021 CNBC television interview, who characterized the airline’s technology as “wonderful,” but also acknowledged, “There’s technology that’s required to reschedule our flight crews, so we have flight attendants, we have pilots, we have airplanes and once it gets behind, it’s just difficult to get that back together so I think the opportunity is to improve on that process. It’s called repair. It’s complicated, but we definitely have some good opportunities there.” The system collapse followed 15 months later.
Southwest Airlines Chair and Former CEO Gary Kelly
Nonetheless, the proxy endorses Kelly’s re-election, noting “his role and his experience enable him to bring invaluable operational, financial, regulatory, governance, and cultural perspectives to the board. The word “technology” is notably absent from the endorsement. In the past three years alone, Kelly was paid over $20 million combined. At what cost?
Second, the management incentive plan does not hold the C-suite accountable for cataclysmic performance blunders. Despite the crisis, “short-term enterprise performance” scored 69.9% of target. Major initiatives, which include (and does not delineate) recovery response, carry a 20% weight and scored 83.5% of target. EBITDA, weighted at 45%, (conveniently) excludes “special items.” Management tallied 86.8% of target, despite the Q4 earnings fiasco. Only on-time performance, weighted at 20%, earned zero points. Net promoter score, likely collected well before December 2022, scored 94.6% of target.
Excluding on-time performance, executives earned 88% of the potential formulaic compensation target points. Despite the disconnect, the proxy reads, “the [compensation] committee continues to believe in the efficacy and relevance of the scorecard structure, despite the significant variance in the types of challenges faced by the airline industry.” Of course — a well-insulated plan continues to pay so well.
Third, Southwest opted against forming a technology committee. The proxy lists new board candidates former Motorola executive Eduardo Conrado and health software entrepreneur Elaine Mendoza. Ostensibly, such experience in the technology sector will satisfy the SEC’s pending board cyber expertise requirements. However, working at a tech firm is a far cry from the meaningful cybersecurity talent boards need.
Last, the board lacks a strong financial reporting expert. Many boards rely on ex-audit partners or CFOs for such roles. Southwest’s audit committee is chaired by John Montford, a former Texas politician and university chancellor, with government relations experience. John Denison, a former CFO with a finance MBA, retired at age 78 after 15 years of board service. Given SEC filings’ growing complexity and scrutiny, the board would be best served adding deep accounting and auditing experience.
Song remains the same
If a sudden and massive operations shutdown triggered by decades of tech neglect didn’t motivate a leadership overhaul, what will? Other boards may not be able to navigate such peril as easily as Southwest’s entrenched organizational oligarchs. Who’s really watching closely — for better or worse?
