Transcript Corporate governance in the Caribbean environment

Caribbean Connect – A High Level
Symposium on the CARICOM Single
Market and Economy (CSME)
____________________________________
Corporate Governance in the
Caribbean Environment
Christopher Ram - June 30, 2006
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Introduction
Definition of corporate governance (CG)
“Corporate governance is concerned with holding
the balance between economic and social goals
and between individual and communal goals…
the aim is to align as nearly as possible the
interests of individuals, corporations and society”
– Sir Adrian Cadbury: Corporate Governance
Overview, 1999 World Bank Report
Is not a compound noun but descriptive term and an
integral part of governance. Governance applies to
all entities government, public and private entities
quasi bodies and civil society.
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Levels of Corporate Governance
Level One - Traditional View
Responsibility limited to the maximisation of profits and meeting the legal
obligations – the minimalist approach.
Level Two – First phase of CG
Emphasis on Responsibility; Accountability; Fairness; Transparency.
Level Three – Corporate Social responsibility
Emphasis on Level 2 Plus issues of contribution to society, the use of resources
and the environment.
Across the region, most companies are levels 1 and 2 but some energy companies
in Trinidad are rapidly moving into level 3.
The challenge for the region is to rapidly move all our entities into level 3.
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What Corporate Governance Does
and does not do
• Seeks to make directors more accountable and answerable to
shareholders as well as other stakeholders;
• Strengthens internal controls;
• Emphasises the role and primacy of independent directors rather
than non-executive directors;
• Prescribes effective committees of the Board such as Audit,
Governance and Compensation;
• Makes the company more attractive to investors
• Makes the entity more attractive to investors by reducing the cost of
capital, and stakeholders
• Is about ethical conduct, trust and integrity
Does not alter the statutory and fiduciary obligations of directors or their
responsibility to add value
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Status of CG Initiatives
• Barbados – Has accepted in principle the
OECS Principles
• Guyana - Draft Code in circulation for 2 yrs
• Jamaica – Code recently adopted by
PSOJ.
• OECS - Principles recently adopted but
still to be issued as final.
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Why Have a Code/Principles?
• Sets the standards of CG for players in the
same market
• Allows for understanding of non-financial
information on entities how they are
managed, the risks they face etc.
• The application of CG opens up the entity
to public understanding and scrutiny.
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Issues of Corporate Governance:
1. Code or set of principles?
•
The US took the statutory, prescriptive route approach –
the Sarbanes Oxley act, 2002.
• The UK adopted rules - the Combined Code rather than
laws –, the main difference being in flexibility - while still
maintaining a strong element of prescription through
Stock Exchange requirements
• The OECD Model followed by the OECS is similarly
principle-based rather than a Code.
Principles seem more relevant to players in different
markets or stock exchanges.
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Issues of Corporate Governance
2. Independent versus NonExecutive Directors
• Directors must act in the best interest of the entity rather than any
relating to shareholding and other interests.
• Directors drawn from group companies are not independent.
• As far as possible the directors should be independent of
management which would discourage combining the roles of
Chairman and CEO;
• The issue of combined role of Chairman/CEO must consider
different skills requirements and the inherent conflict of reporting to
oneself;
• The gene pool of relevant talent is often considered far too small
with the consequence of too many interlocking directorships,
exceeding their sell-by date.
Need to start looking at other pools such as civil society, the public
sector and academia.
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Issues of Corporate Governance
3. Age/term limits for directors
• Most entities have a mandatory retirement
age for employees. Should this apply to
directors of public companies and other
entities and if yes, what should that age
be?
• If no, how to ensure that such directors do
not merely fill a seat blocking out others
and adding no value?
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Issues of Corporate Governance
4. Too Busy Directors
• Some directors are just too busy to meet their obligations
just when the position of the director requires the
devotion of meaningful time to their duties. Directors
meetings determined by airline schedule.
Possible solutions:
• Limiting the number of boards on which a director can
sit;
• Annual Reports should disclose all directorships and
participation in Boards’ and Committees’ meetings.
• Assessment of performance – see next slide
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Issues of Corporate Governance
5. Assessment and Training
• Every organisation considers it vital to review periodically the
performance of individuals and units. Why not for the persons who
bear the most responsibility in the organisation?
• In the developed markets, such assessment are mandatory and
specialist consultancies set up just for this purpose.
This should be on the agenda of the regional Business Council
announced by the Prime Minister of Barbados.
Company’s policy on the training and assessment of directors and how
that policy operated during the reporting period should be included
in the Directors’ annual report.
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Issues of Corporate Governance
6. Disclosure, transparency and conflict
• Common concerns - payments to
directors, related party transactions and
disclosures generally.
• General unwillingness to disclose.
• The conflicts between the regulator and
the regulated.
Need to remove unwarranted challenges by
the regulated. Finding an alternative to
litigation?
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Issues of Corporate Governance
7. Winner take all
The abuse of the 51% control by the person who:
- identifies and appoints all the directors;
- makes all the rules including not unusually directing the entity to
make all purchases from other group companies;
- determines inter-company charges.
The minority shareholders are no more than rubber stamp whose vote
at the AGM merely adds a legal gloss.
Does not appear that this issue has received any consideration in the
region where the pyramid structure is prevalent and the issue both
relevant ad sore. Can fan insularity and resentment.
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Issues of Corporate Governance
8. The public interest company
The concept of the ‘public interest company’
commends itself to countries in the region. It is
about those companies whose operations have
an economic, social or other benefit being
subject to the high standards of accountability,
audit, reporting and governance expected of the
traditional public and regulated companies.
Entities and industries to which this concept
applies would include banks, insurance
companies, significant utilities, resource-based
entities and others whose operations affect the
environment.
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Issues of Corporate Governance
9. Public bodies
• The public bodies and corporations under public
control should demonstrate and set the example
of good governance.
• Given their fiduciary obligations, directors must
exercise independent judgment.
The Jamaican Public Bodies and Management
Accountability Act and the provisions on rotating
auditors and restricting them from performing
non-audit audit services in the Guyana Audit Act
as a good basis for developing a model code for
public bodies.
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Issues of Corporate Governance
10. The role of institutional
investors
Potentially major influence but their role appears extremely
modest. Possible causes include:
The nature and structure of the business form in the region
means that these are often part of the same group;
Other common interests such as cross holdings a tool for
staving off take-overs. Recent example where a Guyana
company rushed into a deal for share exchange with a
Barbados company to preempt a suspected takeover by
a Trinidad company.
The business culture does not allow for ‘rocking of the
boat’.
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Issues of Corporate Governance
11. The Press
• It is an aphorism that sunlight is a natural detergent. The press can
play a major role in monitoring corporate governance and
performance.
• Possibly, had the press been more alert they would have detected
the red flags of Enron, World Comm et al long before their
implosion.
• In many territories, the media are part of conglomerates and are
inhibited.
There seems to be a need for the Caribbean media through
supplements or a periodical dedicated to business and economic
issues including companies and stock exchange performance.
CG rules should require public and public interest companies to meet
with the press prior to the release of company information.
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Issues of Corporate Governance
12. The role of the accounting profession
• The Enron/Andersen fiasco has changed the profession
internationally.
• Formed in 1989, the regional accounting body has failed to meet
most of its goals such as a regional professional qualification, peer
review and a common voice. It needs to refocus and regroup and to
become accepted in the corridors of influence.
• The call for removal of entry in various jurisdictions should take
account of:
1. Variety of tax and corporate legislation;
2. The failure of the profession to deal with the issue of
peer review;
3. The need for accounting standards for SME’s; and
4. The need for professional indemnity insurance
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Issues of Corporate Governance
13. Role of the Employee
• Employees routinely acknowledged as the
most important asset of the entity.
• Information only grudgingly shared with
employees.
• Few companies have worker
representation or attendance on boards
and its committees.
• Whistle blowing by employees.
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Issues of Corporate Governance
14. Access to Information
• Information is now a right in many countries
embodied in Constitutions, Freedom of Information and
Companies Acts.
• Access to Information on companies under
Companies Acts is often negated by failure of
the Registrars to follow-up non-compliance.
• The websites of many public companies and
even stock exchanges still do not have 2005
reports.
In addition to addressing these, legislation should
be introduced to allow the public access to all
information submitted to regulators.
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Issues of Corporate Governance
15. The state of the Office of Registrars (OR)
• Resources have been largely directed at the
newer regulators. Many OR’s are in poor state,
but this is concealed by absence of requirement
of annual reports.
• Poor enforcement encourages poor governance
in private companies which often is the source of
directors of public companies.
• Weak OR’s project a weak business culture to
investment community and frustrates legal
redress.
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Issues of Corporate Governance
16. Caribbean bodies
• Corporate governance must become part of the regional
culture. How can our regional bodies help promote CG?
Suggestions:
• Providing the framework for CG including harmonised
legislation and codes thereby facilitating business and
reducing transaction costs.
• The imperative for a single stock exchange.
• By the demonstration of good CG by such bodies as the
BWIA, LIAT, WICB, UWI, CARICOM and regulators.
• Lenders such as CDB must make CG part of their
lending terms.
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Conclusion
CG is not about techniques and theories. It is a sub-set of governance now recognised as
vital to success, progress and development. In business, its benefits lie in the
likelihood of higher profits, lower cost of capital and greater contribution to society.
CG is not a matter for the private sector alone, nor should it be pronouncements from on
high. The entire society should be involved – governments, academia, the business
community, the professionals and the regulators. It should be promoted conceptually
as well as by example. It should be embedded in our laws, rooted in our culture and
reflected in our practices.
It is impossible to put a money value on CG but research is conclusive that CG has a
trickle down effect. That the standards and performance at the board level become
the benchmark for those at the reception desk and on the shop floor.
Good CG gives the private sector the expertise and the moral authority to challenge
governments, public sector entities and regional bodies when they fall short in areas
of governance
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