Caribbean Connect

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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 Governance1. 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 Non-Executive 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 Governance3. 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.
• Companys 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 Governance6. 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 Governance8. 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 Governance9. 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 Governance11. 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 Governance12. 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 SMEs
  and
• 4. The need for professional indemnity
  insurance

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Issues of Corporate Governance13. 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 Governance15. The state of
the Office of Registrars (OR)

• Resources have been largely directed at the newer
  regulators. Many ORs 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 ORs project a weak business culture to
  investment community and frustrates legal redress.

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Issues of Corporate Governance16. 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