Business Page – June 11, 2000

 Corporate Governance - A luta continua

Introduction

During the nineties there appeared to be a move towards investor activism in Guyana stemming from the perceived abuses in the absence of accountability by the Boards of some public companies. Annual General Meetings (AGMs) were becoming increasingly interesting as Boards were being asked to explain actions which were unchallenged previously. The good old boy network seemed to be under siege. Leading the charge in a dignified and intelligent manner has been Mr. Winston Tyrell whose questions made AGM’s worth attending much more than the hampers handed out by the directors in what appeared to be an unfortunately condescending manner.

Suddenly in the new millenium it is felt that the status quo has returned and companies are once again sometimes treated by the directors like the private property of those who ignore the fact that they are merely custodians of shareholders’ rights. The Companies Act of 1991 was an attempt to address some of the concerns of the shareholder and while it was a laudable effort by those involved, it contains a number of obvious deficiencies. No one in authority has yet assessed its effectiveness or its impact on the stewardship of companies nor has it been revisited to see whether and what changes are necessary. Legislators in Guyana can draw from the Cadbury Report which assumed oversight responsibility for two years beyond the submission of its report until a successor body was appointed.

Responding to public concerns about the lack of oversight over public companies, Business Page carries a feature “ On the Line…..” in which we review as they are published the Annual Report and Financial Statements of Guyana companies. In that series we seek to examine critically but dispassionately the information fed to shareholders and the public. In doing so, we consider not merely whether the Report and Accounts are in compliance with the relevant legislation but whether they also follow “best practice”.

The law can never fully reflect current thinking and it is not unreasonable to expect that the managers of our public companies demonstrate their commitment to modernity, transparency, accountability and ethical conduct by full and fair disclosure and good governance. Many of our top company directors preach to the politicians about good governance when in their own companies they practice the complete opposite. What is necessary for the bull is also necessary for the heifer.

Business Page also rejects the usual response to criticisms about inadequate disclosure that such disclosure aids the competition and poses a threat to the company. Are the managers of our public companies so naïve that they do not do “due diligence’ on their competitors or that they believe that their competitors do not do the same on them? Any company director who seeks information on its competitors from their published accounts is hardly worth that exalted appellation. There can be no justification for a failure to comply generally with “best practice” and certainly none for not meeting the minimum disclosure requirements of the law and regulations including official pronouncements of the Institute of Chartered Accountants of Guyana.

As far as Business Page is aware since the introduction of the Companies Act 1991 in 1995 there has been no public challenge to any breaches of its provisions. Surely our intelligence is being insulted if we are being asked to believe that there is wholesale compliance. Often one cannot help but wonder who is responsible for enforcement of the requirements of the Act which has specific provisions that in the opinion of informed persons are being disregarded.

The accounting profession has statutory protection but has shrunk from any responsibility for monitoring compliance even by its members in their capacity as auditors. The Companies Act places responsibility for the Act on the Registrar of Companies but one wonders whether any thought has been given to placing relevant staff in the Department to enforce compliance. Usually the other regulatory body is the Stock Exchange but since we do not yet have one the responsibility on the Registrar and the accounting profession is commensurately greater.

This is a public interest issue and not one to be left to people like Mr. Tyrell who is so easily singled out as a whiner at shareholders meeting. Given the paucity of skills and other resources one of the challenges facing Guyana is that regulation is put in place without the means to ensure enforcement. It is therefore necessary to rely heavily on self regulation.

Business Page is sensitive to any suggestion that we may be unduly critical of any particular company. Today therefore we begin a series on what are considered some of the broad principles of corporate governance as practiced in most market economies including several of our sister Caricom countries. Future reviews of corporate practices in Business Page will be done by reference to these practices.

Before dealing with specifics however, we think it useful to examine corporate practices in the United Kingdom whose law and regulatory mechanisms now incorporate many of the recommendations made in the report by the Committee on the Financial Aspects of Corporate Governance popularly referred to as the Cadbury Report.

The Cadbury Report

The Cadbury Report which was published in December 1992 recommended a Code of Best Practice that companies should adopt for good corporate governance.

The Code included the following:

  • audit committees to be established for all companies listed on the stock exchange
  • directors’ service contracts should not exceed 3 years, without shareholder approval
  • directors’ total emoluments and those of the chairman and highest paid UK director should be fully disclosed and split into salary and performance related elements
  • Executive directors pay should be subject to the recommendations of a remuneration committee of wholly or mainly non-executive directors

The Code was incorporated into the Stock Exchange Listing Rules together with a requirement to disclose certain information with respect to corporate governance in the annual report and accounts.

The disclosures to be given by the directors were as follows:

  • a statement of compliance with the code
  • a statement of the directors’ responsibility for the preparation of the financial statements
  • statement on the effectiveness of the system of internal control
  • statement on the going concern status of the company
  • a description of other features of the company’s corporate governance arrangements

Auditors were required to give a separate report on these disclosures, but only to the extent that the disclosure requirements had been complied with.

Essence Of Good Governance

One argument advanced by those uncomfortable with such measures is that their imposition would result in unnecessary bureaucracy and costs. Research has proven that good corporate governance is good business with benefits far outweighing any costs that may arise from implementing the appropriate measures. In fact the Cadbury Report points out that “effective accountability” is the essence of good governance and is required if boards are to discharge their responsibilities in a manner that will drive their companies forward and make them more competitive.

The example of a company using an environmentally responsible method of sourcing timber, finding tangible economic advantages by its new approach is not unique. Community issues and concerns provide many profitable opportunities for companies and it is up the leadership of those companies to identify these barometers of society’s direction and make sure that their companies are in step with the trends. As the Cadbury report states:

“By adhering to the Code, listed companies will strengthen both their control over their businesses and their public accountability. In so doing, they will be striking the right balance between meeting the standards of corporate governance now expected of them and retaining the essential spirit of enterprise. Bringing greater clarity to the respective roles responsibilities of directors, shareholders and auditors will also strengthen trust in the corporate system. Companies whose standards of corporate governance are high are the most likely to gain confidence of investors and support for the development of their businesses.”

Conclusion

Business Page has always pointed out that it is impossible to legislate morality and the Cadbury Report expresses the view that the same applies to good corporate governance: “We believe that our approach, based on compliance with a voluntary code coupled with disclosure, will prove to be more effective than a statutory code.” It further points out that statutory measures would impose minimum standards and the risk is that boards would comply with the letter rather the spirit of the requirements. Next week Part 2 will address the appointment, responsibilities, rights and remuneration of directors in a corporate environment governed by best practice, with the primary focus being the non-executive director.