Business Page – June 18, 2000

Corporate Governance – Part 2

Today we continue our discussion on the highly topical issue of corporate governance i.e. the system by which companies are directed and controlled. This definition puts the directors of the company at the centre of any discussion on corporate governance. There can be little doubt that the single overriding objective of any company is the enhancement in the longer term of their shareholders’ investment. In order to do this a company will develop relationships to secure its success. Accordingly it will want to ensure that its relationships with suppliers, employees, customers, the government and the public are grounded on mutually beneficial terms.

It is the duty of the directors to approve appropriate policies and to monitor the performance of management in implementing them. As appointees of the shareholders directors are accountable to them but are simultaneously responsible for relationships with stakeholders.

It is therefore incumbent on every company that it is led by directors of the right calibre, bringing openness, thoroughness and objectivity to bear on their roles. Within this general principle the following apply:

1. The Board should be effective in leading and controlling the company.

2. The decision to combine the two key tasks in any company – the running of the Board and the executive responsibility for managing the business – should be publicly explained and justified.

3. The Board should include a balance of executive and non-executive directors (including independent non-executive such that no individual or small group of individuals can dominate the Board’s decision taking).

4. The Board should be supplied in a timely fashion with relevant information to enable them to carry out their functions.

While in law the Board is unitary and there is no legal distinction between the executive and non-executive directors the courts have looked at the relative involvement of these groups in matters which have come before them. If the executive directors are the heart of the company then the non-executive are the soul and in that regard have considerable responsibility to oversee the management and prevent abuse.

They are seen as having a very important role to play in corporate governance and their independence is therefore critical. They owe their duty and loyalty to the shareholders and not to their fellow directors. Complete independence in a small society is difficult to achieve but every effort has to be taken to prevent their independence from being tainted by social, familial or business relationships with any executive directors.

Companies should ensure that the terms of non-executive directors are reasonably well secured by the Articles. For example all the non-executive directors should not come up for re-election any more often than their executive counterparts.

In carrying out these rather onerous tasks Boards are strongly recommended and under Stock Exchange rules are required to appoint three committees one of which – the Audit Committee we looked at last week. Today we look at the Nominations Committee and the Compensation or Remuneration Committee.

Nominations Committee

Best practice recommends that there should be a formal and transparent process for the appointment of new directors to the Board.

This should include a Nominations Committee made up of members of the Board. Where however the Board is small the company may consider the functions of the Nomination Committee a job for the whole Board. In that case the Board should sit as the Nominations Committee rather than as the Board when it addresses matters concerned with nominations.

The majority of the members of the Nominations Committee should be non-executive directors.

The duties of the Nominations Committee should include the regular review of the structure, size and composition of the Board; identifying and nominating candidates to fill vacancies on the Board as they arise; make recommendations to the Board on the continuation or termination of the service of any executive or non-executive director.

In recognition of their duty to the shareholders, the Chairman of the Nominations Committee should attend shareholders’ meeting prepared to respond to questions on the activities of the Committee.

Appointments to the Board

 Increasingly, shareholders are looking for evidence that the compensation paid to the senior executives of public companies is linked, directly or indirectly to creating real shareholder value. In Guyana of course this difficulty is compounded by companies  refusal to disclose remuneration other than fees paid to directors. They have narrowly and wrongly in my view interpreted the provisions of the Companies Act and ignored the provisions in respect of service contracts which require shareholders’ approval.

In the circumstances of such corporate lawlessness it seems almost futile to speak of best practice. Here again we get the “competitors excuse” – we will not disclose since our competitor is not doing so. There can of course be a hardly weaker excuse.

The Compensation Committee has the overriding objective of balancing the need to promote shareholder interests while avoiding demotivating effects of compensation packages that do not encourage and reward good results.

The size of the committee varies: three to five members is typical. Many compensation committees find it valuable for members to have diverse, complementary backgrounds and broad business knowledge. The committee should be made up of non-executive directors who are and independent of management and free from any relationship which could interfere with their independent judgment.

Although the Chairman of the company may be appointed to the Committee, he or she should not be the Chairman of the Committee.

The duties of the Committee include:

• Setting the broad policy for the remuneration of the Chief Executive, the Chairman of the company and such other members of the executive management it is designated to consider. The remuneration of the non-executive directors should be a matter for the Board excluding the non-executive directors.

• Determining targets for any performance related pay schemes in the company or group and the total remuneration of each executive manager including where appropriate bonuses, incentive payments and share options; vetting and authorising the reimbursement of any claims for expenses from the Chief Executive and Chairman of the company; ensuring that the provisions regarding disclosure of remuneration as required by the law and other rules are complied with; producing an annual report of the Committee for inclusion in the Annual Report of the company and ensuring that the Chairman of the Committee attends the AGM to respond to any questions about directors’ remuneration.

General authority of Committees

Each committee of the Board is authorised by the Board to seek any information it requires from any employee of the company in order to perform its duties.

The committees have an implied authority to obtain any outside legal or other professional advice and if they consider it necessary to obtain reliable, up-to-date information relevant to any matters which comes before them. They may also meet with the company’s professional advisors including auditors, attorneys and financial advisors.

Next week we will close this series by looking at a reasonable balance between corporate prosperity and accountability.