Business Page March 3rd, 2002

Lessons Of Enron - Part 3

Are We Fostering Our Own Enron?


Today we conclude our series on the implications of the Enron debacle for us here in Guyana. We do recommend that you read Dr. Clive Thomas' column on the subject in which he has made path-breaking recommendations for major overhaul in the currently self-regulated accounting profession. This column supports those recommendations while simultaneously calling for better governance in businesses. It is interesting to note that some of the reforms now being discussed in the developed countries include issues of related-parties transactions, conflicts of interest between the fiduciary duties of directors and their personal interest, the role of directors generally and non-executive directors in particular, audit committees, clearer rules of accounting and disclosure and establishing the conditions for a truly independent audit profession. In today's article we look at some of these corporate governance issues and comment on the practices in some of our top companies.

Minority shareholders

Minority shareholders can play a major role in corporate governance - that is if they are allowed to. In Guyana, unfortunately, minority shareholders have practically no say in their company and are regarded at best either as a nuisance or groups to be appeased. Significantly this applies even when the minority shareholder is the government as in the case of GT&T, Guyana Stockfeeds Ltd or any other of the privatised entities.

In Guyana, we have the additional concern that in two of our major companies - Banks DIH and DDL- the directorate and management are almost inseparable and shareholders, whether large or small, have hardly ever made any decision which did not originate from this exclusive group. Because of the practice of interlocking directorships, the institutional investors drawn mainly from the pension funds and insurance companies become caught up in corporate milieu and ignore the additional independent function which they are expected to perform. Given existing corporate culture, it is unthinkable that our institutional investors will initiate any moves to fire their CEO's as happens so frequently in the developed economies.

The concept of democracy should not allow the controlling managers or shareholders to ignore the rights of others - 51% or less cannot be the same as 100%! For some inexplicable reason, we excluded from our Companies Act (CA) one other provision of the Canadian Business Corporations Act on which our CA is modeled - that requiring unanimous shareholders' approval in defined circumstances. While there are provisions in our laws to protect minority shareholders, those apply only in extreme cases and we need reforms which include guaranteed representation at the directorate level for minority shareholders. This can be done by way of changes in the CA, the company's by-laws or through shareholders' agreements.


The annual reports of some of our major public companies including Banks DIH and DDL contain no information on the governance arrangements within those companies. From their annual reports it is impossible to determine whether they have in place such basic safeguards as Audit, Nomination or Compensation Committees controlled by independent, capable non-executive directors. And if they do what is the mandate and are these persons entitled to seek independent professional advice? Are the non-executive directors involved in the establishment of procedures for procurement and marketing, choice of investments and selection of suppliers or are these issues which are reserved only for the executive directors?

Another practice which contributes to concentration of power and poor governance is the fusion of the roles of the Chairman and CEO - a practice which has been largely dispensed with in the public sector and which is looked at with disfavour particularly in Europe though it is still fairly common in the USA. Ken Lay was both Chairman and CEO of Enron and had as his number two his chief finance person, features not dissimilar to what takes place in our top companies.

One of the first steps we have to take, and it would be good for these two companies to set the example, is the separation of the roles of Chairman and Chief Executive Officer. This is an untenable and indefensible position for it assumes that one can be accountable to oneself. Who sets his emoluments and who monitors his performance? The answer in practice is only he. The other executive directors are subordinate to him while he plays a principal role in handpicking the non-executive directors.

Related Party Transactions

The existence and disclosure of transactions with related parties (professional term for those who can exercise significant influence or control or over whom you have control or significant influence over and dealings with) has been a major issue in the Enron affair. The Enron directors and those close to them received substantial benefits that were not disclosed to the shareholders of the company. This situation is perhaps even worse here as the Guyanese reporting culture is still in the most rudimentary stages, there is no oversight body and the auditor is either unwilling or unable to challenge the directors. As a result different companies have vastly different standards of reporting even where the auditor is the same as in the case of GBTI and DDL.

As the just published financial statements of Demerara Bank Limited show however, we in Guyana sometimes seem to be in reverse gear in this respect. DBL has now retrogressed from the incorrect but perhaps convenient interpretation that no disclosure is required if a transaction between related parties is done on an arms length basis, to one which ignores even the existence of related parties in the financial arm of one of our largest groups! Do the directors, auditors and regulators not bear responsibility for this glaring omission?

The financial statements of DDL provide no information on related-parties transactions apparently complacent that the company's shareholders would believe that there are no such transactions in such a widely diverse group. Shareholders are left to wonder from whom DDL purchased its majority shareholding in Solutions 2000 Inc. and whether there was anything to the transaction other than the company's diversification policy.

Banks DIH and Citizens Bank Limited have both fairly recently started to disclose related parties transactions but in the case of Banks DIH these are so cryptic that they hardly help the shareholders to understand those transactions which is the focus of the relevant accounting standard. Again, both these companies have in common the external auditor, chairman and several directors but disappointingly different reporting and disclosure policies - a hard proposition to justify. An equally troubling issue is the frequently repeated concern that directors of some of our public companies engage in both investment and trading transactions with their companies - clearly a conflict of interest and a breach of their fiduciary duties.


Incredibly, despite reporting profits of hundreds of millions of real dollars, Enron paid no taxes, no doubt under schemes devised by their tax accountants and attorneys. After all, taxation is at the heart of the accounting profession and the profession must therefore hold itself partly responsible for the level of tax evasion in this country. Too many accountants are willing to add their signature to accounts and tax returns which they either know or ought to know are incorrect. They owe it to the society which accords them respect and exclusivity to demonstrate a higher standard of professionalism. The tax authorities need to use the weight of the law to stop this lawlessness.

Poor Job

Just as it would be wrong to believe that every American company is an Enron-in-waiting, so too it would be to suggest that everyone of the Guyanese businesses or auditing firms is at best, careless in the discharge of their duties and at worst, dishonest. It is hard to escape the conclusion however that accountants and auditors have been far more interested in protecting the directors' interest rather than that of shareholders. It is disingenuous for auditors to try and wriggle free of the blame by saying that management hid information from them. Surely Andersen is not offering to pay US$800Mn for a well-done audit! The truth is that auditors have fallen prey to the instinct of greed and they have become the agents of the management and accomplices in dubious tax schemes if not outright tax evasion. While I do not believe that only the accountants are at fault in the Enron matter, as a member of the accounting profession, I cannot help but be embarrassed at the tacit acceptance by members of the profession of the trampling on shareholders' rights by directors and the profession's general betrayal of the trust which society has placed in them.


Enron holds lessons for both the business community and the accounting profession in Guyana. We continue to have Enron- type behaviour because of irresponsible and often dishonest directors and senior management. Combine this with sloppy accounting practices and timid auditors who are afraid that questioning transactions involving directors or senior management can lose them lucrative engagements, and the credulity of our already fragile financial system is under siege.

Proper application of accounting rules is fundamental to a sound financial system and if we are to emerge from the dark ages in this regard we must be prepared to recognise this. No investor will put money at risk when there is no assurance that financial information presented can be relied upon. We keep talking about the need to attract investors but no attempt is being made to address the deficiencies in a system fraught with conflicts of interest, poor governance and inadequate financial disclosure.

As the Economist of Feb.9-15, 2002 said in a leader article: It is time for another effort to realign the system to function more in shareholders' interest. Companies need stronger non-executive directors, paid enough to devote proper attention to the job; genuinely independent audit and remuneration committees; more powerful internal auditors; and a separation of the jobs of chairman and chief executive. If corporate (America) cannot deliver better governance, as well as better audit, it will have only itself to blame when the public backlash proves both fierce and unpleasant.

The 1991 Companies Act was designed to bring some democracy and transparency to the corporate sector. Unfortunately, like in the USA, its architects under-estimated the determination of some in the private sector to maintain the schemes and practices which were far from transparent and some of which are downright illegal. We must not believe that our politicians do not know these things and that they are ready to counterattack in allegations of corruption. Next week: A review of the annual reports of Demerara Bank Limited and Citizens Bank Limited.