Business Page –  Jamaica launches a draft of corporate governance

Sunday, March 27th, 2005

Introduction:

Ever since the implosion in corporate America, the English-speaking Caribbean has sought, in some cases quite energetically, a model of corporate governance which reflects the ethos and realities of the region. This was taken a step further earlier this month in St Kitts-Nevis with the hosting of a region-wide forum attended by some one hundred and seventy persons from about twenty countries.

Business Page is pleased to reproduce the points made in a presentation to the forum by Mr Patrick McDonald, a partner in the Jamaican law firm Hart Muirhead Fatta, and a member of the working party set up under the auspices of the Eastern Caribbean Central Bank (ECCB) two years ago to develop a set of principles for corporate governance for the region.

Noting that the Caribbean environment has its own peculiarities, Mr McDonald said that any regional initiative has so far been framed from the mould of the developed countries and might not be entirely appropriate to the region. Mirroring concerns about governance in the public sector, there has developed a public sensitivity to poor corporate governance which can impact on the confidence in and performance of firms perceived as having poor corporate governance practices, particularly firms in the financial sector, where trustworthiness is part of the value proposition. McDonald argued, however, that the level of scrutiny into governance practices generally is not high, and it generally takes a glaring breach of good corporate governance standards to attract attention and perhaps invite sanction.

'One-size does not fit all'

While a considerable amount of work has been done in a number of territories on sensitising decision-makers and members of the wider community on the current issues in corporate governance, particularly in the financial sector, the process has been mainly about principles and practices developed outside of the region. McDonald accepts that the basic tenets of corporate governance are of universal applicability which explains the more recent formal initiatives being undertaken in terms of the development of draft Caribbean principles, and the development in Jamaica of a draft corporate governance code, which saw its public launch last month.

Yet, McDonald notes that there is little point in importing wholesale concepts and practices developed elsewhere, and then trying to cultivate them in an incompatible environment.

It would be unfair and unrealistic to expect that after centuries of under-development the region could be at precisely the same stage of development as the industrialised world. It should therefore avoid, as far as possible, a 'one-size fits all' approach in developing its own corporate governance framework.

At the same time he argues that the region needs to be receptive to ideas developed elsewhere and extract those which can add value and which are workable in all the circumstances.

He feels strongly that embracing good corporate governance can elevate the regional economies into the ranks of more advanced societies and economies. If the region accepts that good corporate governance practices promote efficiency and attract investment, then the regional and hemispheric trade arrangements currently in place and yet to come, make it imperative that it takes a long hard look at embracing high standards of corporate governance to meet the challenge of becoming or remaining competitive.

The regional mix:

McDonald recommends in his paper that in determining what is appropriate, the region must take into consideration the peculiar mix of circumstances that characterise Caribbean economies and societies and identified the following:

* The private sector is relatively closely held for the most part, with significant share ownership by the wider society being comparatively uncommon.

* Multinational corporations, small to medium-sized enterprises (SME's) and family-owned companies dominate the commercial landscape, and even where ownership of such entities has been broadened through listing on stock exchanges in the region, substantial control is retained by the parent company in the case of the multinational corporations, or the controlling family(ies) in the case of family companies.

* Indigenous regional champions are few and tend to be effectively controlled by a few significant shareholders, even if publicly listed.

* The state retains control of significant portions of the economy, including, eg utilities, and in some cases, parts of the financial sector.

* The capital markets remain less popular than traditional debt financing as a source of financing.

* Regional stock exchanges reveal the relatively small level of public participation in the equity market, with low volumes characterising the typical trading day on all such exchanges.

* Institutional investors are small in number, and generally do not have a history of being active in shareholder advocacy.

* Access to education resources is more restricted than in more developed societies, and consequently a much smaller proportion of the regional population has benefited from tertiary education.

Evolving culture:

McDonald notes that the culture of conducting business in the Caribbean is slowly evolving, but in many instances, the demands for transparency and disclosure are still greeted with suspicion, if not downright hostility. In the context of an underdeveloped capital market, not all firms see a tangible benefit in disclosing their prospects, performance and practices to the scrutiny of investors. Controversial topics such as executive remuneration and self-dealings are not usually publicly discussed, and the firms involved in those discussions are usually taken aback by the discussion, as opposed to being the ones inviting the discussion.

The small shareholders in particular wield little influence and are effectively shut out from being able to play a useful role in the corporate governance framework. Prevented from using the boardroom to challenge the dominant shareholder(s), their complaints may not amount to the standard required by the relevant companies legislation to justify intervention by the courts, and they are too small to be able to mount a significant challenge to the management at the forum of the annual general meeting.

Where the state is the major shareholder, normal commercial considerations may not apply, as political considerations can sometimes distort decision-making in state enterprises, even where such considerations are predicated on the basis of the national interest.

As such, governance practices may often be regarded as bizarre in those entities, when contrasted with a normal private sector entity. Beholden to no-one, the state may not perceive the point of adopting sound governance practices in such entities.

Enforcement:

McDonald calls for a robust enforcement of existing law and regulations. He noted the effect of this culture on the corporate governance environment and noted that without enforcement - in the broadest sense of that word - whatever corporate governance framework is established will be ineffective and amount to a mere shell.

He challenged his audience to consider the best way to assure the enforcement of whatever codes or principles are adopted in the Caribbean, and offered the alternatives of legislation or voluntary compliance with the hope that the advances of compliance are perceived by those in control of companies as being in alignment with the self-interest of those companies.

He cautioned against overburdening companies with new compliance requirements that would unreasonably increase the cost of doing business, especially when such requirements amount to a radical shift in practice. He thought it interesting that an economy that is as market driven as the United States, where the discipline of the market is perhaps best exemplified, would have found it necessary to move towards an environment where corporate governance is now practically legislated via Sarbanes-Oxley.

What signal does that send to an environment like the Caribbean, where the discipline of the market is far less effective, he asked?

Clearly the search for the most appropriate model is still on.