Business Page   The Bandits and Directors

Sunday, January  22nd, 2006



When all the technical discussions on the requirement for disclosures to shareholders of public companies had been exhausted, the company executive said to me that given the precarious security situation in Guyana it would be dangerous to expose directors to criminal elements who would go after them if statutorily prescribed information on their emoluments is disclosed. It was the first time I learnt that bandits study annual reports to identify their targets and my respect for that group has increased considerably since then even though it is more likely that my colleague was clutching at straws on corporate disclosures.

It was the revelation of the huge salaries which directors paid themselves as salaries and benefits either when they were in office or as compensation for leaving office that led to the setting up of the Committee on the Financial Aspects of Corporate Governance (known as the Cadbury Committee after its Chairman Sir Adrian Cadbury of the chocolate dynasty). That committee issued its final report in December 1992 and gave birth to the term corporate governance which is in essence nothing more than that there is a basic duty of accountability and transparency owed to the shareholders of public companies by those who manage the affairs of those companies.

1992 and before:

Up till then corporate law was still the dominant framework for what passed as corporate governance. Before 1992 (what a year!!), so little seems to have been achieved. And since then it has been revolutionary. What took place before Cadbury was clearly not adequate, was inflexible, often out-of-date and therefore could not keep up with best practices even when supported by additional stock exchange rules. More appears to have happened in the past fourteen years than all that has taken place since the invention of the joint stock company in 1844!! Yet, the California Public Employees' Retirement System (CalPERS), the world's best known driver of corporate governance recommended in a 1997 publication that periodic review and updating of best practice guidelines should continue while noting that the underlying principle of Cadbury was that the board's structure should be built upon the twin concepts of independence from management and accountability to owners.

Here in Guyana it has been a march backwards. Whether it is the youngsters who say corporate governance in Guyana sucks or the more elegant older folks who would be more comfortable to say that it stinks, the consensus is that things are truly bad and any progress is more superficial and cosmetic than real. Corporate bullies behave worse than the plantation owners using their offices to secretly and improperly enrich themselves often at shareholders' expense, turnaround and use shareholders' funds to pay huge fees to their auditors and accountants to conceal their misdeeds and then pay huge fees to their attorneys to frustrate shareholders' rights and the regulators' duty to enforce the rules.

SEC changes:

While we in Guyana seem doomed to this culture, the world of corporate governance is moving on. This week the five-member US Securities and Exchange Commission (SEC) voted unanimously to propose the biggest changes in rules governing disclosure of executives' compensation since 1992. The new rules requiring companies to provide far greater detail about executives' pay and perks in an effort to bring more openness to an area that has provoked investor anger and could come into force shortly after a 60-day public comment period, possibly in time for the spring annual-meeting season next year.

Under the new rules, publicly traded companies would have to provide annually information on the total yearly compensation for their chief executive officers, chief financial officers and the next three highest-paid executives. The true costs to the bottom line of the executives' pay packages, including stock options, a regular feature of US executives' compensation packages, would have to be spelled out. According to one of the five SEC Commissioners, ''This information is information that shareholders have a right to know.''

Companies would be required to explain the objectives behind executives' compensation and annual filings would have to include sections written in plain English on executive pay. Imagine in a post-Enron USA the SEC Chairman Christopher Cox, who has made fuller disclosure a priority since taking the agency helm last August saying, ''Simply put, our rules are out of date.'' He has not heard about Guyana.

Interestingly the Business Roundtable, a group representing chief executives of the largest corporations, offered their support albeit with some qualifications to the SEC proposal, making confirmation all the more likely.


And in Jamaica, that country's Private Sector Organisation (PSOJ) has just adopted rules on disclosure of compensation that follows the UK practice before a more recent revision in the latter country. The PSOJ clearly does not consider that the provisions of their newly minted Companies Act go far enough. In legislation that is not dissimilar to Guyana their Act requires disclosure of directors' emoluments, pensions (past and present), and compensation in respect of loss of office. "Emoluments", in relation to a director, means the gross sum subject to income tax payable to him as emoluments and includes fees and percentages, any sums paid by way of expenses allowance insofar as those sums are charged to income tax, any contribution paid in respect of him under any pension scheme and the estimated money value of any other benefits received by him otherwise than in cash. "Pension" includes any superannuation allowance, superannuation gratuity or similar payment.

The rules which will become mandatory effective next year will require the company's annual report to contain a statement of remuneration policy and details of the remuneration of its directors and set out the company policy on non-executive directors' remuneration.

The UK:

Previously set out in what is referred to as the Combined Code for listed companies, the disclosure requirements in the UK have now put in the law imposing on directors a duty to prepare a directors' remuneration report not only setting out the information specified in the law but also how the information should be presented (in tabular form).

The auditors are required to report in respect of the auditable part of the directors' remuneration report whether in their opinion that part of the directors' remuneration report has been properly prepared in accordance with the Companies' Act.

The directors' remuneration report is subject to shareholders' approval at the AGM and must be included in the notice therefor.

Information to be included in the remuneration report not requiring examination by the auditor would include the name of each director who was a member of the committee at any time when the committee was considering any such matter and the name of any person who provided to the committee advice, or services, that materially assisted the committee in their consideration of any such matter.

Information to be included in the remuneration report and subject to audit includes the amount of each director's emoluments and compensation including the total amount of salary and fees paid to or receivable by the person in respect of qualifying services; the total amount of bonuses so paid or receivable; the total amount of sums paid by way of expenses allowance; any compensation for loss of office; Excess retirement benefits of directors and past directors; Pensions; Long term incentive schemes; and Share options.

Back to Guyana:

The Guyana Companies Act containing the basic disclosure requirement for directors' remuneration is modelled on the Canadian Business Corporations Act and the provisions are not too dissimilar to the UK's. The problem is that the bunker ethos in our public companies causes them to ignore completely both the law and good practice. Ever willing auditors not only ignore their own professional obligations but act as the handmaidens to what amounts to breaches of the law. The only time that the law was tested in court resulted in a ruling that the company should disclose but this ruling was ignored by the company despite its undertaking to do so.

Companies continue to follow questionable legal advice that the law on disclosure only applies to non-executive directors. Would the accounting profession now be brave and willing to seek further counsel given the developments elsewhere? How much longer will it take us to digest the findings of McKinsey the international management consultants that good corporate practice is also good business.