Caribbean Connect – A High Level Symposium on the CARICOM Single Market and Economy (CSME)

1. Caribbean Connect – A High Level Symposium on the CARICOM Single Market and Economy (CSME) ____________________________________ Corporate Governance in the Caribbean Environment Christopher Ram - June 30, 2006

2. Introduction Definition of corporate governance (CG) “Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals… the aim is to align as nearly as possible the interests of individuals, corporations and society” – Sir Adrian Cadbury: Corporate Governance Overview, 1999 World Bank Report Is not a compound noun but descriptive term and an integral part of governance. Governance applies to all entities government, public and private entities quasi bodies and civil society.

3. Levels of Corporate Governance Level One - Traditional View Responsibility limited to the maximisation of profits and meeting the legal obligations – the minimalist approach. Level Two – First phase of CG Emphasis on Responsibility; Accountability; Fairness; Transparency. Level Three – Corporate Social responsibility Emphasis on Level 2 Plus issues of contribution to society, the use of resources and the environment. Across the region, most companies are levels 1 and 2 but some energy companies in Trinidad are rapidly moving into level 3. The challenge for the region is to rapidly move all our entities into level 3.

4. What Corporate Governance Does and does not do • Seeks to make directors more accountable and answerable to shareholders as well as other stakeholders; • Strengthens internal controls; • Emphasises the role and primacy of independent directors rather than non-executive directors; • Prescribes effective committees of the Board such as Audit, Governance and Compensation; • Makes the company more attractive to investors • Makes the entity more attractive to investors by reducing the cost of capital, and stakeholders • Is about ethical conduct, trust and integrity Does not alter the statutory and fiduciary obligations of directors or their responsibility to add value

5. Status of CG Initiatives • Barbados – Has accepted in principle the OECS Principles • Guyana - Draft Code in circulation for 2 yrs • Jamaica – Code recently adopted by PSOJ. • OECS - Principles recently adopted but still to be issued as final.

6. Why Have a Code/Principles? • Sets the standards of CG for players in the same market • Allows for understanding of non-financial information on entities how they are managed, the risks they face etc. • The application of CG opens up the entity to public understanding and scrutiny.

7. Issues of Corporate Governance:1. Code or set of principles? • The US took the statutory, prescriptive route approach – the Sarbanes Oxley act, 2002. • The UK adopted rules - the Combined Code rather than laws –, the main difference being in flexibility - while still maintaining a strong element of prescription through Stock Exchange requirements • The OECD Model followed by the OECS is similarly principle-based rather than a Code. Principles seem more relevant to players in different markets or stock exchanges.

8. Issues of Corporate Governance 2. Independent versus Non-Executive Directors • Directors must act in the best interest of the entity rather than any relating to shareholding and other interests. • Directors drawn from group companies are not independent. • As far as possible the directors should be independent of management which would discourage combining the roles of Chairman and CEO; • The issue of combined role of Chairman/CEO must consider different skills requirements and the inherent conflict of reporting to oneself; • The gene pool of relevant talent is often considered far too small with the consequence of too many interlocking directorships, exceeding their sell-by date. Need to start looking at other pools such as civil society, the public sector and academia.

9. Issues of Corporate Governance3. Age/term limits for directors • Most entities have a mandatory retirement age for employees. Should this apply to directors of public companies and other entities and if yes, what should that age be? • If no, how to ensure that such directors do not merely fill a seat blocking out others and adding no value?

10. Issues of Corporate Governance 4. Too Busy Directors • Some directors are just too busy to meet their obligations just when the position of the director requires the devotion of meaningful time to their duties. Directors meetings determined by airline schedule. Possible solutions: • Limiting the number of boards on which a director can sit; • Annual Reports should disclose all directorships and participation in Boards’ and Committees’ meetings. • Assessment of performance – see next slide

11. Issues of Corporate Governance 5. Assessment and Training • Every organisation considers it vital to review periodically the performance of individuals and units. Why not for the persons who bear the most responsibility in the organisation? • In the developed markets, such assessment are mandatory and specialist consultancies set up just for this purpose. This should be on the agenda of the regional Business Council announced by the Prime Minister of Barbados. Company’s policy on the training and assessment of directors and how that policy operated during the reporting period should be included in the Directors’ annual report.

12. Issues of Corporate Governance6. Disclosure, transparency and conflict • Common concerns - payments to directors, related party transactions and disclosures generally. • General unwillingness to disclose. • The conflicts between the regulator and the regulated. Need to remove unwarranted challenges by the regulated. Finding an alternative to litigation?

13. Issues of Corporate Governance 7. Winner take all The abuse of the 51% control by the person who: - identifies and appoints all the directors; - makes all the rules including not unusually directing the entity to make all purchases from other group companies; - determines inter-company charges. The minority shareholders are no more than rubber stamp whose vote at the AGM merely adds a legal gloss. Does not appear that this issue has received any consideration in the region where the pyramid structure is prevalent and the issue both relevant ad sore. Can fan insularity and resentment.

14. Issues of Corporate Governance8. The public interest company The concept of the ‘public interest company’ commends itself to countries in the region. It is about those companies whose operations have an economic, social or other benefit being subject to the high standards of accountability, audit, reporting and governance expected of the traditional public and regulated companies. Entities and industries to which this concept applies would include banks, insurance companies, significant utilities, resource-based entities and others whose operations affect the environment.

15. Issues of Corporate Governance9. Public bodies • The public bodies and corporations under public control should demonstrate and set the example of good governance. • Given their fiduciary obligations, directors must exercise independent judgment. The Jamaican Public Bodies and Management Accountability Act and the provisions on rotating auditors and restricting them from performing non-audit audit services in the Guyana Audit Act as a good basis for developing a model code for public bodies.

16. Issues of Corporate Governance 10. The role of institutional investors Potentially major influence but their role appears extremely modest. Possible causes include: The nature and structure of the business form in the region means that these are often part of the same group; Other common interests such as cross holdings a tool for staving off take-overs. Recent example where a Guyana company rushed into a deal for share exchange with a Barbados company to preempt a suspected takeover by a Trinidad company. The business culture does not allow for ‘rocking of the boat’.

17. Issues of Corporate Governance11. The Press • It is an aphorism that sunlight is a natural detergent. The press can play a major role in monitoring corporate governance and performance. • Possibly, had the press been more alert they would have detected the red flags of Enron, World Comm et al long before their implosion. • In many territories, the media are part of conglomerates and are inhibited. There seems to be a need for the Caribbean media through supplements or a periodical dedicated to business and economic issues including companies and stock exchange performance. CG rules should require public and public interest companies to meet with the press prior to the release of company information.

18. Issues of Corporate Governance12. The role of the accounting profession • The Enron/Andersen fiasco has changed the profession internationally. • Formed in 1989, the regional accounting body has failed to meet most of its goals such as a regional professional qualification, peer review and a common voice. It needs to refocus and regroup and to become accepted in the corridors of influence. • The call for removal of entry in various jurisdictions should take account of: 1. Variety of tax and corporate legislation; 2. The failure of the profession to deal with the issue of peer review; 3. The need for accounting standards for SME’s; and 4. The need for professional indemnity insurance

19. Issues of Corporate Governance13. Role of the Employee • Employees routinely acknowledged as the most important asset of the entity. • Information only grudgingly shared with employees. • Few companies have worker representation or attendance on boards and its committees. • Whistle blowing by employees.

20. Issues of Corporate Governance 14. Access to Information • Information is now a right in many countriesembodied in Constitutions, Freedom of Information and Companies Acts. • Access to Information on companies under Companies Acts is often negated by failure of the Registrars to follow-up non-compliance. • The websites of many public companies and even stock exchanges still do not have 2005 reports. In addition to addressing these, legislation should be introduced to allow the public access to all information submitted to regulators.

21. Issues of Corporate Governance15. The state of the Office of Registrars (OR) • Resources have been largely directed at the newer regulators. Many OR’s are in poor state, but this is concealed by absence of requirement of annual reports. • Poor enforcement encourages poor governance in private companies which often is the source of directors of public companies. • Weak OR’s project a weak business culture to investment community and frustrates legal redress.

22. Issues of Corporate Governance16. Caribbean bodies • Corporate governance must become part of the regional culture. How can our regional bodies help promote CG? Suggestions: • Providing the framework for CG including harmonised legislation and codes thereby facilitating business and reducing transaction costs. • The imperative for a single stock exchange. • By the demonstration of good CG by such bodies as the BWIA, LIAT, WICB, UWI, CARICOM and regulators. • Lenders such as CDB must make CG part of their lending terms.

23. Conclusion CG is not about techniques and theories. It is a sub-set of governance now recognised as vital to success, progress and development. In business, its benefits lie in the likelihood of higher profits, lower cost of capital and greater contribution to society. CG is not a matter for the private sector alone, nor should it be pronouncements from on high. The entire society should be involved – governments, academia, the business community, the professionals and the regulators. It should be promoted conceptually as well as by example. It should be embedded in our laws, rooted in our culture and reflected in our practices. It is impossible to put a money value on CG but research is conclusive that CG has a trickle down effect. That the standards and performance at the board level become the benchmark for those at the reception desk and on the shop floor. Good CG gives the private sector the expertise and the moral authority to challenge governments, public sector entities and regional bodies when they fall short in areas of governance