Even accountants can benefit from a periodic encounter with history and as this column revisits the never ending journey to arrive at the Nirvana of Corporate Governance, it is good that we recall a few facts. For example, that the modern quest for good CG began in the UK in 1992. And that the reasons for that search are at least as important as the initiators of the Cadbury Report – the Financial Reporting Council, the London Stock Exchange, and the accountancy profession.
The report came on the heels of the death of Robert Maxwell while cruising on the Canary Islands in 1990, which saw the spotlight coming down on his business empire. It soon emerged that like his modern day counterpart Bernie Madoff, he had been tampering with pension funds to service huge and expensive debt burdens. Like all Ponzi Schemes that one was doomed to failure and soon after, Maxwell’s companies filed for bankruptcy protection in the UK and US. At around the same time the Bank of Credit and Commerce International, at the time the 7th largest private bank in the world with assets of US$20 billion, went bust and lost billions of dollars for its depositors, shareholders and employees. Another company, Polly Peck, received a clean report from its auditors showing healthy profits one year only to declare bankruptcy the next.
Cadbury is sweet
The financial community and the accounting profession recognised that their reputation and that of London as a world financial centre was at stake. They had an interest to act – and so they did, initiating a report that by its very name – Financial Aspects of Corporate Governance – suggest this common interest. The name also confirms that the report was concerned only with the financial aspects of CG and it was left to others to take up the non-financial elements of corporate governance. That continuous effort has been taking place across the world from America to Africa and the most recent revision of the code on corporate governance is in South Africa with the King 3 Report on Corporate Governance.
Developments in Guyana have progressed far more slowly and some very fundamental issues remain to be addressed. We will deal briefly with these in today’s column, influenced by an event abroad which touches directly on an ongoing issue in Guyana – that of having the role of the chairman of the board and the company’s CEO being performed by the same person. But the search for an appropriate corporate governance model for Guyana is bigger and wider than this. There is no one-size-fits-all solution. The search has to be informed by and takes account of the social context and legal framework of the country.
Our very own constitution seems to feel that there is nothing wrong with combining a host of roles burdening us with an Executive President that chairs Cabinet but not accountable to the National Assembly or to the people other than by periodic elections. GECOM also has an entrenched Executive Chairman; while the private sector organisations have structures and chairpersons or presidents who for all practical purposes are also the CEO. To be fair, there is no hard evidence that splitting the functions automatically makes for a more successful company. As the Economist of October 17, 2009 reminds us, academics over the past two decades have produced more than 30 studies comparing the financial performance of companies that divide the two roles with those that combine them. Enron and WorldCom of which readers of this column are all too familiar both split the two jobs, and so too did the Royal Bank of Scotland and Northern Rock, which had to be bailed out in the 2008/2009 financial crisis in the UK.
Principle and pressure
The case for the splitting of the jobs which started with Cadbury is however based strongly on principle – some may even say theory – democracy, and widespread practice in Canada, Australia, much of continental Europe and Britain where 95% of companies in the FTSE 350 list have an outside chairman. The corresponding number among America’s Standard & Poor’s top 1,500 companies is 47%. Yet, the economic crisis that has hit and cost the US trillions has put the defenders of the joint role on the defensive. Earlier this year, shareholders forced Ken Lewis to surrender his second hat as chairman of Bank of America.
More recently, following on their success in persuading Sara Lee – the American global fast moving consumer goods company with one of the world’s best-loved and leading portfolios of food, beverage, household and body care products – to split the two jobs, the managers of (Norway’s) Norges Bank Investment Management which manages a state pension fund of $400 billion, are trying to persuade four American companies—Harris Corporation, Parker Hannifin, Cardinal Health Incorporated and Clorox—to do likewise. They may yet succeed.
Some companies are taking action rather than be pushed. One of the first things that some of America’s troubled banks, including Citigroup, Washington Mutual, Wachovia and Wells Fargo, did when the crisis hit was to separate the two jobs. It did not matter whether the losses they suffered could have been averted by separation or that their action may be purely cynical – something had to be done and the least cost option that offered up itself was the split.
Yet the theory or the logic cannot be dismissed and therefore bear repeating. It can well be demonstrated by a skit in which the chairman who instructs the company secretary on the contents of the Agenda, calls the meeting to order and soon calls on the CEO to present the report on operations for the preceding period. At that point the Chairman takes off one hat, puts on another and addressing fellow directors through the Chairman begins “Thank you, Mr. Chairman, …..”. Since the most informed and powerful person in the room is (also) the Chairman he then directs all the questions to himself. If the boss is chairing its meetings and setting its agenda, the board cannot discharge its basic duty under the Companies Act 1991, nor can it act as a safeguard against corruption or incompetence when the possible source of that corruption and incompetence is sitting at the head of the table.
There are only a handful of public companies in Guyana with a few of them having separated the functions of chairman and those of the CEO, mainly the commercial banks. Banks DIH, DDL, Stockfeeds and Guyana Stores have not, either because of history or in the case of the latter two because of the overwhelming stake the chairman and CEO has in the company. Messrs. Clifford Reis and Yesu Persaud are such huge personalities that it is hard to expect or imagine them other than as supremo, despite the potential dangers and obvious conflicts of interest. America has not ignored the problem and its boardrooms are now more democratic than they were when Jack Welch, described by Warren Buffett as the Tiger Woods of management, ran General Electric. To reduce the concentration of power and authority in one man (it is hardly ever a woman), more than 90% of S&P 500 companies have appointed “lead” or “presiding” directors to act as a counterweight to a combined chairman and chief executive. This person is invariably chosen from among the independent directors, referred to by Cadbury as Non-Executive Directors.
The problem for us is that there is no culture of independence and directors are more often than not selected rather than elected. If a vacancy arises on a board, the directors are empowered under the company’s rules and the law to fill it as a “casual” vacancy and on every case I know of, that person’s election is a formality at the next meeting of the shareholders.
And that selection is done under the majoritarian concept known in politics as winner takes all. In business once a shareholder controls the votes at the AGM, s/he has almost unfettered powers over the company, notwithstanding the minority protection mechanisms in the Companies Act. Better, or worse for the other shareholders, if the shareholder has 51%.
The independent director
Directors’ powers derive from section 59 of the Companies Act while their duties are set out under section 96 of the Act. This requires them to act honestly and in good faith with a view to the best interest of the company, including the interest of the employees in general as well as the shareholders. In a country where it appears that the President is unaware of the provisions of the Constitution, members of the National Assembly argue about basic procedures, and leading attorneys-at-law argue over whether a magistrate can hold a voir dire, it is not unlikely that the majority of directors may never read, let alone understand the Companies Act and the “fiduciary duty” the Act imposes on them.
Non-executive directors are mainly drawn from the shareholders’ other companies and the community to bring some particular expertise or even an element of acceptability to the company. Only the most sophisticated company encourages or tolerates real independence of its independent directors who are hardly ever known for engaging publicly in controversial issues.
The price of failure
Yet with a market for share trading that is far from transparent; a media that is generally not interested in or au fait with the jargon of investing; a consequently under-informed public and under-resourced regulators including in some cases professional bodies, the non-executive directors have an important duty and function to perform. Unfortunately conflicts of interest brought on by self-interest often mean that that function is not only not discharged but more seriously is often compromised. A most telling and very recent case of this compromising of the role and duty of the non-executive director involved a Chartered Accountant who one day after clearing key directors of a company of a complaint about financial impropriety, accepts a position on their board. That not only hurts the shareholders of the company but it undermines confidence in the company and loses further respect for the accounting profession.
There are of course other issues relating to corporate governance that will require attention. These include: their application to non-public companies and if so, how; whether or not corporate governance is better dealt with under principles or guidelines; whether the Companies Act and its administration will be improved by bringing into operation the Deeds Registry Act; the nature of sanctions given that they often hurt the small shareholders who are already victims; and whether there should be protection for whistle-blowers.
For us in Guyana, the dawn may have broken in 1992. We have made little progress since.