The Council of the Private Sector Commission (PSC) of Guyana on April 7, 2011 accepted a Code on Corporate Governance which could have some transformational effect on the way Guyana companies are managed. The code has its origins in the National Competitiveness Council and was identified among eight priority matters at a meeting in 2007. The indications are that organisations representing attorneys-at-law, bankers, accountants, internal auditors, the Deeds Registry and the Guyana Securities Council participated in the preparation of the draft led by an “expert on Corporate Governance.” There is no indication whether the public companies were consulted by way of a draft for discussion or participation in any forum.
There is no effective date for the code suggesting that its principals assume that it is to take immediate effect. Perhaps its authors are unaware that compliance will require some companies to amend their existing by-laws. The sixteen page document contains three sections and an introductory part referred to as the ‘Basis for the Code.’ Not quite correctly, the code describes itself as the “first version” of a Corporate Governance Code for Guyana.
In fact, many years ago, the Securities Council published in 2004 Recommendations for a Code of Corporate Governance in Securities Markets. Unfortunately, those recommendations were ignored by many public companies and the Securities Council was never able to translate the recommendations into a binding code. But not only were the recommendations ignored by many but they were actually challenged by a senior executive of Demerara Tobacco Company Limited, Mr Chandradat Chintamani, now a director of Demerara Distillers Limited, one of Guyana’s premier public companies. Mr Chintamani, echoing the public sentiments of his then boss Mr Michael Harris, wrote in 2004 that he was “unaware of the requirement for a public company to provide a statement on Corporate Governance.”
Bank of Guyana
More recently, the Bank of Guyana, acting under the authority of the Financial Institutions Act of 1995 (FIA) and the Bank of Guyana Act issued Supervision Guideline 8 – Corporate Governance. That guideline which came into effect on January 14, 2008 covers a variety of governance related issues.
I do not recall any occasion on which the Bank of Guyana has expressed concerns about non-compliance with the guideline, no doubt because both bank and non-bank financial institutions require a licence from the Bank of Guyana in order to operate. This is a very useful if coercive tool that almost certainly guarantees full compliance.
Banks, DEMTOCO and DDL
The Chairman of the PSC is Mr Ramesh Dookhoo, who is also an executive of Banks DIH while Mr Chintamani is, (or was up to recently), a member of the executive of the PSC. Would Mr Dookhoo and Mr Chintamani ensure that the companies with which they are associated comply with the code they now recommend? This question is relevant because the PSC’s code does not constitute mandatory or enforceable principles. As the code itself says, it provides a list of the main principles of what is commonly agreed to be good corporate governance practice. Ironically, the PSC code has no more authority than the Securities Council’s recommendations, and it would be interesting to see whether the PSC’s leading members, acting in their company capacity, will take their new code seriously.
The code encourages companies to report on how they apply relevant corporate governance principles in practice, and also to be responsible enough to give an explanation to the shareholders of the reason(s) if they deviate from the code. This is sometimes referred to as ‘comply or explain.’ The code also calls on companies to provide information on their corporate governance policies and principles at the request of shareholders for further evaluation, the very things DEMTOCO said they would only provide if the law so required it.
The PSC code
Let us now look at some of the code’s main provisions that appear to warrant attention.
Section I: The Board of Directors
This section contains eight principles and runs to eight pages.
Principle 1 paraphrases the provisions of the Companies Act 1991 with respect to the powers, functions and duties of the directors. One new and interesting feature is the requirement that the annual report “set out the number of meetings of the board and those committees and individual attendance by directors.”
Principle 2 boldly calls for a clear division of responsibilities at the head of the company and makes it mandatory that the Chairman and Chief Executive Officer (“CEO”) be separate persons. It also requires that the division of responsibilities between the Chairman and CEO be clearly established, be set out in writing, and be agreed by the Board.
This separation of the CEO and the Chairperson has been widely discussed in these columns before. The ‘big man’ culture in Guyana is for a unification of these functions into one holder. Guyana has larger-than-life incumbents in these positions at Banks DIH and DDL, but with the lead persons in the PSC directly associated with those two companies it seems reasonable to assume that those companies are in agreement with the rule.
Interesting too is Principle 3 ‘Board Balance and Independence’ which distinguishes between executive, non-executive and independent directors. In fact the code suggests that there is a rebuttable presumption of non-independence in several circumstances including if the director has been an employee of the company or group within the last five years; participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme; has close family ties with any of the company’s advisers, directors or senior employees; holds cross-directorships or has significant links with other directors through involvement in other companies or bodies; represents a significant shareholder; or has served on the board for more than nine years from the date of their first election.
Reinforcing these stringent conditions, the code requires that at least half the board, excluding the chairman, shall comprise non-executive directors determined by the board to be independent, applying the tests and conditions set out. If applied strictly, this is revolutionary.
Appointments to the Board must be done by way of an Appointments Committee which itself must make available its terms of reference, explaining its role and the authority delegated to it by the board. The terms and conditions of appointment of non-executive directors shall be made available for inspection. The letter of appointment shall set out the expected time commitment.
Principle 5: ‘Information and professional development’ requires among other things that the Board ensure that directors, especially non-executive directors, have access to independent professional advice at the company’s expense where they judge it necessary to discharge their responsibilities as directors.
Principle 6: ‘Performance Evaluation’ is no less important. This principle requires the board to undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. At least every three years, this evaluation should be externally facilitated.
Principle 8: ‘The Level and Make-up of Remuneration’ requires that a significant proportion of executive directors’ remuneration shall be structured so as to link rewards to corporate and individual performance. Of course the risk here is the manipulation of results to earn higher levels of remuneration.
Interestingly, the code does not address the issue of disclosure so that shareholders will have to assume that everything is alright.
Section II: Disclosure and Accountability
Just when the code was heading in the direction of becoming truly progressive, it begins a dramatic downward slide. Much of what is stated under this section – except for a mandatory Audit Committee – is required by the Companies Act. The section is a misnomer since none of the three principles under the section addresses disclosure. In fact, they address financial reporting, internal control, and audit committees and auditors (barely).
Section III: The Relationship with Shareholders
This section contains three principles: communications with shareholders, constructive use of the AGM and shareholder voting. The code superfluously requires non-executive directors to attend all shareholders’ meetings, a requirement of the Companies Act.
It is a pity that the bankers did not draw the code’s architects’ attention to Supervision Guideline 8. While there are some progressive principles in the PSC’s code, it is not mandatory and there are a number of major omissions from what would be considered a modern Corporate Governance Code.
In these days when everything is about the environment, it would have been encouraging to have seen some nodding acknowledgment to sustainable use of resources and respect for the environment. Risk management, compliance with the law and disclosure are areas which are under-addressed.
The PSC has not indicated whether it will monitor companies for compliance. It should.