A Corporate Governance Primer
By Colin Thompson
Stabroek News
July 9, 2004
The concepts of Corporate Governance and Corporate Social Responsibility are enjoying unprecedented exposure the world over with corporate governance practices being identified as a major factor in shareholder decisions, in businesses securing new capital and in countries securing Foreign Direct Investment.
As if to underscore this exposure, The Private Sector Commission hosted a two-day Introductory Workshop on Corporate Governance two weeks ago.
Corporate Governance is defined in The Cadbury Report, published in 1992 and one of the earlier and more recognised reports on the subject, as "the system by which companies are directed and controlled." Corporate Governance deals with the rights and responsibilities of a company's management, its board and shareholders. Today this has been extended to the various stakeholders in the company including employees, creditors, the government and the communities in which companies operate.
In theory, how well companies are run affects market confidence as well as company performance. Good corporate governance should lead to creation of sustainable value for shareholders, result in investor confidence and be reflected in the share price. Conversely, bad governance weakens a company's potential, investor confidence and share price.
Corporate Governance is by no means a new concept. The appointment of directors, the appointment of auditors and the requirement for financial statements are all part of the shareholders' role in governance to ensure that companies are well managed. More recently, however, Corporate Governance has focused on the manner in which the responsibilities of parties are discharged arising from a perceived looseness of accounting standards and financial irregularities at major US and UK companies.
The requirements for good Corporate Governance can be found in Legislation (Companies Acts), regulations (Stock Exchange Listing Rules) and professional and other arrangements such as directors' associations or the accounting profession. In Guyana, requirements of The Companies Act 1991, The Securities Industry Act 1998, Rules of the Guyana Association of Securities Companies and Intermediaries (GASCI) and The Accounting and Auditing Profession provide the yardsticks for measuring Corporate Governance practices.
Internationally, and most often used in discussions on the subject of Corporate Governance, are the principles/requirements contained in the Organisation for Economic Co-operation and Development (OECD) Principles, The Combined Code (UK), and The Sarbanes Oxley Act (US).
The OECD Principles, first endorsed by members in 1999 have become somewhat of a benchmark for both OECD members and non-members alike. A review of these principles began in 2002 and after extensive consultations both within and outside of its membership the revised principles were issued in 2004.
There are six principles intended to form the basis to evaluate and improve frameworks for Corporate Governance.
1. Ensuring the basis for an effective corporate governance framework.
The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.
II. The rights of shareholders and key ownership functions.
The corporate governance framework should protect and facilitate the exercise of shareholders' rights.
III. The equitable treatment of shareholders.
The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.
IV. The role of stakeholders in corporate governance.
The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
V. Disclosure and transparency.
The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.
VI. The responsibilities of the board.
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company and the shareholders.
These principles focus on publicly traded companies and are supported by sub-principles and trends, examples and alternative methods for implementation.
Issued in 2003, The Combined Code on Corporate Governance contains main principles along with supporting principles and provisions. The main principles of the code cover such areas as:
* An effective Board responsible for the company's success
* Separation of the roles of Chairman and CEO
* A balance of executive and non-executive directors
* Directors' induction and evaluation
* Election of Directors
* Remuneration of Directors
* Financial Reporting
* Internal Control
* Audit Committees
* Use of the AGM
* Shareholder Voting
The Sarbanes Oxley Act of 2002 was a direct response to the Enron, WorldCom and other US Scandals.
This Act covers Board Membership, Duties of the Board, Auditor Independence, Audit Committees, Reporting Requirements, Corporate Responsibility for Financial Reports, Internal Controls.
In the region there are no similar codes, and the benchmarks for governance are found in Companies Acts, Stock Exchange Rules and the Accounting and Auditing Profession. The Caribbean Corporate Governance Forum held in September 2003 provided the opportunity for a regional assessment of worldwide developments in Corporate Governance and attempted to launch the beginning of a unified approach for the Caribbean.
Arising from the Forum, a working group was formed. This group's priorities include making representations to the OECD on future revisions to the OECD principles and soliciting the concurrence of regional leaders to champion the cause of Corporate Governance at the Regional Heads of Government level. Broad recommendations were made based on The Combined Code, and various other principles. There have been no further pronouncements from the Forum.
As there will ultimately be increasing discussions locally on Corporate Governance it is important that in arriving at any position we adjust for cultural differences, the strength and sophistication of our capital market, the size of our companies (most would be considered small to medium-sized by UK and US standards) and our investors (according to the Caribbean Corporate Governance Forum, less than 1% of the community can be considered active investors). The Cadbury Report for example was directed to the boards of directors of listed companies in the UK though it encouraged as many other companies as possible to comply. Further, as the Combined Code points out: "Whilst recognising that directors are appointed by shareholders who are the owners of companies, it is important that those concerned with the evaluation of governance should do so with common sense in order to promote partnership and trust, based on mutual understanding.
They should pay due regard to companies' individual circumstances and bear in mind in particular the size and complexity of the company and the nature of the risks and challenges it faces. Whilst shareholders have every right to challenge companies' explanations if they are unconvincing, they should not be evaluated in a mechanistic way and departures from the Code should not be automatically treated as breaches."
(This writer is employed by a company that is traded on the local stock exchange.)