week we started this article prompted by Dr. Clive Thomas’s analysis in
his column in this paper in which he spoke of the “remarkable flexibility
and responsiveness that capitalism, as a social mode of economic
organisation so frequently displays at times of crisis”. Dr. Thomas’s
discussion also noted that inherent in that system are the absence of equity
and fairness and the opportunities for exploitation by “scoundrels,
robbers and crooks of every possible hue and kind”. This he compared with
what he describes as backward undeveloped market economies like Guyana where
there is no efficiency imperative in economic performance or political
performance but which also has some of the negatives and more of the more
noted last week that some of the symptoms of backward capitalism include
weak regulations, ineffective governance, an uninformed and timid press,
unresponsive governments, self-serving rather than self regulating
professionals, inappropriate or poorly enforced laws and a populace that
considers that the way things are is the way they will always be and
corporate lawlessness which we dealt with at some length last week.
we look at some of these other areas.
there is some overlap between corporate lawlessness and corporate governance
which is about how the company is governed and managed. Progressive
capitalism requires that certain institutional arrangements must be in place
and must operate effectively. Some of these would include adequate laws,
regulations and institutions such as functioning, active stock exchanges, an
anti-monopolies commission, a strong accounting profession operating with
clear rules, and competent directors. The Enron/World Com debacle showed
that even in highly developed economies these bedrock institutions can and
do fail for sometimes very simple reasons. Politicians became too beholden
to businesses for campaign funding, the press failed to question the
stratospheric p/e ratios, the accounting profession became overcome with
greed, institutional investors simply forgot their roles while directors
became victims of supremely powerful chief executives. The bursting of the
bubble should therefore have come as no surprise.
Guyana as indeed in any backward and undeveloped economy we therefore have
to find appropriate mechanisms to take us out of the backwardness. But what
do we have? For over ten years we have been spending tons of money in
consultancy on establishing a stock exchange which when it is established
will do little to create wealth, regulate the market and win public
confidence. We would have done better to look at some of the real causes of
the problems contributing to weak corporate governance in the private sector
including some fundamental and inherent conceptual conflicts in legislation
generally and not only those in Guyana. Section 96 of our Companies’ Act
places a duty of care on the directors to act in the best interest of the
company and goes on to point out that in considering the “best interest of
the company” directors must have regard to the interest of the employees
as well as the shareholders. That duty however is owed to the company alone
and it is hard to see how a shareholder benefits from such a provision.
issue is the distinction between independent and non-executive directors.
The concept of the non-executive director came into vogue following the
publication of the Cadbury Report on corporate governance in the UK. The USA
uses the term “independent director” and for good reason. Directors owe
their duty to the company of which they are a director but when they are no
more than representatives of the majority shareholders, are they truly
independent and indeed non-executive? It is not unusual for a chairman who
holds his position on the Board because of his appointment rather than
election, to welcome a worker director with a reminder that he should not
see himself as representing workers but to protect the interest of the
other serious conceptual conflict relates to the auditors of the company.
The law and the accounting profession hold that the auditor is independent
and that he is elected by the shareholders to whom he reports. In reality
however shareholders merely rubberstamp the appointment/(re-)appointment of
the auditor and authorise the directors – in effect the executive – to
fix the fees. He who pays the piper calls the tune is applicable to the
auditing profession as well and auditors will not survive for long if they
run afoul of the executive. Shareholders are also unlikely to be aware of
and do not have access to one of the most important pieces of communication
between the auditors and the company regarding the audit.
investors are supposed to have good business sense and to be able to keep
the executive on their toes but they soon lose their identity and role when
they become part of the group rather than remaining independent. For
example, institutional investor puts up director A to represent it on the
board of B. B however is a major group and appoints the same director A to
look after its interest in one of its subsidiaries. This situation
challenges the strict oversight role which A was expected to play in B.
course it will always be difficult in small societies to avoid some of these
problems but it certainly does not help when the directors club is seen as a
closed network “till death do I leave”. This column has referred to the
reprehensible practice which takes place in Guyana of directors’ pension
schemes! This should surely be outlawed. In addition there should be term
and age limits for directors in public companies.
the whole concept of the joint stock company is the separation of the
shareholders from the executive who of course would be answerable to the
shareholders both as a group and as necessary in their individual capacity.
We referred to a letter by a shareholder to a public company requesting
information on governance matters in that institution but regrettably the
request including follow-up telephone calls has been completely ignored. It
would seem that the only option available would be to resort to the courts
hut this is an expensive, time-consuming process which is surely avoidable.
Perhaps the law did not make allowance for such incredible arrogance but is
it not time that the law recognise shareholders’ right to information?
Would the Stock Exchange make rules to prevent such executive abuse?
important conceptual issue relates to the status of companies. Our law
allows for the incorporation of private and public companies and for the
time being the principal practical difference relates to disclosure for
purposes of filing with the Registrar of Companies. However, it seems to be
the appropriate time for us to consider a new category called the public
interest company. Let us take an example. Company A is a public company
which is carrying on banking business and has total deposits of say $1Bn.
Company B which is in the same business and has total deposits of $6Bn.is a
private company. Should the law treat company B as less important than
company A which is so much smaller? There are several companies which can
come within the category “public interest company” including utilities,
companies conducting financial and insurance business and the private
subsidiaries of public companies. Indeed as we have noted before in these
columns some jurisdictions deem any subsidiary of a public company itself a
has been said in these columns and by Dr. Clive Thomas about that the
accounting profession and few will say that the low regard which the public
has for the profession is without justification. Unfortunately, the
profession in Guyana as indeed the Caribbean is yet to put reform on its
agenda. The profession has and continues to be self-regulated meaning that
it makes its own rules, prescribes its own standards and therefore ought to
ensure that its members comply with them. In practice this is a joke and
accountants have shown themselves as no less hustlers than the sharp
businessmen. Self-regulation has failed in every developed country.
USA has responded to Enron by the introduction of sweeping legislation to
regulate the profession through a Public Company Accounting Oversight Board
with powers to register accounting firms, prescribe and enforce standards
through heavy penalties. Jamaica had such a Board since the seventies but
that did not prevent one of the costliest collapses of the financial system
in the Caribbean. It has resuscitated and strengthened the Board which would
probably be a model for Guyana. Doing nothing is not an option and the
public should call for some reform of the profession.
is evident that the current system of regulating business does not work and
leaves the door wide open for abuses to be perpetrated by those scoundrels
referred to by Dr. Thomas. We have had a number of warnings of the potential
for disaster that the existing culture sustains and pre-emptive action is
needed before another business scandal rocks a system that is ill prepared
to withstand any major negative event, yet everyone is too busy to seriously
address the situation. A good place to start would be to identify who is
really responsible for ensuring effective regulation of companies in Guyana.
We cannot continue to wallow in this blissful backwardness or we will never
be able to provide Guyanese with the economic security that is a necessary
ingredient of stability.