Fish and corporations have little in common ordinarily. One corporate governance expert, though, has seen parallels. “There is an old Chinese saying that fish rots from the head. If you have a rotten fish, it starts at the head. If you have a bad board, everything else will be rotten,” Chris Pierce, a global consultant who has responsibility for education and training at the Caribbean Corporate Governance Institute said.
Pierceundefinedthe CEO of Global Governance Servicesundefinedwas in T&T last week to conduct the first master class for company directors at the Caribbean Corporate Governance Institute (CCGI). The institute was launched last year October and published the first T&T Corporate Governance Code in November. According to Pierce, these are just first steps in what should be a consistent, a “long-term” effort to improve the performance of boards and, by extension, benefit the society as a whole.
How far the rot goes
Successive governments have attempted to position this country as a regional financial leader. However, the Global Competitive Index Report of 2013-2014 published late last year, shows T&T lagging behind in a number of areas that are critical in engendering the faith of foreign investors.
Out of 148 countries, the report shows T&T ranking 118 in the ethical behaviour of firms, 111 in the protection of minority shareholder’s interest, 95 in the strength of auditing and reporting standards, 125 in favouritism in decisions of government ministers, 111 in public trust of politicians, 116 in irregular payments of bribes, 116 in the efficacy of state boards and 89 for the diversion of public funds.
The report goes on to say, “this underscores T&T’s need to improve its corporate governance systems and accounting systems.” (Trinidad Guardian) Over time, T&T’s corporate landscape has been occasionally punctuated with the failure and bad behaviour of institutions, headlines in the press and calls for blood from the public. Pierce, in fact, lists scandal as one of the hallmarks of bad corporate governance.
Without naming any local firm, he described a sequence of events to illustrate what good corporate governance is and, is not. “What do the shareholders do? What does the board do? What do the directors do? What do the managers do? Who should be responsible when things go wrong?
“In T&T, there are many cases where this is unclear. Fingers are being pointed at different people and people are saying, ‘it’s not my fault, it’s somebody else’s fault.’ Corporate governance tries to tackle that by saying, ‘no, it is somebody’s responsibility. There are clear documents which stipulate who has the power, who has the responsibility, who has the duty. In T&T, there are many cases where this is unclear.”
Transparency with funds
Pierce said among the cornerstones of good corporate governance are transparency with funds, making business easier to conduct, documented, publicised rules for dealing with wrongdoing as well as conflicts of interests, awareness of the country’s laws and board knowledge of all of the above. He said dealing with other people’s money made it essential that strong governance systems were in place and that proper accounting was the board’s responsibility.
Having documented policies for handling related-party transactions and conflicts of interest is also essential. Pierce said that well-governed companies had a “register of interests.” He explains what this is:
“Every director should register the interests in which he is involved: maybe they are on other boards; maybe they have shares in other companies; maybe they are related to other people, a wife, a husband who also have a particular interest. These must be registered with the company.”
Conflicts and related-party matters must be dealt with swiftly, said Pierce. He said the board must be made aware of them, so that action can be taken, whether this means barring the person with the conflict from meetings, or not allowing them to have a say or a vote at meetings if they attend.
He also said that an organisation’s related party and conflict of interest policy should be on its Web site where everyone has access to it. Pierce recommended that conflict and related-party issues should also be brought up in annual general meetings. “The company should say that over the past year, three items of conflict of interest have taken place. In each and every case, the code on related-party transactions was followed.”
Asked about many specific instances of apparent conflict of interests in the local business sphere, where individuals served on multiple boards, both in the public and private sector, Pierce told the Sunday Business Guardian that he saw nothing wrong with related-party transactions.
“In an island of this size, in any major business, there are always going to be people that you know, who are related in any transaction. It is inevitable they will exist and you have got to be able to manage it. You have got to say the organisation did have this transaction, but I was not involved in it because I left the meeting. I have not been involved in the implementation. I have not been benefitting from that transaction.”
When asked about episodes of companies reporting on self, the likelihood of it being greeted with suspicion by the Trinbagonian public and whether he recognised this, Pierce responded: “Absolutely. Are they telling us everything? Or are they spinning it in certain ways? Corporate governance recommends that you not only tell people the good news, but also the problems and risks associated with trading. That shares can go up or down and that is based on market conditions and so on. A well-governed company will be a trustworthy organisation, where you can trust the individuals to tell the truth and the whole truth.”
Self reporting falls under principle 3 (Reinforce Loyalty and Independence) of the T&T Corporate Governance Code. It is one of five principles which include: establishing a framework for effective governance, strengthening the composition of boards and committees, fostering accountability and strengthening relationships with shareholders. Adhering to this code is voluntary, with directors of companies choosing to sign on.
When asked if Trinbagonian companies could or should be trusted to self regulate, Pierce said: “To a certain extent. But every country requires a good Companies Act and good legislation. You only move to codes of corporate governance when you’ve got firm laws in place and it is not good enough to have good laws. Those laws have got to be clear and they have to be enforced and when they are broken, people have to be thrown in jail.”
He said what the current code contains international best practice clauses and the companies that are not following international standards either need to comply or explain why they are not doing so. According to Pierce, the CCGI is working on a code for family businesses, which will be published in 2015. He also said there were discussions taking place on a code for state-owned enterprises.
“It would be nice if it came out before the next general election. That could then create some discussion on what the various candidates think should be done in terms of government and state-owned enterprises. Because there may well be significant changes to boards based on the election results.”
Pierce acknowledged that while corporate governance generally dealt with the larger companies in the country’s economiesundefinedand their relationships with their shareholdersundefinedthere were other stakeholders who were affected by poor governance.
What happens in boardrooms
Speaking about the consequences of bad corporate governance to the general public, the consultant said: “If an organisation is badly managed it will not be making a lot of profit.” He added that a decline in profits, in turn, would affect a company’s ability to create or sustain employee. All of these are factors that affect economic growth.
“The man on the street wants economic growth, therefore, it is in the interests of the country as a whole for organisations to be well run. There will be more growth. There will be more employment and more and more money will circulate.”
Corporate governance in the future
Pierce told the Sunday Business Guardian that he is collaborating with the CCGI on training programmes for executives. Topics at the just-concluded master course for directors included: the powers and responsibilities of boards, choosing a strong chair of a board, the quality of the information that a board receives and the reporting of a board’s activity. He admitted that corporate governance was a cultural issue as much as a financial one.
“You do not expect results within the next three months or six months. This is a culture change that the business community is going through. Some people will find it difficult because they are enjoying the way things are. So we are looking at the medium to long term, maybe the next generation of directors that is coming through. One of the first things to do is make the first step. That step is with the CCGI being launched, a code being developed, training taking place and it is important that those first steps are based on strong foundations from which we are able to reach out and create scalability.
Pierce identified T&T as an important centre, which is why the good corporate governance push was started here. From here, he said, it will move to Jamaica and the other islands. The CCGI confirmed that 110 companies are members of the T&T Corporate Governance code, while another 14 are in the process of completing the membership process.
Chairman, Dr Axel Kravatzky told the Sunday Business Guardian that so far, Neal and Massy and First Citizens are the only two that have included some of the stipulations of the code in their current annual report. This included the standards that the companies are working towards and self reporting. He said given the coincidence of the end of most firms’ financial year and the publication of the report, many of their members opted to include information recommended by the report in their next annual report.