Published in Sunday Business Guardian
The recent announcement of the possible purchase by Cable & Wireless Communications Ltd of Columbus International Inc and the appointment of a new board of directors at Trinidad Cement Ltd (TCL) have each created challenges for the boards of Telecommunications Services of T&T (TSTT) and TCL; the principal challenge of the boards is to assure the respective shareholders, employees and other stakeholders that the directors, consistent with their fiduciary duties pursuant to section 99 (1) and (2) of the Companies Act Chapter 81:01 are looking after the best interest of the companies.
This statement by the Caribbean Corporate Governance Institute (the Institute) addresses the corporate governance issues in a general and not in any company specific manner consistent with the enabling legislation and international best practice.
It is now almost one year that the T&T Corporate Governance Code 2013 (“the code”) was launched by the Institute and its Partners, the T&T Chamber of Industry & Commerce and the T&T Stock Exchange. It is submitted that the code underscores and provides guidance in respect of the corporate governance issues, in particular, as in the present cases where a board of directors has, or might be facing the potential of having, directors nominated by competitors on their board.
There are three specific corporate governance issues namely:
(i) ensuring that the all directors individually and collectively satisfy their fiduciary duties to the company of which they are directors,
(ii) ensuring that all potential conflicts of interest are disclosed by directors and
(iii) ensuring that confidential and strategic information in relation to the companies remain confidential.
The code identifies five principles and contain 24 recommendations (download for free at CCGI: www.caribbeangovernance.org); this statement focuses on the practical implementation of the recommendations.
This is in the context that the code is designed to be a report on the application of the principles and recommendations. Or, to put it another way, it explains why and what you have done otherwise.
Principle 1 is concerned with the establishment of a framework for effective governance and states:
• Every company should be headed by an effective board, which is collectively responsible for the long-term success of the company.
• In general, no director should have any doubt about the fact that the law and best practice requires that every director is a fiduciary only to the company on whose board he serves irrespective of who nominated him and how he was voted onto the board.
Recommendation 1.1 states that the board should establish and make publicly available a clear outline of its roles and responsibilities, including any formal delegation to management. The guidance on this recommendation states that every board should have a formal charter. The board should fulfill certain functions, including: (i) monitoring and managing potential conflicts of interest of management and board members.
Therefore, the first thing that the board should establish is a charter; the charter should include (but not be limited to) how related party transactions are handled, the process of disclosure and communications with shareholders and stakeholders and a risk management framework; the charter should also address the process of review and approval of corporate strategy. These are all important considerations for the cases referred to above.
Recommendation 1.3 states that the board should demonstrate ethical leadership, which includes commitment to high ethical standards and responsible decision-making. In the guidance for this recommendation it then states that every company should adopt a written code of conduct that clarifies the standards of ethical behavior required of the board, management and employees.
Recommendation 1.5 states that the board should take into account the legitimate interests and expectations of all stakeholders. The guidance is that the board should formalise its strategies for achieving transparency, balance and equity in stakeholder engagement.
The general thrust, therefore, of the best practice recommendations in the code is for the board to be clear on its purpose and where its loyalty lies and then to design, formalise and publish its approach to governance consistent with this purpose.
Such an approach creates clarity and transparency and avoids potential conflicts of interests and builds confidence amongst all stakeholders; moreover companies which adopt these progressive governance and disclosure policies are more attractive to investors and are likely to attract a premium on their share value.
Other principles identified in the code have implications with respect to the issues that are being discussed and on the basis that the code is a holistic document It is noteworthy that there are interrelationships between the respective principles. We will now briefly refer to these principles.
Principle 2: there should be a balance of independence and diversity of skills, knowledge, experience, perspectives and gender among directors so that the board works effectively. The main thrust here is that when composing the board, the principal consideration should be the skills, perspectives, independence and knowledge that adds value to the board’s deliberations.
The board’s work is complemented by its various committees including the audit committee and the nominations committee; in respect of the latter, the majority of its members should be independent as defined in the code. There must also be a rigorous, transparent, and formal annual evaluation of (the boards) own performance and that of its committees and the individual directors.
Principle 3: All directors should act honestly and in good faith in the best interest of the company, ahead of any other interests. The code offers a definition of independence in the guidance to recommendation 3.1. Moreover the board should undertake an assessment of its independence on an annual basis and disclose in the annual report each non-executive director it considers to be independent.
The guidance is that a director is not independent if he represents a significant shareholder, to be considered as a person who either alone or with one or more affiliates or connected parties is entitled to exercise 20 per cent (or such other percentage as may be determined relevant on a case by case basis) or more of the voting power at any general meeting of the company.
Recommendation 3.3 states that members of the board and senior management should disclose to the board whether they, directly or indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the company.
Principle 4: the board should present an accurate, timely, balanced and understandable assessment of the company’s performance, position and prospects. The key here is disclosure, audit, the approach taken to manage all the risks of the organisation and reporting on the application of the code, its principles and recommendations.
Principle 5: the board should promote constructive relationships with all shareholders that facilitate the exercise of their ownership rights and encourage their engagement with the company. The key here is that all shareholder rights, including minority shareholders rights, are respected.
This statement represents the views of the Institute and not necessarily those of its individual members or partners and it is being issued consistent with the Institutes’ mandate to comment on corporate governance issues in the Caribbean.
View the critique and response
Published by Trinidad & Tobago Business Guardian
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.
Published by Trinidad & Tobago Express Newspaper
Story Created: Jul 23, 2013 at 11:11 PM ECT
Story Updated: Jul 23, 2013 at 11:11 PM ECT
T&T’s corporate governance disclosure practices are below the average of emerging market economies, said Dr Axel Kravatsky, chairman, the Caribbean Corporate Governance Institute (CCGI).
“In terms of corporate governance disclosure practices, the global standards have 61, Jamaica has 35 disclosure requirements in law, while in T&T, there are five disclosure requirements that are mandatory. Some companies already disclose higher than others, particularly those that are listed on stock exchange,” he said at a media briefing on Monday at the T&T Chamber of Industry and Commerce, Westmoorings.
According to a CCGI statement, a 2011 report by Syntegra Change Architects Ltd found the average enterprise in T&T discloses less than half of the items suggested by the International Standards of Accounting and Reporting, which is less than half for other emerging and frontier markets.
In the corporate governance “eco-system”, there are three main partners, he said.
“On one hand, you have the owners who, by law, must appoint directors and directors appoint managers, and this is the relationship among all partners. There are crucial weaknesses and room for improvement in the relationship. The current laws do not require companies to disclose very much to the owners,” he said.
Corporate governance code
The code, when fully established, is intended to be used as a guide, primarily by listed companies.
Kravatsky said the problem of corporate governance is not a short-term fix, but a long-term effort and the CCGI is playing its role in this.
“Current projects include the T&T corporate governance code, together with the T&T Stock Exchange and T&T Chamber of Commerce. In June there is a corporate governance event with experience speakers from Latin America, and in September, a certificate in corporate directorship,” he said.
He said one challenge is defining the scope as to how it relates to existing Central Bank laws and regulations.
“T&T is not a leader in the environment and there are many other countries that have established codes. Codes are developed on the basis of other codes, company practices and laws and regulations,” he said.
He said there are many benefits for companies of having a corporate governance code and “money flows with best practices.”
“Companies that perform better because of this code have lower cost of capital, lower risks of failure and scandal and stronger leadership and operations.”
Good corporate governance also has benefits for the country.
“There are stronger private businesses as well as state-owned enterprises, there is greater benefits from the management of national wealth and there is also greater investor confidence,” he said.
Information provided by the CCGI, showed that a 2002 survey by McKinsey and Company determined that global institutional investors are prepared to pay a premium of up to 40 per cent for companies with superior corporate governance practices.
Roger Hamel-Smith, chairman of the CCGI working group and former Justice of Appeal, in a CCGI statement said: “Recent events in the T&T economy have highlighted the need for companies to recognise the importance of quality oversight with a high degree of accountability. There is no substitute for good judgement. However, institutionalising a set of best practices to which leaders can strive towards and measure against is a critical and meaningful pursuit.”
Wainwright Iton, chief executive officer, T&T Stock Exchange (TTSE), who also spoke at the press conference, said the TTSE has heavily invested in good governance as it results in increased profits, increased transparency and greater opportunities for investors.
The TTSE has 32 listed members and is a project partner with the CCGI in developing a corporate governance code.
“Shareholders, manager, members of the board all benefits from this; also the population at large. Anything we can do to build trust and confidence in the economy, we will,” Iton said.
Iton compared the corporate governance code to a “manual” that companies can use as a guide.
“If you buy a specific machinery or gadget and you want to know how it performs, you need a manual. If we look at the code in that sense, it will guide listed companies and unlisted companies as to how to conduct business in terms of good governance,” he said.
Catherine Kumar, chief executive officer, T&T Chamber of Industry and Commerce, said the code will not be mandatory, but is optimistic T&T companies are “mature” enough to follow the code once developed.
“When you look at companies following ISO 9000, a lot of these things are voluntary as far as compliance, so we expect companies that want to get on the stock exchange and through the chamber’s members, there will be a certain degree of compliance,” she said.
Kumar said the code will develop a new culture in business practices.
“As a developing nation, if we had to put everything into law, it would not be practical. At the moment, we have challenges enforcing the laws that already exist. So this is about encouraging a culture of what is best,” she said.
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