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The rest of the world watched with morbid fascination as one company after another admitted to financial improprieties in sums that appeared ever larger.
There was the expectation that a greater number of corporate executives, members of the financial community and professionals would have been hauled before the courts and placed behind bars. What has been equally fascinating is the rapid response from all corners of the globe to the developments in the USA. Dr Thomas sees in the remedial action taken in the USA a lesson in the “remarkable flexibility and responsiveness that capitalism, as a social mode of economic organisation so frequently displays at times of crisis.”
His column of September 1, referred to the political flexibility displayed by the US establishment which included an about face by President George Bush from a fundamentalist anti-regulation, anti-state intervention position to one where he was prepared to sign into law the most far-reaching and comprehensive piece of financial legislation for several decades. While some of the action taken by President Bush may have been influenced by personal and political considerations given that both he and Vice President Cheney have been personally fingered with indiscretions in past financial dealings and the imperative of the November mid-term elections, the response is real and practical and places some distance between the Republican administration and its natural constituency.
Despite his own political leanings, Dr Thomas came across as praising the flexibility of capitalism when he notes that “there is no doubt that, when it works at its best, the market system is an engine of efficiency.” Dr Thomas concedes however that this comes at a price: the system offers a natural haven for scoundrels, robbers and crooks of every possible hue and kind; and that the market’s drive for efficiency causes it to ignore considerations of equity and fairness.
Competition and efficiency
Dr Thomas contrasts the US response with what he describes as backward undeveloped market economies like Guyana where there is no efficiency imperative in economic performance or political performance. The successful performance of any country is directly linked to the efficiency brought about by competition and responsiveness, and countries such as Guyana where competition and responsiveness are absent, have serious problems. As if that were not enough, Guyana still has the same limitations which its more proactive counterparts possess: crooks and scoundrels both in politics and business flourish despite all the evidence of misdeeds while considerations of equity and fairness are alien concepts. But it does not end there. There are a number of features of backward capitalism which are patently obvious in Guyana, but the very backwardness prevents any desire or pressure to address them. Tragically this is not a theoretical issue but one which goes to the very existence of the country’s development since in order to lift ourselves out of the poverty in which we are mired, we must have greater efficiency whether it is politically or economically driven.
There are many symptoms of backward capitalism some of which are plain and simple corporate lawlessness while others have to do with 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.
This patent disregard for the rules takes many forms and is manifest in abuses against the laws and best practice. Sometimes such lawlessness is actually encouraged by a tolerant government and society when things are done under the label of investment. Recently there was the report in the Stabroek News of a returning ‘investor’ who had spent two million Guyana dollars and in the process had cleared trees and exposed to environmental risks the lifeline of not only individuals but the operations of a nearby budding eco-resort. We have witnessed too a case of the Ministry of Housing resettling residents for an airport expansion project which is yet to receive clearance from the Environmental Protection Agency. Interestingly, not only the State-owned media but society as a whole has shown no interest in such issues. Progressive capitalism recognises that good environmental practice is essential for the long term sustainability of the business and the country.
It is surely no exaggeration to say that tax evasion is thought to be universal among taxpayers in Guyana and even the courts have demonstrated the most benign forbearance no doubt because it would be like opening Pandora’s Box. One feature of tax evasion in Guyana is its sheer crudeness - figures are concocted and books are fiddled with the complicity of accountants and tax consultants who are granted tax practice certificates by the very Revenue Authority which they help to defraud! Worse still is the anecdotal evidence that many of the gamekeepers are working with the poachers introducing into the system a level of corruption that is cancerous. Running the business with tax evasion as one of its core strategies - sometimes euphemistically referred to as tax-minimisation - is hardly progressive capitalism and has to be distinguished from tax planning which includes structuring the business and particular transactions in a tax efficient manner. Capitalism operates by certain tenets which punish inefficiencies mercilessly and it is small wonder that so many businesses with tax evasion as their core strategy end up in the dust heap of failure.
As far back as 1991, the Hoyte administration passed a modern Companies Act to replace the one that had its roots in the nineteenth century. However before it could put that act into effect, it lost the elections and it took three years and pressure from the international financial institutions before the act was finally made effective. Despite the fact that some of our leading business persons and professionals were involved in the preparation of the act and the long lead time for planning for compliance therewith, some of our top companies and accounting firms are still to meet the requirements of the law in critical matters of disclosure and governance. The government has failed to ensure the necessary monitoring and enforcement mechanisms at the registry of companies and I estimate that a staggering 90% of our companies, including the public companies and their subsidiaries, are in breach of one or more requirements of the laws. Very recently one of these very top public companies was persisting in holding its AGM without the adequate notice and documentation and only changed course after some nudging from a shareholder. That same company, however, has failed to respond to a shareholder’s questions six weeks after they were raised.
The Companies Act provides that financial statements of companies be prepared in accordance with pronouncements of the Institute of Chartered Accountants of Guyana (ICAG). Well, the ICAG has prescribed that financial statements should be prepared in accordance with International Accounting Standards, a principles-based versus the rules-based type of accounting standards used in the USA. Even the most cursory review of some of the published financial statements of companies including commercial banks will show that these standards are not universally observed year after year. Clearly the accounting profession is either unwilling or unable to enforce its own pronouncements while the regulators, including the Bank of Guyana, are too tolerant of such omissions.
The current spate of receiverships now taking place in the country has unveiled some rather brazen acts of corporate lawlessness. There were at least two companies which in anticipation of action by their bank creditors engaged in literal asset stripping while all the banks could do was look on in utter amazement and helplessness at the sheer boldness of the perpetrators. The same commercial banks continue to experience painful frustration in seeking to realise their security on loans which have gone sour and many of which are now being challenged in the courts by the borrowers on some rather spurious grounds.
In few other jurisdictions would such abuse be entertained but then we seem to possess a tolerance for corporate malfeasance that is unique among Caricom countries. Many of the banks have themselves contributed to this level of lawlessness by their failure to insist that their customers comply with the country’s laws in return for bank financing. Should the tax authorities pursue the tax evasion which many companies have engaged in over the years, the banks may find that the value of their security is considerably reduced.
Conflicts of interest
Another common area of corporate lawlessness is the issue of conflict of interest in transactions involving mainly executive directors of the entity.
Many of these directors and senior executives trade with the entities of which they are directors in breach of their fiduciary duties to the company.
Corporate law and rules of accounting require that any such transactions be fully disclosed in the financial statements but compliance is more the exception than the rule. In this way profits are siphoned off from the company which provides a tax front to the director who then files as an employee while ignoring his business income which is lost in purchases in the company’s financial statements.
Not to belabour the point but it is precisely this type of activity riddled with conflicts that brought down once mighty Enron where officers made millions through off the books ‘special’ partnerships in which they were principal players and beneficiaries. The regulators in Guyana, (sometimes one is forced to wonder who they are) and the accounting profession should take note and move vigorously to prevent abuses of this nature.
Guyana’s financial system has often been justifiably referred to as unsophisticated and fragile and the current approach to financial regulation does nothing to remove that stigma.
This is an issue of development because any country that is desirous of making serious economic progress must have a credible financial system in which people are prepared to invest with full confidence that they are only assuming normal business risk. It is inconceivable that capital will find its way into a system that is fraught with the abuses that are tolerated by regulators or the profession charged with stewardship responsibility.
To be continued
Last 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 efficient system.
We 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.
Today we look at some of these other areas.
Understandably, 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.
In 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.
Another 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 company.
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.
Institutional 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.
Of 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.
Underlying 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 was ignored. It would seem that the only option available would be to resort to the courts but this is an expensive, time-consuming process which is surely avoidable. Perhaps the law did not make allowance for such 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?
Public interest company
Another 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 $1B. Company B which is in the same business and has total deposits of $6B 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 public company.
Failure of self-regulation
Much has been said in these columns and by Dr Clive Thomas about 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 in 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.
The 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.
It 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.