Low business culture

Given that public companies are so few here, it is tempting to dismiss corporate governance as a first world concept inappropriate to a country practising backward capitalism. In fact it is because of the lack of good governance that we continue to be so backward. It is because of that as well that we in the private sector and civil society cannot speak with authority and conviction to the politicians and the political parties about democracy and governance. We would do well to listen to the President of the World Bank, Jim Wolfensohn, who said “The proper governance of companies will become as crucial to the world economy as the proper governing of countries.”

The problem for our corporate executives is the low business culture in the country going back to the colonial days when no one dared question the white man who came with his own accounting firm with no loyalty to the host country. It has been said that it is easier to (ex)change people rather than culture. It is perhaps no exaggeration that most of our companies have no appreciation or inclination for accountability and responsibility, let alone the distinction between the two. Accountability is a legal concept based both on statute as well as common law, while responsibility is a governance principle.

Corporate governance is not cast in stone but keeps evolving as countries seek better ways to address the issues of accountability and responsibility. Different countries take different approaches and in the USA the accounting and auditing profession and indeed the Securities & Exchange Commission arefinding themselves hemmed in by law following the corporate failures in that country. Post-apartheid South Africa, consistent with the novel approach it took with shared governance at the national level, has just come out with a new code of corporate governance in the form of the King II Report, while in the UK the Cadbury Report and its successors have all been revisited and radical alterations are proposed.

We look at some of the highlights of those reports.

King II

This report sets out the characteristics by which corporate governance can be measured as:

Discipline - the commitment by a company’s senior management to adhere to behaviour that is universally recognised and accepted to be correct and proper.

Transparency - the measure of how good management is at making necessary information available in a candid, accurate and timely manner, reflecting whether or not investors obtain a true picture of what is happening inside the company.

Independence - the extent to which mechanisms exist to minimise or avoid potential conflicts of interest such as dominance by a strong chief executive or large shareowner. These mechanisms range from the composition of the board, to appointments to committees of the board, and external parties such as the auditors.

Accountability - mechanisms should be established to ensure that individuals or groups in a company, who make decisions and take actions on specific issues, are accountable for their decisions and actions. Such mechanisms provide investors with the means to query and assess the actions of the board and its committees.

Responsibility - pertains to behaviour that allows for corrective action and for penalising mismanagement.

Fairness - Systems must be balanced to take account of all those that have an interest in the company and its future. For example, minority shareowner interests must receive equal consideration to those of the dominant shareowner(s).

Social responsibility - A well-managed company will be aware of, and respond to, social issues, placing a high priority on ethical standards. A good corporate citizen is increasingly seen as one that is non-discriminatory, non- exploitative, and responsible with regard to environmental and human rights issues.

Review of the role and effectiveness of non-executive directors - Derek Higgs

On January 20, 2003 Derek Higgs presented this report to the UK Chancellor of the Exchequer and the Secretary of State for Trade and Industry.

In his cover letter, Higgs alluded that the fundamentals of corporate governance in the United Kingdom are sound, thanks to Sir Adrian Cadbury (author of the Cadbury report, 1992).

He also stated that the brittleness and rigidity of legislation cannot dictate behaviour, or foster the trust that he believes is fundamental to the effective unitary board and to superior corporate performance. This similarly applies to Guyana as persons have tried to interpret the Companies Act, usually in their favour.

Some of the recommendations of the Higgs Report are as follows:

* The number of meetings of the board and of its main committees should be stated in the annual report, together with the attendance of individual directors.

* At least half of the members of the Board, excluding the chairman, should be independent non-executive directors.

* The roles of the chairman and chief executive should be separated and the division of responsibilities between these positions should be set out in writing and agreed by the Board.

* A chief executive should not become chairman of the same company.

* The non-executives on the Board should meet as a group at least once a year without the chairman or chief executive present.

* The company secretary should be accountable to the board as a whole, through the chairman, on all governance matters.

* A full time executive director should not take on more than one non-executive directorship, nor become chairman, of a major company.

* All members of the remuneration committee should meet the test of independence and their terms of reference should be published.

The Institute of Chartered Accountants in England and Wales (ICAEW) has stated however that the proposed revisions are written in over prescriptive terms and fear that a ‘tick the box’ mentality will develop.

Audit Committees: Combined Code Guidance - Sir Robert Smith

The Smith Report published on the same day as the Higgs Report focuses on audit committees. Guyana is among a decreasing number of countries where audit committees are not mandatory in public companies and even when they do exist it is usually to allow our public companies to say they have one! Ask them how many times they met other than to review the annual report or how many times the reports of internal and external auditors are considered and you will be shocked at the responses.

The Report stated that “while all directors have a duty to act in the interests of the company the audit committee has a particular role, acting independently from the executive, to ensure that the interests of shareholders are properly protected in relation to financial reporting and internal control.” It further notes that “it is not the duty of audit committees to carry out functions that properly belong to others, such as the company’s management in the preparation of the financial statements or the auditors in the planning or conducting of audits.”

The Report recommends that the audit committee should include at least three members, who should all be independent non-executive directors and that the chairman of the company should not be an audit committee member. It is for the committee to decide if non-members should attend meetings while it is expected that the external audit lead partner will be regularly invited.

Sarbanes-Oxley Act of 2002

As a result of public outcry over Enron et al, the United States sought to enact legislation to address the problems of corporate governance with the passage of this Act. The Act adds a new layer of matters to be addressed by listed companies, their directors and auditors and has established a Public Company Accounting Oversight Board (PCAOB) to oversee the audits of public companies and related matters.

The Act places restrictions on the consulting work which auditors can do for their audit clients and provides that audit firms will be appointed by, and will report directly to, the audit committee and provides that the chief executive officer and chief financial officer must now certify financial statements.