Coporate Governance (Part 1)

Corporate governance is about building strong, sustainable businesses and institutions.  It applies to all forms of organizations – the publicly listed company, a privately held company, large conglomerates, small businesses, the family owned business, a school, a church, an NGO, a government Ministry.

Corporate Governance has real and tangible benefits for companies: its increases investor confidence; reduces risk and the cost of capital and improves the effective functioning of an organization.

Corporate governance refers to the systems and processes through which a company is directed and controlled. Corporate governance specifies the distribution of rights and responsibilities among the organization’s stakeholders (including shareholders, directors, and managers) and articulates the rules and procedures for making decisions on corporate affairs. (See figure). Thus, corporate governance provides the structure for defining, implementing, and monitoring a company’s goals and objectives, and ensuring accountability to appropriate stakeholders.

Recent events locally, and various international financial crises make the case for urgent corporate governance reforms. The dramatic collapse of the CL Financial empire and the almost unbelievable revelations emerging from the Commission of Enquiry are indicators of the significant weaknesses in our corporate governance systems as well as the vulnerability of small open economies such as ours to global events.

A recent research study on companies listed on the local stock exchange, conducted by Syntegra Change Architects Ltd., a locally based consultancy, in collaboration with United Nations Conference on Trade and Development (UNCTAD), under the leadership of Dr. Axel Kravatzky (also Vice-Chair of the Chamber’s Corporate Social Responsibility Committee) reveals important aspects about the scale, nature of the challenge, and path forward for corporate governance reform in Trinidad and Tobago.

The key findings of the study reveal that T&T has the lowest reporting requirements for corporate governance disclosure among 45 nations reviewed by UNCTAD. It is equally noteworthy that, even though the disclosure requirements are so low (only 5 out of 51 reporting requirements are met, using UNCTAD’s widely accepted international benchmark) 94% of companies listed on the Trinidad and Tobago Stock Exchange have been found to disclose more than the minimum required in this country. However, the average disclosure is still below 50% of what Boards of Directors in other emerging markets disclose about their governance practices to their shareholders and the investing public. You can download the full report from their website: www.syntegrachange.com

Legislative or regulatory reforms under way in T&T are not yet proposing more public disclosure. Instead there appears to be a trend towards more regulation.  However, relying only on the Regulators to prevent crises is not a recipe for success. T&T’s Corporate Governance environment, like that of all other countries, is too complex to be controlled sufficiently by regulators alone. Shareowners, the investing public and the media have crucial roles to play in ensuring that firms are governed properly. Furthermore, governance is not only about ensuring compliance with standards. Instead, it is about leadership and steering organizations safely towards sustained success.

Evidence of organizations’ failures in other countries and T&T suggest that lower disclosure, leads to poorer information for decision making, and reduced as well as weakened accountability. Such a weakness in the T&T Corporate Governance System has severe effects on the functioning of the whole corporate governance system of a firm, with, as mentioned above, the end effect being reduced investor confidence, increased risks by the stakeholders, and the actual functioning of the companies negatively affected.

Over the past few years there has been some movement in the right direction. However continuing on the same path with an over-dependence on the Regulators is not a viable option.  The corporate governance system would have crucial weaknesses that would likely lead to a lot of value being destroyed, opportunities missed, and legitimate interests not met. The Chamber endorses the call for a multi-stakeholder, multi-pronged approach to Corporate governance reform where:

1. The business community (including the 88 companies in which the state has an active interest) as well as the NGO community need to increase their awareness, knowledge of, and alignment with good governance practices.
2. The media needs to increase its understanding, investigation, and reporting of corporate governance matters.
3. Investors, private and especially institutional, need to increase their knowledge and advocacy for good corporate governance in their interest.
4. Owners need to be more informed of their rights and knowledge about how to evaluate the performance of the directors they appoint to look after their interests.

Without increased engagement of the above four groups, the regulators’ job would be too great and complex, with failure virtually pre-programmed.

There are many other situations in T&T where it would be valid to say that we have the laws, and even if they are imperfect, we would make huge strides if we only enforced what we already have. This cannot be said for Corporate Governance.   The ‘sunlight’, which corporate governance disclosure is for ecosystem of the national economy, is still faint and existing plans are not ensuring that it will be strengthened nor made more consistent. Given the above, Corporate Governance reform is needed NOW and must include the following elements:

(a)              Developing a T&T Corporate Governance Code that will be the common benchmark for good practices Advocating a mandated increased public disclosure on corporate governance practices through further legislative and regulatory amendments and

(Read Part 2)