The value of corporate governance | Contact Magazine


Corporate governance is improving globally, but not by enough. Investors, shareholders and citizens are demanding greater accountability and transparency. Spurred by legislative and financial obligations, this should produce positive changes in the next decade

by Shelly Ann Mohammed, Head, ACCA Caribbean

Published in CONTACT Magazine


 

Corporate governance continues to advance in global importance and relevance. As the former Group Chief Legal Officer of CL Financial, working with the government on the restructuring of the company, I saw firsthand how the collapse affected the Caribbean. The importance of good corporate governance was never more apparent.

In response to a number of high-profile corporate failures in the United States, rules affecting corporate governance were overhauled. The introduction of the Sarbanes-Oxley Act in 2002 established sweeping auditing and financial regulations for public companies. Aspects of this overhaul have found their way into the legislation of many other jurisdictions.

 

Erosion of trust

Debates on corporate governance remain heavily focused on public companies and regulated organisations, which represent a small fraction of economic activity in most countries. This is particularly true in Trinidad and Tobago, where private and family-owned businesses dominate.

Corporate governance is the framework of rules and practices that direct how businesses operate, and ensure there is the highest possible accountability, transparency, integrity and sustainable success.

ACCA (the Association of Chartered Certified Accountants) has been conducting research on corporate governance since 2012, under a global initiative called “Culture and channelling corporate behaviour”. In the 2008 global financial crash, many companies who were compliant with rules and regulations were still caught in the crisis. This demonstrated very clearly that regulation and corporate governance mechanisms failed to prevent dysfunctional behaviour from spreading and seemingly thriving businesses from collapsing.

Business scandals, public inquiries and corporate wrongdoing continue to make headlines in Trinidad and Tobago, and underscore the need to strengthen the interface between corporate governance and ethics. Trust has been eroded across a range of sectors, from politics to the media to business, and society now demands more accountability.

 

Impact of organisational culture

ACCA’s research shows that culture is often driven from the top: our political as well as corporate leaders have responsibility for ensuring that values are lived and breathed throughout society and in every organisation. A number of institutions such as the Organisation for Economic Co-operation and Development (OECD), and locally the Corporate Governance Institute, are promoting greater transparency, enhanced board effectiveness, greater protection of shareholder rights and improved stakeholder accountability.

It is imperative that state-owned agencies, private family-operated businesses and publicly traded companies understand that corporate governance has positive effects on trust, confidence, credibility and reputation, which can lead to long-term value creation and investor confidence.

External corporate governance consists of mandatory and voluntary codes, reports and frameworks such as company law, stock market listing rules and accounting and auditing standards. According to the World Economic Forum, Trinidad and Tobago still has a lot of work to do in this area (see Table 1). Internal corporate governance is about how such external governance is complied with and embedded within the culture and values of the organisation, and how sound governance is implemented and works in practice.

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The corporate governance framework can play its part in providing a structure for governing the behaviour of companies and their officers. However, external rules, regulations, and codes of practice are not effective unless a climate of compliance is established within organisations. Embedded within companies, there also needs to be a culture recognising the responsibilities and duties of management with regard to the legitimate rights of their stakeholders and shareholders.

Effective corporate governance is about promoting a climate of transparency, scepticism and objectivity, by creating systems, procedures, and internal structures. The aim is compliance with external requirements, but also preempting and dissuading anti-stakeholder behaviour from deep within the organisation.

 

Rebuilding trust

Trust matters, and in Trinidad and Tobago it is at an alltime low. The Centre for Public Impact (CPI), a foundation of the Boston Consulting Group, works to rethink how governments around the world can increase the impact of their corporate governance policies and programmes. In CPI’s view, legitimacy is a central pillar in achieving policy outcomes and producing impact.

CPI’s research shows that governments struggle to achieve desired outcomes when the public does not trust state institutions. Publicly traded companies and conglomerates have traditionally performed better at corporate governance.

For example, in 2019 Ethical Boardroom, a global governance magazine and website, recognised the Massy Group from Trinidad and Tobago as having the “best corporate governance” amongst Caribbean companies in the conglomerate category.

In December 2018 the UWI-Arthur Lok Jack Global School of Business (UWIALJGSB), in collaboration with the Clarkson Centre for Business Ethics and Board Effectiveness at the Rotman School of Management, University of Toronto (CCBE), released the results of a study on the status of corporate disclosure practices among publicly listed companies on the Trinidad and Tobago Stock Exchange (TTSE). Figure 1 shows that companies scoring well were predominantly financial institutions, insurance companies and conglomerates.

Conversely, two groups which make up a significant portion of business in Trinidad and Tobago but often lack good corporate governance are state-owned agencies and family-owned businesses.

More than ever, therefore it is the responsibility of professionals such as lawyers, corporate secretaries and accountants to call out unethical behaviour.

The fight against corruption must start at the top with a clear commitment from our leaders. The principles of corporate governance and ethics need to be embedded in our daily lives, as any perceived lack of trust negatively impacts business performance and lowers investor confidence.

 

Recommendations for state-owned businesses

State boards should be held responsible and accountable for ensuring the highest standards of corporate governance, and should be expected to serve the interests of their stakeholders, including the government as a shareholder, and the taxpayer.

The corporate governance of state-owned enterprises (SOEs) should be a key priority for Trinidad and Tobago.

It can result in significant economic gains and increase competitiveness.

When SOEs underperform, there is a high economic, financial and opportunity cost for the wider economy. It diverts scarce public sector resources and taxpayers’ money away from much needed social sectors which can directly benefit the poor. In Trinidad and Tobago, governance challenges include highly politicised state boards, and lack of autonomy by management in dayto-day operational decision-making.

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A lack of corporate governance in state-owned entities can be a source of corruption. Government should develop a structured transparent process for board nominations, to ensure that directors are appointed who have the required experience and range of competencies to perform corporate governance roles, to guide strategy and oversee management.

 

Recommendations for family-operated businesses

Family-owned businesses underpin Trinidad and Tobago’s economy, and face unique performance and governance challenges as they grow from generation to generation. A McKinsey study showed that around the world only 30% of family businesses survive into the third generation of ownership.

Among the factors that ensure success is strong governance of the company. It is important to have a board with independent external directors and a separation between ownership and management. This helps to complement the family’s knowledge with fresh strategic perspectives from qualified outsiders. If these challenges are managed, family-owned and -operated businesses can endure and prosper for generations.

 

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