By Vindel Kerr, Contributor
Patterson and Shaw
"The framework of corporate democracy, much of which developed in reaction to stock market crash of 1929, restored public confidence by subordinating finance to commerce and providing legitimacy for the otherwise uncontrollable growth of power in the hands of a few private individuals"
- James McRitchie, 1997
THE POLITICS OF CORPORATE AND PUBLIC GOVERNING
BACK in 1930s, and to some extent in many of today's jurisdictions, corporate governance consisted primarily of attorneys engaged in theoretical debates about reducing "agency costs" essentially inefficiencies which arise when the "principles" (stockholders) hire an "agent" (chief executive officer, CEO) whose interests differ from their own. Stockholders want their shares to increase in value and be paid higher dividends; the CEO wants status, a high salary, bonuses and perks.
The 'Holy Grail' for those in the field of corporate governance has been to develop a variety of rewards and safeguards to better align the CEO's interests with those of the shareholders. Rather than actively participating in corporate governance issues, shareholders tend to be passive. With few options left to them, dissatisfied owners are invariably told by the system to love it or leave. This strategy is dubbed the "Wall Street Walk" or the "Wall Street Rule."
Since independence, and right through to the early 1990s the history of Jamaica has been overtaken by a series of highly profiled, debates focusing on the role of the Government, the PSOJ and the "company" in society. The most recent debate centres around talk of "Corporate Social Responsibility" and "Socially Responsible Investment". More importantly, and no doubt been played down by some critics in the private sector and Government, is the level of 'corporate sell-outs', takeovers, downsizing, executive pay-particularly the "Fat Cats", mal-administration of public entities, and the way some local firms structure their dividend policies.
Has anything changed? If so, how can it lead to more effective, accountable and responsible corporate and political leadership?
INTEC FUND
In a report to Parliament months ago, Auditor-General Adrian Strachan described the management of the INTEC Fund as inadequate and implied that those who oversaw the lending of over $700 million to IT start-ups had failed to protect the public's interest. While Strachan found no basis to lay claim of corruption on the part of any public official, he indicated in a case-by-case analysis of six loans made under the scheme, sketched a picture of officials who systematically failed to follow even the most basic business procedures. According to Strachan, in the case of one company, (NetServ Jamaica) ignored warnings long before any money was disbursed. He went further to explain that the company was probably being run by shysters. In spite the severity of losses and fall-out in public trust surrounding this issue, the citizens of Jamaica were merely told that such mistakes were due to youthful exuberance on the part of those who were culpable. It should be noted that three of the core tenets of good governance are transparency, accountability and responsibility-in all their interpretations.
MINISTRY PAPER #13
Citing Ministry Paper #13 that had accompanied the 1998 Budget to Parliament, "poor management practices have compounded the problems arising from the state of the macroeconomic environment." According to that Ministry Paper, among the key governance weaknesses noted to have contributed to the 1990s financial sector meltdown and 'state of the economy' then, were, among many other things:
Lack of, or poor strategic
planning
Failures in the exercise of due diligence and care, specifically:
Inadequate credit/investment assessment and monitoring;
High and non-income earning levels of related party exposure;
Lack of, or non-compliance with proper internal control procedures and effective risk management principles and
Ineffective supervision of the management of these institutions by their board of directors.
In an address to Jamaica British Business Association (March 31, 1999), Managing Director of FINSAC, Patrick Hylton, stated: "Government intervention in the financial sector has also brought into sharp focus issues of corporate governance and the importance of adopting an appropriate governance culture. This will facilitate effective supervision on the part of non-executive directors of the affairs of their companies and the avoidance of undesirable practices, by some managing or executive directors. There has been a loud demand for reform in this regard."
Just one month following this passionate address by the young business Turk, Mr. Audley Shaw, Opposition Spokesman on Finance, revealed in Parliament incidents gross mal-administration and breakdown in public governance where public officials were reportedly paying themselves huge salary packets.
"FAT CATS"
This report followed an informed revelation six months after being brought to public attention, dubbed "Busting the Piggy Bank" that many public sector bosses were in breach of established pay guidelines and were paying themselves millions of dollars at taxpayers expense. After a full-scale investigation requested by the public and endorsed by the Government into the operations of more than 80 of the 200 entities, Prime Minister Patterson, reporting back to Parliament conceding that "the Ministry of Finance" had lost control of the salaries in some of these state-owned companies."
What remains evident is that the failures were due largely to poor administration and outright neglect of and by Chairmen, CEOs and Directors of their fiduciary duty of care, diligence and commitment, and responsibility to public duty. While little might have changed to improve governance in the public sector since, the BoJ for its part, has re-affirmed its commitment by addressing certain corporate governance issues concerning the competence, qualification and suitability of persons for certain managerial appointments in financial institutions as well as setting limits on lending between connected parties. The Companies Act (2001) is to include legislation to bolster good corporate governance. We are therefore hopeful that this will help to provide greater accountability by Directors.
The problem of poorly administered corporations has significant implications for stakeholders, and the performance of the economy as a whole.
When the financial system collapsed in the 1990s, a "ripple effect" was triggered causing widespread failures of "satellite" businesses, many totally unrelated, leading to the loss of thousands of jobs, loss of foreign exchange earnings and loss of national ownership of key institutions to foreign owners. There was an accompanied lost in business and political confidence by many would-be investors.
Vindel Kerr is conducting doctoral research in corporate governance. Comments at: vkerrl@anngel.com.jm
