By Vindel Kerr, Contributor
Kingston Wharves
THE BATTLE for corporate control of Kingston Wharves Limited (KML) could set a new precedent resulting in a landmark decision if the stevedoring companies were to be successful in their pursuit of litigation against Kingston Wharves. For one thing, this author has not found in any international literate, a single case of a port services sector so smeared with director interconnectedness and multiple directorships. Can one man serve many masters? Are we witnessing a fresh spate of attacks on boardroom democracy by an over zealous and selfish few? Will the integrity of boardroom governance be preserved after all this? One thing is certain, the field of corporate governance is poised for enrichment, whatever the decision turns out to be on February 18, 2003.
As early as 1913, Louis Brandeis, US Supreme Court Justice (House of Representatives, Pujo Committee report), commented: "The practice of interlocking directors is the practice of many evils. It offends laws, both human and divine. Applied to rival corporations, it tends to the suppression of competition ... applied to corporations which deal with each other, it tends to disloyalty and violation of the fundamental law that no man can serve two masters. In either event, it tends to inefficiency for it removes incentives and destroys soundness of judgment. It is undemocratic for it rejects the platform: A fair field and no favours- substituting the pull of privilege for the push of manhood."
DAMAGING NATURE OF DIRECTOR
INTERCONNECTEDNESS
The magnitude of the interconnectedness can be likened to the well-documented case of Maxwell Communications Group (UK), now defunct. Robert Maxwell was chairman, President & CEO not only of his multi-million dollar communications empire, but he was chairman for many trust companies associated with his empire group. Very importantly, while the Companies Act of Britain then and now did not allow for the president or CEO of a group of companies to chair the boards of its trust companies, or empowered with voting rights on such boards, e.g. pension funds etc.; Robert Maxwell was undaunted as key members of the judiciary, regulatory, political and legal fraternities of Britain were either his loyal and trusted friends or had a key directorship role spreading throughout the Maxwell empire. In essence, as long as Robert Maxwell served his loyal cronies well, his minority shareholders were of no significance. Rules of law were mere formalities and were not applied to those who were paid to write, preserve and enforce them. And of course, these laws were never meant for the boardroom "cowboys" like many in Jamaica who were once hired hands ("agents") of the corporation. The Enron, Tyco debacle means that corporations the world over must guard against the swindling of corporate profits (shareholders) and the employment of creative accounting methods and tax avoidance.
Maxwell Communications Group collapsed overnight, Robert Maxwell died at sea in the midst of a controversy that had the British economy and more so, it's financial capital, London, paying attention to the importance of corporate governance. The demise of the Maxwell Empire led to significant fall out in the stock markets and loss of confidence in the business district of London. In the final analysis, many authorities were either fired or imprisoned and a new wave of corporate governance measures ensued by the end of the 1980s and into the 1990s. What was different in Britain then compared to Jamaica now, is that laws were on the books governing the role of trustees and their extent of interlocking (interconnection), and their relationships with trust funds/pension, retirement planning etc. In Jamaica, and in spite of repeated calls by this author for urgent corporate governance reform, our authorities remain unmoved while "cowboys" stampede the corporate landscape to their own self-interest.
BREACH OF ANTITRUST LAWS
The prevalence of director interlocking relationships is not surprising given the logic of choosing directors with knowledge and experience of a corporation's business. However, the problem is that when an individual simultaneously serves as a director (or officer) of two competing companies, he or she stumbles into a prime opportunity for collusion. Co-ordination of pricing, marketing, or production plans of the two companies are some examples. In the USA, if such collusion occurs the interlocking director (or officer) could face serious criminal and civil liability charges for price fixing or similar offences under Section 1 of the Sherman Antitrust Act (The Colorado Lawyer, Vol. 26, No. 3, March 1997). .
KINGSTON WHARVES VS.
STEVEDORING COMPANIES
A case in brief: KWL has issued notice to the stevedores on the Kingston Wharves as part of a cost containing strategy recommended by an independent Danish port consulting company which did a study on the operation of the Wharves. One of the companies affected responded by filing lawsuit and obtaining a restraining order until February 2003. In addition, alliances have been established, shares sold and purchased and now a consortium exists which has some 49 per cent of the shares in KWL. Kingston Port Workers Superannuation Fund (PWSF) is one of the companies in the consortium that purchased shares in the company through its trustees. The trustees, however, or some thereof, have overlapping interests as they are also operators of stevedoring businesses and party to the suits which were filed against KWL. The consortium wants eight of the current directors removed and to be replaced with nine of their own nominees, several of whom are the very trustees of the PWSF.
Now let us examine the law addressing the duty to not misuse trustee's position and the duty to avoid conflict between trustees interests and duties. Halsbury's Laws of England 4th edn 2000 reissue vol. 48 explains the ambit of the disabilities as follows:
"Misuse of Trustee's position": A trustee must not in any way make use of the trust property or of his position as trustee for his own interest or private advantages (para 818);"
"Avoidance of conflict between trustee's interest and duty: A trustee must not intentionally place himself in a position in which his interest may conflict with his duty. Therefore he must not enter into engagements in which he has or can have a personal interest which conflicts or possibly may conflict with the interests of those whom he is bound to protect (para 819)";
In interpreting the preceding (Misuse of Trustee's position), one local attorney concluded: "While there are no cases treating this point that are analogous to the facts of the KWL scenario, this is a general principle of equity and therefore applicable to all trustees."
In addition, and drawing from literature cited by said learned attorney, the following cases affirm the generality of the principle as stated in the extracts set out below:
Phayre v Peree 3 ER 1008 HL: "It is perfectly settled that trustees can never deal with trust funds for their own benefit" (Lord Redesdale);
Cook v. Collingridge 37 ER 979: Persons dealing as trustees and executors must put their own interest entirely out of the question;
Dobson v Land 68 ER 337: A trustee can never make a benefit to himself by dealing with the trust property.
From a close analysis of the above, the following questions must be asked: Is there a clear position as to whether or not the trustees of the PWSF are acting contrary to their positions as trustees?
Can it be construed beyond doubt that one or more of the trustees of the PWSF could be using the fund to benefit themselves? Could it be that in one sense, the trustees may be using the trust funds to stave off KWL's intention to evict their stevedoring operations from the Wharves? Are trustees of the PWSF acting in breach of their common law duty not to misuse trust funds for personal advantage in the circumstances of this particular case?
SIGNIFICANT ACADEMIC AND PRACTICAL IMPLICATIONS
The Kingston Wharves battle is already providing invaluable practical and theoretical insights. After a thorough scouring of international literature, there is not to be found a case so unique in issues and complexity of director interconnectedness. Jamaica's corporate boardroom practices need to be examined and brought closer in line with First World corporations more so in light of the Enron scandal.
SHAREHOLDERS OF KWL
Who will the more than 1,200 shareholders of Kingston Wharves choose to represent their best interests? Will shareholders opt to re-elect those who have already been tested and proven? Will shareholders be seeking new and untried directors to lead their organisation into the future? Better yet, will shareholders elect a mix of directors from opposing sides? Indeed, a mixed board could well turn out to be the best or worst thing for the future of the Wharves. Whoever wins, this case is bound to impact company law, better yet, the theory and practice of corporate governance.
Vindel Kerr writes, lectures, conducts doctoral research in corporate governance, and is a business consultant. Comments at: vkerrl@anngel.com.jm
