The debate and focus on good governance has been for the most part constrained to the private sector. This may not be unrelated to the emphasis on good corporate governance practices by regulatory agencies and governments particularly in the aftermath of financial scandals that have plagued corporate giants over the last few decades.
The Enron debacle and major corporate governance failures in companies such as WorldCom, Parmalat and Lehman Brothers have highlighted the importance of not just having corporate governance codes but also ensuring that they are effective and properly implemented. While the referenced scandals ended up in the public domain due to the scale of the repercussions from the corporate failures, the reality is that on a daily basis the absence of good governance practices continues to impact institutions the world over. This week we focus on the important role of good corporate governance in the public sector in The Bahamas.
The concept of corporate governance
Sir Adrian Cadbury defined corporate governance as "the system by which companies are directed and controlled". It is an established fact that companies have a corporate personality and are distinct legal entities from their owners, who are often referred to as shareholders. The owners appoint directors that are the alter egos of the company to oversee the management of the entity's affairs. The responsibilities, duties and potential liability of directors are enormous; hence, the role of a director is not one that should be taken lightly.
In addition to the shareholders who have a stake or interest in the performance and success of the company, there are other stakeholders which may include employees, customers, regulators, suppliers and the general public. These various stakeholders have their own interests, which may be unique and sometimes conflicting. Good corporate governance is aimed at ensuring that a company is managed in the interest of the shareholders with due regard for the interests of all other stakeholders. This requires good stewardship by the directors and prudent administration by management.
The catalyst for good corporate governance
An in-depth study of the history and origin of the various corporate governance codes and standards established over the years will show that they were born out of failures in the governance of entities across the globe. These events placed focus on the operations of boards, the role of directors, remuneration of directors, financial reporting, the role of external auditors and the oversight of management just to mention a few. The result of the studies that ensued would identify transparency, accountability, fairness and responsibility as the main pillars upon which good corporate governance is built.
In The Bahamas and particularly in the local financial services industry, the promotion of good corporate governance practices by companies has been driven by regulators such as the Central Bank of The Bahamas, Securities Commission of The Bahamas and Insurance Commission of The Bahamas. Publicly listed companies are also subject to certain corporate governance and disclosure rules.
Generally, the aforesaid requirements are consistent with international best practices and draw from various standards across several jurisdictions. However, there has not been a major push or drive by successive governments for public corporations and statutory bodies to adopt the vital principles of good corporate governance and the implementation of corporate governance codes for these entities.
Governance and public corporations
It is no news that the overall structure and operations of public corporations and statutory bodies in The Bahamas is different from that of the private sector. There are valid reasons for these distinctions based on the ownership structure, unique mandates and overall philosophy governing these entities. The weight attached to the interests of each stakeholder group is one of the unique differences albeit this needs to be balanced appropriately.
The sole shareholder or majority owner in most of the captioned bodies is the government of The Bahamas and by extension the Bahamian people. While the entities are not in business solely to maximize profits, they owe the people of this country the duty of exercising prudence, financial discipline and good governance in order to protect the taxpayers' funds. This is why the concepts of good corporate governance should be embraced, adopted and codified by public corporations and statutory bodies.
In appointing members of the board of statutory bodies, it is important that the government ensures that individuals that are selected are not only able to contribute to the deliberation of their respective boards but are also aware of their duties and responsibilities. It is also incumbent upon the government to ensure that roles and mandates are clearly defined to avoid confusion and ensure the success of operations.
In this sense, subsequent to the Director's appointment, members of statutory boards should undergo appropriate orientation on the entity as well as their role and be mandated to go through continuing professional development on an annual basis. For its part, the government should reassess the effectiveness of statutory boards via an annual evaluation exercise prior to the reappointment of individuals. All of these requirements and others would ideally be contained in a formal corporate governance code for all public corporations in The Bahamas. Deviation from provisions of such a code should require an explanation by the entity in question in its annual report.
A national corporate governance code
It is the view of this writer that the time is right for The Bahamas to consider drafting and implementing a National Corporate Governance Code (code). While this may seem like an enormous task to embark upon, there are several resources and international standards on this vital topic from which we can build our own unique document. In essence, we need not reinvent the wheel but rather draw from documents such as the OECD Principles of Corporate Governance, Commonwealth Association for Corporate Governance document, UK Corporate Governance Code, US Sarbanes-Oxley Act, German Cromme Code and South Africa King Reports among others. It should be noted that the fundamental principles within all the referenced standards are identical.
The proposed code will clearly address among other things, the roles of the chairman and chief executive officer, board composition and structure, board procedures, matters reserved for the board and delegated authority to management, appointments to board, evaluation of board effectiveness, related party transactions, code of conduct for board members, board balance, supply of information to the board, corporate social responsibility, the audit function, risk management, internal controls and disclosure. The code will contain principles that constitute minimum standards but can be customized by statutory bodies to suit their specific operations.
The implementation of or transition to the code by the private sector should not be onerous seeing that most of the larger companies in The Bahamas would ideally have robust corporate governance policies in place already. The code should adopt overall principles that can be implemented commensurate to the size and nature of an entity. However, all public corporations and statutory bodies should be required to fully implement the code in their corporate governance policies under the oversight of the minister responsible for the body in question.
The gains of good governance
The benefits of good corporate governance are often pronounced in the performance and financial results of an organization. Public corporations and statutory bodies stand to gain likewise from good governance practices with the added advantage of better serving the public interest and better stewardship of the Bahamian people's resources.
Our economy will also be better off in a society and culture that promotes ethics alongside good corporate governance in the public and private sectors. In speaking on East Asia's financial meltdown, Dr. Jesus Estanislao, Founder of the Institute for Corporate Directors in the Philippines and former finance minister, clearly articulated the important role of corporate governance in an economy. Dr. Estanislao remarked: "I see corporate governance as a basic foundation of reform, which really strengthens and modernizes an economy that is wired into the global marketplace".
In the final analysis, the incorporation of good corporate governance practices into the fabric of our economy will further boost investor confidence, enhance the public perception of our corporations and enhance The Bahamas' reputation among the community of nations.
o Arinthia S. Komolafe is an attorney-at-law. Comments on this article can be directed to a.s.komolafe510@gmail.com.
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