E. IRVINGThe Cave Hill School of Business - UWI

November 5th, 2014

Background Definition Trends in Global CG Theoretical Framework Caribbean CG Case of the TCGA Way Forward

South Sea ‘Bubble’ –1st documented evidence of failure in corporate governance (1720)

Establishment of the first joint stock Company Law of Britain 1855

1929 Stock Market Crash – Great Depression

The enactment of Securities Laws during 1933-1937 Berle and Means (1932) - “The Modern Corporation and Private

Property.” Foundation for Agency Theory

Late 1980s demise of the Maxwell Communications Group (Britain). Cadbury Report (1992)

2000s –WorldCom, Tyco, Enron. Sarbanes-Oxley (2002)

2008 – Collapse of Lehman Brothers – Great Recession. Dodd- Frank (2010)

“Corporate Governance is the system by which companies are directed and controlled. Boards of Directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the Directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the Board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship.”

- Cadbury Report (1992)

Directors roles and responsibilities

Protecting stakeholder rights and interest

Crafting strategic direction

Establishing the risk appetite

Agency Theory Shareholder Theory New Institutional Theory Stewardship Theory Stakeholder Theory Principal – Principal Theory

Agency Theory

Principal – Agent Problem

Self interest / Conflict of interest Information Asymmetry Moral hazard Agency costs

Firms should recognize the interests of stakeholders that have a vested interest in the corporation. Freeman (1984)

Research indicate that the country environment or political-economic climate affect corporate performance, Shleifer and Vishny (1997), Doidge et al (2007), Aggarwal et al (2009).

 Country Environment

Country Environment

Stakeholder Theory Model Adopted from Letza, Sun, Kirkbride (2004)

Shareholder activism

Increased direct communication

Regulation e.g. in U.S. pay-for-performance, clawbacks, pay ratio

Director tenure limits

Auditor rotation

Risk management and long-term value creation

Greater risk regulation esp. financial intermediaries

Diversity legislation

Focus on culture, e.g. integrity, whistle-blowing, anti-corruption

Corporate Governance reform internationally has come subsequent to corporate failures (Williams 2010)

Few regional corporate failures mean limited impetus to regulate corporate governance (CARICOM Trade and Investment Report 2010)

Collapse of CL Financial in 2009 fostered renewed efforts to modernize codes for corporate governance

Regional challenge to conceptualize and institute overarching CG code

Caribbean faces some unique features as it pertains to CG In the Caribbean less than 1% of the population could be

deemed as being an active investor community (CARICOM Trade and Investment Report 2005)

Cross ownership of shares among institutional investors and corporations; e.g. about 75% of common shares owned by institutions and about 65% by the top ten, (Kerr 2007)

Overlapping directorship and intercompany “puppet boards”

Hard to apply concept of “independent director”

‘Principal – Principal’ conflict – a case where controlling shareholders can influence board decisions on acquisition and disposal of assets (Estwick 2013)

Corporate Governance regulations emit from a number of sources:

- Company Acts

- Central Banks

- Stock Exchanges

Necessary to improve investor confidence and reduce the risk of corporate failures

Historically the guidelines issued by central banks were given greater scrutiny due to the critical role of financial intermediaries (La Porta et al 2000)

The Central Bank of Trinidad and Tobago in 2007 issued the revised Corporate Governance Guidelines for Financial Intermediaries

Bank of Jamaica in 2008 issued the Standards of Best Practice for Effective Corporate Governance of Deposit-Taking Entities

The Barbados Central Bank published its revised code for corporate governance in the financial sector in early 2013

The Caribbean Corporate Governance Institute in conjunction with Chamber of Industry and Commerce, Trinidad and Tobago Stock Exchange produced a Corporate Governance Code for Trinidad and Tobago in 2013

The Private Sector Organization of Jamaica (PSOJ) in 2009 published their code on corporate governance which should act in concert with existing legislation

The Barbados Securities Exchange (BSE) implemented its corporate governance recommendations for listed companies on the exchange in early 2014

Nomination committee responsible for the screening of new directors, a task traditional held by the CEO.

One objective is to increase board independence and reduce the power and control by the CEO over the board

Audit committee responsible for both the internal and external audit function, oversight and monitoring of management controls

Objective is accurate reporting of financial information to regulators and shareholders

Transparency and accountability

Size and proportionality of boards

‘Comply or explain’ principle

Independent directors, e.g. restrictions of common shares at 5% or less and not be a relative of an officer of the company

Should be ‘Fit and Proper’ (integrity)

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Case of the Toledo Cacao Growers Association

Background and Governance TCGA presently has over 1,100 members from

55 villages (rapid growth: 170 in 2003) Produces organically and fair-trade certified

cacao beans; only organic exporter in Belize It is governed by a 9 member BoD (8 males, 1

female) all of whom are members of the Association.

Membership is over 90% indigenous Maya farmers and 60% of the business transactions are with women

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BoD members are elected yearly but staggered; no term limits

Internal controls need strengthening; no audit committee, same external auditor for past 10yrs

Limited training of BoD; e.g. only two are financially literal, limited orientation

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Born global; has 5yr rolling contract with Green and Blacks’ (owned by Mondelez Int’l)

GB willing to purchase up to 1 mil lbs annually; TCGA supplies about 10% of demand.

TCGA supply < 1% of global market but with good quality beans

All TCGA cacao are sold under the brand “Maya Gold” but TCGA does not own IP rights

Constrains: cost of capital, disease control, infrastructure, IP, land and tax reform

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• Strengthen governance structure (more women / youth, independent directors, sub-committees, training)

• Seek royalties from “Maya Gold” label and or develop own trademark / brand

• Value chain integration (R&D, production, marketing, alternate organic crops under TCGA brand)

• Develop local & regional markets

• Gov’t support

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Deep dives by board and committees Focus on strategy and risk appetite Greater role of regulators Harmonization and information sharing

among regional regulators Board diversity (gender, age, stakeholder)

Corporate Governance has an essential role to play in promoting investor confidence and creating long term value

A sound Corporate Governance regime in the Caribbean should facilitate more competitive and efficient markets

Ideally self regulation and monitoring but… Regional harmonization through regulation

and information sharing

Thank you.

Questions or Comments?