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Effective Corporate Governance

An Emerging Market (Caribbean) Perspective on Governing


Corporations in a Disparate World

Author: Vindel L. Kerr


Publisher: GovStrat, Jamaica
Outskirts Press USA
Date of Publication: 2005
ISBN: 976-8184-86-8; 1598001671
Number of Pages: 356 pages

About the Author

Vindel L. Kerr
Vindel Kerr is Founder & Managing
Facilitator/Consultant of GovStrat. He is an
international trainer, Facilitator and
Management Consultant with 15 years
experience in the corporate world including
senior management positions. His
experience spans industry, education and
research in the private and public sectors.
Mr. Kerr is author and publisher of two
books. In the last 18 months, he has
addressed many international
conferences, tens of corporate boards and
trained hundreds of company Directors and
senior managers. His practical and
academic expertise include corporate
governance, strategic planning, change
management, executive leadership & team
building skills.
My Kerr has also developed significant
expertise in and knowledge of the
international agribusiness having worked
with in the banana industry for 4 years and
began his first professional job with the
Food & Agriculture Organisation of the
United Nations (FAO) in 1988.
He has lectured at the University of the
West Indies, College of Agriculture,
Science & Education and tutored at the
University of Manchester, England. Mr.
Kerr writes occasionally for the Financial
Gleaner and New Executive Times
(Trinidad & Tobago).
The five-time academic scholar finds time
for the theatre arts, cooking, walking,
picnicking and reading world affairs.
Mr. Kerr was educated in Jamaica, Trinidad
& Tobago, the USA and the UK.

The Big Idea


Effective Corporate Governance is a manifesto for building highly effective
Boards and corporations by balancing power, performance and profits with
integrity, transparency, accountability and reform in private and public
sectors. The book is the first publication on corporate governance from an
emerging market perspective and is written specifically for the edification
and continued development of company directors, chairmen, CEOs,
CFOs, Internal Auditors, COOs, Legal Counsels, Company Secretaries,
Head of Audit, Risk Management and Compliance, Bankers Financial
Regulators, Policymakers, Management Consultants, Professors and
students of Business, Finance, government, accounting, law, public policy,
journalists and entrepreneurs. It addresses Corporate Governance
Concepts, History, Development and Trends, Post Enron Developments,
Reforming Corporate Governance Systems, Internal Control & Reporting,
Case Studies on Good and Bad Corporate Governance, Role and Duties
of Directors and Senior Officers, Critical Functions of an Effective Board,
21st Century Competencies of a Good Director, Selecting Chairman and
Directors of State-owned Boards, Non-Executive versus Independent
Directors, Board Composition, Monitoring and Evaluation, Compensation
and Succession Planning, Role of Audit and other Sub-committees,
Director Selection and Indoctrination and Improving.
Effective Corporate Governance is a comprehensive study of the latest
developments in corporate governance systems and practices. It is a
timely work, filled with illuminating insights and practical advices on how to
govern corporations in order to maximize business and economic
performance.
Even as it highlights the need for corporate governance reform in the
Caribbean market, its detailed and sound theoretical analysis of the past,
present, and future of corporate governance prove globally relevant at the
same time. This is a must-read for any institution or individual who
understands the value and importance of corporate governance to modern
management practices.
Published by BusinessSummaries, 3001-91, 11010 NW 30th St., Suite 104, Miami, Florida 33172
2006 BusinessSummaries All rights reserved. No part of this summary may be reproduced or transmitted
in any form or by any means, electronic, photocopying, or otherwise, without prior notice of
BusinessSummaries.com

Effective Corporate Governance by Vindel L. Kerr

I. Corporate Governance: Concepts and Definitions


A corporation is an entity with a legal personality and, in most instances, has
limited liability to its shareholders and managers. It plays a crucial role in the
economic life of virtually every country. Unfortunately, the subject of corporate
governance has remained a contentious issue. This is highly relevant, especially
in light of the major policy changes wrought by globalization.
A. What is Corporate Governance?
Corporate Governance refers to laws, regulations, and acceptable business
practices that determine relationships between corporation owners and its
managers, on one hand, and its investors, on the other hand. It was born and
evolved in response to corporate failures, crises, and misdeeds. More often than
not, these corporate debacles proved blessings in disguise as it led to further
developments and improvements in the field of corporate governance.
In many types of economies, corporate governance concentrates on at least four
important factors:
Ensuring disclosures of all relevant information to shareholders and
creditors; including business risk analyses;
Building a system of rules and voluntary practices that will guide the board
of directors;
Establishing independent audit committees composed of outside directors;
Monitoring and controlling management.
On the other hand, developing economies, like the Caribbean, focus on
strengthening and improving the legal and regulatory systems that will help
ensure better enforcement of contracts and protection of property rights.
B. Corporate Governance Environment
The corporate governance environment largely determines the quality of
corporate governance and the path that it will take. Its key players are
shareholders, board of directors, top management, employees, regulators and
auditors, investors, clients/customers, and suppliers. All other stakeholders are
considered secondary players.
However, the responsibility of ensuring good corporate governance rests heavily
on the shoulders of the board of directors. Regardless of the other key players in
the corporate governance environment, this body acts as a major pivot around
which most corporate activities revolve.
C. Relevance of Corporate Governance
Corporate governance promotes greater transparency, accountability, and
conformity to laws and regulations. As a result, wealth is maximized and long-

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term prosperity for the company, its owners, and stakeholders is assured.
Moreover, this preserves company integrity and reputation, as it minimizes abuse
of power, employment discrimination, mistreatment of shareholders, and poor
accounting practices. Above all, it acts as a shield against widespread financial
crises.
Nonetheless, corporate governance is not just about a commitment to such
ideals. More importantly, it emphasizes the significance of ethics in business. For
instance, a commitment to transparency results in better compliance to laws and
regulations. Accordingly, this lessens the likelihood of fraudulent business
dealings. Thus, corporations attract more investments because of the increased
confidence of local and international investors in them.
D. Perspectives on Corporate Governance
From a business perspective, corporate governance is about maximizing wealth,
while complying with the requisite financial, legal, and contractual obligations.
Whereas, a public policy perspective views corporate governance as one of
ensuring corporate accountability, while nurturing growth and profitability. The
ensuing discussions are just some of the important issues pertaining to corporate
governance:
1. Shareholder vs. Stakeholder Argument
The shareholder argument posits that corporations should be governed in behalf
of its principals, the shareholders. It maintains that corporations have a
responsibility, through its managers (agents), to maximize shareholders' wealth
and nothing more. However, doing so would sacrifice long-term growth and
survival for short-term results and profits.
In contrast, the stakeholder argument views corporations as huge bureaucracies
where various parties have vested legitimate interests. As such, corporate boards
and managers must see to it that the interests of all these other parties, the
stakeholders, are also protected. Moreover, company survival, growth, and
stability are also given priority, aside from profitability and economic efficiency.
2. Volunteered vs. Enforced Governance: Self-Regulation Redefined
Under volunteered governance, corporations willingly adopt existing best
practices, such as the Cadbury Report (1992), to guide their activities. These
firms and business also develop and implement their own guidelines to enhance
their reputation and ensure business prudence and transparency.
Enforced governance, on the other hand, compels companies to adopt such
guidelines and best practices to comply with:
Stock exchange listing requirements;
Securities Commission directives;
Company or business law;
Condition for WB or IMF loans; and,
Institutional and other shareholders activists' conditions.

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Effective Corporate Governance by Vindel L. Kerr

3. One-tier vs. Two-tier Board Models


A one-tier (unitary) board is composed of both executive and non-executive
directors (NEDs), which perform both strategic and monitoring roles. As such, it
allows for both executive and non-executive directors to become intimately
involved in the core processes and operations of the company. However, such a
set-up creates confusion since there is no clear delineation of the directors'
functions and duties.
Alternatively, a two-tier board has a separate supervisory board and management
board. The supervisory board oversees the activities of the management board,
while the management board runs the company and represents it in dealings with
third parties. Here, the functions and duties of each board are clearly defined and
demarcated. This results in the effective monitoring and control of the
organization. However, members tend to have different and diverging
backgrounds which sometimes result in conflicting purposes.
4. On Chairman/CEO Duality
The idea of formally separating the positions of Chair and CEO has been gaining
ground among scholars and critics of corporate governance. It is presumed that
separating these two positions will minimize the risk of director inaction and
ineffective monitoring of management functions.
This may also allow more diversity in thinking inside the boardroom. However,
opponents of this view argue that the Chair/CEO duality actually fosters a strong,
unified leadership.
5. The Independent Director
Independent directors are people who do not have significant familial, personal,
and financial ties with the management. They are the ones most likely to make
the best business decisions due to their objectivity and lack of interest.
Some best practice documents, like the Cadbury Report, leave it to the board to
decide what constitutes independence. Nevertheless, some, such as the
California Public Employee Retirement Scheme (CalPERS), do provide
guidelines and principles that outline the elements of an Independent Director.
6. Corporate Governance Models
Two of the corporate governance models can be found on opposite extremes of
the corporate governance spectrum. At one end is the No Governance Model
that proposes boardroom freedom, subject only to statutory regulations. However,
corporate governance has rendered this model unrealistic.
At the other end is the Rule-Bound Box-ticking Model. Companies operating
under this model are too preoccupied with ethical imperatives. This undermines
their basic objective, which is to earn profit. In turn, this results in timid and
indecisive boards.
At the middle is the Business Efficient Model. Under this, companies balance

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their ethical objectives with their profit aspirations. It is hoped that this model will
strike the balance between the two opposite extremes of corporate governance
models.
E. Corporate Governance Structures and Practices
Corporate governance structures encompass:
generally accepted best practices
pertinent corporate laws and legislations
government regulatory bodies
stock exchange listing rules
accounting standards
corporate transparency and disclosure
professional and business associations
chambers of commerce
watchdog groups
On the other hand, corporate governance practices refer mainly to issues
concerning ownership and control, board composition, Chair/CEO duality or
separation, board dynamics and board attitude.

II. Emerging Trends in Corporate Governance in the


Caribbean
Corporate governance is not just a concern among developing countries. In the
America for instance, questions about the independence of independent audits
are being raised. However, compared to their more advanced neighbors, there is
greater urgency among developing nations to forge clear, strong, and viable
corporate governance systems and structures.
A. Global Convergence of Financial and Accounting Standards
Good corporate governance will enable companies to grow and attract foreign
investments. Caribbean companies need to embrace common international
accounting standards and institute the needed structural and policy changes.
Doing so will allow them to withstand investor's scrutiny, ensure greater
accountability and transparency, and allow full participation in the world economy.
To date, there have been significant advances made toward this goal, such as the
inclusion of corporate governance statements in companies' annual reports, and
the creation of the Financial Services Commission (FSC). However, much work
still needs to be done to create a more credible corporate governance system.
B. On Board Structure and Characteristics
Evidence reveals that corporate governance structures influence board

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composition and practice. For example, the Bank of Jamaica (BoJ) and the
Financial Services Commission (FSC) influence the selection process of directors
in the institutions that they regulate.
They also limit director interlocking among certain categories of board
directorships. In addition, the unitary board of the case company exercises both
decision control and management roles in the decision-making process.
1. Towards Smaller Boards
Smaller boards provide more challenges for each director. For instance, Grace,
Kennedy and Company, Ltd. reduced its board size from 22 to 12. This enabled
each director to become more intimately involved in board committee matters,
thus adding greater value to the organization. In addition, this smaller board size
gives junior executives greater opportunities to interact with the board and
contribute ideas and strategies.
Moreover, this allows members of the board to spot talent and provide early
coaching, leading to a smoother transfer of executive power to younger
managers. Furthermore, research into the 44 publicly-listed Jamaican companies
revealed that the average board size was eight (8), with a range from four (4) to
twenty-two (22), which is in line with global trends.
2. Balancing NEDs vs. Executive Directors
Majority of directors opined that a balance of executives and non-executives will
improve boardroom independence and accountability. For instance, Grace,
Kennedy's board of directors now has an equal number of executive directors to
non-executive directors.
However, there are studies that show that a company's board composition
accounts for less than one percent (1%) of its financial performance. There is no
evidence to confirm or refute that increasing the number of outside directors can
improve a company's performance; nor is there proof to also establish that
companies with a higher proportion of inside directors performed better.
3. Duality or Separation of Chairman/CEO
In many Jamaican companies, the duality of Chairman/CEO has proven to be
successful. Take the case of Grace, Kennedy. One person holds both Chairman
and CEO positions. Despite this, the two roles are quite separate. For instance,
he has decided to remove himself from key roles, such as the auditing and risk
management and compensation committees.
This would indicate that duality or non-duality of Chairman and CEO roles is not
really a serious issue that could affect a company's performance. What is
important is that the boards of these companies make a conscious effort towards
instituting good corporate governance systems.

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Effective Corporate Governance by Vindel L. Kerr

III. On Building Effective Boards


Effective board stewardship is critical in sound corporate governance
development. A formal process of evaluation is needed to determine board
performance. The adoption of international best practices is also crucial.
Moreover, corporate boards should encourage a high-level of social-ethicalcorporate responsibility, as well as the promulgation of the highest standards of
corporate governance in all business activities and affairs. Furthermore, it should
establish an audit committee to ensure effective monitoring and inspection for the
sake of transparency and accountability.
A. Core Qualities of an Effective Chairman
Although it is difficult to prescribe a set of core qualities that a Chairman should
have, s/he must at least be able to demonstrate leadership, integrity, good
judgment, and enterprising skills. In addition, s/he must also possess excellent
communication and interpersonal skills, possess in-depth knowledge of pertinent
laws and regulations; possess business-specific knowledge and acumen; and the
ability to harness the collective skills of the board and executive teams.
B. Key Elements of an Effective Board
An independent and objective leadership is required for a board to be effective. In
addition, it should be accountable to its members, as well as its stakeholders. It
should also strike a balance between executive and non-executive directors. At
the very least, it should possess:
a well-defined system of internal control;
systems to enforce the appraisal of the performance of senior management
and itself;
a formal program of induction and development in order to strengthen the
skills of each director;
a process of appointment and development for executive management;
the facility to adopt technology and seek external skills and talents;
the facility to manage corporate risks;
the objective to promote a healthy corporate culture;
commitment to social and environmental responsibility; and,
an acknowledgment and recognition of the need to protect members' rights
and obligations.
C. Roles and Responsibilities of Key Board Committees
Board committees vary in number, type, and scope. The following discussions
focus on the Corporate Governance Committee, Compensation/Remuneration
Committee, Audit Committee, and the Director Development and Orientation
Committees.

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Effective Corporate Governance by Vindel L. Kerr

1. Corporate Governance Committee


The Corporate Governance Committee will nominate to the board and its
committees criteria for board membership. It will also monitor and preserve board
independence, as well as make constant review and suggestions for
improvement in the corporation's approach to information distribution.
In addition, it is tasked to develop and recommend corporate governance
principles and preside over board and senior management evaluation. Moreover,
it will include a member to sit in other key committees such as the audit,
compensation, and succession planning committees. Furthermore, it will ensure
that key committees are led by independent non-executive directors.
2. Compensation/Remuneration Committee
This committee generally sets the compensation of CEO and senior
management. It will also oversee the firm's overall compensation structure to
determine whether the company provides appropriate incentives for management
and employees at all levels.
3. Audit Committee
An audit committee exists to objectively view published accounts and internal
controls of the company. It also has to ensure that a reliable financial reporting is
done, as well as ensure compliance with regulatory bodies and the Corporate
Codes of Conduct. Moreover, it has to make both internal and external audits,
and perform other responsibilities as may be required. However, as a committee
of the board, it should make regular reports to the board.
4. Induction, Orientation, and Director Development Committee
Generally, this committee should determine the fitness of potential directors. It is
also tasked to make sure that new directors are informed properly of their
responsibilities and that they are provided with all essential tools and materials for
their new jobs.
In addition, this committee is tasked to provide continued learning among board
members and facilitate exposure of these new directors to new and emerging
issues on corporate governance. Moreover, it should assist in executive coaching.

IV. Challenges to Corporate Governance


It takes a leader who can craft farsighted business strategies to guarantee longterm prosperity of a business. The greatest challenge to corporate governance
lies in the ability of companies to meet and satisfy the needs and divergent views
of all its constituents. Among publicly listed companies, a greater degree of
transparency, accountability, and conformity to rules and regulations is expected
of them.
In small companies, corporate governance may prove unnecessary. However,

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larger companies must contend with the growing need to adopt high standards of
governance mechanisms for effective monitoring and control.
Nonetheless, the responsibility of ensuring effective corporate governance should
also take in shareholders' active participation. These people can be helpful in
lobbying for and formulating best practices voluntary guidelines for adoption by
the companies in which they invest in.

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