Op-Ed

Corporate governance for economic value

Corporate governance, resting on the principles of accountability, transparency, fairness, responsibility, and risk management, is essential to well-run organizations.

These are always very visible in the highest performing institutions.

In my opinion, there is significant national economic value to be realized through effective implementation of corporate governance in the public sector and more specifically in state owned enterprises (SOEs). This, however, must start with giving full respect to time tested principles.

Recently, the country was engaged in a vibrant discussion concerning certain appointments in public institutions.

While the discussion was political in nature, with the intent of demonstrating how a contrasting leadership approach could mitigate against certain challenges, when the issues are distilled to their essentials, the discussion was much more about corporate governance principles than political leadership styles, or at least should be.

The point at issue in the conversation represented a fundamental breach of a corporate governance principle that exposed an organization to increased risk at multiple levels.


The principle

Successive administrations have appointed persons to executive chairmanship. An executive chair is a fundamental corporate governance issue, an approach that is counter to best practice for both effective risk management and corporate governance.

Corporate governance principles encourage recognition of the fact that there are two distinctly separate sources of the management of an organization.

The first is the board of directors, which is responsible for the strategic direction of the organization, and the second is the executive and operational managers, responsible for the day-to-day management of business.

An executive chair merges these two very distinct functions, potentially undermining critical risk management controls and organizational checks and balances.

While the practice has been employed in many instances, best practice strongly recommends that the role of chief executive and chair of the board should be kept separate. The main reason being to ensure that power and authority do not become concentrated in a single individual.

Simply put, given the observed perennial weaknesses in SOEs, vesting executive power in a chairman creates a position that is excessively powerful.

The quality of decisions made by SOEs holds serious implications for the country. For example, the level of facilitative service they provide affects economic growth; increased allocations when run inefficiently could lead to possible expansion of the debt stock; and inefficiencies undermine government agenda to deliver on productive programs and initiatives.

Respect for the principles of corporate governance is, therefore, an important matter that should be taken more seriously than has been, up to now. This sets the stage for a program of reforms that could lead a fundamental revolution in the performance of SOEs.


Reforms

In The Bahamas, the focus on corporate governance is usually high for regulated institutions, financial or listed, and of more importance in the private sector.

It needs to take on greater prominence in the public sector. With an annual expenditure of over $400 million and consistent under performance, SOEs represent one of the greatest opportunity for governance reforms to secure tangible economic savings for the country.

It is generally accepted that many of these organizations have both risk management and corporate governance deficiencies.

Appointments to public boards are often not accompanied with adequate orientation and training to aid directors in fully understanding their role and responsibilities, their rights and legal obligation in discharging their fiduciary responsibilities.

These failings create important risk exposures and this is always going to be further exacerbated where there is a concentration of power in the management oversight process.

The governance and risk culture in these entities are often not conducive to maintaining robust strategic oversight.

With some directors having limited understanding or experience, it could create an environment where influential chairpersons could take advantage of such directors to advance their desires while simultaneously controlling the “mind” of the executive.

This lack of experience, exposure and knowledge, in some instances, renders some SOEs boards highly susceptible to the power that an executive chair position can exert, even if unintentional.

Having regard for this, coupled with very clear and authoritative corporate governance principles, executive chairs should be a “no go” area and the practice in public corporations should be discontinued.

Policymakers should take cognizance of the benefits corporate governance can bring to these organizations, and take the necessary steps to ensure that improvements are secured, as part of a broader effort to enhance risk management and corporate governance across the entire public sector.


The consequences

An effective corporate governance regime helps an organization to ensure accountability and transparency for directors, company officers and the wider organization. It should specify and document the responsibilities of the board and its committees.

A well-developed governance framework should specify those matters that are reserved solely for the board’s decision and every director has an explicit responsibility to ensure that those rules are respected.

Seemingly individual failings at the board level often escape the fundamental question: “Where were the other directors and how did they vote?”

The decisions of a board are always deemed collective. Effective governance is a critical prerequisite for company success. The board is a collegial organism not a congenial one.

There should be active challenge and curious probing. The role of executive chair often has the power to limit dissent. Wherever dissent is not tolerated there is bound to be sub-optimality in decision making, at best, or outright bad decisions, failures and losses, at the other end of the spectrum.

Almost counter-intuitively, dissent is most vibrant where trust is high, where there is mutual respect, information is shared freely but appropriately and challenges are based on intelligent and common understanding of the matter at hand.

These are the critical elements, consistent with the principles of corporate governance which the concentration of power has the potential to suppress and consequently undermine the effectiveness of a board.

Robust challenge and dissent is often missing where there is a lack of trust, generally evidenced by confrontation avoidance, and acquiescence to a dominant personality creating opportunities to subvert policies and standard procedures and thereby diminishing the usefulness of the board.


Action steps

The government and SOEs must pay greater attention to effective governance as a means of unlocking critical value for citizens and taxpayers.

Having regard for the budgetary constraints and prevailing economic state, which makes it imprudent to cut support at this time, focus should shift seriously to how to make these organizations more effective.

I believe that the starting point in this is fixing the corporate governance and risk management regimes of these entities with a view of reducing reliance on central government.

In a broader sense, the call is for a public sector wide governance regime, as seen elsewhere in the region.

Government should consider advancing a corporate governance framework for public bodies with the object of ensuring best practices become commonplace across the public sector and related entities.

Policymakers and public boards must then demonstrate greater and consistent adherence to governance and risk management principles, resist the urge to appoint executive chairs, and avoid best practice breaches that have the ability to adversely affect the quality of decision-making and oversight of its boards.


Hubert Edwards is the principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.com. Hubert specializes in governance, risk and compliance (GRC), accounting and finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. He also chairs the Organization for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.

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