The more immediate challenge to our local capital markets has arisen from the aftermath of the financial crises and the lingering uncertainty and volatility that remains with us. Long before the recent financial crises, however, our local stock market has struggled showing at best, lackluster results. The current recession and the resulting economic challenges cannot be ignored, but equally it should not distract us from the more fundamental issues that keep most Barbadian investors away from investing in equities. Despite the commendable efforts of the Barbados Stock Exchange, the average man on the street remains suspicious of many of our public companies and the public as a whole continue to exhibit an unquestionable risk aversion towards investing in shares. Our efforts in the arena of Corporate Governance have not been sufficient to date and this is part of the problem.
The interests of those who effectively control a company (i.e. the directors and its management) can and will often differ significantly from the interests of those who supply the company’s capital (i.e. the shareholders). This threat to the principal-agent relationship has its roots in the separation of ownership from control, typical within public companies, where the owners are not usually involved in running the business. Instead they have to rely on the directors and the executive management team, which the directors have chosen.
The OECD Principals of Corporate Governance highlight the fact that investors’ confidence underlies the effectiveness of all capital markets. Investors need to be comfortable that the capital they provide will be protected from misuse or misappropriation by corporate managers, board members or controlling shareholders. Corporate managers, board members and controlling shareholders often have the opportunity to engage in activities that advance their own interests at the expense of the non-controlling shareholders. Experience shows that an important degree of the extent to which shareholder rights are protected is whether effective methods exist to obtain redress for grievances at a reasonable cost and without excessive delay or bureaucracy.
Without a solid framework for Corporate Governance, the divergence in expectations between the board of directors and the shareholders, as well as the asymmetry of information inherent within this relationship will encourage potential capital providers to stay away from the stock markets altogether. Corporate law does provide a basic framework for Corporate Governance, but arguably not enough. In larger and more developed capital markets, company law is enhanced, in the case of public companies, through the applicable securities legislation. Presently there appears to be no formal corporate governance framework within Barbados to apply to our public companies. For banks and other licensed financial institutions, whether publicly or privately owned, the Central Bank of Barbados has issued a guideline on Corporate Governance (effective October 2006). However, this is only mandatory for licensed banks and financial institutions. The OECD Principles of Corporate Governance have become an international benchmark for policy makers, investors, corporations and other stakeholders worldwide and should be used as a broad framework within which to craft our own governance requirements.
It is worth pointing out that not all shareholders are at a disadvantage and it is certainly the case that not all shareholders are treated equally. A shareholder with a controlling interest can influence the direction of a company through its ability to control the composition of the board of directors. In the not too distant past, we have seen real M&A examples wherein majority shareholders, enjoying distinct advantages over the smaller more dispersed shareholders, have displayed purely opportunistic behavior at the expense of the minority shareholders. An appropriate Corporate Governance framework should ensure equitable treatment of all shareholders including minority shareholders.
Experience in countries with active equity markets show that disclosure can be a powerful tool towards influencing the behavior of companies and protecting investors. A strong disclosure regime can help to attract capital and maintain confidence in the capital markets. Transparency refers to the ease to which a shareholder or another outsider can obtain a meaningful understanding of a company, its strategy and direction. Interestingly, only a handful of public companies within Barbados seem prepared to articulate their story. The Management Discussion and Analysis section within a large number of local annual reports comes across as a prosaic attempt to appease shareholders without containing insightful information that would allow the shareholders to view the business through the ‘eyes of its management’. The board of directors should accept the challenge to improve communication with their shareholders and wider stakeholders. Regular and constructive, two-way and open communication through informal, as well as formal channels should be actively pursued. It appears quite often that many directors have an arrogant belief that shareholders lack the sophistication and experience to benefit from increased transparency. This may have been the case many years ago, but no longer holds true.
Shareholder activism can attract publicity with the potential to influence a public company from the negative publicity that minority shareholder opposition to the Board can bring about. However, since most individual shareholders in a large public company only represent a meager portion of the total shares issued and outstanding, organizing a group of dissident shareholders into a voting majority is normally impractical.
Our public companies need to remind themselves that good Corporate Governance is broader than the basic requirements found within our company legislation. Recently, a number of public companies have come under attack within our local press. Interestingly, a common theme in several of these cases demonstrates that a large number of directors do not believe that they are accountable to a higher level of governance above the basic requirements of the Companies Act of Barbados. In several of these cases, the directors were quick to defend their actions as complying with the Companies Act although it was clear that they had dishonored a number of the fundamental principles underlying good Corporate Governance including, for example, openness, honesty, transparency and fairness.
The experiences gleaned from the takeover of one of our oldest and largest public companies several years ago will likely remain with us for many years at the expense of investor confidence. To help restore confidence within our equity markets, we need to create a culture of good Corporate Governance through voluntary compliance and disclosure (i.e. ‘comply, or explain why’). We need to be proactive to ensure that the necessary framework is implemented so that when we do emerge from the current financial turmoil that we have a suitable foundation in place to further build upon. It is too short sighted to dwell only upon the additional cost and effort that would be required of public companies. I appreciate that several public companies have delisted recently sighting cost as an issue, but in the longer term the additional costs of complying would be far exceeded by the benefits gained from the improved investor confidence and the potential for more voluminous trading activity.