Janet E. Morrison, Contributor
MORRISON
THE STATUTORY duties of directors and officers to act honestly and in good faith and to exercise care, diligence and skill are owed, provides the 2004 Companies Act, "to the company alone".
However, that begs the question, who is the company? Is it the shareholders, or is it those who are now popularly called 'stakeholders' - who include not only shareholders but also creditors, employees and the general public?
Our new Companies Act itself fuels the debate as to whom the duties are owed, in that it also provides that directors may have regard "to the interests of shareholders and employees and the community in which the company operates," thus putting the directors themselves in some doubt as to how many masters they should serve.
THE NEW ACT
As regards the methods of enforcement of directors' duties by employees and the wider community, there are none in the new act, so persons in those classes are no better off for the passage of the act. As regards shareholders, the act provides several new remedies for those who can successfully make out to the court that the actions of the company or the directors towards them have been 'oppressive or unfairly prejudicial'.
The act also sets out the procedure for a shareholder who wishes to represent or defend the company's interest (called a 'derivative action') to take action to remedy a perceived wrong done to the company. However, assuming, as the act does, that shareholders are willing to go to court, and in our jurisdiction they rarely do, proceedings through the courts are expensive, time-consuming and uncertain, and can be commenced only after things have already gone wrong.
Furthermore, even though modern case law holds that directors should take the interest of creditors into account if the company is insolvent or near insolvency, that would, from most creditors' point of view, be too little, too late.
In a post-Enron and Worldcom world, it is fairly clear that in a modern context, there is room for improving the protection of all stakeholders. At home, we have the painful episode of the corporate failures of the 1990s, and these failures have repeated themselves throughout the world.
PROACTIVE APPROACH
Corporate governance has stepped into the breach as a proactive approach to enhance transparency, accountability and integrity of the system and those within it. It is defined in the Corporate Handbook of Governance 2005, developed by the Conference Board, an independent USA non-profit membership organisation focusing on governance issues, as a "system of checks and balances between the board, management and investors that should produce an efficient functioning corporation, ideally geared to produce long-term value. All corporate governance systems throughout the world are the product of a series of legal, regulatory and best practice elements."
In the U.K., corporate governance is enforced mainly under a voluntary, self-regulatory 'comply or explain' regime, where listed companies report to their shareholders and the London Stock Exchange (LSE) on the application of rules contained in their Combined Code of 2003, or, 'explain' why they have not complied. Non-compliance is subject to the sanction of de-listing or companies' inability to access the facilities of the LSE. In the USA, listed companies and directors are required by law to comply on penalty of fines and/or imprisonment.
Whether the system is self regulatory or not, it can inure to the benefit of all stakeholders by encouraging, for example:
1. Balance between the number of executive and non-executive directors and openness as regards their appointment and termination.
2. Transparency in determining directors' remuneration through the operations of a remuneration committee on which non-executive directors sit.
3. Disclosure of the shareholdings and share options of directors and officers.
4. Accountability through the preparation of financial statements in accordance with prescribed accounting standards (for example IFRS) and the oversight of an audit committee.
5. Dialogue with institutional investors and individual shareholders.
Corporate Jamaica has been generally slow to institute internal corporate governance principles though legislative response was swift on the heels of the corporate failures of the 1990's. The response included amendments to the Banking Act and the Financial Institutions Act; the passage of a new Insurance Act and regulations, the Financial Services Commission Act and the Securities Act and regulations.
However, in recognition that corporate governance has a critical role to play in the economic development and prosperity of Jamaica, the Private Sector Organisation of Jamaica (PSOJ) set up a committee of corporate governance in 2001. Its principal output is a draft Code on Corporate Governance that is based on the UK Combined Corporate Governance Code of 2003.
In further recognition of the significance of corporate governance in CARICOM as a means of attracting foreign institutional investors to Caribbean companies, a Corporate Governance Technical Working Group, established in 2003, has developed a code of Corporate Governance Principles for use by Caribbean countries in developing their country codes. The principles will be considered at the CARICOM Heads of Government meeting on February 7-9, 2006 for approval.
Studies have consistently demonstrated that good corporate governance is increasingly important in attracting international investors and that the introduction of good corporate governance practices improves shareholder value for public listed or unlisted as well as private companies.
Given the enactment of directors' statutory duties, an important precursor of the recognition of the legal responsibilities of directors and officers, good corporate governance practices can underpin the law and serve to promote the interests of all stakeholders.
Janet E. Morrison is an Attorney-at-law and Partner at DunnCox, 48 Duke Street, Kingston. You may contact her at Janet.Morrison@dunncox.com
