The Tribune

Corporate governance, which rests on the principles of accountability, transparency, fairness, responsibility and risk management, is essential to well-run companies. These standards are always visible in the best-performing institutions. In my opinion, there is significant national economic value to be realised through effective implementation of corporate governance in the public sector and, more specifically, state-owned enterprises (SOEs). This, however, must start with giving full respect to time-honoured principles.

The Bahamas was recently engaged in a vibrant discussion concerning appointments in public institutions. While the discussion was political in nature, with the intent of demonstrating how a contrasting leadership approach could mitigate certain challenges, when the issues are distilled to their bare bones, the discussion was much more about corporate governance principles than political leadership styles - or at least it should be. The point at issue in the conversation represented a fundamental breach of a corporate governance principle, which exposed an organisation to increased risk at multiple levels.

The principle

Successive administrations have appointed persons to executive chairmanship roles. An executive chair is a fundamental corporate governance issue, since it represents an approach that is contrary 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 a company’s management and control. The first is the Board of Directors, which is responsible for the strategic direction, and the second is the executive managers, responsible for the day-to-day management and operations. An executive chairman merges these two very distinct functions, thereby potentially undermining critical risk management controls and organisational checks and balances. While such appointments have become commonplace on SOE Boards, best practice strongly recommends that the role of chief executive and Board chairman should be kept separate. The main reason being to ensure that power and authority does 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. Quality decision-making by SOEs holds serious implications for The Bahamas. For example, the level of service they provide affects economic growth. Increased taxpayer subsidies, as a result of being run inefficiently, could lead to further expansion of the $11bn-plus national debt, while the same inefficiencies undermine the Government’s agenda to deliver productive programmes and initiatives. Respect for the principles of corporate governance is, therefore, an important matter that should be taken more seriously than it has been up to now. This sets the stage for a programme of reforms that could lead a fundamental revolution in SOE performance.

Reforms

In The Bahamas, the focus on corporate governance is usually high for regulated institutions, financial or publicly listed, and is seemingly more important in the private sector. It needs to take on greater prominence in the public sector. With taxpayer subsidies of more than $400m and consistent under-performance, SOEs represent one of the greatest opportunities for governance reforms to secure tangible economic savings for The Bahamas. It is generally accepted that many of these organisations 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, plus their rights and legal obligations 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 is 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 SOE boards highly susceptible to the power an executive chairman can exert, even if unintentional. Having regard for this, and coupled with very clear and authoritative corporate governance principles, the post of executive chairman should be a “no go” area and discontinued in public corporations. Policymakers should note the benefits corporate governance can bring to these SOEs, and take the necessary steps to ensure 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 to ensure accountability and transparency for directors, company officers and the wider organisation. 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 decisions, and every director has an explicit responsibility to ensure those rules are respected. Individual failings at the Board level seemingly often escape the fundamental question: “Where were the other directors, and how did they vote?”

A Board’s decisions are always deemed collective. Effective governance is a critical pre-requisite for company success. The Board is a collegial organism, not a congenial one. There should be active challenges 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-optimal decision making, at best, or outright bad decisions, failures and losses, at worst. 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, but which the concentration of power has the potential to suppress and consequently undermine Board effectiveness. Robust challenge and dissent is often missing where there is a lack of trust, which is generally evidenced by confrontation avoidance and acquiescence to a dominant personality, creating opportunities to subvert standard policies and 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 climate, which makes it imprudent to cut support at this time, focus should seriously shift to how to make these organisations more effective. I believe the starting point is fixing the corporate governance and risk management regimes of these SOEs with a view to 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. The Government should consider advancing a corporate governance framework for public bodies with the goal 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.

NB: Hubert Edwards is the principal of Next Level Solutions (NLS), a management consultancy firm. He can be reached at info@ nlsolustionsbahamas.com. He specialises 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. Hubert also chairs the Organisation for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com.