Corporate Governance Assignment Essay
Corporate Governance Assignment
Corporate entities of all types need a governing body. In the case of a company, this is its board of directors. Corporate entities governed by a board of directors face the central challenge of the agency issue. Whenever a principal has to rely on agents to handle his or her business, governance issues arise. (Tricker 2012) Presently, corporate governance is an evolving concept as such there is no fixed definition. However, corporate governance has been defined as, “the system by which companies are directed and controlled.” (The Report of the Cadbury Committee on The Financial Aspects of Corporate Governance: The Code of Best Practice 1993) Recent high-profile corporate failures, scandals and, in some cases, executive corruption, have focused international regulatory and public attention on the need for having appropriate corporate governance standards and practices. (Leblanc 2005) As such, much emphasis is being placed on board evaluation.
The ‘principles-based’ model of corporate governance is applied in Commonwealth countries. Under this model companies are required to report that they have followed the governance principles laid down in the codes or to explain why they have not. (Tricker 2012) Guyana being a Commonwealth country is subject to this self-regulatory framework of corporate governance. This paper used the OECD Principles of Corporate Governance (2004) as the basis for reviewing the governance of Republic Bank (Guyana) Limited. As such the paper is organized as follows; 1) explanation of the bases of review, 2) overview of Republic Bank (Guyana) Limited, 3) a review of the boards’ responsibilities, 4) recommendations for improvements and 5) conclusions.
2. Bases of Review
There is no solitary model for good corporate governance, what constitutes good corporate governance will progress with the changing circumstances of the company. Established, codes and guidelines can serve as sound guidance for companies who care to be good corporate citizens. (Du Plessis, McConvill & Bagaric 2005) The OECD Principles of Corporate Governance (2004) are a set of internationally recognised and accepted guidelines that pave the way for establishing good corporate governance within an organisation. Succinctly, put the OECD recommendations in accordance with the OECD Principles of Corporate Governance (2004) are as follows: The rights of shareholders
The equitable treatment of shareholders
The role of stakeholders in corporate governance
Disclosure and transparency
The responsibilities of the board
to act in good faith, diligently, and with care
to treat all shareholders fairly
to ensure compliance with the law
to review and guide corporate strategy
to select, compensate, and monitor key executives
to monitor governance practices
to ensure integrity of accounting and financial systems
In conducting a review of the board of directors, it would be wise to assess along the guidelines stipulated as the responsibility of the board in the OECD Principles of Corporate Governance (2004). Additionally, ensuring that the board complies with the national Companies Act, follows the rules set out in the company constitution and adheres to industry regulations indicates conformance to good corporate governance principles.
3.1. Overview of the Republic Bank (Guyana) Limited
Republic Bank (Guyana) Limited is one of the largest and oldest commercial banks in Guyana. The bank was initially a state owned institution, British Guyana Bank, which was sold to foreign investors thus becoming the Royal Bank. Further, transition saw the Royal Bank being resold to the Government of Guyana leading to the establishment of the National Bank of Industry and Commerce Limited. In 1997 Republic Bank Limited of Trinidad and Tobago purchased majority shares of the company and later renamed it Republic Bank (Guyana) Limited. (‘History of Republic Bank’ 2015) 3.2. Responsibility 1: To act in good faith, diligently, and with care There are two key elements to the fiduciary duty of board members; the duty of care and the duty of loyalty. (Tricker 2012)
The duty of care requires board members to act on a fully informed basis, in good faith, with due diligence and care. (OECD 2004) At Republic Bank (Guyana) Limited the duty of care is established as the board comprises of majority independent directors , whose extensive experience in both business and finance provide invaluable input into the decision making of the company. Additionally, in keeping with the bank’s culture of broad disclosure the executive director ensures that all pertinent information relevant to the bank’s operations is provided to members of the board of directors. (Republic Bank (Guyana) Limited 2014)
The duty of loyalty is of central importance, since it is the basis of executing other corporate governance principles. (OECD 2004) At Republic Bank (Guyana) Limited the duty of loyalty can be seen in the bank’s related party policy underscores the need for all transactions done with related parties and affiliates to be done on the same terms and conditions as with a non-related party. Directors are required to disclose their interest in related party transactions and to recuse themselves from considering or approving transactions in which they have an interest. (Republic Bank (Guyana) Limited 2014)
3.3. Responsibility 2: To treat all shareholders fairly
Republic Bank (Guyana) Limited is a subsidiary of Republic Bank Limited. As at December 31, 2014 the stock holdings of Republic Bank Limited in Republic Bank (Guyana) Limited was 51.1%. The OECD guidelines suggest this principle is of particular importance in companies, such as Republic Bank (Guyana) Limited, who is the controlling shareholder and thus by de facto is able to select all board members. A sound corporate governance system requires that shareholders can actively participate in, and exert influence on, corporate strategic decision-making. If designed well, this can be done effectively through annual general meetings and proxy voting. Additionally, shareholders have a right to participate in, and be sufficiently informed on decisions concerning fundamental corporate changes. (Duhamel 2002) Republic Bank (Guyana) Limited adheres to the OECD principle in several ways.
The company host an annual general meeting to which all stakeholders are given due notice of. Also, in accordance with the bank’s by-laws, three directors retire from the board annually and may offer themselves for re-election at the bank’s annual general meeting. The company also issues an annual report and quarterly financial statements to stakeholders and the general public. Pursuant to the mandate to ensure that the interests of the various stakeholders are considered the board of directors meets, at a minimum, on a quarterly basis while the Executive Sub-Committee of the Board, comprising seven Board members, meets monthly for the remaining months. (Republic Bank (Guyana) Limited 2014)
3.4. Responsibility 3: To ensure compliance with the law
The board of directors of Republic Bank (Guyana) Limited is committed to proper standards of corporate governance and maintaining these standards at the highest level. Continuous monitoring of the bank’s systems and procedures is done to ensure that standards are in keeping with the best practice as determined by the principles of corporate governance. The bank is also guided by the Recommendations for a Code of Corporate Governance issued by the Guyana Securities Council, and Supervision Guideline No. 8 on Corporate Governance issued by the Bank of Guyana under the authority of the Financial Institutions Act 1995. In addition the Bank is compliant with Supervision Guideline 10 on the Public Disclosure of Information. (Republic Bank (Guyana) Limited 2014)
3.5. Responsibility 4: To review and guide corporate strategy As stated in the bank’s Annual report of 2014 “Of critical importance to the board of directors is the responsibility to approve and review the bank’s strategic plan and within this context, to approve annual budgets, including capital expenditure. The board retains the responsibility for reviewing and approving credit applications above a specified limit.” In keeping with the expectation of the board of directors the performance of each Management Officer is also assessed against all key performance areas which among other things may include financial targets.
The performance of all management officers is reviewed by the Board of Directors on an annual basis. Additionally, taking into account the increasing need for risk assessment, the board of directors has established a risk management committee, known as the other risks committee. 3.6. Responsibility 5: To select, compensate, and monitor key executives As stated in the annual report of 2014, the managing director and management team are appointed by the board of directors. Each management officer has a written mandate and is required to execute the stated functions as outlined therein. The managing director’s responsibilities and authorities are documented and approved by the board of directors.
3.7. Responsibility 6: To monitor governance practices
Monitoring of governance practice involves continuous review of the internal structure of the company, monitoring and disclosure of corporate governance practices on a regular basis, self-assessment by boards of their performance as well as performance reviews of individual board members and the CEO/Chairman. (OECD 2004) At Republic Bank (Guyana) Limited, the board of directors approves the organisational structure for the Bank which ensures a reporting structure with prudent and effective controls. The board of directors comprises nine directors including one executive director. Of the eight non-executive directors, five are independent. Republic Bank (Guyana) Limited adheres to the recommendations of the Supervision Guideline No. 8 on Corporate Governance issued by the Bank of Guyana under the authority of the Financial Institutions Act 1995 regarding its board structure.
The board is comprised of an executive director and a majority of independent directors. (Republic Bank (Guyana) Limited 2014) Further, as suggested in the OECD Principles of Corporate Governance 2004, “with single tier board systems, the objectivity of the board and its independence from management may be strengthened by the separation of the role of chief executive and chairman”, Republic Bank (Guyana) Limited chairman is a non-executive director. The managing director of Bank (Guyana) Limited is the only executive director on the board. Additionally, in the annual report of the bank a statement of the bank’s corporate governance practice is made public. 3.8. Responsibility 7: To ensure integrity of accounting and financial systems Several committees have been set up by Republic Bank (Guyana) Limited to ensure integrity of accounting and financial systems. These committees are: 3.8.1. The audit committee
The audit committee of the board meets at least quarterly to review the bank’s system of internal control, financial reporting process, audit and examination process, and compliance with statutory and regulatory laws. When necessary, the Audit Committee is responsible for reviewing the independence, competence and qualifications of the External Auditors. 3.8.2. The compensation committee
The compensation, which meets at minimum once per year, is responsible for formalising the bank’s remuneration policy for staff. 3.8.3. The other risks committee
The other risks committee, which meets quarterly, is responsible for reviewing policies and procedures and ensuring that the Bank is not exposed to unnecessary risks with respect to its operations. 3.9. Responsibility 8: Corporate Social Responsibility
“Every board has a duty to formulate the company’s strategy, recognizing the risks involved, and part of that process involves determining how the company will behave, in other words, establishing how social responsibility will be exercised throughout the organization.” (Tricker 2012, p. 235) At Republic Bank (Guyana) Limited the need to be a good corporate citizen and perform its corporate social responsibility is understood and mirrored in the company’s vision which establishes the bank wishes to set a standard of excellence for social responsibility. Corporate social responsibility activities of Republic Bank (Guyana) Limited are conducted under its Power to make a difference program. The Power to Make a Difference programme aims to enhance the quality of life of disadvantaged persons; support healthcare programmes and disability awareness initiatives; provide opportunities for young people to realise their truest potential through sport, education and the arts; build community spirit and, in essence, help to correct some of society’s ills. (Republic Bank (Guyana) Limited 2014) 4. Recommendations
It was found that Republic Bank (Guyana) Limited in its governance aims to be a good corporate citizen by complying with rules and regulation stipulated at a national level and also meeting international standards of corporate governance. However, there are areas that could stand improvement and as such the following recommendations are made: 1) The chairman of the board of directors should be an independent non-executive director. Presently, the chairman of the board of directors of Republic Bank (Guyana) Limited is also the managing director of Republic Bank Limited, the majority shareholder in Republic Bank (Guyana) Limited. Having a connected non-executive director as chairman hinders board objectivity.
Since the chairman’s interest are aligned with the majority shareholder it can be posited that the rights of minority shareholder is at threat of being be overlooked. A non-executive chairman will be able to play a critical role in representing the different constituencies in the company with an impartial viewpoint. (Cossin & Caballero 2013) 2) The compensation committee of the board of directors in addition to formalising the bank’s remuneration policy for staff, should also be responsible for setting the remuneration policy and employment contracts for board members. This committee of the board should comprise either wholly or a majority of independent directors. (OECD 2004) 3) The bank should establish a nominating committee. The nominating committee offers a check-and-balance mechanism designed to reduce the possibility of a dominant director.
The nominating committee should be made up wholly, or mainly, of independent outside directors, to make recommendations on replacement or additional members of the board. (Tricker 2012) 4) A standing committee of the board should be established with significant independent director membership, to recommend policies and to oversee corporate activities on corporate ethics codes, whistle-blowing procedures, and corporate social responsibility (CSR). (Tricker 2012) As suggested in the OECD Principles of Corporate Governance 2004 in fulfilling its control oversight responsibilities it is important for the board to encourage the reporting of unethical/unlawful behaviour without fear of retribution. 5) Of the nine members of the board only one is female. Republic Bank (Guyana) Limited should enhance board diversity by balancing the gender of the directors on the board. Studies that have validated a performance-based rationale for bringing women on boards. Results have demonstrated that companies with women board members outperform companies with no women directors.(Norris, 2012)
Standards of corporate governance are determined by the measures which companies take for themselves, whether voluntarily or otherwise, to improve the way they are directed and controlled, and by the legal, ﬁnancial, and ethical environment in which they work. The governance framework is there to encourage the efﬁcient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, of corporations, and of society. (Claessens 2003) The governance of Republic Bank (Guyana) Limited, when reviewed in relation to the functions of the board as presented in the OECD Principles of Corporate Governance 2004 was found to compliant with most. Thus it can be deduced that, in administering both its conformance and performance duties, the board of directors of Republic Bank (Guyana) Limited adheres to best practices as they recognise good governance can play a role in promoting economic growth and business integrity.
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