Chapter 2. Emergence of Corporate Governance in the Commonwealth Caribbean

• Pages: 43-65

CHAPTER 2

EMERGENCE OF CORPORATE GOVERNANCE IN THE

COMMONWEALTH CARIBBEAN

S G

INTRODUCTION: WHAT IS CORPORATE GOVERNANCE?

Corporate governance comprises a country’s private and public institutions,

both formal and informal, which together govern the relationship between the

people who manage corporations (‘corporate insiders’) and all others who invest

resources in corporations in the country. These institutions notably include the

country’s corporate laws, securities laws, accounting rules, generally accepted

business practices and prevailing business ethics.1

The Organization for Economic Co-operation and Development (OECD) defi nes

corporate governance as involving ‘a set of relationships between a company’s man-

agement, its board, its shareholders and other stakeholders. Corporate governance

also provides the structure through which the objectives of a company are set and

the means of attaining those objectives and monitoring performance are determined.

Good corporate governance should provide proper incentives for the board and man-

agement to pursue objectives that are in the interests of the company and shareholders

and should facilitate e ective monitoring.’

THE ORIGINS OF CORPORATE GOVERNANCE

A review of the voluminous literature on corporate governance provides interesting

contexts for the factors that have infl uenced and shaped the emergence of existing

corporate governance systems across the globe. What is clear is that these systems have

developed in countries and regions in direct response to socio-economic and political

events, including scandals and corporate failures, changes in market characteristics

and shareholder activism.

The origin of the modern corporation dates back to events in England as early as

the 17th century. Until the beginning of this century, partnerships were the dominant

means of organising businesses that were jointly owned and partners bore unlimited

personal liability for the contractual obligations of the fi rm. One of the fi rst corpo-

rations that came into existence was the British East India Company, a joint-stock

company, which was granted an English Royal Charter by Queen Elizabeth I on 31

December 1600 for the purpose of trading into the East Indies. The company began

with 218 members and was governed by a General Court of Proprietors, comprised

of those with voting rights and a Court of Directors, which was the executive body

1 C Oman, Steven Fries and Willem Buiter, ‘Cor porate Governance in Developing, Transition and

Emerging–Market Economies’ (OECD Centre Policy Brief No 23, 2003) <http://www.oecd.

org/social/poverty/28658158.pdf>.

44 Commonwealth Caribbean Corporate Governance

responsible for the running of the company. The governance structure of the Com-

pany bore great similarity to that of a moder n company: the Court of Proprietors was

comprised of shareholders who met in annual general meetings; the Court of Direc-

tors was the board which was assisted by subcommittees, and the Royal Charter laid

down the boundaries within which the Company could work. Over the next 200 years,

corporations were generally small institutions chartered for specifi c purposes, such as

banking. Corporations could only exist for a limited time, were not allowed to make

any political contributions, and could not own stocks in other companies.

The beginning of the era of industrialisation changed this scenario signifi cantly.

Industrialisation saw the emergence of new large fi rms, especially in the railroad

industry, with huge requirements for capital. Concurrently corporations were allowed

to write broader and less restrictive charters, which saw owners and managers avoiding

responsibility for harm and losses caused by the corporation, and led to the concept

of limited liability. Between 1895 and 1904, the fi rst great merger wave in the US

consolidated companies into mega corporations with limited responsibility and lim-

ited accountability. In response, markets for the exchange of shares opened in New

York and some European capital cities. But by the end of the 19th century and the

beginning of the 20th century, control of corporations had essentially shifted into the

hands of managers and ownership and control separated, creating what is known as

the ‘agency problem’. In the 18th century, Adam Smith drew attention in The Wealth of

Nations to this governance issue in his commentary on joint stock companies:

The directors of such companies however being the managers rather of other people’s

money than of their own, it cannot well be expected that they should watch over it with

the same anxious vigilance which the partners in private copartnery frequently watch

over their own . . . Negligence and profusion, therefore, must always prevail, more or

less, in the management of the a airs of such a company.2

In the 20th century, discussions about corporate governance on both sides of the

Atlantic largely focused on the consequences of the separation of ownership and man-

agement. Sir Adrian Cadbury, in his book Corporate Governance and Chair manship: A Per-

sonal View3 provides a telling treatise on the collapse of Penn Central in 1970, related

by board member Louis Cabot, a Harvard professor, who had served on the board

for ‘one fateful year’. Penn Central was the United States’ largest railway company

and was the sixth largest company in the country. Cabot painted a picture of poor

board practices: meetings that were poorly led by the Chairman, sketchy fi nancial

reports that were rarely discussed in detail, requests for capital expenditure without

proper justifi cation, oral reports by the Chief Executive O cer always promising bet-

ter results in the next month but which never came true. By the time he wrote to the

chairman to express his concerns, Penn Central had already collapsed and Cabot was

being sued along with the other directors. The Securities and Exchange Commission

2 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Edwin Cannan, ed. 1904

edn) <http://www.econlib.org/library/Smith/smWN.html> accessed 18 December 2014, 439.

3 A Cadbury, Corporate Governance and Chairmanship: A Personal View (Oxford University Press 2002)

10–03.