Presentation provides an overview of the theoretical concepts in corporate governance, few definitions, methods to measure it and a brief overview of recent developments in corporate governance in the Caribbean.

1. AN OVERVIEW OF CORPORATE
GOVERNANCE
E. IRVING
Cavehill School of Business
September, 10th
, 2013

2. Content
Introduction
Definitions of Corporate Governance
Theoretical Framework
• Agency Theory
• Shareholder Theory
• New Institutional Theory
• Stewardship Theory
• Stakeholder Theory
Measuring Corporate Governance
Corporate Governance: A Caribbean Overview
Summary

3. INTRODUCTION
• The Caribbean region is currently challenged by lingering
negative economic effects of the “great recession”
• “Lehman Brothers is considered to be an example of a
company that failed during the financial crisis of 2008 in large
part due to ineffective oversight by the board of directors.”
Larcker and Tayan (2010)
• They ascertained that board quality and poor oversight
played a greater role in the company’s failure than structure
and composition.

4. • The collapse of CL Financial continue to pose challenges for
governments, shareholders, and taxpayers across the region.
• “…financial difficulties faced by the CL Financial Group resulted
from excessive related-party transactions, an aggressive high
interest rate mobilization strategy with corresponding high risk
investments, high leveraging of the Group’s assets and weak
corporate governance.” Extracted from Caribbean Centre for Money and
Finance Newsletter, January 2013, Vol.6 No.1
• The relationship between the governance structure of
corporations within the region and mechanisms to ensure
compliance and sustainability should be examined and
strengthened.

5. Definitions of Corporate Governance
• ‘Rules and regulation that govern the relationship between
the managers and shareholders of companies as well as
stakeholders like employees and creditors.’ OECD (2004)
• “procedures and processes according to which an
organisation is directed and controlled. The corporate
governance structure specifies the distribution of rights and
responsibilities among the different participants in the
organisation – such as the board, managers, shareholders and
other stakeholders – and lays down the rules and procedures
for decision-making.” OECD (2010)

6. • Cadbury (1992) states that “Corporate Governance is the
system by which companies are directed and controlled.”
• According to Aoki (2001), corporate governance is defined as
“structure of rights and responsibilities among the parties
with a stake in the firm.”
• Becht, Bolton and Roell (2002) define corporate governance
as being ‘concerned with the resolution of collective action
problems among dispersed investors and reconciliation of
conflicts of interest between various corporate claimholders.’

7. • Cornelius (2005) proposes that “corporate governance can be
defined as the stewardship responsibility of corporate
directors to provide oversight for the goals and strategies of a
company and foster their implementation.”
• Fahy et al (2006) states that “corporate governance is the
systems and processes put in place to direct and control an
organisation in order to increase performance and achieve
sustainable shareholder value.”
• The firm has a particular governance structure to enable it to
balance the rights and responsibilities of varying
stakeholders.

8. THEORETICAL FRAMEWORK
Agency Theory
• Principal – Agent Problem
– Self interest / Conflict of interest
– Information Asymmetry
– Moral hazard
– Agency costs

9. Model of Principal – Agent Problem
Figure 1. P- Principal A-Agent

10. • Berle and Means (1932), recognized need to separate
the issue of control and ownership and called for more
transparency, voting rights and accountability.
• This became the basis of the Principal-Agent Theory
which tries to explain the conflict arising from the
varying interest of the principal (owners) and the agent
(managers). Jensen and Meckling (1976)
• Fama and Jensen (1983) explained this relationship in
terms of legal contracts and the mechanisms that are
needed to maintain this relationship.

11. • Eisenhardt (1989) examined two streams of Agency Theory:
positivist agency theory and principal-agent relationship
approach.
• The former generally focuses on the owner/CEO relationship
in large corporations while the latter is more general and can
be applied to family ran companies.

12. Shareholder Theory
• "There is one and only one social responsibility of business –
to use its resources and engage in activities designed to
increase its profits so long as it stays within the rules of the
game, which is to say, engages in open and free competition
without deception or fraud.” Friedman (1970)
• Shareholder theory is aligned with the agency theory, both
view the relationship between the principal and agent as
paramount and that the responsibility of management is to
maximize profits.

13. New Institutional Economics
• Coast (1937) proposed that in reality firms
focus on minimizing transaction costs.
• These costs include contractual hazards,
information asymmetries, self interested
opportunism, Williamson (1984)
• Like agency theory, this model focuses on the
principal – agent relationship although the
approach to the problem differs slightly

14. Stewardship Theory
• Left alone management will act in best interest of firms and
shareholders
• Don’t believe in the pessimistic view of human nature (e.g.
self-interest), they hold that this view re-enforces and
influences such negative behavior, Ghoshal and Moran (1996)
• Donaldson and Davis (1991, 1997) argues that no principal-
agent problem exists.
• Agents are stewards for the company’s assets and not agents
of owners. They are a necessary component of this
relationship.

15. Stakeholder Theory
• Firms should recognize the interests of
stakeholders that have a vested interest in the
corporation. RE Freeman (1984)
• Research indicate that the country
environment or political-economic climate
affect corporate performance, Shleifer and
Vishny (1997), Doidge et al (2007), Aggarwal
et al (2009).

16. Country Environment
Country Environment
Stakeholder Theory Model
Figure 2. Adopted from Letza, Sun, Kirkbride (2004)

17. Measuring Corporate Governance
• Varying interests, incentives and rights of the
stakeholders make it difficult to design and
measure a suitable rubric across corporations
and countries.
• The fact that the institutional setting varies
and the country context are different make
comparative analysis a challenge. Judge
(2009)

18. Corporate Governance Index (G-Index)
• Designed by Investor Responsibility Research
Center (IRRC).
- Utilizes 24 provisions to measure proper
governance e.g. corporate by-laws, charters,
annual reports, filings to the S.E.C.

19. Governance Matrix International
(GMIRatings)
• Uses over 600 variables including board
accountability, financial disclosure, internal
controls, corporate social responsibility, and
shareholder rights.
• Gathered mainly through publicly available
information including press releases, regulatory
filings, news articles, company websites,
company policy, company documents as well as
board and management interviews.

20. Corporate Governance Quotient (CGQ)
• Developed by the Institutional Shareholder Services (ISS)
• Uses over 50 criteria in seven broad categories to rate
corporate governance. The rating is based on related
companies (industry specific) in seven categories plus an
overall score.
• These variables are two-fold: ‘inside’ content such as
board of directors, audit, charter, by laws, laws of the state
or territory of incorporation, executive compensation,
qualitative factors, ownership and director education, and
‘outside’ or public information, regulatory filings, websites
and press releases.

21. Antidirector Rights Index (ADRI)
• This matrix was developed mainly by La Porta et
al (1998) and further refined by Gompers (2003).
• Uses six components, three that impact
shareholder voting – voting by mail, voting
without block shares and ability of minority to
call extraordinary meeting and three variables
looks at minority shareholder protection,
preventive rights, potential and judicial remedies.

22. Caribbean Overview
• The Caribbean Corporate Governance Forum Report of
2003 in addressing the challenges to CG in the region
stated:
“Firstly, corporate governance is most often discussed
in the context of promoting investor protection. In the
Caribbean less than 1% of the population could be
deemed as being an active investor community. CG has
not played an important role in regional corporations
due to the lack of institutional and retail investor
participation. Secondly, the Caribbean has not
experienced the types of crisis and loss of investor
money/depositor’s funds that has been happening in
other regions”

23. Caribbean Trade and Investment Report 2005, list the
following challenges:
• Small pool from which to chose directors;
• The concept of the independent director is hard to apply;
• Small number of public companies;
• Relatively large number of private companies;
• Active role of the State in economic activities;
• Dominance of large family owned firms;
• Preference for commercial bank financing;
• Legal, statutory and regulatory framework is under-
resourced

24. Trinidad and Tobago
• The Chamber of Industry and Commerce,
Trinidad and Tobago Stock Exchange and the
Caribbean Corporate Governance Institute are
working to prepare a draft Corporate
Governance Code
• It is hoped that national standard for how
companies (both private and state owned) are
governed will improve investor confidence
and reduce the risk of corporate failures.

25. Jamaica
• In late 2012 Jamaica produced a corporate
governance framework for 191 public bodies.
• These rules cover twenty principles of good
governance - governance composition, roles
and responsibilities of boards and top
management, risk management, disclosure,
ethics and corporate social responsibility.

26. Barbados
• The Barbados Central Bank published its revised
code for corporate governance in the financial
sector in early 2013.
• Regional corporations have traditionally used
debt verses equity to finance their operations,
this enables banks and other financial institutions
to ensure firms are governed properly.
• Well governed financial institutions should help
to stabilize the finance sector and act as an
additional mechanism to monitor corporations

27. Summary
• Corporate Governance is critical as corporate failures
can have negative social and economic effects
• CG theory has evolved from focusing solely on the
principal – agent relationship to include other
stakeholders
• Measuring what is good CG is challenging particularly
for analysis across industries and countries
• The Caribbean has begun to pay some attention to
the role of CG

28. Questions or Comments?