The recent controversy over the dismissal of Dennise Demming as Chair of the Tourism Development Company (TDC) has sparked yet another round of debate on the role and operation of State-owned Enterprises (SoEs).
Some of the issues which have arisen are:
•What is the purpose of these SoEs?
•How do the Boards of these SoEs get appointed?
•Are Board Directors of SoEs required to follow directions from the line Minister?
•Do Board Directors of SoEs have the right to get involved in managerial decisions such as hiring of staff and awarding of contracts?
•Do Ministers and Permanent Secretaries have the right to meet with or direct staff of the SoEs without the input of the Board of Directors?
•Given the recent Appeal Court decision in the UTT case, what is the legal liability of Board Directors of SoEs?
The State Enterprises Performance Monitoring Manual issued by the Ministry of Finance and the Economy in July 2011, at page 2, sets out the rationale:
(Strategic National Objectives)
State participation in commercial enterprises would be limited to those activities which meet strategic national objectives and which cannot be achieved through the legal, regulatory, institutional, or incentive framework…
That manual lists 80 SoEs—44 of which are 100% owned and seven of which are majority-owned by the State. That is a very high number in comparison with other countries and the fact is that most of them are not profitable.
This number excludes bodies such as the National Carnival Commission (NCC) as well as Statutory Agencies, such as WASA, HDC, TTEC, CDA. The SoEs and Statutory Agencies, together with the other ones like NCC, are State-controlled.
It might seem that since the State only holds a minority interest in some of those companies, those should not be described in that way, but the fact is they are. In several of the companies and institutions in which the State is minority shareholder, the Board of Directors is effectively appointed and controlled by the State.
It is impossible to establish any true idea of their performance since most of them do not publish audited accounts. What is more, the audited accounts which do appear from time to time are often several years out of date.
In October 2015, a special committee was established to examine the operations and performances of the State Enterprises. Its chairman is Dr Terrence Farrell and the other members are Jerry Hospedales, Dr Ronald Ramkissoon, Angela Hamel-Smith, Allison Lewis and Dr Rolph Balgobin.
In light of the significant decline in national revenues and the long-term problems associated with the SoEs, the findings of this committee will be very important.
In The Two Tendencies published just before the May 2010 general elections, I suggested that there are two views as to the role and operation of these SoEs. The dominant view is that having won an election, the party in power has every right to appoint selected people to various positions in the State sector, including SoEs.
The less common view is that there are certain SoEs which are so important that those Boards’ appointments should only be for well-qualified and experienced persons.
This leads right to one of the greatest areas of confusion, which is the difference and relationship between the State and the Government. The State is said to be permanent, outliving political parties and spanning many generations.
The Government, however, is the team of political officials who take office after an election with the task of running the State in the national interest.
The State can be likened to a Company, in which strategy and policy is set by the Board of Directors, which is the Government. The management implement the strategy and policy, providing reports on performance to the Board of Directors.
The key point is that neither the Board of Directors or the management, however great their level of skill, own the company. The Company is owned by its shareholders, which is really the citizens of the country.
That is the model which outlines the way the State. The Government and the citizens are supposed to relate.
Of course the reality is very different, since the Government effectively appoints Board Directors to the various SoEs. Those are rightly called political appointments, since most of these positions are given to political loyalists. That is not to say that those persons do not have skills and experience, but the decisive issue is that of the political loyalty of the appointees.
Under the Companies Act, Board Directors are required to:
(Duty of Directors and Officers)
99. (1) Every director and officer of a company shall in exercising his powers and discharging his duties:
- act honestly and in good faith with a view to the best interests of the company; and
- exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances…
When one considers the alarming reports of the way in which the SoEs are operated, it is clear that the basic laws of proper conduct have been regularly breached for a long time now.
In some cases, that motivation might arise from political loyalty, in which Board Directors are following Government instructions. In other cases, the improper and illegal acts are committed for personal gain.
In terms of governance, the issues with the Board Directors of the SoEs actually arise before they are even appointed. The lack of an open process for selection of SoE Board Directors means that the entire arrangement can be seen as ‘Grace and Favour’ appointments, in which certain persons are favoured over others.
That degree of secrecy is unhealthy for such crucial decisions and can even produce the situation in which selected persons are being congratulated for Board appointments they know nothing about, never having even applied!
The lack of transparency in the selection of SoE Board Directors also means that governments can appoint favoured persons who may have been involved in highly questionable acts in the past, with the public being the last ones to know. The existing arrangement is in need of an urgent and serious review so that this selection process is more transparent and responsive to genuine public concerns.
One of the intangible barriers to accepting these political appointments is the sheer degeneration of our public discourse. Our cultural tradition of ‘mauvais langue’, in combination with the dizzying influence of social media, have made national service risky for those who value their reputations.
I can scarcely imagine how we will be speaking with each other in the next ten years.
For example, in the case of the recent dismissal of Dennise Demming, the Ministry of Finance issued an undated press release on 16th May 2016, which included a letter of 12 May 2016 from the TDC, signed by the other Board Directors.
That letter stated:
“…The Board has concluded that the actions of the Chair exposes the Board, its’ (sic) Directors, the employees of the TDC and ultimately the Ministry of Tourism to an unacceptable level of risk and that such actions are not in accordance with good corporate governance…”
At no point in either the TDC letter or the Ministry’s Media Release are any of these actions identified. The TDC’s letter—dismissing Demming—appears to have been a private item, yet the Ministry published the damaging and unspecified allegations.
The final, macabre, twist is that the catchphrase ‘good corporate governance’ was used as a rationale. It all reminds me of the long-time saying ‘Nearer to Church, further from God’.
Another formidable deterrent for persons who would otherwise be willing to serve as Board Directors is the requirements to make declarations of assets, liabilities and income to the Integrity Commission. I agree with Dr Terrence Farrell’s view that the fundamental assumption of dishonesty is a profound disincentive.
A significant aspect of the SoE review would have to address this issue if the quantity and quality of persons willing to serve as Board Directors is to be enhanced.
The Integrity Commission should require only a declaration of interests and focus its limited resources on properly investigating reports of wrongdoing by public officials.
The final part of the picture I wish to focus on is the legal liability of the SoE Directors.
The 2011 eTeck lawsuit was, to my knowledge, the first case in which the State sued a SoE Board Directors under Section 99 of the companies Act. The allegation being that those Directors breached Section 99 and were negligent in making a large investment in 2005.
It is historic enough that SoE Directors were made to face this lawsuit, but what gave this matter greater importance was the success of the State in having the four-year time-limit set aside. This was no doubt a politically-motivated lawsuit and one in which the State has prevailed, thus far.
At this stage, with an Appeal Court decision in its favour, the State is in a commanding position insofar as this litigation is concerned. The concerns arise in relation the prospect of SoE Directors being sued, years after the event and beyond the time-limit, by one’s political adversaries.
The latest review of State Enterprises being undertaken by the Farrell Committee is yet another in a series of attempts to rationalise this important sector.
I know that the Caribbean Corporate Governance Institute wrote on this general issue lately, so it would be be very interesting to have their further views.