Dr Robertine Chaderton on Good Corporate Governance in Financial Institutions: Competence and Accountability

Tue Apr 23, 2013

A review of her presentation at the O. C. Forde Memorial Lecture

by The Financial Alliance

The first presentation in the O. C. Forde Memorial Lecture Series was made by Dr Robertine Chaderton at the Peace Memorial Hall on Wednesday, April 10, 2013. Dr. Chaderton spoke on “Good Corporate Governance in Financial Institutions: Competence and Accountability.” Corporate governance has to do with the rules, processes, or laws by which businesses are operated, regulated and controlled. There is a good corporate governance structure when there are adequate mechanisms to prevent the abuse of corporate power by company officials.{{more}}

Dr Chaderton explained that corporate governance first became a subject of discussion in the US during the 1970s and in the UK and Europe in the late 1980s. Corporate governance issues, however, only took centre stage after the high profile collapse of Enron, WorldCom, Arthur Andersen and other companies about 10 years ago. Chaderton highlighted important corporate governance developments. She mentioned the Sarbanes-Oxley Act which was passed by the US Congress in 2002. This Act, she said, prohibits accounting firms from auditing companies for which they also provide accounting services, so they cannot be the referees and be a part of the playing team at the same time. Dr Chaderton bemoaned the fact that in the Caribbean there are archaic laws which specify no sanctions for failures in corporate governance in private companies. She lamented the lack of adequate regulatory skills in the region and pointed out that CL Financial’s operations were often considered to be “too complex to understand.”

Dr Chaderton used an imaginary conversation between two convicted financial criminals, Allen Stanford and Bernie Madoff, who are both in US prisons, to drive home her points. Madoff said to Stanford, in one of the imaginary exchanges, that the legislators are always behind the schemers. The Caribbean Trade and Investment Report 2010 expressed the opinion that regulators are always playing catch-up in the area of financial innovation.

Dr Chaderton spoke about her clash with Mr Leroy King when she was hired, as a consultant, to review the staff arrangements of the Financial Services Regulatory Commission (FSRC) of Antigua and Barbuda. Mr. King was the CEO of the FSRC at the time and Dr Chaderton was taken aback by his violent outburst after she casually asked him during an interview if he was ever asked to “look the other way” by a client. King responded by accusing Chaderton of being on a witch-hunt that was outside the scope of her remit. Leroy King was later indicted in the case of Allen Stanford. He was named as a co-conspirator and accused of accepting about $160,000.00 in bribes to whitewash his agent’s review of Stanford’s International Bank finances and deflect inquiries of the US Securities and Exchange Commission. Stanford boasted in an exchange with Madoff that he had King and many others “in his pocket.” Dr Chaderton was obviously very close to the truth. She feels that there is a need for an umbrella, independent regulatory body for the entire CARICOM, to ensure best practices across the region for all types of institutions and to restrict the spread of undesirable business practices.

One of the main principles of corporate governance codes, according to Dr Chaderton, is that the CEO of a corporation should not also be the chairman of its board of directors. Chaderton said that if one person held both posts, an internal auditor may well be forced to complain to the chairman about his or her own behaviour as CEO.

Chaderton stressed the need for competent and trained directors who do not feel that they are entitled to special benefits as a result of their position. The ECCB provides director training opportunities. She said that there is a role for independent non-executive directors who could serve on desirable board sub-committees, such as an audit committee and a compensation committee. The very restrictive Ethical Investment Research Services definition of an independent director and the more relaxed version adopted by the ECCB because of our peculiar Caribbean circumstances were provided. An independent non-executive director is generally a director who is not beholden to the CEO or other management officials as a result of employment arrangements or family relationships – or for other specified reasons – and who is therefore able to make objective contributions to board discussions. Directors should think of themselves as representatives of shareholders and not as representatives of management. The job of a board member is to monitor management and hold it accountable for its decisions.

The idea of an independent non-executive director seemed foreign to Stanford, who said to Madoff during their imaginary conversation that he hand-picked his directors and they did his bidding. Stanford went on to say that his chief financial officer manufactured financial statements to satisfy his requests and was very well paid in return. Chaderton said that individual directors typically get into trouble because of conflicts of interest. There is always the temptation to, for example, secure for themselves loans at concessionary rates without repayment and to approve loans for close relatives and friends, even where they may not have satisfied loan requirements. These kinds of conflicts between personal interests and company interests are at the heart of corporate governance problems.

Chaderton called on shareholders to recognise their power, to attend AGMs and to discard the idea that management should not be questioned. Dr Chaderton said that she has a colleague who conducts shareholder training before AGMs, which helps many individuals to overcome the fear of speaking on specialised topics or asking ‘foolish’ questions. She promoted whistle-blowing and called for the protection of whistle-blowers. She said, in fact, that we should encourage our children to speak out for what is right from an early age.

Dr Robertine Chaderton ended her presentation by saying that good corporate governance facilitates growth in capital markets and engenders confidence in financial institutions. She also provided a checklist of fraud mitigation or fraud prevention techniques. There was a very good discussion period after Chaderton’s lecture, during which several members of the audience either asked questions or made comments. Dr Chaderton responded to the questions and comments, which covered a wide range of related issues. Mr Dougal James, a local business consultant, made the final contribution to the discussion. He expressed the hope that the lecture marked the beginning of “new thinking” and a “new vision” for our financial landscape.