About 23 years ago, I penned a commentary in the Mirror Newspaper entitled “A Shady Business” in which I reflected on the rise and fall of the mighty ENRON in the USA.
Even now, my mind boggles at the catalogue of “infelicities” that ENRON was able to commit in plain sight, in a country that shamelessly claims to have the most discerning oversight arrangements in the world. Within a decade, ENRON rose to become one of the most powerful corporations in the world, with mega-holdings in North America, Asia and Europe. Its shares were rampantly traded on the New York Stock Exchange (NYSE). Yet, it would take less than a year for ENRON to collapse into corporate oblivion.
It emerged that all along ENRON was nothing more than an empty shell. Its mission statement claimed that its core business was “…to create value and opportunity …by combining its financial resources, access to physical commodities and market knowledge to create innovative solutions to challenging industrial problems.” That claim had enough air in it to fill a zillion balloons; but no one took notice, not even when ENRON brazenly admitted that “…most of the things we do have never been done before.”
ENRON’s creativity extended beyond energy trading. It relied heavily on sleight-of-hand accounting to conceal massive financial losses. It used off-book transactions to inflate the price of its stock. It traded with dummy businesses. It encouraged thousands of its employees to invest their hard-earned pensions in its stock but forbade them from selling their stock when share prices began to nosedive. Meanwhile, top executives, aware of ENRON’s impending collapse, were offloading their stock in an obscene hurry. They made a fortune while their colleagues on the shop floor lost their lifesavings and their jobs. Even as the Securities and Exchange Commission (SEC) and other oversight agencies announced their planned investigations of ENRON’s precipitous collapse, its accountants and auditors were brazenly shredding reams of incriminating evidence.
The core lesson in ENRON’s Romanic rise and fall, is that those charged with its management and oversight failed to do their jobs. ENRON’s Executives invested considerable time and money to compromise stock brokerage houses and commercial banks and Boards responsible for setting accounting standards. Together, they encouraged investors to buy ENRON stock, knowing the company was nothing more than a shell, and even as its fabricated value was being exposed.
At the time, many respectable financial analysts saw ENRON’s demise as the tip of an iceberg. They alleged that several other high-profile businesses listed on the NYSE were using ENRON-type, creative accounting to dupe investors. About two years later, the US and the global financial system would be ripped apart by the mother of all financial crises, with the housing market as its “ground zero.”
The Caribbean has had its own share of corporate scandals, with CLICO being among the worst and most recent. There is enough slackness in the region’s corporate governance system to believe that more business failures are possible. The only way future crises can be averted is if Company directors, shareholders and monitoring and oversight entities fulfil their respective legal and fiduciary responsibilities.
Country leaders and company directors must appreciate that no company or market has a divine right to investors’ money. As Arthur Levitt once observed, if a country does not have a reputation for strong corporate governance, and accounting and reporting practices, capital will flow elsewhere. Countries like Singapore appreciate this fact.
The role of shareholders in helping to ensure sound corporate governance cannot be overstated. Unfortunately, most shareholders are more concerned about earning dividends than about fully exercising their legal rights, responsibilities and protections. Caribbean Case Law affirms that a shareholder can sue a company for violating his/her rights. When shareholders fail to assert that they are the rightful owners of a company, with supreme, rulemaking authority given to them, through annual general meetings (AGMs), they unwittingly encourage company chairpersons and directors to believe they own a company (bank) and cause them to disrespect shareholders, including by not holding AGMs as mandated by a company’s by-laws—which constitute a contract between the shareholder and a company–and the Companies Act of Saint Lucia (CASL).
According to the CASL, shareholders have a right to receive relevant material and information from a company on a timely and regular basis. Section 149 of the Act compels a company to place before shareholders at every ANNUAL meeting of shareholders, comparative financial statements and auditor reports. These documents must be sent to each shareholder not less than 21 days before each annual meeting. It’s bad enough when these legal provisions are violated but it’s even worse when no explanation is given to shareholders. One expects that in keeping with their respective legal mandates, the Registrar of Companies and/or the Eastern Caribbean Central Bank (ECCB) would have demanded and received an explanation whenever this requirement is not fulfilled, especially by a bank.
Company directors are servants of a company, to which they owe fiduciary duties. The CASL demands full disclosure by company directors and managers and imposes on them a duty of care to always ensure they are acting in the best interest of a company and not in their own best interest. Section 91 of the CASL obliges a company director who is a party to an existing or proposed “material contract” between that company, and another company in which he/she or has a material interest, to disclose in writing to the company, the nature and extent of his/her interest. It would be interesting to know whether a collective agreement between a bank and a trade union constitutes a “material contract.”
Saint Lucia’s has a suitable legal framework that can ensure sound corporate governance. However, many laws are rendered toothless by enforcement failures and by a culture of indifference to questionable corporate behaviour. Failure to put right the things that are wrong can only create a culture where wrongful behaviour becomes normalized.