Dear Editor,
The recent articles in the Sunday Stabroek ‘Business Page’ on how the stock market works in Guyana has given much food for thought. Issues were raised that I can both agree and disagree with but which cannot be ventilated in this letter. My personal view is that a strong reason for the poor performance of the stock market in Guyana is the issue of corporate governance.
The fundamental problem of corporate governance is the expropriation of outside investors (shareholders and creditors) by insiders. This is manifested mainly through transfer pricing, transfer of assets, targeted issues and repurchases of securities or shares, pursuit of non-profit maximizing projects, and a prominent phenomenon recently, the consumption of perks and the over-generous compensation of CEOs and company executives.
Early in the new millennium, the Financial Times carried a groundbreaking article on corporate governance in India. It argued that there was this ethos that a company belonged to a family in India and that this was radically changing. India’s stock market adopted one of the toughest corporate governance codes of any emerging market economy.
Under the code, companies must appoint independent directors to at least one third of all positions on the board, and half if the chairman is an executive. The article pointed out that directors are obliged to set up audit shareholder grievance and remuneration committees headed by independent directors. Directors must publish annual reports with detailed analyses and statements by managers and disclosure of any dealings in company shares. The Company Act in India makes directors personally liable if financial statements violate accounting standards that are in line with international best practices (OECD). These radical reforms entrusted shareholders with a powerful residual right over a company’s cash flow and a right to a vote as a main source of power. Foreign institutional investors have invested more than $20B in India equities. Of the emerging market economies, India has more companies that are listed on foreign stock exchanges. Portfolio investment in the equities of public companies is now the main and stable source of Foreign Direct Investment (FDI) in India. Despite being ranked very low in the corruption index at 87, India Inc shines globally because of good corporate governance.
Even though there are other critical conditions that would facilitate the growth of a stock market such as accounting standards and a fair justice system and law enforcement, there is too the cozy relationship between business executives and the accounting firms that audit their companies which was well documented after the Enron fiasco, and Guyana is no exception in this regard. The binding constraint to the development of an effective stock exchange in Guyana, is corporate governance whose principal goal is to restrict expropriation so as to facilitate external finances. Good corporate governance is tested by the protection it offers to small shareholders especially.
The nexus between the stock market as a critical component of the capital market, economic growth and development is well established in empirical research. Guyana provides ideal conditions for a good research project on a viable stock market Institutional investors such as insurance and pension and medical funds, that are extremely liquid and pay annuity, look for viable longer term investment offering a spectrum of risk and expected return.
Finally, it is universally accepted that public accountability is a prerequisite for good governance for which there are no boundaries.
Yours faithfully,
Rajendra Rampersaud
