Jamaica has made advances in corporate and public governance, but...

Jamaica has made advances in corporate and public governance, but...

Delano Franklyn

Sunday, March 18, 2012

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A slightly edited presentation by Delano Franklyn to the Public Seminar on Corporate Governance hosted by the Financial Services Commission at the Jamaica Pegasus Hotel in New Kingston on March 15, 2012.

IN 1995, Jamaica experienced a near collapse of its financial sector.

The Planning Institute of Jamaica (PIOJ), in outlining the possible causes of the financial collapse, stated, among other things, that the growth of the number of financial institutions prior to the collapse was not followed immediately by improvements in the requisite regulatory framework, and as a result, this led to mismanagement and speculative excesses within the sector.

That financial collapse has impacted the Jamaica economy in two ways:

First, the establishment of the Financial Sector Adjustment Company (FINSAC) which intervened on behalf of the State by way of its guarantee of all deposits, pension funds, insurance policies and investments in institutions falling under the Banking, Financial and Insurance Acts. The cost of this intervention was a significant charge on the nation's budget, the consequence of which we are still experiencing today.

Second, the strengthening of the regulatory framework governing the operation of financial institutions, including the establishment of the Financial Services Commission (FSC) in 2001.

Ponzi schemes

To a large extent, it is the FSC which saved Jamaica from being completely overrun by myriad Ponzi schemes which recently engulfed the country.

These Ponzi schemes were able to mushroom for three primary reasons:

First, known and reputable persons and institutions were involved. A list of the names of the institutions and persons published by the FSC indicates that even persons who propagate the highest form of ethics and moral values in the society were involved in the collection of funds. Some of these persons are now on the run from people who are demanding repayment.

Second, the high level of informality which exists in the Jamaican economy. Studies have shown that the size of the informal economy in Jamaica is almost 50 per cent. This informal economy is characterised by a hustle mentality. It operates above, around, and under the regulated economy. Its culture is one of anti-regulation. It settles its own scores where there are differences. It is not class or social specific. All types are involved ÷ the rich, the poor, the social, the anti-social and big and small businesses.

Third, the existence of selective morality and ethical values in the country. The owner of a business in Jamaica has no difficulty conspiring with another to extract electricity from the Jamaica Public Service, but rightly calls in the police if an employee is caught stealing; a provider of professional services has no difficulty operating two books in order to avoid the payment of taxes, but complains bitterly about the irregularity with which his garbage is being collected; and there are persons among us who have no respect for planning or building laws. They build anything, anywhere.

These three features which allowed Ponzi schemes to flourish are regrettable features of the Jamaican society which impact very negatively on corporate and public governance in Jamaica.

These features can be combated in two ways:

1. The implementation of a strong regulatory framework and provisions related to standards of conduct, which allows for strict and rigid penalties when breaches occur and the perpetrators are caught.

2. A consistent, persistent, and relentless national assault against the erosion of social and ethical values in the society.

Let me deal with the two separately.

Regulatory framework

Firstly, the existence of a regulatory framework and provisions relating to standards of conduct.

Jamaica is not short on regulations. In fact, Jamaica can be compared with any developed country in the range and scope of regulations which exist to deal with the indiscretions of persons in the public and private sectors. I will cite some examples.

1. The Contractor General Act. This provides for the monitoring of the award and implementation of government contracts and establishes a National Contracts Commission for that purpose.

2. The Corruption (Prevention) Act which requires public servants to give to the Commission for the Prevention of Corruption statutory declaration of their assets, liabilities and income. The declaration must also include information regarding assets, liabilities, and incomes of the spouse and the children of the declarant.

3. The Financial Administration and Audit Act, which provides that the auditor general is duty-bound to report to the financial secretary, any deficiency, loss or destruction of government property and the occurrence of an unauthorised expenditure.

I am of the view that this Act should be amended to allow the auditor general to report his or her findings to the director of public prosecutions who will then determine if criminal charges must be brought against a person who has destroyed Government property or was involved in any improper, extravagant, or wasted expenditure of Government funds.

4. The Staff Orders for the Public Services, which governs the conditions of service for pubic officers (that is, persons employed in the central government services, in accordance with the Public Services Regulation) provides an important and comprehensive code of conduct, including, among others, rules that prevent corruption, conflicts of interest and prohibit participation in partisan political activity by public officers.

5. The Parliament (Integrity of Members) Act, under which is established the Commission for the Prevention of Corruption which makes provisions for disclosure of the assets, liabilities and income of senators and members of the House of Representatives. The Act also provides that the assets, liabilities, and income of the declarant's spouse and children are to be furnished as well.

While there is room for improvement, Jamaica has a raft of regulations to ensure public sector oversight. What we need to ensure is that we become far more proactive in the application of these laws and regulations. As an example, the Contractor General Act is not new. What is new is the vim and vigour with which the Act is being applied.

The regulations governing the operation of the financial sector have been significantly strengthened. This includes the regulatory powers of the Bank of Jamaica (BOJ) and the FSC, which has the responsibility for the supervision of insurance companies, unit trusts, securities, trading houses and pension funds.

The strengthening of the BOJ and the FSC has led to greater reporting requirements by financial institutions and the imposition of a greater obligation on bank auditors.

There is also the Code on Corporate Governance which has been developed by the Private Sector Organisation of Jamaica.

That code sets out the core principles and best practices for adoption by all publicly listed companies in Jamaica, and non-listed companies engaged in the provision of financial services.

As examples, the Code sets out that:

* There should be a clear division of responsibilities between the running of the board (the chairman) and the executive responsibilities of the running of the company's business (the CEO);

* No one individual should have unfettered powers of decision;

* The establishment of an audit committee;

* The establishment of formal, rigorous, and transparent arrangements for selecting independent auditors; and

* There should be a transparent procedure for the appointment of directors to the board.

Values and attitudes

The establishment of a strong regulatory framework to strengthen corporate and public governance is one thing, but to me, even more important is operating in a society underpinned by good values and attitudes.

That is why I have consistently argued for a persistent and relentless national assault against the erosion of social and ethical values in our society.

Members of the society must recognise the necessity of having a moral feeling towards each other.

A strong regulatory framework is important, but critical as this is, I believe that our efforts are doomed to failure unless we restore as a country, a sense of decency and national purpose in everything that we do.

What kind of economic development are we going to have? How sound will our financial institutions be? How effective will our national boards be if what we are creating is a society that is rapidly in danger of dehumanising itself?

As an example, we have a bad attitude to public funds. Some of us believe that we are not required to account for public funds. Some persons are given contracts, not because they have the requisite skills, but because of how much money can be made; public property is constantly vandalised, including schools and community centres. We cannot go on like this. We need to bring back a sense of value, honesty, and decency in what we do.

Members of the society must feel that there is an obligation to do what is right. Take the issue of the payment of taxes:

* 80 per cent of the company taxes and 50 per cent of the property taxes are not being collected and, therefore, not being paid.

* Apart from PAYE taxpayers, only 4,000 individuals are paying income tax.

* It is estimated that 250,000 persons who should be paying taxes are paying nothing.

Of course, there is the obvious need for serious tax reform, but there are those among us who feel that they have no social or moral responsibility to pay taxes.


Good corporate and public governance are important in any society, including Jamaica. As a developing country, Jamaica, in recent times, has made critical advances in both areas. However, in a changing environment there is always the need to ensure that modern best practices are introduced.

As we go about strengthening the regulatory framework to improve governance, it is also important that we arrest the general deterioration in our ethical values and societal norms. This is in order to become known to others as a country with a reputation for honesty, integrity, and trust.

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