Flaw in governance of state enterprises

THE EDITOR: The recent resignation of the chairman of First Citizens Bank Limited (FCB) has served to highlight once again a fundamental legal flaw in the system of governance of the affairs of companies established under the Companies Act in which Government holds all or a majority of the shares. The following points are to be made:

(1) Successive governments of Trinidad and Tobago for the past 25 years or more have consistently failed to make a distinction between State enterprises, which are companies incorporated under the Companies Act as opposed to State enterprises, which are statutory corporations established by an Act of Parliament.

(2) For more than two decades, ministers in the Ministry of Finance or their subordinates have from time to time arrogated to themselves the power to dictate and instruct boards of directors of companies incorporated under the Companies Act in which Government holds all or a majority of the shares, how to run their businesses on a day to day basis. Recently this “supervision” has been justified on the basis of a monitoring manual, apparently prepared by officials in the relevant Ministries.

(3) However such instructions are only founded on a proper legal basis in the case of the statutory corporations such as WASA, NHA, CDA or the like where the line ministers are given the express statutory power to issue directives and instructions to the particular institution.

(4) The giving of directives and instructions is wholly without any legal foundation and contrary to corporate law when one comes to deal with a state enterprise which is a company incorporated under the Companies Act. This is because it is well established in law that the persons who are in charge and control the affairs of such a company are the directors. This is made clear by section 60 of the Companies Act 1995 which provides: “Subject to the articles and any unanimous shareholder agreement, the directors of a company shall (a) exercise the powers of the company directly or indirectly through the employees and agents of the company; and (b) direct the management of the business and affairs of the company.”

(5) The shareholders are not entitled to issue directives to the Board as to how to manage the affairs of the company. If the shareholders are displeased with how the directors are conducting the company’s affairs then the remedy is to call a meeting and remove the directors.

(6) In the past the corporate culture which prevailed in the country was one where the directors of companies in which Government held a majority of shares were more compliant with the wishes of their appointor. We are now in an era where Directors are more aware of their responsibilities and the prevailing ethos, emanating from the Companies Act 1995, has enhanced directors’ sense of wanting to make an independent judgment instead of merely carrying out the wishes of their appointors. The era of the “yes” man is on the decline. In such an environment there is likely to be more resistance to ministerial directives.

(7) All of the foregoing suggests that there is going to be more tension and continuing confusion until the legal structure which governs companies in which Government holds the majority of shares is sorted out in a manner consistent with the prevailing corporate law. Otherwise the law should be changed to cater for this special corporate creature.

CLAUDE H DENBOW SC
Port-of-Spain