"Perception Or Reality"...Does Corporate Governance Create Value For Shareholders: The Case Of Gracekennedy Ltd.

Address By Douglas Orane, Chairman & Ceo, Gracekennedy Ltd.
To Jef/Govstrat Sponsored Seminar At The Hilton Hotel
On Tuesday, October 25, 2005

Miss Jacqueline Coke-Lloyd and Mr. Vindell Kerr, Co-Chairs, Hon. Minister of Finance & Planning (if still present), Dr. Medhav Mehra, President of the World Council for Corporate Governance, Ladies and Gentlemen.

Thank you for giving me the opportunity to make a brief presentation on GraceKennedy's experience with Corporate Governance. I will begin by asserting unequivocally that our experience in initiating and maintaining the principles of Corporate Governance at GraceKennedy has demonstrated that it does create value for shareholders.

Let us look at this experience. GraceKennedy introduced a formal Corporate Governance structure in 2000 when our Board took a decision to establish a Corporate Governance Committee comprised of all the non-executive directors of GraceKennedy.

GraceKennedy had for many years before this seen the importance of good governance and had established clear principles to guide the organization by the publication of a document called "The Philosophies and Policies of GraceKennedy" in the mid 1990's.

By 1999 however, it became clear to us that it was necessary for us to formalise a Corporate Governance Structure as we continued to expand into a wide range of businesses, locally and internationally.

We came to this decision as we developed more precisely than we had done in the past, our corporate goals and objectives in light of the reality of the process of globalisation. From this came a growing realisation that if we did not shape and hone our company's systems, procedures and activities to grapple with this reality we might be doomed to extinction like so many others.

We watched with growing concern the sobering examples of Barings, the UK's oldest merchant bank laid low by a rogue trader in Singapore and the collapse of the international bank BCCI. In more recent times we have watched a series of corporate failures, including Enron, WorldCom Parmalat and the Martha Stewart episode; and most recently Refco, one of the largest securities traders in the U.S.A.

Here at home what has come to be known as the meltdown in the financial sector in the 1990s heightened our concerns.

In response to this the Government quite rightly initiated a series of legislative changes to strengthen the regulatory environment in which companies within the financial sector and publicly listed companies operate. The Stock Exchange has also responded with similar initiatives.

These legislative changes were welcomed and have certainly helped to provide the framework for good governance. It is our view, however, that good governance comes from inside the entity rather from outside and that, while the external regulations will serve to force compliance on stated issues, the real changes will arise from inner changes within the organization. It is well recognised that ethical behaviour originates from a long tradition of deeply embedded values in one's culture.

In earlier times, it was felt to be sufficient to rely on a handshake or principles that "my word is my bond" when the players in the business community knew each other personally over many years. In the new global environment and with the increased business with different partners from all over the world, with new technology that allows things to happen faster than before, there is the possibility not only of spectacular opportunities but also of cataclysmic implosions.

I believe that we were singularly fortunate at GraceKennedy because we had a cultural foundation which enabled us to embrace the principles of Corporate Governance with relative ease.

We began the process of setting out a road map for our development which we named our 2020 Vision. We were envisioning what some might call audacious goals for a relatively small company in a small developing country; and we knew that we had to be equally bold in establishing the organisational framework which would give us a fighting chance to achieve these goals.

Our founding fathers had established bedrock principles for the company during its formative period in the 20s, 30s and 40s. Our core values were enunciated as honesty, integrity and trust and we consistently reaffirmed our status as a company with unswerving commitment to our country, Jamaica, and to our fellow Jamaicans. We were never in any doubt about this even when we did not necessarily approve of the directions that the country was taking at one time or another.

The fact that we had managed to survive from 1922 amid the social, political and economic vicissitudes which have been Jamaica's experience over the years has, I think, given us a certain institutional flexibility, in other words, we are not averse to new thinking and new ways of doing things.

As we looked at the environment which globalisation was creating, this flexibility helped us considerably. We studied the principles of Corporate Governance as practised in the U.K., U.S.A. and Canada and decided that this was the right way to go. I might add that there was very little by way of Jamaican experience in this area to help to guide us at that time.

We established our Corporate Governance Committee in 2000 and set out its responsibilities as follows:

• to enhance the company's system of corporate governance by establishing, monitoring and renewing the principles of good governance with which the company and its directors will comply;
• to promote high standards of corporate governance based on the principles of openness, integrity and accountability taking into account the company's existing legal and regulatory requirements;
• to establish such procedures, policies and codes of conduct to meet these aims as is considered appropriate from time to time including:
• responsibility for the nomination of new directors and review of the existing board of directors.
• responsibility for the review of Risk Management in the company
• At the same time we established two related committees also composed solely of non-executive directors:
• The Group Audit Committee which approves the scope of the internal audit plan at the beginning of the year and meets monthly to review reports from the Group Internal Audit Department. Regular reports are made to the Board on critical matters. In addition the committee considers the Group's system of internal control.
• The Compensation Committee which approves executives directors' emoluments and the executive directors' incentive payment system
• Other initiatives included:
• Appointment of a lead external director
• Establishing the Corporate Governance Code which sets out the core corporate governance principles adopted by the company. These principles were guided by the Combined Corporate Governance Code of the UK because at the time there were no local precedents to follow. I am happy to say that the PSOJ has prepared a draft Code which is under discussion and which may serve to guide companies in this area.
• Development of an updated "Code of Ethics & Guidelines for Business Conduct" which will apply to all employees and directors in the Group. Employees and directors will be asked to confirm their compliance with the code on an annual basis.
• We have also embarked on a project to ensure that all key policies and procedures in the group are adequately documented which is a critical aspect of the compliance process.

To specifically answer the question which I have been asked to address which is "Does Corporate Governance Create Value for Shareholders" I would say, definitely yes.

In 2001 I made the following observations in my half yearly report to the shareholders which support this view.

"As part of the seminar, [on corporate governance in Grace, Kennedy] the implications of a recent survey by McKinsey & Company, a global management consultancy, were considered.

McKinsey's findings were that three quarters of investors say that Board practices are at least as important to their evaluation of a company as is financial performance. Over 80% say they would pay a premium for well-governed companies and these premiums range as follows by region:

We are of the view that recent increases in our stock price have been at least in part due to a wider recognition of our corporate governance practices. Our stock price has moved from $17.95 on January 1, 2001 to $29.00 on June 30, 2001, an increase of 62.0%".

In fact, if you had bought $1,000 worth of GraceKennedy stock units on the first trade day in January 2001, this stock would on October 21, 2005 be worth $8,022 or a 702% increase in value.

Using another measure, over the same period January 2, 2001 to October 21, 2005, the average PE ratio of all stocks on the JSE moved from 7.48 to 14.55, an increase of 95%. By comparison, GraceKennedy's PE moved from 5.39 to 14.23, an increase of 163%.

What these comments indicate are as follows:

• I. It makes good business sense to be transparent and therefore supportive of an environment of public disclosure.
• II. McKinsey's survey indicates that the more corrupt a society is, the more investors are willing to pay a premium for the benefits of good governance and transparency.

The question uppermost in the minds of investors is "who can I trust?"

This is especially relevant in a small society like ours where rumour and gossip are constants and where people tend to rely on these unofficial channels for information as much as or perhaps even more than on established channels such as media, financial analysts etc.

In this environment, we at GraceKennedy believe that the greater our levels of transparency, the more likely we are to maintain credibility.

Our objective is to sustain an organisation robust enough to survive in any environment which is able to withstand external shocks in Jamaica such as natural disasters or social disorders of one kind or another; as well as external shocks such as the spikes in oil prices which we are now experiencing.

Important in creating this resilience as an organisation is the need to develop our people, to give them the skills and insights to cope with unforeseen problems which result from changing social, political and economic problems and what we are witnessing today as greatly accelerated change. The speed with which technology instigates change is phenomenal - and if companies like ours are to survive, we have to learn to deal with this. We have to instil confidence in the mind of the public that we have the ability to adapt even as we are continuing to maintain growth.

We are constantly monitoring developments in the business world both nationally and internationally and seeking to adopt policies and programmes which will help us to adapt and maintain the desirable equilibrium as a corporate entity. Towards this end we have implemented programmes such as enterprise risk management which is designed to preserve and maximise the value of GraceKennedy. In practical terms this means identifying and managing risks which could affect our strategies, operations, finances, compliance and reputation. As we work our way through this process, it ironically allows us to be more accepting of sound risk taking practices as we become more sure footed in assessing and managing our risks. To quote Nehru "The policy of being too cautious is the greatest risk of all"

It is important, we believe that investors learn to discern the long-term developments of any corporate entity rather than judging its progress by depending on, say its quarterly earnings which in the nature of business are cyclical.

At present, we are also closely examining the issue of disclosure of beneficial owners of shares in publicly traded companies.

The Rules of the Jamaica Stock Exchange and the Securities Act have gone a long way towards allowing for the transparency necessary to effectively monitor and deter market manipulation and insider trading. These rules are however incomplete as shareholders may under the current laws hide behind a numbered or trust account. This is contrary to current trends under the Anti-Money Laundering statutes that demand full transparency to allow for effective monitoring. In the post 9/11 environment where issues relating to money laundering and terrorism activities have become increasingly prominent in our society, there is the risk that significant blocks of shares can be controlled by unknown parties concealed behind nominee shareholders. It also facilitates market manipulation as persons engaged in a trade may hide behind such arrangements.

The United Kingdom legislature has addressed this weakness by way of Section 212 of the United Kingdom Companies Act which allows a company to, by notice, require nominee shareholders to disclose details of the beneficial owners of the shares held by them as nominees.

The local Securities Act has a similar provision, however the notice requiring disclosure may only be applied in respect of shareholdings of 10% or more. The local statute is also silent on penalties. The UK statute in contrast provides that a UK company may apply to the court for an order requesting the information. Failure to comply with the order could result in the shares in question being subject to restrictions such as suspension of voting rights, retention of dividends and non transferability for the shares. Failure to comply may also result in a fine, imprisonment or both.

It is critical that this remaining gap in our legislation be closed. As our laws are currently structured it is possible for blocks of shares to be held by nominee shareholders without others knowing who are the beneficial shareholders. In fact the largest 20 listed companies on the London Stock Exchange have all changed their articles to include provisions similar to section 212 of the UK Companies' Act to give themselves adequate protection.

This is an option which companies listed on the JSE should seriously consider by amending their articles in the near future.

Much, much more is demanded of today's managers and personnel in business enterprises than was the case even 20 years ago in a country such as ours. We must learn to exploit technological developments to our advantage, we must not only continually train our employees and upgrade their skills, but we have to imbue in them the absolute necessity for excellence in performance; we have to make them aware that they compete for market share not only with their familiar Jamaican counterparts but with people in far away places whose names we sometimes cannot even pronounce, but who impact our lives in important ways, and most importantly, that we can do all these things while displaying integrity every step of the way.

We believe that through good Corporate Governance there will be full transparency and accountability and that the ultimate winners will be not only the shareholders who have vested their trust in the company, but also other stakeholders such as employees and the wider community, who will all benefit from a strong, robust, sustainable business in their midst.