ethical behaviour & corporate governance - the institute of

ETHICAL BEHAVIOUR

AND

CORPORATE GOVERNANCE

PRESENTATION BY

KOFI KODUAH SARPONG, PhD, CA (Ghana)

TO THE INSTITUTE OF CHARTERED ACCOUNTANTS

GHANA

June 2, 2011 at Koforidua

I. Structure of Presentation

• Introduction

• Factors in economic growth and development

• Defining corporate governance

• Evolution of corporate governance

• Key points to note

• Significance of corporate governance

• Models of corporate governance

• Framework for corporate governance of businesses in Ghana

• Ethical perspectives of corporate governance

• Conclusion: The Future of Corporate Governance in Ghana

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II. Factors in Economic Growth and Development

Three factors:• Human capital

• Physical capital

• Technology

Emergence of a fourth factor:• Institutions- Ensures efficient use of the three key factors• Institutions- Ensures efficient use of the three key factors

“Institutions are the rules of the game in a society or more formally, are thehumanly devised constraints that shape human interaction” (Douglas North,1990- Nobel Laureate)

Corporate governance is an institution in the above sense and is also afundamental necessity for ensuring the efficient development of the three keyfactors of economic growth

3

contd.

Factors in Economic Growth and Development

Human

Capital

Human

Capital

Physical Physical Economic Economic

Co

rpo

rate

Go

ve

rna

nce

4

TechnologyTechnology

Physical

Capital

Physical

Capital

Economic

Growth

Economic

Growth

Co

rpo

rate

Go

ve

rna

nce

III. Defining Corporate Governance

• Cadbury:

The system by which companies are directed and controlled. (describeshow companies ought to be run, directed and controlled.)

• Kyereboah-Coleman and Biekpe:• Kyereboah-Coleman and Biekpe:

It is about supervising and holding to account those who direct and controlthe management. (embodies legitimate lines of accountability by definingthe nature of the relationship between the company and key corporateconstituencies.)

5

Contd. Defining Corporate Governance

• Deakin & Hughes:

Relationship between the internal governance mechanisms of corporationsand society’s conception of the scope of corporate accountability.

• Keasey et al:The structures, processes, cultures and systems that engender the successfulThe structures, processes, cultures and systems that engender the successfuloperation of organizations.

• Maati:The whole set of measures taken within the social entity, i.e. the enterprise,to favour the economic agents to take part in the productive process inorder to generate some organisational surplus, and to set up a fairdistribution between the partners, taking into consideration what they havebrought to the organisation.

6

Contd.

Defining Corporate Governance

• OECD:

The system by which business corporations are directed and controlled.

The Corporate Governance structure specifies the distribution of rights and

responsibilities among different participants in the corporation, such as theresponsibilities among different participants in the corporation, such as the

board, managers, shareholders and other stakeholders and spells out the

rules and procedures for making decisions in corporate affairs. By doing

this, it also provides the structure by which the company objectives are set

and the means of attaining those objectives and monitoring performance.

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IV. Evolution of Corporate Governance

• Emerged with the formation joint-stock companies and democratic

capitalism (share ownership)

• Principal-Agent Paradigm– Fundamental agency problem: Berle & Meane (1932)

– Agency theory: Jensen and Meckling (1976)

• Principal faces 2 main problems:– Selection of most capable managers

– Giving managers the right incentives to put forth appropriate efforts

and make decisions aligned with shareholders’ interests

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contd. Evolution of Corporate Governance

• Corporate failures of recent times internationally:

– Freddie Mac and Fannie Mae

– Enron

– Barings Bank

– Royal Bank of Scotland

– Northern Rock– Northern Rock

– WorldCom

– Merril Lynch

– Anderson

in Ghana:

– Meridian BIAO

– Bank for Housing and Construction

– Cooperative Bank

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V. KEY POINTS TO NOTE

– Shareholders and other stakeholders

– Fairness

– Transparency

– Accountability

– Legal and Regulatory Framework

– Risk Management

– Information Flows

– Responsibility of Management and the Board

– Monitoring of actors

– CEO selection

– Executive compensation

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VI. Significance of Corporate Governance

• Corruption

• Capital Markets

• Profitability

• Corporate Social Responsibility

• Bail-out by governments (implications for taxpayers)

• Capital Formation and Economic Growth

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VII. Models of Corporate Governance

• Shareholder Model – Maximisation of wealth for investors and shareholders

– Developing and improving the formal system of performance, accountability between management and shareholders

– Making decisions based on what is best for investors

• Stakeholder Model – Corporate social responsibility– Corporate social responsibility

– Considers the interest of employees, suppliers, government agencies, communities and groups with which it interacts

– Assumes a collaborative and relational approach to business

• Triple Bottom Line Model – Economic, social, environmental

General push is for the stakeholder or corporate responsibility model bycompanies worldwide. This embraces the Shareholder Model.

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VIII. Corporate Governance Framework in Ghana

• The Companies’ Code, 1963 (Act 179)– All registered corporate entities

• The Securities Industry Law, 1993 (PNDCL • The Securities Industry Law, 1993 (PNDCL

333) and The Securities Industry (Amendment)

Act, 2000 (Act 590)– Regulating stock exchanges, investment advisors, securities dealers,

collective investment schemes which are licensed under the Securities

& Exchange Commission

13

contd.

Corporate Governance Framework in Ghana

• The Ghana Stock Exchange’s Listing

Regulations, 1990 (L.I.1590) Rules on

Takeovers & Mergers- Regulating listed companies- Regulating listed companies

• Bank of Ghana Regulations– Regulating banks and other Financial Institutions

• National Insurance Commission– Regulating insurance companies and insurance brokers

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The above legal framework contains provisions which are relevant for

effective Corporate Governance:

• Board of Directors– The business of the Company is managed by the Board, except where

contd. Corporate Governance Framework in Ghana

– The business of the Company is managed by the Board, except where

the Regulations of the Company prescribe otherwise. The relevant

issues are: membership, independence and expertise.

– Shareholders appoint directors

– Membership qualifications ensure that people of integrity are appointed

– Minimum of 2 directors, maximum to be fixed by each company.

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– No requirement to appoint independent directors

– The Code allows the appointment of Executive Directors. No

prescription for a balance exists.

– Different shareholders interests may be represented.

– CEO duality: the Code does not provide for separation of CEO and

Board Chairman.

contd.


Board Chairman.

– Fiduciary role of Directors

– Provides sanctions in the event of breaches

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• Tripartite Audit Functions– Internal Audit

– External Audit

– Audit committee of the Board

• Audit Committees of the Board- Not a requirement under the Code

contd.


- Not a requirement under the Code

- Required under GSE and BOG Rules

- Good practice

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- Terms of Reference of Audit Committees

- To monitor the integrity of financial statements of companies and any

formal announcement relating to the company’s financial performance

- Reviewing the company’s internal financial and other controls

- To monitor and review the effectiveness of the company’s internal and

external audit functions

contd.


• Quality Control in the Auditing Process and

application of Ethical standards

• Mandatory Rotation of external auditors-BoG sets

the pace 18

• Financial Reporting & Disclosures– Reporting Standards - IFRS

– Mandatory Disclosures

– Voluntary Disclosures

– Reporting should be timely and integrity-driven

– Adequacy of Disclosures to Stakeholders???

contd.


– Adequacy of Disclosures to Stakeholders???

• Investigating Stakeholder information needs

• IFRS and legal requirements being minimum

• Enforcement of mandatory disclosures- Trends in Ghana?

• Voluntary disclosures may be necessary to ensure more balanced

reporting

�Value-added statements

�Environmental Reporting

�Other non-financial reporting 19

• Disclosure choices are cost-benefit issues (paradoxical)- ethical conduct is necessary here!

• Risk Management– Types of Risks

• Reputation risk

contd.


• Reputation risk

• Financial risk

• Physical risk

• Credit risk

• Operational risk

• Other risks???

– Focus on Risks to ensure a stable organization and avoid any upheavals

– Effective internal controls and related monitoring required

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• Monitoring

– Board should ensure that good practices are implemented

– Board should carry out self-assessment exercises

– External regulators, i.e. Registrar of Companies, SEC, BOG, GSE,

contd. Corporate Governance Framework in Ghana

– External regulators, i.e. Registrar of Companies, SEC, BOG, GSE,

NIC, ICAG, should perform their roles

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IX. Ethical Perspective of Corporate Governance

Definition of Ethics:

Ethics may be defined as a system of moral principles. It may also be viewed

as a branch of philosophy dealing with right and wrong and the morality of

motives and ethos.

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Moral principles differ from person to person so are the notion of what is right

or wrong, belief systems and motives.

What then is ethical behaviour? (If I may ask) It appears to me that it is a

personal definition – knowledge of which helps define the choices we make,

the goals we attain and the path our lives navigate.

contd.

Ethical Perspective of Corporate Governance

Our ethical portfolio is shaped by our EVERYTHING: experiences, peers,

religious beliefs, edicts from a power we deem higher than ourselves (e.g.

International laws, Ayatollah, Pope, Supreme Consciousness), people to whom

we are exposed and even our decision to seek out models of ethical behaviour.

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Dr. Elmer Hess, President of the American Medical Association, has observed:

“If a man is good in his heart, then he is an ethical member of any

group in society. If he is bad in his heart, he is an unethical member”.

He adds that to him,

“the ethics of medical practice is as simple as that”.

contd.


• Ethics is concerned with what we are and not just what we do. It is

obedience to the unenforceable

• Four Cardinal Virtues for Ethical Behaviour• Prudence – good judgment, competence, practical reasoning• Prudence – good judgment, competence, practical reasoning

• Justice (fairness)

• Courage (fortitude) – not foolhardiness or recklessness

• Self-mastery – discipline or temperance

• Trust, integrity, fairness matter and are crucial

to the bottom line.

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contd.


• Adequacy of Legal Compliance – proven to be inadequate.

– lacks the moral firepower to restore confidence and build trust

– Many abuses in the past were entirely legal

– Diminished capacity of the uninformed in understanding sophisticated

models e.g. derivatives

– Well-counseled executives have many tricks

• Ethical Dimensions– Relationships and Building trust (in and outside the organization)

– Concerned with reasons, motives, intentions

– Embraces the letter and spirit of regulations

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contd.


Board’s Role in Ethical Leadership:

• Should make ethical standards part of the corporate agenda

• Have broad ethical awareness

• Lead in setting ethical standards

• Ensure enforcement of ethical behaviour• Ensure enforcement of ethical behaviour

• Build commitment and respect for values

• Meet social obligations

• Train employees, management and the board in best business

practices

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X. CONCLUSION

Future of Corporate Governance in Ghana– Embrace Stakeholder Model

– Ethical Leadership Principles and expectations

– Strengthen disclosure practices; enforce mandatory fully and encourage voluntary disclosures

– Develop company purpose statements that cover stakeholder interests

– Implement Board self-assessment

– Rigorous board membership requirements

– Requisite competencies in board composition

– Ask tough questions about controversial issues and embrace objectivity

– Strengthen capacity of regulatory agencies

– Review the companies’ code to strengthen its corporate governance credentials

– Debate on executive compensation

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References

• Berle, A. A. & Means, G.C 1932, The Modern Corporation and Private Property, Macmillan, New York.

• Cadbury, A, (1992), Report of the Committee on the Financial Aspects of Corporate Governance. Gee Publishing, London.

• Deakin, S & A. Hughes (1997), “Comparative corporate governance: An interdisciplinary agenda”, In Enterprise and Community: New Directions in Corporate Governance

• Ghana Companies Code (1963), Ghana, Companies Code, (Act 179), Act of Parliament, Accra.

• GSE (1990), Ghana Stock Exchange Listing regulations, L.I. 1509, Ghana Stock Exchange Publication, Accra.

• GSE (2001), Ghana Stock Exchange Factbook, Ghana Stock Exchange Publication, Accra.

• GSE (2002), Ghana Stock Exchange, Official Trading Results, Ghana Stock Exchange Publication, Accra

• Jensen, M. C & Meckling, W. H. 1976, “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure”, Journal of Financial Economics, vol 3, pp. 305-350.

• Kyereboah-Coleman, A. & Biekpe, N., (2006), The Relationship between board size, board composition, CEO duality and • Kyereboah-Coleman, A. & Biekpe, N., (2006), The Relationship between board size, board composition, CEO duality and firm performance: Experience from Ghana. Corporate Ownership and Control Journal, Vol. 4 (2)

• Manual on Corporate Governance in Ghana (December, 2000. Prepared by the International Finance Corporation (IFC), Carl Bro Intelligent Solutions and African Management Services Company (AMSCO).

• Mayer, F. (1997), “Corporate governance, competition, and performance”, In Enterprise and Community: New Directions in Corporate Governance, S. Deakin and A. Hughes (Eds), Blackwell Publishers: Oxford

• Mensah, S., K. Aboagye, E. Addo and S. Buatsi (2003) “Corporate Governance and Corruption in Ghana” A Report prepared for IDRC CRDI ACMF CIPE October 2003

• Mensah, S. (2002), “Corporate governance in Ghana: issues and challenges”, paper presented at African Capital Markets Conference, December.

• Mensah, S. (2000), “Corporate governance in Africa”, paper presented at the Consultative Meeting on Corporate Governance in Africa, Kenya, October.

• Metrick, A. & J. Ishii, 2002, “Firm level corporate governance”, Global Corporate Governance Forum, Research Network

• Securities and Exchange Commission (2001), Corporate Governance: Code of Best Practices, Ghana Accra.

• S. Deakin and A. Hughes (Eds.). Blackwell Publishers: Oxford http://soc.kuleuven.be/io/ethics/paper/Paper%20WS4_pdf/Surendra%20Arjoon.pdf

• Tsamenyi, M., Enninful-Adu, E. Onwumah J., Disclosure and corporate governance in developing countries: evidence from Ghana, Managerial Auditing Journal 2007

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