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
2
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 are the rules of the game in a society or more formally, are the
humanly devised constraints that shape human interaction” (Douglas North,
1990- Nobel Laureate)
Corporate governance is an institution in the above sense and is also a
fundamental necessity for ensuring the efficient development of the three key
factors of economic growth
3
contd.
Corporate Governance
Factors in Economic Growth and Development
Human
Capital
Physical
Capital
Economic
Growth
Technology
4
III. Defining Corporate Governance
• Cadbury:
The system by which companies are directed and controlled. (describes
how companies ought to be run, directed and controlled.)
• Kyereboah-Coleman and Biekpe:
It is about supervising and holding to account those who direct and control
the management. (embodies legitimate lines of accountability by defining
the nature of the relationship between the company and key corporate
constituencies.)
5
Contd. Defining
Corporate Governance
• Deakin & Hughes:
Relationship between the internal governance mechanisms of corporations
and society’s conception of the scope of corporate accountability.
• Keasey et al:
The structures, processes, cultures and systems that engender the successful
operation 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 in
order to generate some organisational surplus, and to set up a fair
distribution between the partners, taking into consideration what they have
brought 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 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.
7
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
8
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
– 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
10
VI. Significance of Corporate Governance
•
•
•
•
•
•
Corruption
Capital Markets
Profitability
Corporate Social Responsibility
Bail-out by governments (implications for taxpayers)
Capital Formation and Economic Growth
11
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
– 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 by
companies worldwide. This embraces the Shareholder Model.
12
VIII. Corporate Governance Framework in Ghana
• The Companies’ Code, 1963 (Act 179)
– All registered corporate entities
• 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
• Bank of Ghana Regulations
– Regulating banks and other Financial Institutions
• National Insurance Commission
– Regulating insurance companies and insurance brokers
14
contd.
Corporate Governance Framework in Ghana
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
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.
15
contd.
Corporate Governance Framework in Ghana
– 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.
– Fiduciary role of Directors
– Provides sanctions in the event of breaches
16
contd.
Corporate Governance Framework in Ghana
• Tripartite Audit Functions
– Internal Audit
– External Audit
– Audit committee of the Board
• Audit Committees of the Board
- Not a requirement under the Code
- Required under GSE and BOG Rules
- Good practice
17
contd.
Corporate Governance Framework in Ghana
- 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
• Quality Control in the Auditing Process and
application of Ethical standards
• Mandatory Rotation of external auditors-BoG sets
the pace
18
contd.
Corporate Governance Framework in Ghana
• Financial Reporting & Disclosures
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–
–
–
–
Reporting Standards - IFRS
Mandatory Disclosures
Voluntary Disclosures
Reporting should be timely and integrity-driven
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
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contd.
Corporate Governance Framework in Ghana
• Disclosure choices are cost-benefit issues (paradoxical)- ethical conduct is
necessary here!
• Risk Management
– Types of Risks
• 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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contd. Corporate
Governance Framework in Ghana
• 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,
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.
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.
22
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.
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”.
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contd.
Ethical Perspective of Corporate Governance
• 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
Justice (fairness)
Courage (fortitude) – not foolhardiness or recklessness
Self-mastery – discipline or temperance
• Trust, integrity, fairness matter and are crucial
to the bottom line.
24
contd.
Ethical Perspective of Corporate Governance
• 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
25
contd.
Ethical Perspective of Corporate Governance
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
• 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
27
References
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