Good
corporate governance reduces emerging markets’ vulnerability to financial
crises, reinforces property rights, reduces transaction cost and leads to
capital market development. What trends are being followed in Ghana and Kenya?
1.0
The need for good corporate
governance practice in developing countries cannot be over emphasized. Good
corporate governance practice contributes to sustainable economic growth and
development by enhancing the performance of companies and increases their
access to outside capital. [i ] Good corporate governance
practice leads to significant increase in economic value of firm, high
productivity and low risk of systemic financial failure for countries. [ii ] On the other hand, weak
corporate governance framework reduces investor confidence and discourages
outside investment.
Even
though it is widely accepted that the concept of corporate governance
originated from the Joint Stock Companies Act of 1844, and the Limited
Liability Act of 1855 in the UK, other scholars maintain that corporate governance
began more commonly spoken of in the 1980s. According to supporters of the
later view, the 1980s was characterized by stock market crashes and failure of
many corporations in different parts of the world due to poor governance
practices. Whatever the case may be the fact remains that both developed and
developing countries have placed more emphasis on good corporate governance
practices across the globe as means of enhancing and sustaining growth and
development.
FOCUS
ON GHANA AND KENYA
Ghana
and Kenya are emerging markets in West and East Africa. Both countries are
former British colonies and members of the Commonwealth of Nations. These
countries for the most part adopted the British code of corporate governance
which is aimed at addressing agency problem that exists between manager and
shareholders. The primary focus of the corporate laws of these countries is to
provide protection to shareholders and stakeholders against manager . This
section of the paper examines key provisions of the Securities and Exchange
Commission (SEC) of Ghana and the Capital Market Authority (CMA) of Kenya.
Focus
on Ghana’s SEC
There are several documents
that contain regulatory framework for effective corporate governance practice
in Ghana. The Companies Act, 1963 (Act 179), the Securities Industry Law 1993
(PNDCL 333) as revised by the securities Industry Act 2000 (Act 590), the
Securities Exchange Commission Guideline 2010 and the listing regulations, 1990
(L.I.1509) of the Ghana Stock Exchange, [iii ] are documents that
contain provisions regulating corporate governance. However, this section of
the paper examines the SEC guidelines and highlight key provisions on
shareholders related issues.
The Board of Directors, CEO and
independent directors related issues
According to section I (1) of
the SEC guidelines[ iv ],
the principle objective of the board of directors of a corporate entity is to
ensure that the corporate body is properly managed in order to protect and
enhance shareholder value and to meet the corporate body’s obligations to
shareholders, the industry in which it operates, and the law.
Section I (14) provides that
there should ideally be a separation between the roles of chairman and managing
director/Chief Executive Officer particularly in listed companies unless there
are specific reasons which militate against such separation or as may be in the
case of smaller corporate bodies, the cost of separation is uneconomical. The
function of the board chairman, according to section I (19) include: (i) ensure
that the board meets regularly and that meetings of the board are conducted in
a proper manner; (ii) ascertain the views and/or the decision of the meeting on
the issues being discussed, etc.
Another key issue highlighted
in section one of the guidelines is the appointment and qualifications of
non-executive directors. It is clearly spelt out in section I (22) that the
appointment of non-executive directors should ordinarily be a matter for the
board as a whole and the selection process should be based on merit. In
addition, section I (23) states that a non-executive director should deemed
independent if he is not a substantial shareholder of the corporate body; has
not been employed by the corporate body in an executive capacity for the
previous three years; is not a professional adviser or consultant to the
corporate body, etc.
Committees of the Board
The code directs every
corporate organization whom the code is directed at to establish audit and
remuneration committees. However, section II (42) clearly state that the board
should constitute such committees, as it may deem appropriate to assist it in
the discharge of its functions and responsibilities. Section IV (92) of the SEC
guidelines provides that to ensure continuity of effective auditing, a person
involve in auditing must be frequently changed or rotated to allow new
procedures into the audit work.
The audit committee, according
to section II (47) should comprise at least three directors, the majority of
whom should be non-executive and the membership of the audit committees should
ideally comprise directors with an adequate knowledge of finance, accounts and
the basic element of the laws under which the corporate body operates or is
subject to. The remuneration committee, according to section II (57) should
comprise of a majority of non-executive directors. The code unequivocally states in section II
(58) that executive directors who are members of the committee should exclude
themselves from deliberations concerning their own remuneration.
Focus
on Kenya’s CMA
The Company Act 1962 contains
the statutory law governing corporate governance in public listed companies in
Kenya. [v] Other matters with respect
to corporate governance in Kenya including director duties and shareholder
protection are dealt within the Company Act[ vi ]. The Capital Markets
Authority (CMA) Act 2002, the Nairobi Stock Exchange Regulations and Penal Code
c.63 are other regulations that govern Kenya’s corporate governance practice.
This section of the paper focuses on key provisions of the CMA guidelines in
regard to enhancing good corporate governance practice in Kenya.
The board of Directors and
independent directors
Section 2.1.4 of the CMA code
states that the board should comprises of executive directors and non-executive
directors (including at least one third independent and non- executive
directors) of diverse skills or expertise in order to ensure that no individual
or small group of individual dominate the boards’ decision-making process. Independent
director is classified as director who has not been employed by the Company in
an executive capacity within the last five years, not associated to an adviser
or consultant to the Company or a member of the Company’s senior management or
a significant customer or supplier of the Company or with a not-for-profit
entity that receives significant contributions from the Company; or within the
last five years, has not had any business relationship with the Company (other
than service as a director) for which the Company has been required to make
disclosure.
The role of the Chairman and
Chief Executive
According to section 2.2.1,
there should be a clear separation of the role and responsibilities of the
chairman and chief executive, which will ensure a balance of power of authority
and provide for checks and balances such that no one individual has unfettered
powers of decision making. Where such
roles are combined a rationale for the same should be disclosed to the
shareholders in the annual report of the Company.
Board committees
Section 2.1.1 provides that the
board of all listed companies should establish relevant committees and delegate
specific mandates to such committees as may be necessary. However, emphasis is
placed on the establishment of an audit, nominating and remuneration
committees.
Comparing
and contrasting the SECs and CMA
What is there in common?
Ghana and Kenya are two former
British colonies. Both countries adopted the British common Law system and some
co-values including basic corporate governance norms. This section of the
paper, haven view the Ghana Securities Exchange Commission guidelines and the
Capital Markets Authority guidelines, compares the two documents to identify
what they have in common.
Part I, paragraph 12 of the SEC
guidelines and section 1.3 of the CMA guidelines clearly point out that these
guidelines were not develop base on corporate governance problems of these
countries. Both countries adopted segment of the Organization for Economic
Cooperation and Development (OECD), the United Kingdom, and the Commonwealth
Association for Corporate Governance guidelines on corporate governance. While
it is true that provision adopted from these documents would help enhance good
corporate governance practices in these countries, the governance problem that
most countries of these organizations and region seek to address is quite
different from governance problem in Ghana and Kenya. In the UK, for example,
governance framework aimed at protecting managers against shareholders. On the
other hand, Ghana and Kenya are face with agency problem that exist between
majority or controlling shareholders and minority shareholders. Thus, effort to
promote good corporate governance practice should focus more on the protection
of minority shareholders against majority shareholders.
The idea of independent
director as provided for in section 2.1.4 of the CMA, and section I (22) of the
SEC guidelines as an approach to address corporate governance issues in these
countries is a complete misplaced priority. Independent directors are necessary
for countries (the US for instance) where diffused shareholding is practiced
and corporate entities are separated from the owners/shareholders. In this
case, there could be independent directors because no single shareholder has
the power to appoint directors. Besides, the intent of independent director is
to have outside force (s) monitoring management on behalf of shareholders since
shareholders are completely separated from the entity. In the case of Ghana and
Kenya, where controlling shareholders have among other power, the power to
appoint and dismiss directors who are not working in their interest, the chance
of director independence is dam .
Section I (14) of the SECs and
section 2.2.1 of the CMA guidelines provide for separation of the role and
responsibilities of the board chairman and Chief Executive Office. The intent
for these provisions, as spell out in both the SEC and CMA guidelines is to
prevent the concentration of too much power in one person’s hand which makes
the entity vulnerable to abuse. Lois (2008) found that reduce agency cost and
improve corporate performance would be achieved through the greater
independence in decision making that would be achieved by separating the role
of the CEO and Chairman. However, it is doubtful whether separating the role of
the CEO and Chairman is likely to solve the corporate governance problem in
Ghana and Kenya. The doubt stems from the fact that majority shareholders are
the controller of companies in Ghana and Kenya and the board is likely to act
in the interest of majority shareholders as they (majority shareholders) have
among other power, the power to hire and fire management who does not act in
their interest. [vii]
Identifying their differences
Despite the similarity, the CMA
and SECs guidelines have some important differences. This sub-section points
out some basic differences in the two documents.
Section IV (92) of the SEC
guidelines provides that to ensure continuity of effective auditing, a person
involve in auditing must be frequently changed or rotated to allow new
procedures into the audit work. The provision mentioned above however did not
specified timeframe within which the rotation should take place. On the other
hand, although the MCA provides for the establishment of audit committee and
the process of external audit, the code is yet to include the rotating of
auditor in its provisions.
A key aspect of Ghana’s
corporate governance framework is the viability of legal recourse against
director or insider. Any shareholder may apply to court to cancel an Annual
General Meeting (AGM) resolution for unfair discrimination or decisions
contradicting the company bylaw ; any shareholder can also sue directors on
their duty of care and diligence. [viii] The law allows a 5%
shareholder (10% for private firms) to call an AGM and add items onto the
agenda. In addition, shareholders have oppression rights in case of unfair
discrimination whereby the court may order the company or other shareholders to
buy out the aggrieved shareholder. [ix] On the other hand, in
Kenya the decision to sue rests with the board of directors as only the board
can bring proceeding in the company’s name. [x] No advocate in the name of
a shareholder can bring proceeding against a company without the authority of
the board.
Conclusion
Documents that contain
regulatory framework for effective corporate governance practice in Ghana and
Kenya are developed with less attention on the actual agency problem in these
countries. The provisions on independent director and separation of the duties
and responsibilities of the CEO and Chairman of the board cannot effectively
promote good corporate governance since controlling shareholders to a large
extent influence the hiring and firing of directors. Both countries for the
most part practice the insider model of corporate governance, but adopt the
British corporate governance code which focus is to protect corporate owners
against manager whereas the governance problem in these countries is between
minority and majority shareholders. There is a huge disparity between what
corporate laws in these seek to address and what exists in reality. It is
important for other emerging economics in Africa to take note from Ghana and
Kenya with respect to adopting corporate governance code that best address
their corporate problem.
Although there are some
disadvantages (such as wasteful litigation in the form of multiple actions by
minority shareholders and holding the company hostage by disgruntled minority
shareholders where they do not agree with the decision of the company) of
minority shareholder sue, it would best protect minority shareholders in these
countries with help of a sound legal system. Even though the World Bank (2008)
found the minority shareholder rarely use legal recourse against director due
to high costs and delay associated with court system in Ghana, I must admit
that the move by Ghana is in line with good corporate governance practice.
A full independence of the
board, not from within itself, but from the external influence of majority
shareholder at the expense of minority shareholders, and rules allowing smaller
shareholders to be represented on the board by means of cumulative
voting/proportional representation can
better address agency problem that exist within these countries as well as
enhance good corporate governance practices.
(P. Samuel Goweh a student of Jindal School of
International Affairs, Jindal Global University)
[1] See the Report on the Observance of Standards and
Codes (ROSC) Corporate Governance, Corporate Governance Country Assessment
Ghana May 2005. Available here: https://openknowledge.worldbank.org/bitstream/handle/10986/8470/358770GH0ROSC010governance01PUBLIC1.pdf?sequence=1
[1] ibid
[1] Prospect
and Challenges of Corporate Governance in Ghana; OtuoSerebourAgyemang, Emmanuel
Aboagye and Aaron Yao OfoeAhali, International Journal of Scientific and
Research Publication, Vol. 3. May, 2013
[1]
Available here: http://www.ecgi.org/codes/code.php?code_id=310
[1]
International Company and Commercial Law Review 2008; The Law affecting
corporate governance in Kenya: a need for review. Lois M. Mausikali , 2008
[1] See
link here: http://www.kenyalaw.org/kl/fileadmin/pdfdownloads/Acts/Companies%20Act.pdf
[1]
International Company and Commercial Law Review 2008; The Law affecting
corporate governance in Kenya: a need for review. Lois M. Mausikali , 2008
[1] Report
on the Observance of Standards and Codes (ROSC) Corporate Governance, Corporate
Governance Country Assessment Ghana May 2005. Available here: https://openknowledge.worldbank.org/bitstream/handle/10986/8470/358770GH0ROSC010governance01PUBLIC1.pdf?sequence=1
[1] ibid
[1]
International Company and Commercial Law Review 2008; The Law affecting
corporate governance in Kenya: a need for review. Lois M. Mausikali , 2008
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