Good corporate governance reduces emerging markets’ vulnerability to financial crises, reinforces property rights, reduces transaction cost and leads to capital market development. P. Samuel Goweh explores the trends being followed in Ghana and Kenya.
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.
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.
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 betweenminority 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