Corporate governance in an emergent economy: a case of Ghana

• Date: 02 February 2015
• DOI: https://doi.org/10.1108/CG-04-2013-0051
• Pages: 52-84
• Published date: 02 February 2015
• Author: Otuo Serebour Agyemang,Monia Castellini
• Subject Matter: Strategy,Corporate governance

Corporate governance in an emergent

economy: a case of Ghana

Otuo Serebour Agyemang and Monia Castellini

Otuo Serebour Agyemang

is a Research Fellow and

Monia Castellini is a

Researcher both are

based at Department of

Economics and

Management, University

of Ferrara, Ferrara, Italy.

Abstract

Purpose –The purpose of this study is to examine corporate governance practices in an emerging

economy. It focusses on how ownership control and board control systems operate in corporate

organisations in an emergent economy, assuming that these systems are essential for enhancing good

corporate governance practices in emerging countries.

Design/methodology/approach –The paper builds on descriptive multiple-case study with multiple

units of analysis to divulge how ownership control and board control systems function to ensuring

effective corporate governance in publicly listed corporate organisations in Ghana. A criterion-based

sampling technique is used to select the companies. Thereafter, three techniques of data collection are

used to gather data from the companies: archival records, semi-structured interviews and observation.

Findings –By linking the gathered data to the paper’s theoretical propositions, the study highlights that

all the companies are characterised by the presence of large shareholders, and, in consequence, they

tend to exert extensive control over the activities of the companies through their involvement in the

decision-making processes. However, whilst the presence of large shareholders has the tendency to

solve the agency problem, it poses challenges in regards to minority shareholders’ interests in these

corporate organisations. The study also reveals that boards of directors tend to exercise control over

corporate organisations when majority shareholders stop interfering in their dealings. This implies that

when major shareholders fully partake in corporate decision-making processes of companies, boards

of directors seem to be sheer advisory bodies to management.

Research limitations/implications –This is a paper to shed light on corporate governance practices

in four large publicly listed corporate organisations on the Ghana Stock Exchange, so the observable

facts do not apply to other emergent economies. In addition, the sample does not represent all

corporate organisations in Ghana; thus, the empirical observations cannot be generalised to other

organisations that have not been included in this study. However, the empirical results can be applied

to other similar corporations in Ghana and other emergent economies in an analytical sense. With the

application of inductive reasoning, the results can be applied to provide important appreciation in an

effort to understand the structure of corporate governance practices in organisations in developing

countries.

Practical implications –A comparative analysis of the empirical observations from this study and the

recommended guidelines of corporate governance of Ghana has been carried out, and aspects in

which organisations need to reform and improve to fully comply with the guidelines are highlighted:

director independence, director evaluation, introduction of new directors and board education. This

could possibly be the foundation upon which corporate governance structures in these organisations

can be restructured and further enhanced.

Originality/value –The majority of the studies of corporate governance in emergent economies have

used quantitative techniques to examine the relationship between corporate governance mechanisms

and firm performance. However, this study takes a different approach to examine corporate governance

practice in an emergent economy by using a comprehensive and defensible qualitative analysis to

examine relations between ownership structure and shareholder control, and board of directors and

board control. In addition, it highlights how ownership and board control systems interact in corporate

organisations in emergent economies.

Keywords Case studies, Corporate governance, Board of directors, Corporate ownership,

Boardroom effectiveness, Audit committees

Paper type Case study

Received 24 May 2013

Revised 10 January 2014

Accepted 27 January 2014

PAGE 52 CORPORATE GOVERNANCE VOL. 15 NO. 1 2015, pp. 52-84, © Emerald Group Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-04-2013-0051

1. Introduction

Corporate governance has its roots from the emergence of capitalism and modern stock

organisations, the development of international trade and the enormous growth of

multinational corporations during the “industrial revolution” in the early part of the

nineteenth century (Erismann-Peyer et al., 2008). It has recently received much attention as

a result of the incidence of corporate frauds, accounting scandals, excessive

compensation packages, insider trading, self-dealing, misleading disclosures and

possible civil and criminal liabilities of corporate organisations. Accordingly, these have

alerted both internal and external stakeholders to intensify their inspection of the

unassailability of corporate governance practices within corporations (Mark, 2011). In

addition, many economies are incrementally making reforms to corporate governance

practices to raise the entire standards of corporate governance and to offer corporate

organisations possible financial and investment benefits (Grimminger and Benedetta,

2013). However, there has been a spate of arguments about the “essential” principles of

effective corporate governance in the sense that this concept develops and expands, and

it changes in accordance with new insights and challenges in the corporate world (Jacques

du Plessis Hargovan and Bagaric, 2011).

Issues of corporate governance are germane to emerging countries, in view of the

assertion that these economies lack vibrant, long-established financial institutions to

address matters pertaining to corporate governance (McGee, 2009). The widespread

existence of small enterprises that do not have their shares listed, and of large family-,

foreign- and or state-owned enterprises (SOEs) whose stocks are also not widely listed

locally, is argued to be the obvious logic behind the absence of corporate governance

issues in these economies (Oman et al., 2003). However, the view that issues of corporate

governance are less relevant to countries with insignificant amount of large corporate

organisations with widely traded stocks are flawed (McGee, 2009;Berglof and Claessens,

2004;Oman et al., 2003). Just as good public governance allows the citizenry to effectively

ascertain whether their interests are being served, corporate organisations, irrespective of

their sizes and locations, must also strive to strengthen their governance practices so that

their shareholders can make reasonable investment decisions. Currently, virtually all

developing, transition and emerging market economies are faced with one pressing

concern: how to establish the groundwork for long-term economic performance and

competitiveness in diverse ways. But the setting up of such foundation to embark on such

tasks cannot be materialised without the existence of good corporate governance in these

economies. This has, currently, prompted governments, directors, corporate owners,

corporate managers and other stakeholders in these economies to realise the

indispensability of good corporate governance practice.

In Ghana, more and more corporate organisations are being induced to apply good

corporate governance to effectively and efficiently compete on the international market.

The recommendations of the Companies Code 1963 (Act 179), Security Industry Laws

1993 (PNDCL 333) as amended by the Securities Industry Act, 2000 (Act 590), as well as

the listing regulations 1990 (L.I. 1,509) of Ghana Stock Exchange (GSE), outline the roles

of the board, directors and auditors. They also provide shareholders’ rights and regulatory

framework for the setting up and operations of corporate organisations in corporate

governance practice. The Institute of Directors (IoD-Ghana), the Private Enterprise

Foundation and the State Enterprises Commission are all involved in the enhancement of

effective corporate governance practice in Ghana.

There has been quite a number of programmes to addressing corporate governance

issues in Ghana. In 1999 and 2000, several seminars on issues of corporate governance

were hosted by the Ghana Institute of Directors, in partnership with the Commonwealth

Association of Governance. A survey on Ghana’s top 100 corporate organisations and

some SOEs was presented during those conferences. The aim of the survey was to

examine the prevailing situation with regards to corporate governance practice in both

VOL. 15 NO. 1 2015 CORPORATE GOVERNANCE PAGE 53

privately owned and SOEs. The report revealed that good corporate governance practice

was gaining roots in the operations of corporate organisations in Ghana. Nonetheless, the

IoD recommended some measures for enhancing corporate governance practice in

Ghana. These are: the strengthening of existing legal and regulatory frameworks that

demand more transparency to back solid and stable corporate governance practice; and

the clarification of governance roles and responsibilities. In 2001, a conference sponsored

by the Centre for International Private Enterprise was held in Accra to discuss issues

pertaining to the significance of effective corporate governance for sustainable growth in

West African economies.

The report of this conference highlighted the main constraint confronting corporate governance

practice in SOEs in Ghana. Government interference in the affairs of these corporate

organisations raises a lot of pressing concerns in terms of corporate governance. This kind of

interference leads to a rarity of effective corporate governance practice in these corporate

organisations. Etukudo (1999), in a report, notes that this rarity of effective corporate

governance practice in Sub-Saharan African economies mostly arises from the unclear

relationship among the state, as the owner of the corporate organisations, the board

and senior management. The rarity of good corporate governance in state-owned

corporate organisations in Ghana has led to abysmal performance and failure of these

corporate organisations. Lack of institutional and legal reforms that ensure that

managers of state-owned corporate organisations are independent in carrying out their

day-to-day activities while also strengthening their accountability resulted in poor

performance of these corporate organisations.

In 1983, the government of Ghana considered the importance of undertaking

comprehensive reforms of state-owned corporate organisations in Ghana by introducing

the Economic Recovery Programme. These reforms included:

a policy reform to ensure that state-owned corporate organisations operate in a

commercial way;

institutional and legal reforms;

rationalisation of state-owned corporate organisations via divestiture and mergers;

rehabilitation of selected profitable state-owned corporations;

improvement in the management of state-owned corporate organisations; and

restoring financial solvency and discipline.

With the establishment of the State Enterprises Commission law, 1987 (PNDCL 170), these

reforms were validated. To complement these reforms, the divestiture implementation

programme was launched in 1987, aimed at encouraging private sector growth by limiting

the role of the state in the economy, as well as to relieve the state of the drain on its scarce

resources. Following these reforms, a lot of state-owned corporate organisations have been

divested. Some of them have been successful in their performance. Although not all have

been successful, privatisation of SOEs is vitally important for effective corporate

governance practice, in that most state-owned corporate organisations do not comply with

the existing rules and regulations in relation to corporate governance, and this eventually

affects their performance.

Socio-economic development of Africa and the world, in general, raises alarm for the need

to create an atmosphere to appreciate corporate governance practice in Ghana. The New

Partnership for African Development is a vision that was adopted by African leaders to

create a new partnership between the Western and African countries in achieving

socio-economic development of the African region. This initiative considers good corporate

governance as one of the vital issues for poverty reduction through investment-driven

economic growth and economic governance. This initiative highlights the fact that, to

reduce poverty in an economy, effective corporate governance practice should be the

PAGE 54 CORPORATE GOVERNANCE VOL. 15 NO. 1 2015