Feature Article of Friday, 6 January 2012
Columnist: Sakyi, Kwesi Atta
By Kwesi Atta Sakyi
1st January 2012
The word corporate is derived from the Latin word corpus or body and governance is derived also from Latin and it means helmsman or one who steers the direction of a ship so that it safely and successfully sails to port to dock. Therefore, corporate governance is about how the affairs of a body corporate or limited liability company are organized to achieve the objectives of profit maximization, increasing shareholders’ value and meeting its mission statement objectives. Every limited liability company is governed by a memorandum of incorporation or association which serves as its constitution, defining its relationship with the external world. Internally, it is governed by its Articles of Association which serve the equivalent of by-laws, stating how meetings are to be held, powers and duties of directors, among others. All companies, whether private or public in the UK, are governed by the Company Law 2006 as amended and also by the UK Corporate Governance Code published by the London Stock Exchange.
Of course, companies as fictitious legal personalities are treated in law as separate legal personalities with capacity to enter into legal relationships, sign contracts under their own seal, own property, sue and be sued. A company is, therefore, in existence on its own as a separate legal entity, apart from its owners, the shareholders. In a closed corporation such as a private limited company, majority of the shareholders are family members with no problem of a dawn raid or takeover by hostile black knights. Therefore, private limited companies do not face too much of the problem of divorce between ownership and control because they are not allowed to float shares on the stock exchange nor are they required by law to make their accounts public. On the other hand, in public limited companies, there is the possibility of divorce between ownership and control as the open corporation has large operations and they appoint directors and managers as agents to manage their estates. This principal-agent relationship creates numerous problems.
The famous legal precedent is that of Dodge Vs Ford in 1911 where it was ruled that Ford erred in law by distributing surplus profits to customers without consulting his principal, Dodge. It was Dodge who had bankrolled him to start his business of car manufacturing. This issue of principal-agent relationship is the crux of corporate governance. Are managers and directors going to act in the best interest of the corporation, their principals (employers), other stakeholders, in the public interest or themselves? This is a million dollar question. Many corporate failures such as Enron, BCCI, Barings Bank, WorldCom and others have been attributed to malfeasance and insider-trading by directors.
DUTIES OF DIRECTORS
Directors are people of clout, experience and sound track record who are head-hunted to populate the board of corporate entities. Some are Executive Directors (EDs) such as the Chief Executive Officer (CEO) or the Managing Director (MD). Others are Non-Executive Directors (NEDs) who are nominated or elected onto the board from outside as independent, objective and detached directors with no formal business connections with the company. Non-Executive Directors are required to be available at least 3 days in a month to attend to their duties on the board. They are the ones who populate the board nominations, audit, risk and remuneration committees. Non-Executive Directors are often recruited as ex-officio board members in the case of public institutions or charities or non-profit organizations. For listed companies, it is recommended that they fit the bill by being recruited through rigorous recruitment procedures. All directors have to avoid conflict of interest such as using their position for personal material or pecuniary advantages. Directors ought to have high moral fibre to have personal ethical principles, to be au fait and savvy about the Combined Code, UK Governance Code, OECD Code, recommendations of the EU Social Charter, Sarbanes-Oxley Act 2002 in the USA, various CG Codes, Reports and Commissions on CG such as Cadbury Report, Greensbury Report, Hampel Report, Turnbull Report, Kings Report and Higgs Report, among many others. Corporate Governance requires that companies should be run in an efficient, transparent, responsible, profitable and fair manner. Transactions should be captured and recorded as true and fair record of trading and as much as possible, no window dressing, creative accounting or doctoring and massaging the figures or cooking them up. It requires that there should be no secret or off balance book accounts and that accounting records should be kept according to international financial standards or best practice.
Directors are supposed to make statutory and voluntary disclosures about the company’s affairs for the sake of stakeholders. They should treat all stakeholders fairly and they have the fiduciary duty of ensuring that they use their sound knowledge to manage various risks that can occur and affect the business’ survival as a viable going concern. Directors are expected to abide by the recommendations made by the Institute of Directors, by not engaging in any activity that will dent the image or reputation of the company. It is expected that directors obey the law and ensure that the legal obligations of the company are met. They have a duty to institute internal controls of checks and balances to avoid internal process failures. They have oversight functions of supervising all the functional areas and monitoring activities. They prepare the annual reports to the AGM and they should submit themselves to periodic appraisal and upgrade their knowledge and skills through training and self development. They are expected to act as boundary spanners by integrating the internal and external environments of the company to avoid strategic drift. Directors should be rotated every 3 years and they should offer themselves to be voted for. It is a condition sine qua non and a desideratum for directors to fashion strategies to build the goodwill and image of the company through activities such as corporate social responsibility, establishing ethics committees, leading the pack in change management, driving the culture of the company to establish rapport among all stakeholders. In Zambia for instance,, the Institute of Directors (IOD) is vibrant and they have organized conferences, some of them under the auspices of the UN and with eminent world-renowned authorities such as Professor King of South Africa in attendance. Ghana, being a developing country, is not yet vulnerable to big time corporate scams and scandals as the Ghana capital market is in its embryonic stage. All the same, it is important to sensitize ourselves to be ready for take-off. The Ghanaian economy is growing at a fast rate and if corporate scandals are low, then it will become a destination for inward flow of Foreign Direct Investment(FDI) as foreigners will have confidence in our corporate world.
We need to encourage whistle blowing and also encourage all the staff in Ghanaian companies to register with professional bodies which exercise gatekeeping and sunshine rules over them. Being a professional ensures that employees and directors will exercise high levels of probity, integrity and due diligence in their gubernatorial remit. The Ghanaian media has a cardinal role to play in carrying out investigative journalism to expose corporate scams. In this regard, the media has to throw their search light both on profit and non-profit organizations such as the mushrooming NGOs which are sometimes used by some crooked individuals to line their pockets and to use as façade for soliciting money from donors and evading taxes. The issue of corporate governance is the concern of every citizen because business decisions have direct and indirect effects on the populace. Consider the issue of noise pollution, air and water pollution, traffic congestion, deforestation and rapid depletion of non-renewable natural resources. These natural resources should be exploited in a sustainable and judicious manner and communities close to them should be compensated for social costs or negative externalities caused by the exploitation of those resources. Whilst Milton Friedman and the Chicago School argue that the business of business is business, so there should be no double taxation in the form of Corporate Social Responsibilities, advocates of CSR such as Henry Mintzberg, Carr and Sternberg strongly support CSR in the sense that corporate entities use more than a fair share of social and public infrastructure and they cause more wear and tear to them. Besides, the fight against poverty and corruption in Ghana cannot be won if we fail to practise the good tenets of corporate governance. Well, I have to end here since the topic of corporate governance is convulated and has many ramifications. See you next time in Part 2 in the next edition.
Kwesi Atta Sakyi
1st January, 2012