A new awakening for corporate governance

In the wake of the collapse of seven local banks within one year, Ghanaians need to keenly track corporate governance practice in both state and private enterprises; especially when the taxpayers’ money has been used to bail out banks which are in business to make profit.

In fact, since independence Ghanaian industries have been grappling with sound corporate governance practices; largely because a chunk of businesses are owned by family, friends or political cronies.

In the 1960s, Ghana’s industries were some of the strongest in West Africa.  Examples of local industries that produced strong brands were in agro-processing, garment and textile industries, consumer goods, agricultural tools, essential commodities and packaging materials among others.

Local brands like Sanyo, Akasanoma, Evereday Battery, Saltpond ceramics, Pwalugu tomato, Tata Brewery, Boakye Mattress, Pioneer Tobacco Company, Apino soap, Ameen Shangari, Bonsa Tyres readily came to mind when mention was made of local industries. In fact, we used to have some of the best locally produced towels and bedsheets in Ghana; all that has gone to Chinese companies in the midst of a booming hotel and tourism industry.

These mostly family businesses also held their own against foreign competition and helped boost Ghana’s nascent economy. All things being equal, by this time those industries should have either been medium or large-scale businesses with continental or global representation.

Plight of local industries

Local industries began to suffer reversals when the Armed Forces Revolutionary Council (AFRC) swept to power in a coup d’état in 1979. Judging from the actions and inactions of the power-holders of the time, it appeared government had an agenda to stifle local industries that belonged to perceived political enemies.

The seizure and closure of many local industries was probably the beginning of the downturn for local industrialization.  Besides, the advent of the Provisional National Defence Council (PNDC) in 1981 ushered Ghana into Structural Adjustment and Economic Recovery Programmes.

These bitter economic prescriptions of the IMF/World Bank downplayed the role of local industries in economic development. Thus, as local industries faced difficulties foreign companies gained a foothold – making Ghana a net importer of industrial and essential goods.

One estimate put it that by 1999 more than 600 local small, medium and large industries had collapsed due to the suffocating business environment at the time. The worst-affected sector was garments and textiles, which is still reeling under unbridled foreign competition. Most of Ghana’s industries suffered from the effects of dumping cheap foreign goods. The textiles and garments industry, which employed close to 30,000 workers in the 1980s and 90s, now employs less than a thousand hands.

 

Poor corporate governance

Apart from the harsh economic and political decisions that stifled local industries, another critical reason for Ghana’s weakened local industries can be attributed to poor governance structures. This poor corporate governance practice in Ghana is still the main headache of local industries, as is currently unfolding in the banking sector.

As stated earlier, most of these industries were family-owned – which paved way for mismanagement and maladministration. The common refrain in Ghana is that the business belongs to my uncle, my auntie, my father, mother etc., so I can do what I want with the money. The buying of luxury cars, rather than reinvesting or retooling, characterized management decisions. Besides, failure to diversify ownership and bring on board experts and new investments also stifled the family businesses.

Owners of local industries need to understand that high quality corporate governance helps to underpin long-term company performance. While other developing countries like Malaysia, Thailand etc. have some standards of corporate governance, the same cannot be said about Ghana.  No doubt, without the highest levels of corporate governance local businesses are not attractive to foreign investments or partnerships.

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For instance, the UK Corporate Governance Code has been instrumental in spreading best boardroom practice: such as risk management remuneration and relationships with both shareholders and stakeholders, whose input tends to have a positive impact on business profits.  Perhaps, what has led to the collapse of the seven banks thus far is the lack of respect for stakeholder and customer interests.

 

Corporate culture

Culture in a corporate context can be defined as a combination of the values, attitudes and behaviours manifested by a company in its operations and relations with its stakeholders. These stakeholders include shareholders, employees, customers, suppliers and the wider community and environment which are affected by a company’s conduct.

This underlies the fact that companies do not exist in isolation. They need to build and maintain successful relationships with a wide range of stakeholders in order to remain relevant. These relationships will be successful and enduring if they are based on respect, trust and mutual benefit. I stand to be corrected, but my opinion is that many local industries – especially our local financial institutions – do not place any value on their reputation; which is why some local industries are becoming uncompetitive even at home. The more recent collapse of the seven banks is a classic case. As local banks are becoming uncompetitive, their foreign counterparts are taking more ground.

In short, cultural failures damage reputations and have a substantial impact on shareholder value. Elsewhere customer base and brand identity now account for over 80 percent of total corporate value, compared to under 20 percent 40 years ago.

This shift magnifies the impact on total value when a reputational crisis occurs. This is a challenge for local industries and their boards and managers. So, if local industries are to become competitive locally and globally, they must find ways to understand and influence the factors which affect culture and behaviours.

 

The role of boards

Many local industries, including state-owned enterprises, tend to downplay the role of boards of directors. The fact is that wherever companies are vibrant and globally competitive, boards have played meaningful roles in decision-making as against the overbearing influence of managing directors or executive directors.  Because we do not attach seriousness to the role of boards, appointing authorities often appoint people with no technical skills to companies to satisfy a certain constituency.

In the UK, where we draw our corporate lessons from, the corporate Governance Code ascribes to boards a responsibility for setting the company’s values and standards.

“One of the key roles for the board includes establishing the culture, values and ethics of the company. It is important that the board sets the correct ‘tone from the top’. The directors should lead by example and ensure that good standards of behaviour permeate throughout all levels of the organisation. This will help prevent misconduct, unethical practices and support the delivery of long-term success.” The code further states that culture is closely linked to risk and appetite, and it asks boards to look at the risks which might affect the company and its long-term viability.

 

Business strategy

One other area that local industries need to focus on is that of defining their purpose, strategy and business model. Many local industries probably lack clear visions and missions. In a survey of boards and CEOs at some British firms, they responded that a clear purpose – why the company exists and what it is there to do – is the starting point for a successful company.

Perhaps, in an increasingly complex business environment, boards and executive teams need to have a good understanding of the company and how it makes money – its business model – in order to have a clear line of sight between the decisions they take and how they impact on the company’s culture and deliver its purpose.

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Moving forward, local industries should recognize the value in defining and communicating a broader purpose beyond profit, which generates wealth and delivers benefits to society as a whole. This can help create shared goals, motivate employees and build trust with customers. This is what is probably lacking on local terrain, thus promoting one-man-shows and the imminent collapse of local industries – like the seven banks.

It is a general business principle that aligning business decisions with purpose and values, and focusing on how financial targets will be achieved, will over the long-term lead to more sustainable value creation. The key lesson for sound business management is that a strong governance system is essential for a healthy culture. While the processes and practices in the boardroom are equally important, governance needs to focus on the substance of what boards do, who they engage with, what information they are given, and what questions they ask. Boards should see that good governance runs through all areas of the business, including the executive committee and the layers of middle management.

 

Sound decision-making

Aligning business decisions with purpose and value will deliver improved decision-making and better outcomes. Shareholders rely on the board to oversee a healthy culture that is compatible with the business model, steers the executive and delivers the strategy. Therefore, boards must be actively engaged in the business of shaping, overseeing and monitoring culture, and holding the executive to account where they find misalignment with company purpose and values.

Local industries should also consider reviewing their corporate social responsibility policies to reflect the growing expectations of their stakeholders. Whatever the case, companies that are purposefully investing in social responsibility achieve brand enhancement over time, as well as building stakeholder relationship.  The focus on CSR is based on the need for an organisation’s willingness to embrace environmental sustainability; while social responsibility is meant to address labour issues like working conditions, health and safety, fair wages and ethical sourcing. This explains why these expectations have become the rallying point for the CSR debate.

 

In conclusion, below are three best practices to consider

  1. Recognise the value of culture: A healthy corporate culture is a valuable asset, a source of competitive advantage and vital to the creation and protection of long-term value. It is the board’s role to determine the purpose of the company and ensure that the company’s values, strategy and business model are aligned to it. Directors should not wait for a crisis before they focus on company culture.
  2. Leadership: Leaders, in particular the chief executive, must embody the desired culture – embedding this at all levels and in every aspect of the business. Boards have a responsibility to act where leaders do not deliver.
  3. Be open and accountable: Openness and accountability matter at every level. Good governance means a focus on how this takes place throughout the company and those who act on its behalf. It should be demonstrated in the way the company conducts business and engages with and reports to stakeholders. This involves respecting a wide range of stakeholder interests.

 

References

  1. Financial Reporting Council (2016) corporate culture and the role of boards
  2. The importance of Corporate Governance: http://www.applied-corporate-governance.com/importance-of-corporate-governance.html

(***The writer is a Development and Communications Management Specialist, and a Social Justice Advocate.  All views expressed in this article are my personal views and do not represent those of any organization(s). (Email: safoamos@gmail.com Mobiles: 0202642504/ 0243327586

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