A good corporate governance system that takes the interests of numerous stakeholders into account is vital, if not the number one factor, for the success of any company within the short, medium and long term. Every corporate organisation, therefore, needs a clear governance structure with a clear scope of responsibility, role assignment, reporting and accountability mechanisms. The principles of good corporate governance must be reflected in the governance structure adopted by a corporate entity, or the reason for departing from the principle must be clear. However, there is not a one-set fit all purpose governance structure that every company must adopt. Therefore, each company must adopt a structure that meets the need of the corporate entity. These must, however, be within the framework of the law. This article discusses some case studies to illustrate corporate governance structures that may likely create confusion and impede organisational development. The selected case studies reflect the prevalence governance system for the majority of companies in Ghana.
The case studies
Three cases illustrate governance structures that informed this write-up. However, it must be borne in mind that the determination of whether a company has a good corporate governance structure or not is based on the outcome than simply comparing the structure to what one considers an ideal. So the narration of the case studies should not be seen as necessarily bad corporate governance in itself.
In the first scenario, ABC Company Limited has two shareholders. Both shareholders are directors. Both shareholders are also employees of the company, with shareholder A given the position of chief executive officer and Shareholder B given the position of managing director. In addition, there is a general manager who oversees all the other heads of departments. The heads of departments supervise employees, some of whom work in more than one department.
In the second scenario, XYZ Company Limited has two shareholders. The two shareholders are also part of the board of directors. Shareholder A holds the majority of the company’s issued shares and is also the board chairperson. In addition, both shareholders are employees of the company, with shareholder A occupying the position of executive chairperson and shareholder B occupying the position of managing director. In addition, shareholder B is also the Company Secretary.
In the third scenario, HW Company Ltd has two shareholders, a husband and a wife. They are the only directors of the company. One shareholder plays the role of the board chairman and the managing director. The other is stated as the Company Secretary.
These three scenarios are reflected in the governance structure of many companies in Ghana with some variations. These governance structures can likely be fitted into the framework of the law. However, they create confusions that do not lead to efficiency in achieving corporate goals as they negate some principles of good corporate governance.
Principles of corporate governance
Do the above scenarios cover an ideal corporate governance structure? Generally, corporate governance is defined as a system of rules, practices and processes by which a company is directed and controlled. The structures above are put in place to direct and control the activities of companies ABC, XYZ and HW. For all three to fit the definition, they must be based on rules, practices and processes aimed at directing and controlling the company. Not only that, the purpose of corporate governance must be factored into the system in place to direct and control a company. The purpose of corporate governance generally is to manage the competing interests of the numerous stakeholders of a company for the growth of the company whilst ensuring profitability. This will include the interests of shareholders, directors, employees, consumers/customers/clients, the immediate local community and the country as a whole, the regulators and the government. Over-concentration on the interest of a particular stakeholder(s) against another is likely to lead to an adverse outcome for the company. It is, therefore, important that the governance structure must have mechanisms to avoid such overconcentration. At first glance at the structures above, it may be surmised that there is such overconcentration since the shareholders dominate every aspect of the structure.
For the above reasons, one must reflect the principles of corporate governance in the working of the structure. These principles include
- leadership, ethics and integrity
- participatory and inclusiveness
- consensus-oriented
- accountability and transparency
- responsiveness, effectiveness and efficiency
- equity or fairness
- rule-based – both legal and non-legal rules
- clear roles and responsibilities of the various actors
Each of the above principles must be reflected in the corporate governance structure. The possible defect in the above three cases will border mainly on a lack of accountability, an unclear definition of the roles and responsibilities of the various actors, and transparency and informality in the decision-making process. A majority shareholder who is a chairman of the board of directors and doubles as an executive chairman or managing director will unlikely be accountable since he or she can take any decisions without much opposition and subjecting such decisions to thorough deliberation. Additionally, there is no separation of powers exercisable as a shareholder, board chairperson, director and executive chairperson and managing director. This is not to say the structure is wrong in itself. The point is that the structure must intentionally put mechanisms in place to ensure accountability, separation of powers, clear delineation of roles and responsibilities, avoidance of abuse of powers and discretion, as well as ensure transparency. This may call for mechanisms such as having independent directors in the majority, separating the role of chairperson and managing director, clearly defining the roles and limiting the powers, introducing stringent minority protection clauses in the constitution and having representation for employees at the decision-making level.
The second scenario may also be viewed as not consistent with the law. Whilst the Companies Act did not provide for the terminology or position of a chief executive officer, the law provides for the position of a managing director, which is in practice referred to as the chief executive officer. The designation of one shareholder as a chief executive officer and another as a managing director is likely to lead to confusion in the roles and responsibilities of each position. The Act provides rules on the delegation of the powers of the board of directors to the managing director. To avoid confusion about who can exercise the delegated powers of the board, the constitution must go the extra length by clearly spelling out clear powers, roles and responsibilities of the managing director and the chief executive officer of ABC Company Ltd to avoid confrontation and confusion in roles. In the third instance, the relationship between the husband and wife is likely to lead to many informal decisions, lack of accountability and in some instances “a one-man/woman show” whilst the other looks on without much interest or taking an active role in the governance of the company.
The above cases illustrate that there are many governance structures not reflective of corporate governance principles in place in many companies in Ghana that are militating against the growth of companies and, in fact, leading to the demise of such companies. Many companies remain stagnant without ever realising their full potential because of the corporate governance structure in place. In their best case scenarios, these companies may be seen as local champions when these companies can grow beyond the limited space in which they currently operate. It is said, what doesn’t grow will eventually die. This has become the story of many one-person or one-person-driven companies and family-owned businesses in Ghana. The mindset change requires adapting or restructuring the corporate governance structure purposely to ensure the growth of the companies.
As recognised about the governance of nations, dictatorship is a flawed system of governance. Whilst constitutional rule may have its challenges, the systems based on the rule of law, separation of powers, checks and balances, judicial review (able to challenge decisions, actions or rule of authorities), etc., have produced a far better outcome for the stakeholders (citizens). Similarly, a corporate governance system that fails to reflect these concepts and the principles listed above will likely hurt the company in the long run.
Further, ensuring that an efficient and effective corporate governance structure is in place does not mean adopting a structure that works for one company and implementing it in another. Shareholders and directors need to start reflecting on the corporate governance structures of their companies. Advisors need to look beyond whether the structure in place is consistent with the law. A corporate governance structure must, in totality, be based on law and reflective of the principles stated above tailored to cater for the needs of the many corporate stakeholders with an eye on growth and profitability.
Conclusion
Whilst a company may not necessarily succeed because it has a good corporate governance structure, the lack of it will definitely kill a company. It is just a matter of time. Therefore, owners of businesses must, in their own interest and the interest of all the stakeholders, ensure there is a good corporate governance system based on sound principles to ensure the growth of their companies. This is not to take control away from owners but to ensure they exercise such control in a manner that benefits all stakeholders, including themselves.
Ferdinand is a Partner, with the Corporate & Finance Practice Group of AB & David Africa. He is based in the Accra office and works with the firm’s Corporate & Finance team, which advises on transactions across sub-Saharan Africa. He has advised several corporate entities and businesses on their corporate governance structure, structuring transactions, raising funding and partnership arrangements for projects. Ferdinand also lectures at the GIMPA Faculty Law in corporate law. He recently published a book titled “Modern Principles of Company Law in Ghana”.
Email/Telephone No.: [email protected] / 0242262180
