LEADERSHIP & GOVERNANCE

(MGT 351)
Lecture 7

Lecturer: Mr Ernest Nifah

Introduction - Corporate Governance

Learning Outcomes
Students should be able to:

•Define Corporate Governance.

•Explain Corporate governance

•Briefly explain the role of Good Corporate

Governance in an organization.

•Explain the four pillars of Corporate Governance

 Sole proprietorship
• A sole proprietorship is owned and operated by a
single person.

• Sole proprietorships are the most numerous in

terms of number of businesses in Ghana.

• Who bears governance risk in a sole

proprietorship?
 There are few risks with respect to governance from the
perspective of the owner.
 Creditors, including trade creditors, have the highest risk
with respect to governance.
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 Partnership
• A partnership has two or more owner /
managers.

• Who bears governance risk in a partnership?

 There are few risks with respect to governance
from the perspective of the owners, with
ownership rights and responsibilities detailed in
the partnership agreement.

 Creditors, including trade creditors, have the

higher risk with respect to governance.
Copyright © 2013 CFA Institute
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 Corporation
• “The business corporation is an instrument
through which capital is assembled for the
activities of producing and distributing goods and
services and making investments.

 Accordingly, a basic premise of corporation law is

that a business corporation should have as its
objective:
 the conduct of such activities with a view to enhancing
the corporation’s profit and the gains of the
corporation’s owners, that is, the shareholders.”
 Corporation

• “When they (the individuals composing

a corporation) are consolidated and
united into a corporation, they and their
successors are then considered as one
person in law . . .
Corporation Form

1. Limited liability for investors;

2. Free transferability of investor interests;
3. Legal personality – have the legal capacity to
amend rights and obligations (entity-
attributable powers, life span, and
purpose);
4. Centralized management.
Corporate governance: Objectives and guiding
principles
• There are inherent conflicts of interest in
corporations in which the ownership and
management are separate.

• Objectives of corporate governance:

 To eliminate or mitigate conflicts of interest.
 Particularly those between corporate managers and
shareholders; and
 To ensure that the assets of the company are used
efficiently and productively and in the best interests
of its investors and other stakeholders.
Copyright © 2013 CFA Institute
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Purpose of a Corporation

• Human satisfaction
• Social structure
• Efficiency and efficacy/value
• Ubiquity and flexibility
• Identity and distinctiveness
• Personality – morality ?
Corporate Governance

• Contemporary corporate governance started

in 1992 with the Cadbury report in the UK.

• Cadbury was the result of several high profile

company collapses.

• Corporate Governance is concerned primarily

with protecting weak and widely dispersed
shareholders against self-interested Directors
and Managers (CEO'S)
 Recent Corporate Failures
1. Worldcom - Formerly known as WorldCom, now known as MCI. This U.S.-based
telecommunications company was the second-largest long-distance phone company
in the country until a massive accounting scandal that led to the company filing for
bankruptcy protection in 2002. The company founder and former CEO Bernard Ebbers
was sentenced to 25 years in prison, and former CFO Scott Sullivan received a five-
year jail sentence. Arthur Anderson, the accounting firm responsible for auditing Enron
Corp said, the company collapsed due to financial mismanagement.

2. Enron - The US energy company in 2001 became the world's biggest bankruptcy
(supposed assets of $63bn), due to the fraudulent accounting of chairman and a few
directors, and negligence of auditors Arthur Andersen (then one of the world's major
five accounting corporations), which also folded as a consequence of the scandal.

3. Polly Peck - A British FTSE 100 conglomerate corporation, imploded in 1990 with
debts of £1.3bn amid claims of gross mismanagement and fraud.

4. Mirror group of companies - Founder Robert Maxwell's death from drowning in 1991
exposed his theft of £100s of millions from his corporation's pension funds, leading to
the bankruptcy of the UK Mirror Group company and substantially reduced pensions
for thousands of workers even after compensation from public funds.
Ghanaian firms, recent failure related to
risk

•Capital Bank
•UT Bank
Corporate Governance coverage
• Corporate Governance primarily
concerned is with public listed
companies i.e. those listed on a Stock
Exchange

• Focused on preventing corporate collapses

such as UT Bank and Capital Bank, Enron,
Polly Peck and the Maxwell companies.
 UT Bank and Capital BANK were listed.
Corporate Governance

UT BANK and Capital Bank

• became deeply insolvent, (their liabilities

exceed their assets) revoked their licenses
and they have now been taken over by GCB
per Bank of Ghana instructions.
 Bank of Ghana to unravel the factors leading to the
collapse of these bank through audit to ascertain these
Banks compliance to corporate Governance and
adherence to proper financial administration
1–14
Cont.

• Head of Banking Supervision of the Bank of

Ghana, Raymond Amanfu said, and I quote:

• “You must protect your interest as a shareholder.

Shareholders appointed the board. The boards
are accountable to the shareholders and so if  the
board is accountable to you and quite a significant
number who are shareholders were on the board,
and you supervise the banks to get into this
situation – you are the risk taker.”
1–15
 Definition of Corporate Governance
• “Corporate Governance is the system by which companies are
directed, managed and controlled…”
(Cadbury Report, UK, 1992)

• “Involves a set or relationships between a company’s

management, its board, its shareholders, and other
stakeholders.

• Corporate governance also provides the structure through

which the Mission, vision and for that matter, objectives of the
company are set, and the means of attaining those objectives
and monitoring performance are determined.” (OECD, - Organization
for Economic Cooperation and Development. Principles of Corporate Governance, 1999; 2004)
Definition of Corporate Governance

• Corporate Governance influences how the

objectives of the company are set and
achieved, how risk is monitored & assessed, &
how performance is optimized.

• Good corporate governance structures

encourage companies to create value (through
entrepreneurialism, innovation, development &
exploration) and provide accountability &
control systems that commensurate with the
risks involved”
Cont.

• “Corporate governance deals with the

ways in which suppliers of finance to
corporations assure themselves of
getting a return on their investment” (The
Journal of Finance, Shleifer and Vishny [1997, page 737).
 Other Definitions
• "Corporate governance is about promoting
corporate fairness, transparency and
accountability" (J. Wolfensohn, president of the Word
Bank).

• “The directors of companies, being managers

of other people's money than their own, it
cannot well be expected that they should
watch over it with the same anxious vigilance
with which the partners in a private co-
partnery frequently watch over their own”
 Corporate Governance Definition (OECD )

• “Corporate Governance is an internal means

by which corporations are operated and
controlled … which involve a set of
relationships between a company’s -
a.Management,
b.Board,
c.Shareholders and other stakeholders.”
NB: OECD – Organization of Economic Co-operation & Development (consist
(
of is a group of 34 member countries that discuss and develop economic and
social policy. All members are democratic countries and free market economies).
Corporate Governance Parties

1. Shareholders – those that own the company

2. Directors – Guardians of the Company’s

assets for the Shareholders.
3. Managers who use the Company’s assets
to create and add value
Cont.
 Shareholders and directors have two completely different roles
in a company.
 The shareholders (also called members) own the company by
owning its shares.
 The directors manage the company for the shareholders.
 Unless the articles of the company say so (and most do not) a director
does not need to be a shareholder and a shareholder has no right
to be a director.

 The separation in law between directors and shareholders can

cause confusion in private companies.
 If two or three people set up a company together they often
see themselves as 'partners' in the business.
 That relationship is often represented in a company by all of
the partners being both directors and shareholders
1–22
Cont.

For instance: In the recent case in Ghana:

UT Bank had 6 Board of Directors, with

Captain Joseph Nsonamoah (retired) as
co-founder and chairman of the board.

Capital Bank also had 6 Board of

Directors, with Pastor Mensah Otabil, as its
Chairman.
1–23
Corporate Governance and relevance to Africa

• What relevance does it have to Africa

where there are few public listed
companies?

• Most companies are non-listed, private

family owned businesses where the
shareholders and the managers are often
the same people
Corporate Governance and Valuation

•Corporate Governance is at the

intersection of strategy, control and
finance.
•Corporate Governance is a primary driver
of firm specific and market risk in
valuation approaches.
 Market risk, or systematic risk, affects a large number of
asset classes, whereas specific risk, or unsystematic risk,
only affects an industry or the particular company.
 Note: Market risk cannot be mitigated through portfolio diversification
Four Pillars of Corporate Governance

1. Accountability

2. Fairness

3. Transparency

4. Independence
1. Accountability

• Ensure that management is accountable

to the Board.

• Ensure that the Board is accountable to

shareholders.
2. Fairness

• Protect shareholders rights

• Treat all shareholders including

equitably

• Provide effective redress for violations

3. Transparency

Ensure timely, accurate disclosure on all

material matters, including the financial
situation, performance, ownership and
corporate governance
 4. Independence
• Procedures and structures are in place so
as to minimize, or avoid completely
conflicts of interest.

• Independent Directors and Advisors i.e.

free from the influence of others
Stakeholder - definition
• Sustainability recognizes stakeholder rights i.e.
the rights of interested parties e.g. employees,
the community, suppliers, customers etc.
• Encourage co-operation between the company
and its stakeholders in creating wealth, jobs
and economic stability

 Sustainability refers to development that meets the needs of the

present without compromising the ability of future generations to
meet their own needs’
Business Ethics
• Established values and principles a
company uses to inform and conduct its
activities

• Should permeate a company’s culture

and drive its strategy, business goals,
policies and activities

• Usually found in a code of ethics

Corporate Governance System