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TOPIC 11

CORPORATE
GOVERNANCE
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Kramankus ICA Family 2018
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Corporate Governance
 What is Corporate governance?
 It refers to the set of processes, customs, policies, laws and
institutions affecting the way in which an entity is directed,
administered or controlled.
 Simply put, CG is the system by which entities are directed and
controlled.
The overall goal of CG is to serve the needs of shareholders and
other stakeholders by directing and controlling management
activities towards good business practices in order to satisfy the
objectives of the entity.
It aims at enabling effective and prudent management of an
organisation in order to achieve its objectives.
CG is necessary in both profit making and not for profit entities, but
most important for large companies.

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Corporate governance
 Elements of corporate governance
 The fundamental concerns of CG in all definitions are:
 Management and reduction of risk
 Enhancement of overall performance through supervision and
management within set best practice guidelines.
 Establishment of framework to pursue within which organisations
pursue their strategy ethically and effectively.
 Emphasis on compliance to the letter and spirit of codes and other
regulations.
 Ensuring accountability and transparency.

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Corporate Governance
 Drivers of CG development
 Increasing internationalisation and globalisation
Concern for financial reporting
 Need for parity of treatment of both domestic and foreign investors
 Characteristics of individual countries
High profile corporate scandals and collapse eg Erron, Worldcom
etc.

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Corporate governance
 Symptoms of Poor Corporate Governance
The following are indicative of poor governance:
 Domination of the board by single individual or group
Absence of a board or its involvement
Lack of adequate control function (weak internal control and audit)
Poor supervision
Lack of independent of scrutiny (external audit function)
Lack of contact with shareholders (No AGM)
Emphasis on short term profitability
Misleading accounts and information

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Corporate governance
Corporate Governance Theories
 Corporate governance is founded on certain theories on the
ownership and management of organisations.
The four main theories that explain corporate governance are:
Stewardship theory
Stakeholder theory
Agency theory
Transactional theory.

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Corporate Governance - theories

 Stewardship theory
 In this theory managers are viewed as the stewards of the
organisations assets charged with their employment and
deployment in ways consistent with the overall objective of the
organisation.
Owners/shareholders reserve the right to dismiss their stewards if
they are dissatisfied by their stewardship through a vote in AGM.
 Stakeholder theory
It further built upon the stewardship theory and propounded that
management has a duty of care, not just to owners of the company
in terms of shareholder value maximization.

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Corporate Governance - Theories

 Agency theory
 The theory states that management will act in an agency capacity,
seeking to service their own self-interest and looking after the
performance of the company only where its goals are con-incident
with their own interest.
It aims at ensuring that managers pursue effectively shareholders
best interest.
CG guidelines are concerned with shareholder-manager
relationship.
Transaction cost theory
The way the company is organised or governed determined its
control over transactions.
That managers are opportunistic and therefore the theory aims at
ensuring that managers effectively pursue shareholders best
interest.

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Corporate Governance Principles

Development of Corporate Governance
Different countries have different approaches to corporate
governance.
 The USA, UK, South Africa and Europe have all taken different
approaches dependent on the emphasis.
Ghana has adopted the principles of CG of the Organisation for
Economic Co-operation and Development (OECD) which focuses
largely on separation of ownership and management of the
company.
Principles
Most codes are built around the principles of
Integrity
Accountability
Independence
Good management

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Corporate Governance Principles

 CG Reports
There are several works done on CG in many countries
resulting in several reports and recommendations and
most common ones are:
Sarbanes-Oxley Act 2000 (USA)
Kings Report, 1994 ( South Africa)
Cadbury Committee Report 1992 (UK)
Greenbury Committee Report 1995 (UK)
Hampel Committee Report, 1998 (UK)
Turnbull Committee Report, 1999 (UK)
Higgs Report, 2003 (UK)
Smith Report 2003 (UK)
EU corporate Governance Forum
OECD

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Corporate Governance Principles

 Generic Principles and Codes
Even though there are different approaches to development of CG,
most of the codes are based on a set of principles and these are:
To ensure adherence to and satisfaction of the strategic objective of the
organisation
To Minimise risk (financial, legal and reputational risk) through effective
systems of controls.
To promote integrity in organisations dealings
To fulfil responsibilities to all stakeholders and to minimize potential
conflict of interest between owners, managers and wider stakeholder
community
To establish clear accountability
To maintain the independence of those who scrutinise the behaviour of the
organisation and its senior executive.
To provide accurate and timely reporting
To encourage more proactive involvement of owners in effective
management of the organisation.

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OECD Principles of CG
 Ghana and OECD principles
Ghana has adopted the OECD principles in 2006 and this has
since influence corporate governance in the country.
OECD principles focused on separation of ownership and
management issues.
OECD principles are grouped into five broad areas:
The right of shareholders – participate and vote at GM, elect and
remove board members, and right to information.
The equitable treatment of shareholders- equal treatment of all
shareholders.
The role of stakeholders- right of stakeholders should be protected.
Disclosure and transparency- Timely and accurate disclosure
The responsibility of the Board- strategic guidance, effective
monitoring, govern in the best interest of the company and its
shareholders.

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Code of Best Practice for List Companies

 The code of best practices in corporate governance is an
optional code designed for publicly listed companies in
Ghana.
It enshrines the principles of corporate governance to be
followed by all organisations.
It has seven sections as follows:
The mission, responsibilities and accountability of the Board
Committees of the Board (Audit committee, Remuneration
Committee,
Relationship to shareholders an stakeholders
Financial affairs and auditing
Disclosure in Annual reports
Code of ethics
Glossary.

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Players in Corporate Governance

 Key Role Players in CG
 For CG to be effective, structures and officers of the organisation
must play their role well.
Key structures and officers required include
Board of directors, the Chair and CEO
Shareholders activism
 Committees of the board
 Directors
 Internal audit
External audit

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Board of Directors
 Board Structure
In Ghana, boards have unitary structure where all directors have
the right to participate in board decision making contrary to the dual
board structure (management board + supervisory board) practiced
in Germany and three board structure in Japan.
In unitary board model there is a common legal responsibility and
inclusive decision making.
Objectives of a Board
The objective of a board is to ensure that the corporate body is
properly managed in order to protect and enhance shareholders
value and to meet the firm’s obligations to the shareholders, the
industry and the law.

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Board of Directors
 Duties of the Board
According to the Code of Best Practice principal duties are:
Strategic guidance of the corporate body
 Overseeing the management and conduct of the business
Identification of risk and the implementing systems
Succession planning and responsibility for senior management
Overseeing of internal control systems
 Communications and information dissemination policy

Role of the Board

“To define the purpose of the company and the values by which the
company will perform its daily existence and to identify the
stakeholders relevant to the business of the company. The board
must then develop a strategy combining all the factors and ensure
management implements that strategy” (King Report, SA).

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Board of Directors
 Ethical Responsibility of the Board
The board should follow ethical values and develop an
organisational ethics policy.
Ethical values to be followed by the board include:
Responsibility- takes responsibility for the ethical conduct of business
Accountability- justifying decisions to shareholders and stakeholders
Fairness- fairly considering all legitimate stakeholder interest
Transparency- disclosing information to stakeholders.
Individual directors on the board owes the following moral
duties
Conscience – utmost honesty and independence, avoiding conflict of
interest
Inclusiveness- collective interest of all stakeholders
Competence- knowledge and skill
Commitment – diligence and devotion
Courage- decisive action and risk with integrity.

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Board of Directors - Chairman

 Board Chairman
In Ghana, the board chairmanship position and the chief executive
to be held ideally by two different people.
Justifications for the separations of responsibilities:
 Both jobs are demanding roles and it is not likely that one person
would be able to do both jobs satisfactorily.
 concentration of power in the same hand will render the board
ineffective in controlling the chief executive
 Avoidance of conflict of interest
 Strengthen accountability since the board cannot make the CEO truly
accountable for the management if he is also the chairman.
 Supply of relevant information to the directors may be hampered if the
CEO as a board chairman demands such information from himself as
CEO.

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Board Directors
Role of the board chairman are:
Running the board and setting its agenda
Ensuring the board receives accurate and timely information
Ensuring effective communication with shareholders (chairman
report in the annual report to shareholders)
Ensuring that sufficient time is allowed for discussion of
controversial issues
Taking the lead in board development
Facilitating board appraisal
Encouraging active engagement by all the members of the board
Reporting and signing off accounts

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Board of Directors- Chairman

 Attribute of an effective Chairman
According to Higgs Report an effective chairman is
someone who:
 Upholds the highest standards of integrity and probity
Leads board discussions to promote effective decision-making and
constructive debate
Promote effective relationship and open communication between
executive and non-executive director.
Builds an effective and complementary boards
Promote highest standards of corporate governance
Ensure clear structure for and the effective functioning of the board
committees
Ensure effective implementation of board decisions
Establish a close relationship of trust with the CEO, providing
support and advice whilst respecting executive responsibility.

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Board of Directors - CEO

 Role of the CEO
The CEO is the senior executive in charge of the management team
and is answerable to the board for its performance.
 The CEO is responsible for running the organisation and for
proposing and developing the strategy and business objectives in
consultation with the directors and the board.
The CEO is aslo responsible for implementing the decisions of the
board for its performance.
The CEO is responsible for developing the main policy statements
and reviewing the organisational structure and operational
performance of the organisation.
He is also responsible for managing the risk profile of the firm
He makes recommendations to the relevant committees on the
remuneration policy, executive remuneration and terms of
employment.
He is also responsible for investment and financing issues of the firm.

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Board of directors – Executive directors

and Non-Executive directors
 Executive and Non-executive directors
 Effective boards are composed of executive directors and
executive directors.
Executive directors are those boards members who have
managerial responsibility in the company as well ( internal officers).
Non-executive directors have no managerial responsibility in the
company (outsiders)
Both directors have the same legal duties, responsibilities, control,
compliance and behaviour under the Companies Act 1963.
However, some CG reports like Higgs assigned monitoring and
scrutiny role to executive directors and are seem at independent
officers.
In Ghana, the number of non-executive directors must be at least
one-third of the total membership of the board, and no less than
two.

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Board of directors – Executive directors

and Non-Executive directors
 Advantages of having Non- executive directors on
the Board
 they bring on board certain special external experience and
knowledge which executive directors may lack.
They provide a wider perspective than executive directors.
 Presence of executives directors boost the confidence of third
parties such as investors and creditors in the corporate governance
processes in the company.
Certain roles are best perform by non-executive directors:
removing the chairman or chief executive, intervention between the
board and management and confidant role for the CEO and
chairman
They provide strong independent element on the board and thus
serve well on remuneration committee.

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Board of Directors – Executive Directors and

Non-Executive Directors
 Problems of having executive directors
 the executive directors may not always be independent since they
may be linked to the company as suppliers or customers e.t.c
 Selection of executive directors to serve on the board may be
contentious matter.
 Unavailability of high calibre non-executive directors
 Views of non-executive directors may not carry much weight in
decision making.
 Devotion to the board’s work may be minimal since they may be
having other responsibilities elsewhere.

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Executive Remuneration/Compensation
 Executive remuneration
Director pay has become an increasing important issue in
corporate governance.
Directors being paid excessive salaries and bonuses has been
seen as one major corporate abuses for many years,
Directors remuneration should be set by a remuneration committee
consisting of independent non-executive directors.
The remuneration policy should:
Be set by independent members of the board
 Tie bonuses to measurable performance or enhanced shareholder
value
Be full transparency of directors remuneration in the accounts.
Include the pay scales applied to each director
Consider the relativity to other companies.
Consider the risk level of the company

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Executive Remuneration
 Remuneration Committee
The Remuneration Committee is a committee of the board
responsible for establishing remuneration arrangements.
The committee determines the general policy on the remuneration
of executive directors and specific remuneration packages for each
director.
The committee should be made up of independent non-executive
directors.

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Board of directors – Executive directors and

Non-Executive directors
 Remuneration Packages
Packages will need to attract, retain and motivate directors of
competence and at same time taking into account shareholders
interest.
The Remuneration Committee must ensure a balance between the
different elements of the package (basic rewards and incentives)
This will help to reduce the agency cost by aligning the directors
interest with that of the shareholders.
Elements of the package may include:
Basic salary –
Performance related bonuses (executive directors should be given
bonuses based on performance. NB short term performance measures
should never be used)
Share options after vesting period
Benefit in kind
Pensions

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Role of Shareholders in Corporate

Governance
 Role of shareholders
Shareholder activism is the involvement of shareholders in the
affairs of the company and its management.
A company’s shareholders are often a mix of thousands of private
investors and large institutions (institutional shareholders).
In recent years, institutional shareholders are increasing and some
case they hold 60% of the shares of the company
This development has caused a change in the balance of power
between shareholders and directors as fund managers are legally
obliged to actively manage investments on their client’s behalf.
This has helped swing the balance of power in favour of increased
shareholder activism.

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Board Disclosures and Corporate

Governance.
 Board Disclosure
 the board is required to make certain disclosures on the
organisation to the shareholders and other stakeholders.
Reports of the board should convey a fair and balance view.
The board is required to explain their responsibility for preparing
accounts and aslo the report should indicate the going concern
status of the company.
Other issues that the board will report on include:
Information about the board
Report on remuneration, audit and nomination committees
Relations with auditors
Effectiveness of internal controls
Relations and dialogue with shareholders
Sustainability reporting

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Board Disclosures and Corporate

Governance
 Disclosure in annual report in Ghana
The board is to ensure that information is disclosed on the following
matters in the annual report (CBPCG):
All management fees paid by the company
The identities and percentage holdings of substantial shareholders
 Significant cross shareholding relationships
Related party transactions
Details of incentive schemes such as share option scheme
The fees paid to the auditors of the company for audit and non-audit
related work
Any other material issue concerning employees and other stakeholders
such as creditors and suppliers.
Directors are aslo required to report on external risk of the
company.

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Internal Control and Corporate

Governance
 Role in internal Control
 Internal control systems have a key role in managing risks linked
with a company’s business objectives, helping to safeguard assets
and shareholders investment.
Internal control system aslo aids the efficiency and effectiveness of
operations, the reliability of reporting and compliance with laws and
regulations.
The internal control requirements are:
To maintain a sound system of internal control
To conduct an annual review of internal control
To report on the review in the annual report.

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Internal Control and Corporate Governance

 Responsibility for Internal Control
The board is responsible for the system of internal control, for setting
policies and seeking assurance that will enable it to satisfy itself that
the system is functioning effectively and managing risks.
 Management is responsible for implementing board policies on risk
and control.
Management should identify and evaluate the risks faced by the
company for board consideration.
Management should design, implement and monitor a suitable internal
control system.
All employees also have some responsibility for internal control as part
of their accountability for achieving business objectives.
In respect of review, management is responsible for monitoring the
system of internal control and providing assurance to the board it is
done so.
Audit committee has significant role in the review process.

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Internal Audit and Corporate Goverance

 What is Internal audit?
Internal audit is defined by IIA as “an independent, objective,
assurance and consulting activity designed to add value and
improve an organisation’s operations. It helps an organization
accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve effectiveness or risk
management, control and governance processes’.
Objectives of internal audit
Review the accounting and internal control systems
Examine the financial and operating information
Review the economy, efficiency and effectiveness of operations
Review safeguards of assets
Review implementation of corporate objectives
Identification of risk and review overall risk management policy
Special investigations

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Internal audit and corporate governance

 Role of internal audit in corporate governance
 Key role of internal audit in corporate governance is to improve
risk management and governance process by assessing and
advising on how risk associated with the entity's operations.
The extent of internal auditors work depends on the scope and
priority of the assignment and the risk identified.
 Accountability and Independence of internal audit
The internal auditor is accountable to the highest executive level of
the organisation, preferably the audit committee of the Board.
The internal auditor is and is seen to be independent and the
independent of internal auditors is influenced by:
The responsibility structure
The auditor’s mandatory authority (audit charter)
Auditor’s own approach

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Internal audit and corporate governance

 Types of audit
Operational audit (value for money audit)]
Systems audit
Transaction audit (probity audit)
Social audit
Management investigations.

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External Audit and Corporate Governance

 What is external audit?
 it is an audit undertaken by accounting firms to ensure that the
financial statements give true and fair view of the financial state of the
entity.
Role of External Audit
Primary purpose of an external audit is to review the books and
records in order to give a professional opinion on whether the financial
statements represent a true and fair view of the organisation.
External and internal audit
Both review controls and records but internal audit seeks to add value
to the organisation whilst external audit try to give opinion on the
financial state of the organisation.
Co-ordination between the two will minimise duplication of work and
encourage wider coverage of audit issues and areas,
Extent to which external audit will rely on the work of internal auditor is
influenced by organisational status, scope of function, technical
competence and due professional care.

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Audit Committees and Corporate

Governance
 Audit Committee
Audit Committee is a committee of the board responsible for
appointment, compensation and oversight of external auditors.
It aslo has responsibility for reviewing the effectiveness of internal
control and internal audit processes within the organisation.
Composition of AC
AC should comprise at least three directors, the majority of whom
should be non-executive.
The chairman of the committee should be a non-executive director.
CEO, CFO, head of department and representative of the external
auditors should ordinarily be invited to attend meetings.

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Audit Committees and Corporate Governance

 Functions of the AC
 Recommended the appointment of the external auditors
Liaise with the external auditors for the purpose of maintaining and
ensuring audit quality, effectiveness, risk assessment.
Interact of internal auditors
Review with auditors their report on the financial statement
Review adequacy of internal control systems and degree of
compliance with material policies, laws and codes of ethics.
Provide a direct channel of communication between the board and
the external auditors and internal auditors, accountants and
compliance officers
Report to the board on all issues of significant extraordinary
financial transactions
Assist the board in developing policies on controls and operating
systems.

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End of CSEG

To God Be the Glory

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Redeemer Krah@Kramankus ICA Family

2017. Contact 0243340420 20