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KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY - INSTITUTE OF DISTANCE LEARNING

MSC / MPHIL INDUSTRIAL FINANCE AND INVESTMENTS

CORPORATE GOVERNANCE AND ETHICS ASSIGNMENT

YEAR TWO, SEMESTER ONE (APRIL, 2015)

BY:

GROUP TWO (2) B

(ACCRA CITY CAMPUS)

NAME INDEX NUMBER

1. CHARLES EKORNUNYE ANSAH - PG1334013 - Leader

2. BRIGHT DORTSO - PG1338813

3. JOHN DAVID WOLEDZI - PG1346013

4. MAXWELL KWAME ZOWONU - PG1346913

5. FRANCIS TIMORE BOI - PG1337313

6. ERASMUS YAW AFRIYIE - PG86730012

7. IRENE N.L.JONES-NELSON - PG1341113

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QUESTION 1

The Ghanaian Securities and Exchange Commission defined corporate governance in 2002

as the manner in which corporate bodies are managed and operated. The Organization for

Economic Co-operation and Development (OECD) however defines it (corporate

governance) as a set of relationships governing the various members of a corporation. It is

further defined by the OECD (1999) as the system by which business corporations are

directed and controlled.

There are two main approaches to corporate governance and these are rules based

approach and principles based approach.

(a) (i) Rules-based In a rules-based jurisdiction, corporate governance provisions are legally

binding and enforceable in law.

Rules based approaches to corporate governance tend to be found in legal

jurisdiction and culture that lay great emphasis on obeying the letter of the law

rather than the spirit. They often take the form of legislation, notably the

Sarbanes-Oxley Act. Non-compliance is punishable by fines or ultimately by

delisting and director prosecutions.

There is limited or no room for interpretation of the provisions to match

individual circumstances. Investor confidence is underpinned by the quality of

the legislation rather than the degree of compliance (which will be total for the

most part).

(ii) Principles-based approach

The corporate governance practices used in developed countries are not directly applicable

in developing economies because of political, economic, technological and cultural

differences (Mensah 2002; Rabelo & Vasconcelos, 2002).This means that there is a need to

develop models of corporate governance that consider the conditions in each developing

country and that are not directly borrowed from developed countries.

The Sarbanes-Oxley Act of 2002 (often shortened to SOX) is legislation passed by the U.S.

Congress to protect shareholders and the general public from accounting errors and

fraudulent practices in the enterprise, as well as improve the accuracy of corporate

disclosures.

In the global securities marketplace, restoring faith in governance by investors has become a

time-sensitive, crucial initiative to ensure capital still flows into the trading arena; that stock

prices are buttressed; and that investors will be able to accurately assess the value and

potential of companies and/or funds.

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A quick look at the various jurisdictions speaks for itself.

In the USA, the Sarbanes-Oxley Act was introduced into legislation by The House of

Representatives and then the Senate who were concerned about the fact that CEOs, CFOs and Boards must be expressly accountable for the Financial Statements and Management

Estimates published by their companies. This act is a specific rules-based approach and a

requirement by all corporations operating in the USA. It confers special responsibility and

expectations on Public Accounting Firms and Auditors, the Securities Exchange

Commission, and State Legislatures to police the Act.

Recently the US Securities and Exchange Commission (SEC) approved new Governance

rules outlined by the NYSE and NASDAQ, for companies listed on their exchanges. Those

who fail to comply by November 2004, risk being de-listed.

In Canada, the TSE refused to enunciate hard and fast rules, preferring instead to outline

Guidelines, then rely on shareholders to hold their Boards accountable for operating in

relation to the guidelines. As of January 16, 2004 the Ontario Securities Commission

published its proposals for best practices in governance, and requiring all Issuers to make

regular disclosure about their practices against such best practices. The OSC has thus moved

towards a quasi-rules based environment.

In the UK, the Cadbury Commission of the London Stock Exchange released their Combined

Code of Governance Principles and Best Practices. The suggestion being that companies

self-report to the investment community against these standards as their approach to

restoring trust in their market.

The Hong Kong Laws regarding good governance were published as a Code of Best Practices. These explicitly state that they are not intended as rules to be rigidly adhered to, but should rather serve as guidelines that companies should aim for.

The German Panel on Corporate Governance essentially embraced the OECDs Principles of

Governance and recommended transparency approaches to information and disclosure

practices by German listed companies.

CalPERS, the huge California Public Employees Pension Fund investor established Principles of Governance, which they presumably use to help decide whether or not they will

invest in a particular company or Fund.

Outside the specific corporate governance realm, there are a multitude of recommendations

but few hard and fast rules-based applications.

In Canada, the Canada Revenue and Customs Agency (CRCA) sets rules that outlines the

minimum expectations and practices for which Charitable Organizations Boards must comply in order to retain their charitable status.

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The report: Building on Strength: Improving Governance and Accountability in Canadas Voluntary Sector. (Also known as the Broadbent Report) established a set of best practices and recommendations for Canadas Charitable and Not-for-Profit community that has become the defacto standard against which all such organizations are measured. Still in

discussion is whether a regulatory body will be established to police this sector.

In a much broader context, the OECD has developed Corporate Governance Guidelines that

are nonbinding Principles that reflect the views of member countries. The OECD also publishes governance guidelines for government bodies and NGOs.

Many countries have specific laws against embezzlement and/or tax evasion which usually

are the basis for police action against crooked politicians, businesses and individuals.

The World Bank and International Monetary Fund create specific rules requiring

transparency and democratic processes for countries/governments looking to receive their

funds.

Transparency International has garnered many signatures of countries that commit their

companies, government institutions and individuals to the avoidance of bribes, kick-backs,

etc. Those who break the rules, even outside their country are liable for prosecution and

penalty in their home country.

As you can see, most jurisdictions around the world favour the use of Principles and

Guidelines and extend a belief and trust in their organizations to subscribe to such principles.

Such faith also leaves the vigilance of good practice to the larger community, and leaves

unclear the specific consequences however one assumes that public exposure of practices not in keeping with the principles will result in significant loss of face and credibility. In

America, there is a tendency not to extend such trust, and instead to develop and insist on

compliance to a specific set of rules. In such a system the consequences of non-compliance

are clear, and supposedly swift, yet restricted to the jurisdiction of the regulatory body.

Tick-the-box and rules-based approaches to governance are no longer adequate for any

organisation - be it a government, a publicly-traded or privately-owned corporation, a state-

owned entity, a multi-lateral institution or a charity.

The success of every organisation increasingly correlates directly to its reputation among its

stakeholders. In order to remain in good standing, an organisation needs to transform its

approach to governance to one based on transparency, accountability, evidence of

effectiveness and adaptability - what we call principles-based governance. This need for

principles-based governance is fuelled by the pervasive public scrutiny of organisations, a

trend that will only increase with advances in social media and technology.

A central purpose of governance is to ensure that those in power are accountable to those

whose interests they represent. A principles-based governance framework helps ensure open

and effective communication to investors and other stakeholders.

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Many organisations already profess that their good reputations are what attract and retain

their best employees. Organisations that implement principles-based governance frameworks

are able to set, and monitor, the standards of governance for themselves, their subsidiaries

and portfolio companies, and to raise the standards of governance in the sectors in which

they operate. This fosters trust within, and of, the organisation. A principles-based

governance framework will also generate evidence of effectiveness to quell controversy, and

be highly adaptable to respond quickly to emerging risks, and deliver in challenging

environments.

Principles-based governance goes far beyond mechanics such as board composition and the

frequency of committee meetings. It encompasses risk management, business lines and

strategies, board effectiveness, compliance, and engagement with the full range of

stakeholder groups. Governance must be woven through every aspect of an organisation,

including its culture, people and its public face.

When governance is applied as a box-ticking exercise in the current environment it often

fails. Regulation in the GCC remains rules-based. As a result, organisations often approach

governance as a process of complying strictly with rules rather than considering governance

from a wider stakeholder-based perspective. This is a high risk approach. Instead,

organisations need to instil governance principles that embody the spirit of the rules. In other

words, the principles should inform efforts to comply with the rules so that compliance is

about satisfying the spirit of the underlying regulatory objective, not merely the letter.

Unfortunately, a rules-based approach also tends to encourage those to play games with the

rules, to find loopholes in the rules, and to find ways around the rules. This has been

evidenced in the past few months in both Canada and the USA by our political leaders shortly

after passing new, restrictive, campaign fundraising rules. Still, a rules-based approach can

snap the members of a certain community into action in a very short period of time, and

hope to ensure a minimum new standard of practice, that will rapidly increase trust in their

system.

The Value of a Principles- Based Approach

The rigour with which governance systems are applied can be varied according to size,

situation, stage of development of business, etc. Organisations (in legal terms) have a choice

in the extent to which they wish to comply, although they will usually have to comply or

explain. Explanations are more accepted by shareholders and stock markets for smaller

companies. Obeying the spirit of the law is better than box ticking (sort of business you are rather

than obeying rules). Being aware of overall responsibilities is more important than going

through a compliance exercise merely to demonstrate conformance. Avoids the regulation overload of rules-based (and associated increased business costs).

The costs of compliance have been a cause of considerable concern in the United States.

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Self-regulation (e.g. by Financial Services Authority in the UK) rather than legal control has

proven itself to underpin investor confidence in several jurisdictions and the mechanisms are

self-tightening (quicker and cheaper than legislation) if initial public offering (IPO) volumes

fall or capital flows elsewhere. Principles essentially have no minimum standard of practice

and can rise over time. Principles work to influence a broad set of practices conforming to a

level of expectation by the community at large. The implication being, that if anyone in the

community believes your practices to be skirting the issue, or non-genuine, then you have a

problem of confidence in your actions. This then should leverage everyone up to a high

standard of practice, as minimal compliance will not really be tolerated by most onlookers.

Principles also encourage organizations to start right away at moving their current practices

in-line with the Principles, leaving room for continuous improvement over time.

PARTICULAR SITUATIONS OF DEVELOPING COUNTRIES

Developing countries economies tend to be dominated by small and medium sized

organisations (SMEs). It would be very costly and probably futile, to attempt to burden small

businesses with regulatory requirements comparable to larger concerns. Effective and

efficient management of public sector organizations is an issue of concern in many countries.

Melese et al. (2004) argue that public sector organizations are increasingly being held more

accountable for their performance and are therefore expected to operate efficiently and

effectively. This means that public sector organizations have to search for ways to improve

on their activities. Notable approaches include the use of performance contracts. Similarly,

activity based management practices can increase transparency and efficiency when

conducting government activities thereby assisting public sector organizations to achieve

their objectives (Baird, 2007; Melese et al., 2004).

Historically, some public sector enterprises were formed to create employment for large

numbers of people. However, in recent years, public sector management has become

increasingly results and customer-focused (Jarrar & Schiuma, 2007).

This can be partly attributed to a growing unwillingness among many communities and

governments to accept the continuation of historic commitments simply because they are

historic. Some countries have also noticed diminishing differences between the private and

public sectors. For instance, private sector organizations are now expected to take more

social responsibility measures while the public sector is witnessing the need to focus on

customers and to justify their existence. The contemporary business environment pays great

attention to target, measurement, accountability, productivity gains and the continued

relevance and value of specific activities or programs. The proper management of public

sector organizations is therefore an issue of concern in developed and developing countries.

It has been noted that the concept of governance has existed for centuries. However, many

African economies began to pay particular attention to the ideals of good governance in the

beginning of the 1980s. According to Qudrat-I Elahi (2009), the term good governance was

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first mentioned in a 1989 World Bank report on Sub-Saharan Africa but since the 1990s

many donor agencies have sought the pursuit of good governance. Currently, corporate

governance is a buzzword in the business world.

Corporate governance systems have evolved in a number of developing African countries

(Solomon & Solomon, 2004). However, Rwegasira (2000) argues that the concept of

corporate governance is not necessarily the best solution for developing economies. This is

because a number of developing countries face numerous problems that include unstable

political regimes, low per capita incomes and diseases. Such problems require more elaborate

solutions than simply adopting corporate governance concepts. Moreover, there is a general

lack of research in corporate governance practices in developing countries, especially

countries in the African continent (Okeahalam, 2004; Shleifer & Vishny, 1997).

This lack of research can be attributed to the fact that, for a long time, the issue of corporate

governance did not receive adequate attention in the developing world. Yakasai (2001)

observes that historically the ability of managers to run organizations was never questioned.

Consequently, there was little concern for corporate governance or information disclosure

and transparency. That situation has changed and the concept of corporate governance is

currently acknowledged to play an important role in the management of organizations in

developing economies.

Tsamenyi, Enninful-Adu and Onumah (2007) argue that developing countries are often faced

with a multitude of problems that include uncertain economies, weak legal controls,

protection of investors and frequent government intervention. These problems make it even

more necessary for developing countries to adopt effective corporate governance structures.

The pressures of an increasingly globalized world economy, democratization, IMF/World

Banks economic reforms and the recent financial scandals in the West have forced a number

of developing countries to adopt the corporate governance ideals (Ahunwan, 2002; Gugler,

Mueller & Burcin, 2003; Reed, 2002). It has also been suggested that improved corporate

governance systems can serve as an incentive for attracting foreign investment (Ahunwan,

2002).) In fact, it is poor economic performance and high international debt levels in

emerging markets that forced the World Bank, IMF, and the IFC to intervene in an effort to

improve the corporate governance systems of these markets (Reed 2002).

A number of developing countries have embraced the corporate governance ideals. However,

developing countries practice corporate governance models that are different from the

models adopted by developed countries (Rabelo & Vasconcelos, 2002). This is partly due to

the unique economic and political systems found in developing countries. Mensah (2002)

argues that developing countries are poorly equipped to implement the type of corporate

governance found in the developed market economies because developing countries are

characterised by state ownership of firms, interlocking relationships between governments

and financial sectors, weak legal and judiciary systems and limited human resource

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capabilities. Corporate governance structures in developing countries are weak.

Consequently, several measures have been suggested on how to improve such structures.

Notable suggestions include the use of equity instead of debt for growth, increasing overall

investor confidence through increased transparency, strengthening of capital market

structures and encouraging the use of competition to improve performance of domestic firms

(Reed, 2002).

The concept of competitions as a way of encouraging improvements in productivity has been

adopted in many parts of the world (Marwa & Zairi, 2008). Competitions mainly involve

rewarding firms that excel in stated areas and they can be administered at a national level.

Firms that have adopted total quality management (TQM) ideals often use the Malcolm

Baldrige framework as a quality control tool for their activities.

CONCLUSION

The corporate governance practices used in developed countries are not directly applicable

in developing economies because of political, economic, technological and cultural

differences (Mensah 2002; Rabelo & Vasconcelos, 2002).This means that there is a need to

develop models of corporate governance that consider the conditions in each developing

country and that are not directly borrowed from developed countries and therefore a

principled based approach is most suited for developing countries.

QUESTION 2

(a) Criticisms of remuneration committee

The role of the remuneration committee is to have an appropriate reward policy that

attracts, retains and motivates directors to achieve the long-term interests of shareholders.

A Remuneration Committee is responsible for advising on executive director

remuneration, policy and the specific package for each director. Its objectives are; to

have a clear policy on remuneration that is well understood and has the support of

Shareholders; produce performance packages that are aligned with long-term shareholder

interests and have challenging targets; to have a reporting system that is clear, concise

and gives the reader of the annual report a bird's-eye view of policy payments and the

rationale behind them.

The remuneration committee has demonstrated failures of duty in several areas.There is

evidence of a lack of independence in the roles of the non-executive directors (NEDs)

who comprise the committee. One of the main purposes of NEDs is to bring independent

perspectives within the committee structure and shareholders have the right to expect

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NEDs to not be influenced by executive pressure in decision-making (such as from the

finance directors). Two of the NEDs on the remuneration committee were former

colleagues of Mr Woof, creating a further conflict. The effect of this lack of independence

was a factor in the creation of Mr Woofs unbalanced package. That, in turn, increased

agency costs and made the agency problem worse.

There was a clear breach of good practice with the remuneration committee receiving

and acting on the letter from Mr Woof and agreeing to the design of the remuneration

package in such a hasty manner. Remuneration committees should not receive input

from the executive structure and certainly not from directors or prospective directors

lobbying for their own rewards. Mr Woof was presumptuous and arrogant in sending the

letter but the committee was naive and irresponsible in receiving and acting upon it.

There is evidence that the remuneration was infl uenced by the hype surrounding the

supposed favourable appointment in gaining the services of Mr Woof. In this regard it

lacked objectivity. Whilst it was the remuneration committees role to agree an attractive

package that reflected Mr Woofs market value, the committee was seemingly coerced

by the finance director and others and this is an abdication of their non-executive

responsibility.

The committee failed to build in adequate performance related components into Mr

Woofs package. Such was the euphoria in appointing Mr Woof that they were

influenced by a clearly excitable finance director who was so keen to get Mr Woofs

signature that he counselled against exercising proper judgement in this balance of

benefits. Not only should the remuneration committee have not allowed representations

from the FD, it should also have given a great deal more thought to the balance of

benefits so that bonuses were better aligned to shareholder interests.

The committee failed to make adequate pension and resignation arrangements that

represented value for the shareholders of Tomato Bank as well as for Mr Woof. Whilst

pension arrangements are within the remit of the remuneration committee and a matter

for consideration upon the appointment of a new chief executive, shareholder value

would be better served if it was linked to the time served in the company and also if the

overall contribution could be reconsidered were the CEO to be removed by shareholders

for failure such as was the case at Tomato Bank.

(b) Components of a rewards package The components of a typical executive reward package include basic salary, which is

paid regardless of performance; short and long-term bonuses and incentive plans which

are payable based on pre-agreed performance targets being met; share schemes, which

may be linked to other bonus schemes and provide options to the executive to purchase

predetermined numbers of shares at a given favourable price; pension and termination

benefits including a pre-agreed pension value after an agreed number of years service

and any golden parachute benefits when leaving; plus any number of other benefits in

kind such as cars, health insurance, use of company property, etc.

Balanced package is needed for the following reasons

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The overall purpose of a well-designed rewards package is to achieve a reduction

(minimisation) of agency costs. These are the costs the principals incur in monitoring the

actions of agents acting on their behalf. The main way of doing this is to ensure that

executive reward packages are aligned with the interests of principals (shareholders) so

that directors are rewarded for meeting targets that further the interests of shareholders.

A reward package that only rewards accomplishments in line with shareholder value

substantially decreases agency costs and when a shareholder might own shares in many

companies, such a self-policing agency mechanism is clearly of benefit. Typically,

such reward packages involve a bonus element based on specific financial targets in line

with enhanced company (and hence shareholder) value.

Although Mr Woof came to Tomato Bank with a very good track record, past

performance is no guarantee of future success. Accordingly, Mr Woofs reward package

should have been subject to the same detailed design as with any other executive

package. In hindsight, a pension value linked to performance and sensitive to the manner

of leaving would have been a worthwhile matter for discussion and also the split between

basic and incentive components. Although ambitious to design, it would have been

helpful if the reward package could have been made reviewable by the remuneration

committee so that a discount for risk could be introduced if, for example, the internal

audit function were to signal a high level of exposure to an unreliable source of funding.

As it stands, the worst that can happen to him is that he survives just two years in office,

during which time he need not worry about the effects of excessive risk on the future of

the company, as he has a generous pension to receive thereafter.

(c) Ethical case for repaying part of pension Mr Woof was the beneficiary of a poor appointments process and his benefits package

was designed in haste and with some incompetence. He traded freely on his reputation

as a good banker and probably inflated his market value as a result. He then clearly failed

in his role as a responsible steward of shareholders investments and in his fiduciary

duty to investors. In exposing the bank to financing risks that ultimately created issues

with the banks economic stability, it was his strategies that were to blame for the crisis

created. The fact that he is receiving such a generous pension is because of his own

lobbying and his own assurance of good performance places an obligation on him to

accept responsibility for the approach he made to the remuneration committee five years

earlier. The debate is partly about legal entitlement and ethical responsibility. Although

he is legally entitled to the full value of the pension, it is the perception of what is fair

and reasonable that is at stake. It is evident that Mr Woof is being self-serving in his

dealings and in this regard is operating at a low level of Kohlbergs moral development

(probably level 1 in seeking maximum rewards and in considering only the statutory

entitlement to these in his deliberations). A more developed sense of moral reasoning

would enable him to see the wider range of issues and to act in conformity with a higher

sense of fairness and justice, more akin to behaviour at Kohlbergs level 3