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Int. J. Adv. Multidiscip. Res. (2016). 3(11): 82-92
International Journal of Advanced Multidisciplinary Research
ISSN:2393-8870
www.ijarm.com
DOI: 10.22192/ijamr Volume 3, Issue 11 -2016
Research Article DOI:http://dx.doi.org/10.22192/ijamr.2016.03.11.008
OECD Principles of Corporate Governance: Compliance among
Ghanaian Listed Companies.
[a] [b]*
Samuel Gyamerah ; Albert Agyei
[a] School of Management and Economics, University of Electronic Science and Technology of China
[b] School of Business, Valley View University, Ghana.
*Corresponding Author: agyeialbert74@vvu.edu.gh
Abstract
This study has explored the corporate governance practices in Ghanaian listed firms using
Keywords the OECD five principles of corporate governance. These principles are: Rights of
Shareholders, Equitable Treatment of Shareholders, Roles of Stakeholders in Corporate
Corporate Governance, Governance, Disclosure and Transparency, and Responsibility of the Board. A set of
OECD, questionnaire containing carefully selected questions on each principle was administered in
governance principles, 20 selected firms on the Ghana stock market. The participants included three stakeholders of
board responsibility. each company. Namely: Board of Directors, Management and Audit Committee.
Percentages, mean, and standard deviation were used to describe the responses from the
respondents. Again, the Kruskal-Wallis test was conducted to determine if there were
significant difference between the responses of each group. The study revealed that OECD
corporate governance practices are implemented in Ghanaian listed firms with Rights of
Shareholders being the most practice (mean=3.94, SD=0.8747).
1.0. Introduction
Due to recent global financial crises caused partly by debate across the world due to the Asian crises and the
non-optimal corporate governance practices by firms, poor performance of the corporate sector in Sub-Saharan
the concept of corporate governance has become a Africa. Developing nations, of which Ghana is no
worldwide subject of interest to both business acumen special case, are currently progressively grasping the
and academicians. The massive losses recorded by most idea of good corporate governance, as a result of its
financial firms which almost caused a break down in the capacity to affect sustainable growth positively. Most
financial system and led to a recession brought into light firms have embraced and are practicing good corporate
the importance of corporate governance practices (Lang governance knowing that it increases their business
and Jagtiani, 2010). performance and valuation at the bottom line.
Corporate governance has been the topnotch of policy According to the Organization for Economic
agenda in most developed market economies for over Cooperation and Development (OECD, 2004), corporate
decades and it is step by step warming its way to the governance are the rules and practices that are used to
highest point of the policy plan on the African continent. govern the relationship of managers and shareholders,
According to Berglof and von Thadden (1999), and other stakeholders of a corporation. According to
corporate governance has become prominent subject for them, it enhances the growth and financial stability of
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Int. J. Adv. Multidiscip. Res. (2016). 3(11): 82-92
firm by reinforcing market confidence, financial market companies by using the five OECD principles of good
integrity and economic efficiency. Feleaga, Feleaga, corporate governance as a yardstick.
Dragomir and Bigio, (2011) opined that with a sound
corporate governance, rights and responsibilities are 2.0. Literature Review
carefully distributed among management, board of
directors, shareholders and other stakeholders of the 2.1 Concept and Definition of Corporate Governance
firm, and at the same time clarifying all rules and
procedures in the decision making process concerning The concept of corporate governance has no universal
the affairs of the company. In monitoring management, definition. It has been defined differently by various
enhancing performance and curtailing the agency authoritative bodies and authors from various
problem, it is important for firms to adopt good perspective.The concept of corporate governance
corporate governance mechanism (Ghabayen, 2012). traditionally was to alleviate agency problems in
In the past decades, there have been quite an increasing organizations. However, with the emergence of financial
number of studies investigating the practice of corporate fraud of Enron, WorldCom and other big corporations in
governance by firms in developing countries and the early 1990s and late 2000s, corporate governance
emerging market around the globe. Corporate placed much emphasis on disclosure, transparency and
governance of firms have been investigated in Kenya accountability. The concept of corporate governance
(Mulili and Wong, 2011), Nigeria (Olayiwola, 2010), now embraces large issues in organizations ranging from
five Arabian countries (Baydoun et al., 2013) and Egypt ownership structure to the process and procedures of the
(Bremer and Elias, 2007). Most of these studies have firm. Corporate governance is thus seen to go beyond
concentrated on other parts of Africa and developing financial disclosure and agency problem to involve the
countries without considering Ghana. relationship among the frim, its staff, its creditors and
Several mechanisms have been adopted to enhance environment. Issues involving employee compensation,
corporate governance among firms in all sectors in grievance resolution, proper record keeping,
Ghana since the establishment of the Ghana Stock conformance to standards and compliance to regulatory
Exchange. The Securities and Exchange Commission requirements are all now incorporated in corporate
(SEC) of Ghana in 2010 released the Code of Corporate governance codes.
Governance Guidelines on Best Practices to propel According to Oman (2011), corporate governance
market operators to conform to best corporate broadly includes the laws, regulations and acceptable
governance practices. Again, Ghanas corporate business practices of both private and public institutions
governance code is aligned with the principles of good that governs the relationship between business managers
corporate governance by the Organization of Economic or entrepreneurs (corporate insiders) and the investors or
Cooperation and Development (OECD, 2004), the shareholders. Mayer (1997) sees corporate governance
Commonwealth Association of Corporate Governance as a mechanism of bringing into line the interest of
(CACG, 1999) and codes and best practices put forth by investors and managers in order to ensure that firms are
regulatory bodies in other emerging markets. This code operated to benefit investors. Again, the Organization
was put in place to ensure that firms on the Ghana Stock for Economic Co-operation and Development (OECD)
Exchange (GSE) conform to good business practices (2004), defines corporate governance as “a set of
that will ensure that the shareholders, stakeholders and relationships between companys board, its shareholders
the firms interest are met. Therefore, the big question and other stakeholders” (p.11). To the OECD, corporate
that comes into play is does these firms actually governance does not only define relationship between
conform to the principles of corporate governance corporate players. it also provides the structure through
established in these codes of best practices? which the objectives of the firm are set, the means of
A scan of academic literature has revealed that there has attaining those objectives and monitoring performance.
been scanty study on the level of practice of corporate It has been defined by the Cadbury Committee
governance in developing countries and emerging (Cadbury, 1995, p. 15) as “the system by which
markets. Also, to the best of our knowledge, to date, companies are directed and controlled”.
there hasnt been any study investigating the level of Al-Najjar (2010), portrays corporate governance as a set
corporate governance compliance among Ghanaian of relationships between a companys management, its
listed firms. Therefore, the study addresses this current board, its shareholders, and different partners. Al-Najjar
gap in Ghana by assessing the level of corporate recognizes two sets of governance variables that
governance compliance among Ghanaian listed influence management undertakings. First is internal
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Int. J. Adv. Multidiscip. Res. (2016). 3(11): 82-92
corporate governance, which identify itself with the were designed to flexible and can be adopted in different
connection among the management, board, shareholders cultures, circumstances and traditions in different
and different partners. The second has to do with the countries. Most countries corporate governance codes
backing and support of good corporate governance. are based on the principles of the OECD, and Ghanas
These elements incorporate laws, regulations, and corporate governance code has this element. The OECD
suitable oversight by government or other regulatory has five main corporate governance principles and these
bodies, such as, central banks or security exchanges. are discussed below:
Abor (2007) contended that corporate governance can be
considered as compliance with regulations and the 2.2.1 Rights of Shareholders and Key Ownership
mechanisms for building up the nature of ownership and Functions
control of organization within an economy.
The OECD (2004) principles posit that corporate
Other prominent writers like Cochran and Warwick governance framework should protect and facilitate the
(1988) have also defined corporate governance to exercise of shareholders rights. It states that the basic
embrace a wide range of issues arising from interactions shareholders right include: secure method of ownership
among senior management, board of directors, registration, convey or transfer shares, obtain relevant
shareholders and other stakeholders. Similarly, Shleifer and material information on the firm on a regular and
and Vishny (1997) defined corporate governance in timely basis, participate and vote in annual general
another dimension as the ways in which investors meetings, elect and remove members of the board, and
(suppliers of finance to corporations) assure themselves share in the profit of the firm. John, Litov and Yeung
of getting returns on their investment. (2008) have suggested, firm with better shareholders
protection are more likely to engage in riskier
From these definitions, it could be realized that investments that can create firm value. Similarly, Mallin
corporate governance is mainly concerned with the and Melis (2012) have stressed that the core aspect of
rules, laws and regulations that aid in the governance of corporate governance is matters concerning
institutions. It includes the manner in which these rules shareholders rights. This is because shareholders are the
are applied to regulate the relationship of the various providers of risk capital and their investments need to be
stakeholders in an institution to ensure a legitimate protected.
accountability to various corporate constituencies.
Again, corporate governance can also be seen as a 2.2.2 Equitable Treatment of Shareholders
system or mechanism for establishing the nature of
ownership and control of organizations within an “The corporate governance framework should ensure
economy. In this context Shleifer and Vishny (1997) equitable treatment of all shareholders, including
explained that corporate governance mechanisms are minority and foreign shareholders. All shareholders
economic and legal institutions that can be altered by the should have the opportunity to obtain effective redress
political process-sometimes for the better. for violation of their rights (OECD, 2004, p.20). Thus,
all shareholders within the same class should be given
2.2 OECD Principles of Corporate Governance equal treatment. This principle also requires board and
management to disclose all material interest in matters
The OECD came into full force on September 30, 1961. and transaction that affects the company. The study of
The key function of the OECD was to provide Santiango-Castro and Brown (2011) on the expropriation
management consulting to member governments. The of minority shareholders rights and firm performance in
OECD seeks to promote governance reforms in a close Latin American markets concluded that a lack of
cooperation with other international organization. This is investor protection in emerging markets might cause the
normally done in joint collaboration with the World expropriation of minority shareholders rights leading to
Bank and International Monetary Fund (IMF). poor performance. According to Salvioni and Bosetti
Roundtables, summoning senior policymakers, (2006), good corporate governance is based on equitable
regulators and market participants are organized to treatment for shareholders which ensures that members
enhance the comprehension of governance and to of the company or other shareholder groups do not
support regional reform efforts (Chowdary, 2002). The benefit directly or indirectly from commercial, financial
OECD principles of corporate governance become part and asset-involving operations.
of the core 12 standards of global financial stability.
Currently, it has become a benchmark used by
international financial institutions. The OECD principles
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Int. J. Adv. Multidiscip. Res. (2016). 3(11): 82-92
2.2.3 Role of Stakeholders in Corporate Governance decision making body in the firm that aligns the interest
of shareholders, board members, the firm, management
The corporate governance framework should recognize and other stakeholders. It provides advice to and support
the rights of stakeholders established by law and through to managers to improve and run the affairs of the firm
mutual agreements and encourage co-operation between (Minichilli, Zattoni and Zona, 2009). Ferrer and
corporations and stakeholders in creating wealth, jobs, Banderlipe (2012) have posited that a board with greater
and the sustainability of financially sound enterprises accountability, honesty, expertise, integrity and ethical
(OECD, 2004). Thus, there should be a co-operation responsibility will ensure sustainability in business
between the company and stakeholders (employees, partnership between the company and its stakeholders.
creditors, suppliers, shareholders and environment) in Again, the studies of Bhagat and Black (1999) has
creating value. Firms need to be stakeholder-oriented established a significant statistical relationship between
since a firm cannot maximize its value when it ignores firms performance and board effectiveness.
the interest of its stakeholders (Jensen, 2010). Though
the primary responsibility of the board is to increase 2.3 Framework of Ghanas Corporate Governance
shareholders wealth, it has a responsibility towards all
stakeholders and should manage all potential conflict of In 2010, the Securities and Exchange Commission
interest between the firm and its stakeholders (SEC) of Ghana released the code of best practices on
(Prugsamatz, 2010). corporate governance in Ghana to augment the already
existing guidelines on good corporate governance
2.2.4 Disclosure and Transparency practices. These existing guidelines were the Companies
Act 1963 (Act 179), the Security Industry Law, 1993
The corporate governance framework should ensure that (PNDCL 333) as amended by the Security Industry
timely and accurate disclosure is made on all material (Amendment) Act 2000, (Act 590), The Ghana Stock
matters regarding the corporation, including the Exchange Regulations 1990, (L.I. 1509), the Securities
financial situation, performance, ownership, and and Exchange Regulations (2003), L.I. 1728, the Stock
governance of the company. The disclosure must Exchange Commission guidelines on best practices in
include but not limited to the following: financial and corporate governance (issued and published in 2003) and
operating results, company objectives, major share the “Guidance Notes” of 2004 which requires market
ownership and voting rights, and related party operators to comply with corporate governance practices
transactions (OECD, 2004). According to Gill, Vijay relating to the establishment of audit sub committees in
and Jha, (2009) for a company to achieve optimum pursuant to regulation 61 of LI 1728 (2003).
transparent to all its stakeholders, then it must disclose
information relating to corporate performance and This code was issued to corporate entities licensed under
financial accounting. The study of Patel, Balic and the Securities and Industry Laws and the issuers of
Bwakira (2002) found that companies with lower public listed securities trading on the Ghana Stock
disclosure and transparency are less valued than Exchange. This code is an all-inclusive guideline of
companies with higher transparency and disclosure. corporate governance in Ghana at the moment. The
They concluded that higher transparency and disclosure provisions of the code were developed in a manner that
reduces the information asymmetry between firms were in accordance with the principles outlined in the
management and stakeholders. Similarly, Chi (2009) OECD principles of corporate governance (Otuo and
found that better transparency and disclosure practices Monia, 2013). The code expounds on the following key
establish a stronger corporate governance practice which arears of corporate governance: Board-Related Issues,
leads to firms performance. Shareholders-Related Issues, Involvement of other
Stakeholders and Audit-Related Matters. All these
2.2.5 Responsibility of the Board matters have been explained in the SEC 2010 code in
accordance with OECD principles. Therefore a study
The OECD (2004) states that, the corporate governance investigating whether firms on the Ghana Stock
framework should ensure the strategic guidance of the Exchange conform to the five OECD principles of
company, the effective monitoring of management by corporate governance is in the right direction.
the board, and the boards accountability to the company
and the shareholders. This suggests that board members 2.4 Empirical Review
should act on a fully informed basis, in good faith, with
due diligence and care, and in the best interest of the There have been few studies on the practice of corporate
company and the shareholders. The board is the highest governance by listed firms in developing and emerging
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