According to the World Bank's 2005 Report on the Observance of Standards and Codes (ROSC) for corporate governance in Ghana, the recent performance of Ghana's capital market demonstrates its potential. However, challenges remain because of its weak institutional foundation and capacity and enforcement gaps. The 2005 World Bank ROSC reports that the improvement of Ghana's capital markets is more dependent on increasing the institutional capacity of the regulators, administration, and judiciary than on reforming the legal framework. Recommendations to improve corporate governance include upgrading the institutional framework, continuing to review and modernize legislation, spreading awareness of the importance of corporate governance, establishing active and independent boards, and improving disclosure. Listed companies are subject to the Companies Act of 1963, the Ghana Stock Exchange listing rules, and the Securities Industry Law of 1993, which was amended by the Securities Industry Act of 2001. The SEC issued a voluntary Code of Best Practices on Corporate Governance, but a company's compliance with the code must be included in its annual report. The 2005 World Bank ROSC indicates that although few companies report on their compliance with the Code, company compliance with the Code has improved.
General Overview
According to the World Bank's 2005 Report on the Observance of Standards and Codes (ROSC) on corporate governance in Ghana, the recent performance of Ghana's capital market demonstrates its potential. However, challenges remain because of its weak institutional foundation and capacity and enforcement gaps. The 2005 World Bank ROSC reports that the improvement of Ghana's capital markets is more dependent on increasing the institutional capacity of the regulators, administration, and judiciary than on reforming the legal framework. Businesses do not yet promote an "ethical, responsible and transparent corporate governance environment" (p. 1), Retail investor awareness is practically nonexistent, institutional investors are not very involved, and majority shareholders tend to control the boards and overshadow smaller investors. A number of factors discourage medium and large firms from listing, including possible loss of control, cost of listing, transparency, and accountability.
The ROSC makes a number of policy recommendations to improve corporate governance in Ghana. The institutional framework should be overhauled to improve training, resources, and effectiveness. Focus should be placed on advancing the new commercial court and "private arbitration"; establishing a central depository system for equities; improving the effectiveness of the company registry, and increasing the Institute of Chartered Accountants enforcement of accounting/auditing. Corporate governance related legislation should continue to be reviewed and modernized. Awareness of the importance of corporate governance, transparency, and accountability should be raised through director training, and Securities and Exchange Commission (SEC) certification should be considered. Boards should be active and independent. Disclosure needs to be improved through better SEC resourcing and training, and electronic market surveillance by the Ghana Stock Exchange (GSE) should be considered.
Ghana seeks to improve its standard of corporate governance in order to increase investment and liquidity on the GSE, according to the London Business School's 2003 report. Shareholders are active but not particularly educated in finance. The report recommends that shareholders and directors be better educated on their rights and responsibilities.
Ghana's corporate governance framework has a number of unique features, according to the 2005 World Bank ROSC. First, there is a large presence of multinational companies and banks in Ghana, providing an example of high corporate governance standards that can serve as a guide to other companies. Second, "Ghana is characterized by a relatively large set of institutional investors (who are yet to become active in the area of corporate governance), and a small but sophisticated securities market operators industry, servicing mostly foreign investors" (pp. 1-2), with little awareness for retail investors. Third, there is a low level of bank credit available to the private sector. Most bank assets are held in government paper, partially due to high reserve requirements and good government paper interest rates. This reflects the makeup of private sector borrowers, including small and medium sized enterprises (SMEs), and a sizable informal sector. Fourth, improving enforcement is limited by the poor institutional foundation and capacity. Finally, although the stock market is small, its popularity is growing and is attracting potential investors.
Listed companies are subject to the Companies Act of 1963, the Ghana Stock Exchange listing rules, and the Securities Industry Law of 1993, which was amended by the Securities Industry Act of 2001. The corporate legal framework is based on English Common Law. The London Business School's 2003 report indicates that the Companies Law of 1963 is outdated and under review by the Registrar General's Office, which the 2005 World Bank ROSC notes is part of the Financial Sector Strategic Plan. The London Business School's 2003 report also indicates that the SEC issued a Code of Best Practices on Corporate Governance that is based on the Organization for Economic Cooperation and Development principles and the Commonwealth Association for Corporate Governance principles. The Code is voluntary, but a company must include its level of compliance with the Code in its annual report. However, the 2005 World Bank ROSC indicates that although few companies report on their compliance with the Code, compliance has nonetheless improved. Also, the GSE Rule Book, which includes rules pertaining to members, listing, trading, and settlement is under review and is expected by the GSE website to be completed by 2006.
The 2005 World Bank ROSC reports that the SEC is responsible for supervising listed companies, investment advisors, brokers/dealers, unit trusts, mutual funds, share transfer agents, collective investment schemes (CIS) trustees, custodial services providers, the Central Securities Depository, registrars, and underwriters. Companies must register with the Registrar General's Department of the Attorney General's office and the Ministry of Justice. The GSE is a self-regulated organization (SRO) supervised by the SEC. The central securities depository was established in 2004 by the Bank of Ghana and expanded to include equities in 2005. State-owned enterprises (SOEs) and statutory corporations are supervised by the State Enterprises Commission. The judicial system is overloaded, slow, and not always fair. To help this problem, the Ghana Arbitration Center, a "pilot fast-track High Court" (p.1) and a specialized commercial court were established. The London Business School's 2003 report indicates that "courts are slow and expensive and the SEC serves as an alternative dispute resolution venue and is more aggressive in its enforcement of rules" (p. 34). Some pressure has been taken off the courts by the Administrative Hearings Committee, a quasi-judicial body. Other organizations that are involved in Ghana's corporate governance are the Institute of Directors (IoD), the Private Enterprise Foundation, the Institute of Economic Affairs, and the Ghana Centre for Democratic Development. The IoD promotes the training of listed companies' directors, but does not have a certification program.
The GSE was open for trading in 1990. It is fairly illiquid, with very low market turnover. In 2004, market capitalization was US$ 2.1 billion, which was 24 percent of GDP. The 2005 World Bank ROSC reports that the bond market is limited but initial public offerings (IPOs) are on the rise. Ownership is concentrated in the state and foreigners. The U.S. Department of Commerce's 2007 Country Commercial Guide indicates that in January 2007, the GSE had 32 listed companies, 2 government bonds, and 4 corporate bonds. It also oversees portfolio investment. Market performance was very strong in 2003-2004, dropped significantly in 2005, and improved a bit in 2006. In addition, the introduction of new regulatory policies is promising.
The Investor Protection Index is a subcomponent of the World Bank's 2007 Doing Business Indicators. The Investment Protection Index consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Ghana scores 7 in the Disclosure Index, against a regional average of 4.7 and an OECD average of 6.3. It scores 5 in the Director Liability Index, against a regional average of 3.1 and an OECD average of 5.0 and 6 in the Shareholder Suits Index against regional average of 5 and an OECD average of 6.6.
The Principles
Principle I: Ensuring the Basis for an Effective Corporate Governance Framework
In its 2005 Corporate Governance Country Assessment of Ghana, the World Bank rates Ghana's observance with the sub-principles of Principle I as follows. "Overall corporate governance framework" was rated as "Largely Observed," indicating that only minor shortcomings are observed, which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Legal framework enforceable and transparent" and "Clear division of regulatory responsibilities" were rated as "Partially Observed," indicating that while the legal and regulatory framework complies with the principle, practices and enforcement diverge. "Regulatory authorities have sufficient authority, integrity and resources" was rated as "Materially not Observed," indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance.
The 2005 World Bank ROSC makes a number of recommendations for the improvement of Ghana's institutional and legal frameworks. The ROSC suggests that the SEC's capacity be developed with regard to staff, training, and recourses. The SEC needs to improve enforcement of disclosure quality, related party transaction (RPT) regulations, insider trading, disclosure of director remuneration, ownership disclosure, market operator conflict of interest management, rule-making, and shareholder redress. Also, the SEC should improve the transparency of its redress functions, such as publicizing the work of the Administrative Hearings Committee. According to the ROSC, "the overlap of jurisdiction of the SEC, Bank of Ghana and National Insurance Commission should be addressed by the Joint Committee of Financial Sector Regulator Cooperation. Also, it needs to be decided whether the SEC or Bank of Ghana should license government securities dealer operation of banks" (p. 25). A fully electronic market surveillance system that creates a real time link between the SEC and GSE and the GSE and brokers should be implemented. The World Bank further suggests that there should also be an electronic database of insider holdings. The division of monitoring duties held by the SEC and GSE should be clarified. A GSE webpage that grants access to all company filings should be created. The new Commercial Court should be strengthened by continuing training, recourse-provision, and quality monitoring. Arbitration should be promoted as an alternative dispute resolution mechanism. The central depository system for equities should be completed "with a special focus on migration to a central registry system" (p. 25). Settlement time should be improved and a central clearance and payment system that provides access to broker/dealers should be established. Finally, the Registrar General's Department (RGD) should be staffed, trained, computerized, and motivated to effectively supervise company forms. It should monitor the completeness and disclosure quality of fillings and provide good access to company fillings. The availability of resources available to the SEC and RGD needs to be evaluated to judge whether they have the resources to ensure disclosure and enforcement of public firms.
The 2005 World Bank ROSC further recommends that the Companies Code of 1963 be reformed and synchronized with the SEC regulations, and updated to include electronic transfer of shares and other new mechanisms. The Long-Term Savings Plan Act 2005 should be implemented and operational guidelines for private Savings Plans should be drafted. All stakeholders should be included in consultations on new laws. The State Enterprises commission should "continue corporatizing SOEs" (p. 25) and motivate the large SOEs to become listed on the GSE. A greater emphasis should be placed on the corporate governance practices of SOEs and an SOE corporate governance assessment should be conducted. Credit registries should be regulated, and private share registries should be regulated and prevented from handling listed securities after completion of the central depository system for equities. Market operators also should be better regulated, particularly with respect to handling potential conflicts of interest among broker/dealers, asset managers, securities analysts, future rating agencies, and the banks and insurers who own them. Brokerage research should be separated from the rest of the functions of brokerage firms and there should be equal broker borrowing restrictions for independent broker/dealers and those affiliated with banks. Specific operating guidelines should be provided to regulate custodians, including protections for the beneficial owner in case of custodian bankruptcy. The reporting requirements of the GSE should be aligned with the SECs reporting requirements, including the provision for quarterly reports. A minimum price should be set for squeeze-outs, oppressed shareholder withdrawal, and share buy-backs. Foreign ownership requirements should be retracted, and "best practice [should regulate] large transactions of 25 percent and above, as well as transactions for substantially all assets" (p. 25).
Principle II: The Rights of Shareholders and Key Ownership Function
In its 2005 Corporate Governance Country Assessment of Ghana, the World Bank rates Ghana's observance with the sub-principles of Principle II as follows. "Shareholder's rights to consult with each other" was rated as "Observed," indicating that all essential criteria are generally met without any significant deficiencies. "Rights to participate in fundamental decisions" and "Shareholders' Annual General Meeting rights" were rated as "Largely Observed," indicating that only minor shortcomings are observed, which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. The sub-principle "Disproportionate Control Disclosure" was rated as "Partially Observed," indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. "Basic Shareholders rights," "The functioning of control arrangements," and "The facilitation of ownership rights" were rated as "Materially Not Observed," indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance.
The 2005 World Bank ROSC recommends that Ghana spread awareness of the importance of corporate governance. To do so, institutional investors, executives, and directors should receive training and a shareholders association should be established. The listing of new companies should be promoted by the GSE through educational efforts, and public awareness about the capital markets should be improved. The SEC should consider including director training as a listing requirement instead of just a recommendation, and it should authorize bodies to complete the training. In addition, the SEC should enforce the comply-or-explain requirement of the SEC's Code of Best Practices on Corporate Governance.
According to the 2005 World Bank ROSC, basic shareholder rights are protected, for the most part. Information is readily available in a timely manner, but enforcement of disclosure is sub-par. A central depository system for equities was expected to be available in 2005. There is no regulation for private registry services. No shareholder can nominate a director without the approval of the board and management. Although basic annual general meeting (AGM) rules are implemented, shareholders have little impact within listed companies. Controlling shareholders dominate AGMs through the board. Although shareholders may vote by mail, they rarely do so due to the inefficiency of the postal system. Electronic voting is not an option. Company bylaws and prospectuses must include information about share classes, and any changes must be disclosed. The ROSC adds that "approval of decisions by negatively impacted classes is regulated" (p.2).
Principle III: The Equitable Treatment of Shareholders
In its 2005 Corporate Governance Country Assessment of Ghana, the World Bank rates Ghana's observance with the sub-principles of Principle III as follows. "All shareholders should be treated equally" and "Prohibit insider trading" were rate as "Partially Observed," indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. "Board/Managers disclose interests" was rated as "Materially not Observed," indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance.
According to the 2005 World Bank ROSC, no shareholder can nominate a director without the approval of the board and management. Although basic AGM rules are implemented, shareholders have little impact for listed companies. Controlling shareholders dominate AGMs through the board. Although shareholders may vote by mail, they rarely do so due to the inefficiency of the postal system, and electronic voting is not an option. Company bylaws and prospectuses must include information about share classes and any changes must be disclosed. The ROSC states that "approval of decisions by negatively impacted classes is regulated" (p.2).
The law does not ensure equitable treatment of shareholders by directors. The 2005 World Bank ROSC recommends replacing the law that allows directors to give special treatment to a certain class with a requirement that directors provide equal treatment to all shareholders. Minority rights are weakly protected. All shareholders may bring an AGM resolution to court for being unfair or contradictory to the company bylaws, and all shareholders may sue a director. However, there is little defense of minority rights. An AGM can be called by a 5% shareholder interest or, for private firms, by a 10% shareholder interest. Although there are oppression rights for shareholders that require a company or other shareholders to buy back their shares, there is no minimum/ fair price rule. The ROSC recommends that a minimum price should be set forth in law for squeeze-outs, oppressed shareholder withdrawal, and share buy-backs. The ROSC also suggests that the Companies Code should guarantee representation on the board for smaller block holders, and adds that there should be a provision allowing minority shareholders to nominate a director. In addition, to comply with best practices, the law must require disclosure of the rights of different share classes and the amounts of shares in each class, as well as stakeholder issues in the annual report.
Principle IV: The Role of Stakeholders in Corporate Governance
In its 2005 Corporate Governance Country Assessment of Ghana, the World Bank rates Ghana's observance with Principle IV as follows: "Performance-enhancing mechanisms" is rated as "Observed," indicating that all essential criteria are generally met without any significant deficiencies. "Legal Rights of stakeholder are respected" and "Whistleblower protection" are rated as "Largely Observed," indicating that only minor shortcomings are observed, which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Stakeholder Redress," "Stakeholder Disclosure," and "Creditor Rights and Law enforcement" are rated as "Partially Observed," indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge.
According to the 2005 World Bank ROSC, stakeholder issues are not addressed in the annual report but must be to be in line with best practices. The SEC has the power to provide redress, but the ROSC suggests that the SEC redress functions be more transparent, for example by publicizing the work of the Administrative Hearings Committee. Redress is expected to be better facilitated by the introduction of a pilot fast track High Court and the new Commercial Court, which should improve on the inefficiency and corruption of the court system. In addition, a Whistleblowers Bill is before Parliament. The ROSC also recommends that all stakeholders be included in consultations on new laws.
In its 2005 Corporate Governance Country Assessment of Ghana, the World Bank rates Ghana's observance with Principle V as follows: "Fair and timely dissemination" as "Largely Observed," indicating that only minor shortcomings are observed, which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Standards of Accounting and Auditing," "Disclosure standards," "External auditors should be accountable," and "Disclosure of conflicts of interest by analysts, brokers, rating agencies" as "Partially Observed," indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. "Independent audit annually," and "Disclosure of conflicts of interest by analysts, brokers, and rating agencies" as "Materially Not Observed," indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance.
The 2005 World Bank ROSC offers a number of recommendations to improve disclosure. The SEC needs to expand its responsibilities to include monitoring quality of disclosure, the timely filing of material announcements, disclosure of related-party transactions (RPTs), ensuring that director holdings registers are well maintained, and other types of non-financial disclosure. RPTs should be regulated for directors, controlling owners, and large non-controlling owners, in accordance with best practices. The identity of ultimate beneficial owners should be required in the annual report. Executive and non-executive directors should be prohibited from taking out related loans. Also in line with best practices, the law should require that the annual report include company objectives, stakeholder issues, governance policies, and a Management Discussion and Analysis section. Disclosure of non-listed companies should also be monitored. The Ghana National Accounting Standards should be reviewed to ensure compliance with international accounting and auditing standards. The Institute of Chartered Accountants should have the ability to monitor audits and the power to stop unlicensed auditors from practicing. Best practices require that the law define auditor independence; it should not just be included in the Code of Professional Conduct of Accountants. Also, to comply with best practices, the law must require disclosure of the rights of different share classes and the amounts of shares in each class, as well as stakeholder issues in the annual report.
In its 2005 Corporate Governance Country Assessment of Ghana, the World Bank rates Ghana's observance with Principle V as follows: "Access to information," "Apply high ethical standards," and "The board should fulfill certain key functions," as "Largely Observed," indicating that only minor shortcomings are observed, which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. "Acting with due diligence and care" as "Partially Observed," indicating that while the legal and regulatory framework complies with the Principle, practices and enforcement diverge. "Exercise objective judgment" was rated "Materially Not Observed," indicating that, despite progress, shortcomings are sufficient to raise doubts about the authorities' ability to achieve observance. "Fair treatment of all shareholders" was rated "Not Observed," indicating no substantive progress toward observance has been achieved.
The 2005 World Bank ROSC includes a number of recommendations for Ghana in order to establish active and independent boards. There should be independence or non-executive obligations for directors and, to be in compliance with best practices, the audit committee must be entirely independent. Minority shareholder rights to elect a director should be included in the Companies Code. Although the SEC Code of Corporate Governance includes audit committee functions, they should be incorporated into the law. Instead of the number of directorships being restricted by recommendation, it should be restricted by law. The law that allows directors to give special treatment to a certain class should be replaced with the requirement that directors provide equal treatment to all shareholders.
Nganga, S., Jain, V., Artivor, M., "Corporate Governance in Africa -- A Survey of Publicly Listed Companies," December 2003. Available from London Business School website. Accessed on October 15, 2007. (Nganga et al. 2003)
World Bank, "Ghana: Report on the Observance of Standards and Codes (ROSC) - Corporate Governance Country Assessment," May 2005. Available from World Bank website. Accessed on October 18, 2007 (ROSC 2005)
U.S. Department of Commerce, "Doing Business in Ghana: A Country Commercial Guide," February 2007. Available from U.S. & Foreign Commercial Service and U.S. Department of State website. Accessed on October 3, 2007. (U.S. DoC 2007)
World Bank, "Doing Business: Snapshot of Business Environment - Kenya," 2007. Available from World Bank website. Accessed on October 15, 2007. (WB 2007)
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