Transcript Corporate Governance, A Catalyst for Organizational Success.

Corporate Governance,
A Catalyst for Organizational
Success.
Internal Audit Agency Conference
KWAME BOASIAKO OMANE-ANTWI, Ph.D., FCCA
WHY CORPORATE GOVERNANCE (CG)

Because Nation’s competitiveness and wealth
depends on the competitive nature of its
corporations.

Corporations play a critical role in the
National Economy.

Liberalization and de-regulation of economies
resulting in greater freedom in management.
2
 Too many players in the field of business
resulting in competition with its attendant
weaknesses in standards and accountability.
 Market conditions are increasingly complex –
 emergence of institutions
 Failure of corporates due to lack of
transparency and disclosures.
3
• Because of the interplay of Factors in Economic
Growth and Development
Corporate
Governance
Human Capital
Physical Capital
Economic Growth
Technology
(Source: ICAG 2011 Conference Paper)
4
WHAT HAS GIVEN CG IMPETUS IN 21ST CENTURY
 Scandals upon scandals in the corporate world.
 Business Executives believe scandals have
permanently changed business landscape:

Asia 88%, Europe 81% and North America 78%
 76% are improving internal controls
 64% are reviewing relationship with auditors and
accountants.
 55% are revising their Codes of Ethics.
 Less than 20% believe new governance standards will
improve CG in the area of ethical behaviour.
(CG Reputation Watch Report, 2003)
5
Corporate Failures of recent times
• International
 Freddie Mac and Fannie Mac
 Enron
 Barings Bank
 Royal Bank of Scotland
 Northern Rock
 Merril Lynch
 Anderson
 Lehman Brothers
6
Corporate Failures of recent times
• Ghana
 Meridia BIAO
 Bank for Housing and Construction
Cooperative Bank
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CG Defined:
“ CG is the application of best management
practices, compliance of law in true spirit
and letter, adherence to ethical standards
for effective management, distribution of
wealth and discharge of social
responsibility for sustainable
development of all stakeholders”
(source: ICSA India)
8
• “CG is about promoting corporate
fairness, transparency and
accountability”
(James D. Wolfensohn, Former
President of the World Bank)
9
“CG is concerned with holding the balance
between economic and social goals and
between individual and communal goals.
CG framework is to encourage the
efficient use of resources and equally to
require accountability for stewardship of
those resources. The aim is to align as
nearly as possible the interests of
individuals, corporations and society”
(source: CADBURY, 2000)
10
CG Defined in Ghana
“The manner in which power is exercised in the
management of economic and social resources
for sustainable human development. It is a vital
ingredient in the maintenance of a dynamic
balance between the need for order and
equality in society, the efficient production and
delivery of goods and services, accountability in
the use of power, the protection of human
rights and freedoms
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and the maintenance of an organized
corporate framework which each citizen can
contribute fully towards finding innovative
solution to common problems. More
specifically corporate governance refers to the
manner in which the power of a corporation is
exercised in the stewardship of a corporation’s
total portfolio of assets and legal rights of all
stakeholders in the context of its mission”
(Source: Manual of Corporate Governance in
Ghana; December 6,2000)
12
CG Definition Analysed
• CG is nothing but the moral or ethical or value
framework under which corporate decisions are
taken.
• CG encompasses
 Commitment to values and ethical business conduct
 Maximization of shareholders’ values on a sustainable basis
 Fairness to all stakeholders including – customers, employees,
investors, vendors, government and society at large.
 Risk management
 Environmental Policy
 Wealth creation for the Nation.
13
Corporate Governance(CG)
Perspective
• From a public policy perspective, CG
Is about nurturing enterprises
Ensuring accountability
Prescribing public policies
Providing corporate incentives
Disciplining corporates
Protecting the interest of stakeholders
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CG GAME – ROLE OF GOVERNMENT
• To maintain competitive markets via antitrust and
fair trade laws
• To regulate non-competitive markets.
• To maintain a balance of power between capital and
labour
• To ensure orderly capital markets
• To protect consumers from unsafe products and
fraud.
• To ensure equal access to employment, education,
housing and public accommodations
• To protect the environment.
15
THE CG PREMIUM QUESTIONS
• Does CG affect company’s performance?
• Which specific CG good practice provisions are
most important.
• What is the interplay between country-level CG
framework and specific company factors?
• What are the caveats regarding the CG debate?
N/B Remember the story of CG debate dates as far
back as 1612 when the world’s first listed
company was founded – The Dutch East Indies
company.
(Source: Institute of Directors, UK, 2009)
16
CG PHILOSOPHY – THE GUIDING FORCE (A)
• Transparency
• Accountability
• Disclosure
• Value creation
17
CG PHILOSOPHY- THE GUIDING FORCE (B)
• CG has implication for:
 Business Ethics
 Corporate Social Responsibility
• CG helps organizations to define the meaning
of good business practice in the interest of the
poor and the marginalized.
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QUALITY CG DEPENDS ON:
•
•
•
•
•
•
Management Integrity
Board’s Ability
Adequate Processes
Commitment from Top to bottom
Participation of Stakeholders in management
Quality of Corporate Reporting
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CG ISSUES AND MODELS
•
•
•
•
Shareholders rights
Board Composition and Structure
Auditing, Control and Risk Management
Shareholder Model
 Wealth maximization
 Accountability
• Ethical leadership
 Ethical standards and accountability
 Protect the environment
• Triple Bottom Line
 Economic, Social, Environment
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THEREFORE, CG IS ABOUT:
Fulfilling long-term strategic goals of owners
Taking care of the interest of employees
A consideration for the environment and local
communities
Maintaining excellent relations with customers
and suppliers
Proper compliance with all the applicable legal
and regulatory requirements
21
Benefits of good CG
• Responsible for setting behaviour on the ethical
line
• Attacks directly corruption and cronyism
• Respected as a pillar of good governance
• In the political and administrative spheres, it
signifies growth of standards of
Transparency
Accountability
Profitability
Integrity
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• Essential tool for prosperity and economic growth.
• The link between good governance and business success
is irrefutable.
• Companies with weak governance system are significant
investment risks.
• Enhances Corporate Social Responsibility as Business
Strategy
23
• A good corporate citizen becomes an icon and
enjoys a position of respect especially in the
transformational leadership areas: generation of employment
 contribution to public health
 disaster prevention and measures
 spread education
 sustainable consumption of natural resources
 saving of pollution
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• Internationally accepted norms of good
CG standards found expression in:
 Private sector
 Public sector
 Governance thinking of countries i.e.
National Governance
Human Governance
Societal Governance
Economic Governance
Political Governance
25
THEREFORE,CG IS A FUNDAMENTAL PILLAR
OF SUSTAINABLE DEVELOPMENT:
26
THEREFORE AFRICA AND FOR THIS DISCUSSION GHANA
NEEDS GOOD CG MOST BECAUSE:
- If we reduced the world’s population to a village
of 100 people, the picture is pitiful like this:
 60 Asians, 14 Africans, 12 Europeans, 8 Latin
Americans, 5 USA/Canada and 1 South Pacific.
 51 Male, 49 Female
 82 Non white, 18 white
 67 Non Christians, 33 Christians
 80 Living in substandard housing
 67 Unable to read
 50 Malnourished and 1 dying of starvation
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33 Without access to safe water supply
 39 Lack access to improved sanitation
 24 Do not have electricity (and of the 76 that do have
electricity, most use it for light at night)
 7 People would have access to internet
 1 Would have a college education
 1 Would have HIV
 2 Would be near birth; 1 near death
 5 Would control 1 third of the village’s wealth
 33 Would receive and attempt to live on only 3% of the
income of the village
(Source: Based on UNDP and CIA Fact book data and Adapted from ICAG 2011 Conference)
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THE CRUSADERS OF CG
• United Kingdom remains the leading crusader in
CG best Practices:
 Theft Act
Cadbury Committee
 Greenbury Committee
 Hampel Committee
 Turnbull Report
 Myners Review
 Directors Remuneration Report
 Tyson Report
 Higgs Report
 Smith Report
1968
1992
1995
1998
1999
2001
2002
2003
2003
2003
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THE CRUSADERS OF CG CONTINUE
 UK
Turnbull Review
 Revised Combined Code
2004
2003, 2008
 Operating and Financial Review (OFR)
2005
 Institute of Directors, UK
 Serious Fraud Office
1988
New Bribery Act (Received Royal Assent) April 8, 2010
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THE CRUSADERS OF CG CONTINUE
• USA
 Corrupt Practices Act
1977
 Treadmay Commission
1985
 Committee of Sponsoring Org.
1992
 Sarbanes Oxley Act
2002
 Foreign Corrupt Practices Act
1977
 National Association of Corporate Directors
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THE CRUSADERS OF CG CONTINUE
• South Africa
 King’s Report I
1994
 King’s Report II
2003
 King’s Report III
2010
 Institute of Directors, S. Africa
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THE CRUSADERS OF CG CONTINUE:
The Commonwealth/The Organization for Economic
Co-operation and Development (OECD) Countries
Led by UK took the ff initiatives:
 OECD Principles
of CG
1994
 OECD Principles of CG
2004
 CACG Guidelines
1999
 OECD Anti-Bribery Convention
International Corporate Governance Network 1995
•
THE UN GLOBAL COMPACT-Ten Principles
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CG DEVELOPMENT IN GHANA
 Criminal Code (Causing Financial Loss Act 29) 1960
 The Companies Code 1963 (Act 179)
 The Securities Industry Law 1993 (PNDCL 333) as
amended in 2000 (Act 590)
 The Ghana Stock Exchange Listing Regulation 1990
 Economic and Organized Crime Office (Act 408) 2010
 Manual on CG in Ghana
2000
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CG DEVELOPMENT IN GHANA CONTINUE
 AGI CODE OF BUSINESS
2006
 Bank of Ghana Regulations
 National Insurance Commission
 Institute of Directors, Ghana
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CORPORATE GOVERNANCE FRAMEWORK IN GHANA
• THE 2003 ‘TRINITY ACTS’ OF GHANA
 The Procurement Act (Act 663)
2003
 Financial Administration Act (Act 654)
2003
 Internal Audit Agency Act (Act 658)
2003
• TRIPARTITE AUDIT FUNCTIONS
 Internal Audit
 External Audit
 Audit Committee of the Board
• FINANCIAL REPORTING & DISCLOSURES
36
UK’s CG STRONGEST MESSAGE TO THE WORLD
• “INSPITE CG INITIATIVE IN UK – THE ANNUAL
CORRUPTION PERCEPTIONS INDEX AND MAP
SHOWS THAT BRITAIN’S IMAGE EXTERNALLY
FALLS WELL SHORT OF SQUEAKY CLEAN”
• “IT WOULD BE DAMAGING TO UK FIRMS IN
FOREIGN MARKETS IF THIS COUNTRY WAS SEEN
AS AMBIVALENT ABOUT TACKLING CG ISSUES
PARTICULARLY CORRUPTION”
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• “GETTING OUT OF OUR CURRENT ECONOMIC
MESS REQUIRES US TO HARNESS THE
CAPABILITIES OF ORGANISATIONS, OUR
TEAMS AND OURSELVES”
(SOURCE: THE CHARTERED INSTITUTE OF PERSONNEL
AND DEVELOPMENT UK; APRIL 2011)
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COMMONWEALTH ASSOCIATION FOR CG-GUIDELINES
(1999)
Principle 1 – Leadership
“ The Board should exercise leadership, enterprise,
integrity and judgments in directing the
corporation so as to achieve continuing
prosperity for the corporation and to act in the
best interest of the business enterprise in a
manner based on transparency, accountability
and responsibility”
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Principle 2 - Board Appointment
“ The Board should ensure that through a
managed and effective process, Board
appointments are made that provide a
mix of proficient directors, each of
whom is able to add value and to bring
independent judgment to bare on the
decision-making process”
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Principle 3 - Strategy and Values
“ The board should determine the
corporation’s purpose and values,
determine the strategy to achieve its
purpose and implement its values in other
to ensure that it survives and thrives, and
ensure that procedures and practices are in
place that protect the corporation’s assets
and reputation”.
41
Principle 4 - Company Performance
“ The
board should monitor and
evaluate the implementation of
strategies, policies, management
performance criteria and
business plan”
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Principle 5 – Compliance
“The
Board should ensure that the
corporation complies with all
relevant laws, regulations and
codes of best business practice”
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Principle 6 - Communication
“The Board should ensure that the
corporation communicates with
shareholders and other
stakeholders effectively”
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Principle 8 - Relationship with
stakeholders
“The Board should identify the
corporation’s internal and
external stakeholders and agree
to a policy, or policies,
determining how the corporation
should relate to them”
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Principle 9 - Balance of Powers
“The Board should ensure that no
one person or a block of persons
has unfettered power and there
is an appropriate balance of
power and authority on the
board”
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Principle 10 - Internal Procedures
“ The Board should regularly review
processes to ensure the effectiveness
of its internal systems of control, so
that its decision-making capability and
the accuracy of its reporting and
financial results are maintained at a
high level at all times”
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Principle 11 - Board Performance
Assessment
“ The Board should regularly
assess its performance and
effectiveness as a whole and
that of the individual directors ,
including the Chief Executive
Officer”
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Principle 12 - Management
Appointment and Development
“ The Board should appoint the Chief Executive
Officer and at least participate in the
appointment of senior management ,ensure the
motivation and protection of intellectual capital
intrinsic to the corporation, ensure that there is
adequate training in the corporation for
management and employees, and succession
plan for senior management”
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Principle 13 - Technology
“The Board should ensure that
technology and systems used in
the corporation are adequate to
properly run the business and for
it to remain a meaningful
competitor”
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Principle 14 - Risk Management
“The Board must identify key risk
areas and key performance
indicators of the business
enterprise and monitor these
factors”
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Principle 15 – Annual Review of future
Solvency
“The Board must ensure annually
that the corporation will
continue as a going concern for
its next fiscal year”
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DIRECTOR’S CHANGING ROLE
- Changing Responsibilities and best practice
in the 21st Century.
• Majority of directors should be independent
• Separate the roles of chairman of the board and CEO
• Enhancing the role of Non Executive Directors
• Set a “tone at the top” and a corporate culture that
promotes ethical conduct
• Periodic evaluation of performance of the board.
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AUDIT COMMITTEE’S CHANGING ROLE
- Changing responsibilities and best practice in the
21st Century
• Mandatory Audit Committees
• Independent members of audit committee
• Financial expertise with authority to engage
advisors
• Appoint, compensate, retain, and oversee
independent auditor
• Establish procedures for receipt, retention and
treatment of complaints relating to accounting,
auditing, and internal control matters.
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MANAGEMENT’S CHANGING ROLE
- Changing responsibilities and best practice in
the 21st Century
• To certify fair presentation of financial
statements and assessment of internal
controls and procedures over financial
reporting
• Prepare for new disclosure requirements
• Enhance code of ethics for senior officers
• Increase time and attention to governance
activities
55
INTERNAL AUDITOR’S CHANGING ROLE
- Changing responsibilities and best practice in the
21st Century
• Mandatory internal audit function
• Independent Internal Auditor
• Oversight function of audit committee over Internal Audit
function
• Internal controls over financial reporting (COSO)
• Enterprise Risk Management (COSO)
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INDEPENDENT AUDITOR’S CHANGING ROLE
- Changing responsibilities and best practice in
the 21st Century
• Auditors are not immune from the economic pressures
• Regulatory framework for the auditing profession
• Non-audit services that create conflict of interest
prohibited.
• Fraud detection strong on the auditing agenda
• Rotation of lead partner or coordinating review partner
every five (5) years.
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CG MODELS OF BEST PRACTICES
•
•
•
•
•
•
•
•
•
•
•
Board to provide entrepreneurial leadership
Human Resource Accounting
Model code of organizational values
Transparency and Accountability Towards
shareholders and society
Financial Disclosures
Employee Welfare
Environmental Protection
Women’s Development
Model Audit Committee
Total shareholders’ return
Model policy on gifts and political contributions
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ABC OF EFFECTIVE CG BEST PRACTICE MODEL
 Board of Directors – Monitor ethical
values, approve vision, mission, oversee
external communication, evaluate senior
management, monitor control system, risk
management and assess board
effectiveness.
BOARD OF DIRECTORS
EXECUTIVE MANAGEMENT
 Executive Management – Develop and
demonstrate attitudes and beliefs,
develop business objectives, control
systems, risk management etc.
FRONT-LINE MANAGEMENT
PROCESS
PROCESS
PROCESS
PROCESS
3
OBJECTIVES
1
2
EFFICIENCY/
EFFECTIVENESS



FINANCIAL
REPORTING



COMPLIANCE/
RISK MGT



SUPPORT
FUNCTIONS
CFO, HR, LEGAL
TECHNICAL
INTERNAL
AUDIT
(Source: Omane-Antwi B; ABC OF EFFECTIVECG BEST PRACTICE MODEL,
2007)
 Front-Line Management – Align
business objectives and control activities.
 Support Functions – Rely on line control
objectives to support corporate control
objectives (provide coaching facilitation)
 Internal Audit – Monitor the entire
evaluation process, perform specific
reviews to support front-line executives,
think value for money and provide 59
Comminuting CG Best Practice in
Ghana
AngloGold Ashanti Annual Report-2004
 Identity of controlling interest holder
 Board structure and matrix of skills
 Responsibilities of Non-executive director
 Audit and CG Committee members
 Responsibilities of Audit and CG Committee
 Nomination Committee
 Remuneration Committee
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 Disclosure Policy
 Compliance Issues
 Codes of Ethics and Whistle-Blowing Policy
 Risk Management and Risk Factors
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CG TRANSGRESSIONS
• Executive compensation grossly disproportionate to
corporate results
• The misuse of corporate funds and assets
• Trading on insider information
• Disclosure problems – misrepresentation of true
earnings and financial conditions of companies
• Obstruction of justice or destroying of evidence
• Poor or complete lack of risk management
• Stock promotion that has gone to an extreme in the
creation of very questionable or unproven business
concepts.
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WHO ARE THE CG TRANSGRESSORS
•
•
•
•
•
•
•
•
•
CEOs and Senior Management
Investment Bankers
Market Markers
Investment Analysts
Regulators
Board of Directors
Internal Auditors
Public Accounting Firms
Government
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CG Case Studies – Ghanaian
Stakeholders’ Activism in 21st Century
• Case 1 - Ghana Commercial Bank-2004
-Boardroom Battle exercising power by
dropping accountability.
• Case 2 - Ghana Broadcasting Corporation 2004
-Boardroom Battle –Long Hand of
Government in CG
• Case 3 - PSC Tema Dry Dock and Shipyard 2005
-Risk Management Challenges
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• Case 4 - Benso Oil Palm Plantation-2004
- Failure to consider Local Community in
decision-making
• Case 5 - Energy Commission 2005
-Transparency and Accountability conundrum.
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Concluding Thoughts
“Good CG is essentially built on the foundation of
inspiration that breeds Confidence, Competence,
Vision and Virtue.
It also relates to one’s professional conduct and
relationship with stakeholders like shareholders,
employees and the government”.
(Institute of Directors, Ghana Code of Ethics)
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THE PLAIN TRUTH ABOUT CG
• It is not only to protect shareholders’ wealth but it
should be tempered by the influences and
objectives of other parties:
Management Team/Directors
Employees and Trade Union
The Public at large
Customers
Supplies
Finance Providers
Professional Accountants/Assurance Service Providers
Lawyers and
Government
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CG PILLARS YOU SHOULD NOT FORGET
•
•
•
•
INTEGRITY
ACCOUNTABILITY
INNOVATION
PARTNERSHIP
N/B “THE ROAD TO REFORM IS MORE TRUST,
FEWER TARGETS AND NOT TOO MUCH
NUMBER CRUNCHING” –
(21st Century Enlightment Publication; RSA UK JOURNAL,
SPRING 2011)
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EPILOGUE
- CG means ‘Change’ Truly there should be a change . In
short ‘Change’ is enviable-Change is the enviable
outcome of progress and innovation.
- Innovation is simply the learning perspective ,which
continues to improve and create future value.
- Again, CG is about change, innovation, learning new
things to improve and create future value for the
organization.
-Truly, CG is a catalyst for organization success.
Let us all embrace good CG practice today
(Prof. Kwame Boasiako Omane-Antwi ,2011)
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THE END
THANK YOU
Kwame Boasiako Omane-Antwi PhD, FCCA, FRSA(UK)
Professor of Accounting & Vice Rector
Pentecost University College
Sowutuom
Tel 0244-32448/0202011775
E’mail: [email protected]
[email protected]
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RESOURCES:
• Corporate Governance – A Director’s Guide;
Directors Publication Ltd 2004
• Corporate Governance by John L. Colley JR et al;
McGraw Hill, 2003
• Corporate Governance – Modules of Best
Practices 3rd Edition, ICSA India, 2003
• Corporate Governance Regimes – Convergence
and Diversity, edited by Joseph A. McCalery et
al; Oxford University Press; 2006
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RESOURCES CONTINUE:
• Public Sector Auditing – The Value for Money by
Sir John Brown, John Wiley and Sons Ltd, 2007
• The Director’s Handbook edited by Martin
Webster IOD, Prisent Mason 2005
• The Handbook of International Corporate
Governance; A definitive Guide 2nd Ed, Institute
of Directors UK; Kogan Press 2008
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