Question Tag: Board Responsibilities

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  • 15 Marks

CSEG – Nov 2015 – L2 – Q6b – Corporate governance framework

Explain five principles of corporate governance based on the OECD guidelines adopted by Ghana.

Ghana has adopted the principles published by the organization for Economic Co-operation and Development (OECD) which deal mainly with performance problems that result from the separation of ownership and management of a company. Explain FIVE (5) principles of corporate governance.

Five principles of corporate governance

Most corporate governance codes are based on a set of principles founded upon ideas of what corporate governance is meant to achieve. This is based on a number of reports.

  1. To ensure adherence to and satisfaction of the strategic objectives of the organisation, thus aiding effective management.
  2. To minimize risk, especially financial, legal and reputational risks, by ensuring appropriate systems of financial control are in place, systems for monitoring risk, financial control and compliance with the law.
  3. To promote integrity, that is straightforward dealing and completeness.
  4. To fulfill responsibilities to all stakeholders and to minimize potential conflicts of interest between the owners, managers and wider stakeholder community.
  5. To establish clear accountability at senior levels within an organisation. However, one danger may be that boards become too closely involved with day-to-day issues and do not delegate responsibility to management.
  6. To maintain the independence of those who scrutinize the behaviour of the organisation and its senior executive managers. Independence is particularly important for non-executive directors, and internal and external auditors.
  7. To provide accurate and timely reporting of trustworthy/independent financial and operational data to both the management and owners/members of the organisation to give them a true and balanced picture of what is happening in the organisation.
  8. To encourage more proactive involvement of owners/members in the effective management of the organization through recognizing their responsibilities of oversight and input to decision making processes via voting or other mechanisms.

Note: Some students may approach this question from the perspective of the OECD principles of corporate governance as follows:

  1. The right to shareholders: Shareholders should have the right to participate and vote in general meetings of the company, elect and remove members of the board and obtain relevant and material information on a timely basis. Capital markets for corporate control should function in an efficient and timely manner.
  2. The equitable treatment of shareholders: All shareholders of the same class of shares should be treated equally, including minority shareholders and overseas shareholders impediments to cross- border shareholding should be eliminated.
  3. The role of stakeholders: Rights of stakeholders should be protected. All stakeholders should have access to relevant information on regular and timely basis. Performance-enhancing mechanisms for employee participation should be permitted to develop. Stakeholders, including employees, should be able to freely communicate their concerns about illegal or unethical relationships to the board.
  4. Disclosure and transparency: Timely and accurate disclosure must be made of all material matter regarding the company, including the financial situation, foreseeable risk factors, issues regarding employees and other stakeholders and governance structure and policies. The company approach to disclosure should promote the provision of analysis or advice that is relevant to decisions by investors.
  5. The responsibilities of the board: The board is responsible for the strategic guidance of the company and for the effective monitoring of management. Board members should act on a fully informed basis, in good faith, with due diligence and care and in the best interest of the company and its shareholders. They should treat all shareholders fairly. The board should be able to exercise independent judgement; this includes assigning independent non-executive directors to appropriate tasks.
  • 12 Marks

CSEG – Nov 2017 – L2 – Q3b – Corporate governance framework

Discuss the composition, functions, and factors to consider in the remuneration of directors within a corporate governance framework.

Sawaba Telco Ltd is a recently listed local company that is in the process of reorganizing its corporate governance structure to reflect its status as a public company. At the first board meeting after the listing, the board chairman raised the issue of setting up sub-committees of the Board. The Board agreed to start with two sub-committees: the Remuneration Committee and the Audit Committee. The board chairman is unsure how the remuneration committee of the board should be composed, its functions, and other related matters. As a corporate governance consultant, the board chairman has written to you for advice on various issues regarding the remuneration committee.

Required:

Write a report to the board chairman advising him on the following:

i) The composition of the Remuneration Committee. (3 marks)

ii) THREE functions of the Remuneration Committee. (3 marks)

iii) THREE factors to be considered in the remuneration of executive and non-executive directors. (6 marks)

i) The composition of the Remuneration Committee:

The Remuneration Committee should comprise a majority of non-executive directors. Executive directors who are members of the committee should exclude themselves from deliberations concerning their own remuneration. This ensures that there is no conflict of interest and that decisions are made objectively and fairly.
(3 marks)

ii) Functions of the Remuneration Committee:

  1. Establishing a formal and transparent procedure for developing policy on executive remuneration: The committee is responsible for setting the framework for executive pay, ensuring it is aligned with the company’s objectives and shareholder interests.
  2. Ensuring that a proper system of long-term and short-term compensation is in place: The committee ensures that performance-oriented incentives are provided to management, balancing between rewarding short-term achievements and fostering long-term value creation.
  3. Scrutinizing executive contracts: The committee examines executive contracts to ascertain any potential inordinate losses the corporate body may incur in the event of an early termination of services, protecting the company’s financial interests.

(2 marks for each point, Total 6 marks)

iii) Factors to be considered in the remuneration of executive and non-executive directors:

  1. Level of experience: The remuneration levels of directors should reflect their experience and the level of responsibilities they undertake within the company. More experienced directors may warrant higher compensation due to the value they bring to the organization.
  2. Exclusion of the concerned director: The board as a whole should determine the remuneration of non-executive directors, with the individuals concerned excluding themselves from deliberations on the matter. This helps maintain objectivity and fairness in the decision-making process.
  3. Commitment of non-executive directors: The remuneration of non-executive directors should be fixed at a level that ensures their commitment to the duties and obligations they are required to discharge. Adequate compensation can incentivize directors to fully engage with their roles, contributing effectively to the company’s governance.

(2 marks for each point, Total 6 marks)

  • 10 Marks

AAA – March 2023 – L3 – Q5a – Current issues, Government external audit and public accountability

Evaluate five responsibilities of the Board for risk management of rural banks.

The Central Bank of Ghana (BoG) is mandated to ensure the smooth running of the banking system. Over the years, Bank of Ghana has taken pride in enforcing stricter regulation and supervision. In this regard, the BoG formulated the Banks and Specialised Deposit Taking Institutions Act, Act 930 in 2016, which empowers it to be more aggressive in dealing with deviations in the sector. The BoG, aside instituting regulations, undertook a clean-up of the financial sector. This saw the number of universal banks drop from 30 at the beginning of 2018 to 23, as at the end of December 2018. These 23 universal banks were able to meet the minimum capitalisation requirement of GH¢ 400 million by the end of December 2018 (BoG, MPC reports, 2018).

Major corporate failures worldwide have dented investor confidence as well as raised several questions on the effectiveness of a firm’s internal control system and the corporate governance structures and also poor risk management especially for banks. Bank of Ghana in addressing collapse of Rural Banks and the risk management gap of the rural banking space introduced the Risk Management Guidelines for Rural and Community Banks in May 2021.

Required:
Evaluate FIVE (5) of the responsibilities of the Board for risk management of rural banks.

(10 marks)

Responsibilities of the board for risk management of rural banks.

  • The board of the RCB oversees the operations of the RCB and is an important check on management’s performance including risk management. The Board’s responsibility for risk management emanates from provisions in various laws and regulations. Section 56 (d) of the Banks and Specialised Deposit-taking Institutions Act, 2019 (Act 930) 2 example enjoins Bank of Ghana to ensure prudent operation including matters relating to risk management. The RCB Board has to ensure compliance with the provision of this section.
  • The Board shall be responsible for ensuring the establishment and operation of an effective risk management system in line with the provisions of this Act. The Board shall also have responsibility for the level of risk assumed by the RCB Board. To carry out the responsibilities effectively, RCB Boards need to be fully aware of risk management methodologies. This shall be further strengthened through participation in training in Rural Bank risk management within twelve months of appointment.
  • The Board shall ensure Key management Personnel and other staff responsible for managing RCB risk go through training in risk management and have appropriate expertise for the risk management functions.
  • The Board shall ensure the RCB adopts and implement sound methodologies for the identification, measurement and monitoring of risks.
  • In ensuring that RCB adopts sound methodologies for risk management, the Board shall have responsibility for approving all policies for the RCB including all risk management policies, procedures and strategies; ensure availability of required resources, compliance with approved risk management policies, procedures and strategies; continually assess the relevance of the policies, procedures and strategies in line with existing and emerging risk and hold management accountable.

(5 points @ 2 marks each = 10 marks)

  • 10 Marks

PSAF – May 2017 – L2 – Q5a – The context of public financial management

This question identifies symptoms of defective corporate governance in a public sector organization and discusses the responsibilities of the Board of Directors in promoting good governance.

Ghana Approval Authority (GAA) is a public sub-vented organization established in 1995 as a standard approving authority for industrial, medical, and food substances in Ghana. Dr. Kamkam was appointed as the Chief Executive Officer (CEO) four years ago and he reports to a seven-member Board of Directors. GAA derives its powers from an Act of Parliament that was passed over two decades ago. The CEO upon resumption of office found that the enabling enactment of the Authority is out of date and could not regulate the activities of the board effectively. He therefore introduced a lot of innovations and initiatives to run the Authority effectively and efficiently, however, some of his initiatives were inconsistent with the provisions of the enabling enactment. His initiatives, despite their inconsistency with the law, produce great results for the Authority.

Dr. Kamkam has a very good relationship with the Board of Directors over the period resulting from fat allowances and kingly treatment he offers them, especially the board chairman who is a personal friend to him. This empowers him to make unilateral decisions knowing that the board is under his full control and dominance. The board meets fewer times than required by the enabling Act of the GAA. Furthermore, internal audit is not given the required attention by management and the audit committee has not been constituted in the last four years.

The Authority outsourced most of its supporting services to the private sector. The CEO has ensured that all of these services are outsourced to companies owned by his close friends and relatives. In some cases, the services are outsourced to companies in which the board chairman has significant interest. Past records support the action of the CEO that outsourcing to close associates produces better services than an “arm’s length” sourcing. The Authority is also not able to meet information disclosure requirements due to the policy of the CEO to operate on the blind side of the public in order to reduce visibility and nose-poking behaviors of the media.

Required:

i) Explain FOUR symptoms of defective corporate governance that can be identified in GAA. (6 marks)

ii) Identify FOUR responsibilities expected of the Board of Directors of GAA to promote good corporate governance. (4 marks)

i) Symptoms of Defective Corporate Governance in GAA:

  • Violation of Rule of Law: The CEO’s actions undermine the legal framework of the Authority by implementing initiatives inconsistent with the enabling enactment, which weakens the rule of law.
  • Ineffective Board: The Board of Directors is ineffective as it fails to meet regularly and is overly influenced by the CEO, compromising its independence and effectiveness in governance.
  • Conflict of Interest: The CEO and Board Chairman engage in actions that create conflicts of interest, such as outsourcing services to companies owned by their close associates and relatives.
  • Lack of Internal and External Scrutiny: The absence of a constituted audit committee and neglect of internal audit weaken the internal control environment, reducing transparency and accountability.

ii) Responsibilities of the Board of Directors to Promote Good Corporate Governance:

  • Oversight and Monitoring: The Board should actively oversee the operations of the Authority, ensuring compliance with laws and regulations.
  • Independence and Objectivity: The Board should maintain independence from management, avoiding conflicts of interest and ensuring decisions are made in the best interest of the Authority.
  • Internal Control and Audit: The Board should ensure that effective internal controls are in place, including the establishment of an audit committee and support for internal audit functions.
  • Accountability and Transparency: The Board should promote transparency by ensuring that the Authority meets its information disclosure requirements and operates in a manner that is accountable to the public.

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