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Corporate Governance and the Capital Market in Ghana: The Stymieing Role of the State

Document Cited authorities 1 Cited in Related
Vincent
Pages285-308
Date01 August 2018
DOI10.3366/ajicl.2018.0234
Author
Published date01 August 2018

This article is organised into four sections. Section I will describe the link between corporate governance and economic growth generally. Section II will describe the current state of Ghana's capital market, providing a descriptive analysis of Ghana's political and corporate economy by tracing the development of Ghana's corporate law and environment from independence, through the massive divestiture programmes in the late 1980s to its current financial systems. Section III will explain how the state violates key corporate governance rules on director independence and minority shareholder protection. Section IV will conclude by showing that in deciding whether to invest in a public firm or sticking with a small one-man business, the investor is influenced by the performance of state-owned enterprises (SOEs).

CORPORATE GOVERNANCE AND ECONOMIC GROWTH

There exists a positive correlation between corporate governance practices and economic growth. Countries that take good corporate governance1 practices seriously also tend to have a relatively high economic progress.2 The inverse may also be true – countries with no or poor corporate governance practices do also tend to have low economic growth.3 The argument here, however, is not that bad corporate governance practice is the cause of a country's economic woes. The argument, rather, is that good corporate governance enhances general economic growth, so that a country whose economy is on the rise is, also, likely to experience even faster growth if good corporate governance practices pervade it. Similarly, a country which is not doing well economically may be transformed if its corporate governance practices are directed towards the optimum.

As it turns out, good corporate governance does not come about naturally. It depends on certain prerequisites, namely better financial systems, effective legal systems and remedies and a good education system that trains top-class managers and directors, lawyers, etc. Another important prerequisite is what Roe refers to as ‘political foundations’.4 These foundations relate to the resolution of the tension that comes with separating ownership from management and control. An economy's general performance and, of course, performance at corporate governance, therefore, depends heavily on the extent to which these prerequisites are promoted. To be able to assess Ghana in respect of its corporate governance properly, it may be necessary to review the country's political economy, not least because it speaks to the ‘political foundation’.

 GHANA'S POLITICAL AND CORPORATE GOVERNANCE ECONOMY Ghana's Current Capital Market

Trading on the floor of the Ghana Stock Exchange (GSE), Accra, opened in November 1990. About 25 years down the line, the GSE could only boast of a total of 36 listed companies5 and a market capitalisation of listed securities of about US$22,635 million as at the beginning of 2014.6 The Ghanaian capital market has also been described as ‘illiquid and highly concentrated’.7 In 2012, the GSE's liquidity, as measured by the total value traded ratio,8 stood at 0.1 per cent, tumbling from 0.6 per cent in 2005.9 This is notwithstanding the fact that Ghana, the first country south of the Sahara to gain independence,10 is endowed with huge reserves of natural resources, including, diamonds, gold, manganese and bauxite,11 which it has been exploiting in commercial quantities for several decades.12

Not even the discovery of oil in 2007 or the fact that Ghana recorded an economic growth among the highest in the world in 201213 (and is currently estimated to be growing at the rate of 13.7 per cent real GDP)14 seems to be having any impact on the fortunes of the GSE. Also, Ghana's stock market capitalisation to GDP ratio is still very low, at 8.5 per cent in 2012.15 This low ratio, generally, means that the stock market is seriously undervalued. Most importantly, it also means that the stock market is divorced from the country's economic growth.16 That is, investors and businesses are antipathetic towards the capital market.

This antipathy goes beyond the capital market. The formal sector of Ghana's economy, too, is very small, employing just about 13.3 per cent of the country's total work force.17 The number of public (as opposed to private) corporations is even smaller, as most Ghanaian businesses, like typical African businesses, ‘consist largely of households and small-scale enterprises that operate outside the formal financial system.’18 This also means that investors and businesses are antipathetic toward the corporate form, too.

 History

Ghana began its life as a socialist-oriented state.19 The state was responsible for the provision of almost all social goods and services. The state also dominated commerce and industry. The vehicles with which these services were provided were the numerous statutory corporations.20 This makes the state the dominant, almost the sole, player on Ghana's corporate scene. Also, Ghana began its independent life as an underdeveloped economy. Kwadwo Konadu-Agyemang, for instance, observes that ‘the result of the exploitative activities of the colonial government itself and European firms (especially cocoa-buying, banking, shipping and mining) was such that when the British finally pulled out of Ghana in 1957, they left behind a country which bore all the most important features of underdevelopment.’21

The economy was an importer of finished goods and an exporter of raw materials. All the vital sectors of the economy were controlled by foreign, mainly British, private firms. John Esseks gives the following account of the economy at the time of independence:

In March 1957, when Ghana gained her political independence, over 90 percent of the country's import trade was in the hands of foreign firms; two British banks shared about 90 percent of all banking business; expatriate companies held 96 percent of total timber concessions; foreign investors owned all functioning gold mines and controlled about half of the annual diamond production; general insurance was entirely in the hands of expatriate firms; and foreign companies earned the bulk of total receipts in the small manufacturing sector.22

Turning things around, taking control of affairs from the foreign colonial power, was the purpose of the fight for independence. Therefore the country's founder, Kwame Nkrumah, adopted policies that were socialist-leaning.23 Nkrumah's policies were intended to – and in fact did to a large extent – lead to de-colonising the economy. Thus Esseks reports again, later:

By 1965 the state importing enterprise handled 35 percent of the country's total commercial imports; the state insurance corporation transacted about 50 percent of all insurance business; the government's commercial bank accounted for over 60 percent of total deposits; the state-owned Black Star Line carried about 17 percent of Ghana's seabourne commerce; the government's Ghana National Construction Corporation had succeeded in displacing almost all private contractors from the largest subsector of building and construction, that was financed by public funds; and the factories owned by the state or partnerships between government and private interests produced 27 percent of total output in manufacturing.24

 Through the de-colonisation process, the state became a major player in almost all sectors of the economy – transportation, aviation, agriculture, fishing, education, manufacturing, commerce and even entertainment.25 These enterprises were wholly state-owned. They were, however, organised and run in the form of profit-seeking private enterprises or corporations. Their establishing Acts made them corporate legal entities, separate from their shareholder (the state) and capable of owning property, and endowed with a board of directors whose powers, unless specifically curtailed, were as those of privately incorporated entities

This arrangement is similar to the hitherto state-owned corporations in the United States – the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the likes. These statutory corporations were, however, not listed public companies yet. This is, perhaps, what differentiates Ghana's SOEs at the time from those found in the US, the Fannie Maes, the Freddie Macs, etc.

Being the sole shareholder of these enterprises, the government appointed and removed the members of the boards of directors. For most of the SOEs, government functionaries and even cabinet ministers were ex officio members of the boards of directors. This exposed the SOEs to political influence, a possible bane of corporate governance.26

It may be true that political influence does not necessarily lead to poor firm performance. For example, SOEs could benefit from the government's credibility to gain access to cheaper capital. Also, in a study (though not specifically on SOEs) by Cooper et al., a positive correlation was found between firms’ political connections and their future earnings.27 On the other hand, however, political influence seems necessarily to be contrary to the dictates of good corporate governance, in the sense that corporate directors, whose independence is necessary for good corporate governance, always have to keep looking over their shoulders when making business decisions. When taking a decision, for instance, corporate directors necessarily have to factor into consideration matters that are ‘politically correct’ but often completely irrelevant and sometimes even detrimental to firm performance.

Ghana's SOEs were, therefore, under heavy political influence. This would later explain the strong culture of government interference in the affairs of these corporation even after they became public under the divestiture programme. Corporate governance issues – protection of minority shareholders, directors’ independence, etc. – therefore did not show up, and if they did at all...

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