Ghana recently experienced two overnight bank collapse and a third bank currently under official administration by KPMG. Such scandals have been prevalent in advanced nations but have largely remained unknown to developing economies until their recent occurrence in Ghana.
An African proverb says ‘if you close your eyes to facts, you will learn through accidents,’ which means if we close our eyes or keep quiet about the deep seated challenges that have bedevilled our corporate landscape by brushing them aside, one day we will learn the hard way’ has been enacted before our very eyes.
The demise of our banks could be attributed to a gamut of issues. Though the regulator, Bank of Ghana, asserted that weak economic growth, poor corporate governance and risk management practices were responsible for the demise of the banks, I believe there were other causes that led to the collapse of the banks.
Bias decision-making in our boardrooms occasioned by conflict of interest issues, lack of Non-Executive Directors (NED) independence and dominant personalities within and outside of boardrooms whose instructions cannot be overturned were the main causative factors.
Unfortunately, this less talked-about canker is not limited to decision-making in our boardrooms alone, but also extends to the wider Ghanaian leadership space.
Indeed, regulatory agencies world-wide have achieved very little success in their frantic attempts at proffering rules and regulations to fix this issue.
A sub-standard board of directors will not be option for any company that wants to achieve its corporate goals and excel in performance. One of the roles of directorship is the exercise of fiduciary duty through the provision of care for the company they govern.
However, as Marnet has professed, “flawed decisions can be made with the best of intentions and competent individuals can believe passionately that they are making sound judgement when they are not.”
These distortions of prudent judgement in boardrooms which manifest in bias decision-making does not imply that our directors are unqualified, less capable and experience, but rather it is a situation of lack of independence and objectivity in our boardrooms.
Non-executive director independence
The lack of independent mindedness of some NEDs whose presence on boards are to mitigate the agency problem, according to the underlining corporate governance model, breeds bias decision making.
Unfortunately, instead of acting in good faith and playing to the rules of the games, as required of professional referees, some board members are so highly compromised through connectedness that sadly their judgement is impaired.
Secondly, the composition criteria prescribed by regulators for the composition of boards which has stipulated the need for majority NEDs so as to forestall conflict of interest challenges have often been flouted and made total mockery of.
Research reports indicate that substantial number of NEDs are grey directors whose objectivity and independence are questionable.
Consequently, one of the board’s function in the corporate governance paradigms, which is to control managerial conflict of interest and undertake critical assessments of managerial action and behaviour, is often neglected because of the dependencies, social ties, and loyalties operating in our boardrooms. The situation is a reflection of one of Jensen’s submissions: “Courtesy, politeness and deference at the expense of truth and frankness during board meetings, reflecting a general reluctance of confronting a CEO regarding management decisions, are seen as both a symptom and cause of failure in the control system.”
Lack of NED independence is created by board appointments which are often made with the objective of promoting compatibility, fit, consensus, and cooperation at the detriment of the fundamental principles of corporate governance- independence, objectivity, transparency, and accountability.
This unfortunate situation promotes board capture by CEOs and sometimes shadow directors. We cannot say that board members of corporate bodies in Ghana lack integrity. No, rather it is a situation where competent and rational NEDs have fallen prey to power dominant CEOs, Board Chairs, and shadow directors who cannot be opposed, thus sadly affecting truth and frankness in boardrooms even when things are going bad.
The issue is not limited to board capture alone but also subtle regulatory capture where long arms of dominant personalities on boards or affiliates stretch into the corridors of the regulator capturing the rules and regulations which are supposed to protect shareholders, customers and other stakeholders.
Conflict of interest
The salient idea underlining corporate governance is the assumption of self-interested agents whose behaviour must be guided by monitoring, incentives, and disclosure in order to achieve the best long-term interest of shareholders.
The shortcomings of this rational model which operates in a complex web of conflict of interest has been correctly spotted by regulators and varied guidelines and legislations are being thrown at it lately in order to mitigate the self-interest behaviour of the agent.
Many experts have argued that recent corporate disasters experienced world-wide are the products of poor monitoring and weak internal control structures and mechanisms.
However what those arguments fail to consider is the bigger issue of conflict of interest which has not fully been dealt with by regulators, corporate governance guidelines, and legislation and which has thus reared its ugly head in the form of bias decision making in boardrooms.
Conflict of interest challenges have sadly resulted in imprudent and sometimes fraudulent behaviour on the part of executive management and the acquiescence of the board.
Again, casual observations into the Ghanaian corporate governance landscape reveals a situation of several personal relationships often undisclosed in our boardrooms which generate bias decision making because of the direct monetary and non-pecuniary benefits. Monetary incentives are not the only factors that affect decision making.
Decision-making at the board level and loyalty to organisations are also affected by friendship, family and other non-pecuniary self-interest. There are indications that some of our board members are only gatekeepers for some major shareholders and not the larger corporate governance participants.
Sadly, this web of conflict of interest which engenders bias decision making in boardrooms are often ignored or deemed as minor issues by the courts and regulators alike.
Another issue gradually creeping into the Ghanaian corporate governance space is the influence of dominant personalities in boardrooms. Dominant personalities are either owners or affiliates of owners who serve as either CEOs, management members, chairpersons or board members. Whether as dominant CEOs, chairpersons, board members or even a shadow directors, these voices influence decision making in management or on boards.
Dominant personalities can turn out to be good or bad for company management. Research shows that dominant personalities, especially CEOs, can deliver performance that is much worse rather than much better.
Good examples of dominant personalities in company management are Steve Jobs of Apple and Bill Gates of Microsoft and bad examples are the recent case of Enron under Kenneth Lay and Lehman Brothers under Richard Fuld.
Corporate governance is not against dominant personalities in company management because these personalities often bring corporate visions into reality. However, what corporate governance frowns upon is where the dominant personality (CEO, chairperson, and/or affiliates) becomes strategic deviance swaying the company off its strategic direction due to self-interest.
Dominant personalities are often a disaster in the medium to long-term because they get stuck in the old culture prevailing when they started the company, ending up harming the company because they want to strengthen their position in the company to make short-term gains. Casual observation can quickly find evidence to support this statement in the Ghanaian corporate governance space. Sadly, what we are witnessing is a situation of absence of strong boards to counter the potential self-interest of a dominant CEO or strong independent non-executive directors who can stand up to a dominant chairperson or shadow director’s influence.
So what can we do?
Going forward, non-executive relationships must be thoroughly scrutinised. The regulations that check conflict of interest issues must be brought to speed in line with current developments. It is refreshing that the regulator has started initiating measures to sanitise and strengthen corporate governance structures in the banking industry.
I am encouraging the regulator to look at the issue of bias decision making in our boardroom, since in a free market economy the only way that the customer will be protected is the safeguard of their interest through regulation.
Also the issue of cross-directorship must be checked. Cross directorship occurs when an executive director of company A serves as a NED in company B, while another executive director of company B serves as a NED at company A.
This scenario makes the two boards too intimately involved with each other and reduces the scrutiny the two board members involved in the cross-directorship bring to board deliberations. Lastly, directors serving on boards should make full disclosures as soon as they are aware of the existence of real and potential conflicts between their personal interests and company’s interest, because the rule of the game is integrity, accountability, and transparency. — GB
The writer is the Head of Business Administration Department, UPSA