Research On Emerging Capital Markets

... AND CORPORATE GOVERNANCE IN GHANA: HOW GHANA CAN ATTRACT INTERNATIONAL INVESTMENTS

Introduction

This paper investigates the emerging capital market and corporate governance in Ghana. Generally, emerging markets are known to be characterized by innumerable endemic problems such as weak political structures, weak or non-existent legal protection for investors and inconsistent data to evaluate economic growth. These factors prevail in most of Africa’s fragmented economies. However, current anecdotal evidence shows they are being addressed in some of the economies. An encouraging trend is the practice of corporate governance in Africa, including Ghana, appears to be gaining grounds (Okeahalam & Akinboade, 2003).

The paper examines how the current investment climate is affected by the political system; and how economic growth and corporate governance practice in Ghana can be compared to those of the other capital markets in the region. Finally, the paper recommends possible measures to increase transparency in Ghana’s capital market; remove inefficiencies that stymie growth; and improve investor confidence.

Background Information on Emerging Capital Markets

Globalization has opened up many investment opportunities for investors in some of the most obscure countries in the world. However, the main goal of every investor is to maximize returns on investments. To maximize returns, the investor’s strategy is to invest in a market where he can diversify his portfolios and succeed in gaining returns commensurate to the level of risk assumed. The investor will not be willing to put out investment capital if visibility for potential return on investment is obscure. With such objectives in the investor’s mind, the investor will tend to invest in only emerging capital markets where information on corporate governance is well developed, which tends to disadvantage the relatively opaque corporate governance in Ghana and Africa as a whole.

The terminology “emerging markets” was derived from the expression “newly industrializing countries”. The expression “newly industrializing countries” was coined by IMF in the 1980’s and used to describe the few fast-growing economies in developing countries in, Asian and Latin American countries. In the 1990s, the number of liberalized economies increased, and as a result, the IMF replaced the term “newly industrializing countries with the expression “emerging markets”. These emerging markets now include Africa, Asia, Latin America and Russia. Emerging markets have some fundamentally applied characteristics that distinguish them from the developed markets. Emerging markets are countries with new and small stock markets that are experiencing rapid economic growth, and are located in countries with below- average income.

Development of Ghana’s Stock Market

The first attempt to establish a stock exchange operation in Ghana was conceived in 1968. This fundamental idea came up because of a government study that asserted that, for Ghana to develop there is the need to establish a stock market as a catalyst for economic development and growth by attracting the needed capital for development. Because of the developing countries weak and fragile economies, the IMF and the World Bank instituted economic reforms and structural adjustment programs in the 1980s and 1990s to help many African countries to develop and improve their underdeveloped financial sectors and to support economic growth. In addition, mobilization of capital for “immense work” was the foundation of industrialization in England (Bagehot, 1873). In addition, for entrepreneurs to be successful they should be funded by banks to enable them to produce innovative products by using efficient production processes (Schumpeter, 1912).

The current state of Ghana’s economy and financial sector

Ghana’s economy has gone through decades of economic mismanagement with the attendant erratic economic growth pattern. However, the performance of Ghana’s economy from 2001 to 2005 was very impressive. The economic policies put in place by the government helped the economy to maintain a relative stable growth rate of about 5. 1 %. In 2005, the growth rate exceeded expectations at a rate of 5. 8 % compare to the Africa’s average growth rate of 5. 2 %. In addition, the growth rate was very competitive to other dynamic economies of China, India and Russia (World and Regional Growth Rate, 2005). The rating of B given to Ghana is a resounding affirmation of international financial markets’ positive outlook on Ghana. This is interpreted as a “huge important step for a sub-Saharan country”. Thus besides South Africa, Ghana is the only country in the Sub – Saharan Africa to have entered the international capital market. (Abbey, 2007). In summary, it could be stated that Ghana’s economy is growing.

Challenges of Emerging Markets

Emerging markets are associated with developing nations. Despite the benefits of economic growth and capital for developments, there are persistent numerous challenges that plague these markets. These challenges include 1) political risk. Strong democratic elected governments with effective opposition variables are good for emerging markets, as these will ensure investors’ confidence that the rule of law will protect their investment, 2) low savings rate. In capital formation for every economy, the level or rate of savings is directly proportional to the capital investment.

Thus if the level of savings is low, the magnitude of investments will be low as well. The problem of savings rate is very severe in the developing world especially in the Sub – Saharan Africa where the pervasiveness of poverty is widespread. According to the World Bank in 1998, 26 percent of the 1.2 billion wedged in poverty lived in Sub – Saharan Africa. This poor segment of the population earns less than $ 1 per day. Ghana’s poverty rate was about 38 percent (World Bank, 2000), 3) low investment in technology and human capital. The interest shown by investors in emerging market, and the use of technology in today’s business world, demand highly trained skilled employees. However, in Africa’s case, the lack of technology usage is attributed to poor economies and human capital developments. The formal education trainings offered through the schooling system are not of high quality. This is consistent with the Ghana’s illiteracy rate close to 40 % (Ghana ICT, 2003); 4) and lack of transparency in business. The need for clear and explicit information could not be undervalued in terms of wooing investors. Accordingly, government policies on investments opportunities must ensure the provision of accurate information that could be used by investors to plan strategically.

Corporate Governance

The integration of global financial markets has accelerated the concept of corporate governance. The inefficiencies or dubious managerial accountabilities, failure to protect investors, corruption, and embezzlements all go to determine whether the investor will be rewarded with successes or penalized with failure. It has been argued above that for emerging economies, and even developed nations to develop, improve and sustain their economic growth; they need the flow of capital and investment. Consequently, for nations to attract and capitalize on the flow of capital, they must enforce the “basic principles of good corporate governance” (OECD, 1999). Corporate governance ensures and enhances transparency, integrity, accountability, meeting shareholders goals, and accelerates economic development through the flow of both foreign and domestic capital. It also prevents corruption, dishonesty and mismanagement. It ensures effective and efficient use of resources that guarantees investors protection. The only ultimate assurances that can be granted to investors in emerging markets are the strict enforcement of corporate governance and transparent disclosure.

Corporate Governance in Sub – Saharan Africa

Sub – Saharan Africa is no different from any of the other emerging markets. Scholarly literature or studies on the subject of corporate governance are on nominal basis in relation to Sub –Saharan - Africa. However, recent studies suggest that the picture looks promising because of the various governments are implementing effective practice of corporate governance to attract foreign capital to their stock markets. The concept of corporate governance is taking roots in the region. To confirm the urgency given to the practice of corporate governance in the Sub – Saharan Africa, a research conducted by the Institute of Directors in Ghana on 100 companies and some state – owned enterprises in 2000 found that the practice of corporate governance is cemented and being enforced in both the private and public sectors. In view of this, the governments of South Africa, Nigeria, Botswana, Zimbabwe, Mauritius, and Kenya have put in place companies acts, which enforce stringent corporate governance to ensure transparency in their financial disclosures and operations.

Corporate Governance in Ghana

Over the past three decades and including the present, corruption, bribery, weak legal system, illegal and unethical ways of conducting business have been, and to some extent, the order of the day in Ghana (Mensah, 2000), Mensah, Aboagye, Addo & Buatsi, 2003). These practices have become increasingly common and by that, only those who are prepared to use these illicit means can conduct business in Ghana. As a result, Ghana was deprived of private investments because investors had no confidence or were scared to put their resources in Ghana for the fear of losing these resources. Nevertheless, the pressure from IMF / World Bank, the determination and policies of the present administration to deracinate or eliminate corruption or illicit business practices and to grow the economy have induced the government to introduce stringent corporate governance practice to attract investors to Ghana.

Ghana’s Regulatory Framework

Ghana derived its corporate governance regulations from the Ghana Companies code of 1963, Ghana Stock and Exchange Listing Regulations (GSE, 1993), Security Industry Law of 1993, (PNDC LAW, 333), amended in 2001 (Security and Exchange Commission, 2001) and finally the code of accounting ethics imposed by the Ghana Institute of Chartered Accountants on disclosures that meets international standards.

In Ghana, the seriousness shown by the government in introduction and promotion of good, sound and effective corporate governance to reduce or eliminate corruption, as well as strengthen the ethics of corporate governance practice could be augmented by the present administration’s slogan of “zero tolerance for corruption”. As a result, some former and present ministers of state have been imprisoned for roguish behaviors. These imprisonments are meant to instill discipline and caution government officials and individuals of the administration’s determination to battle corruption.

Ghana’s ultimate goal is to ensure and guarantee that private investments are protected. As a result, Ghana’s Stock market operations have been impressive and have received a vote of confidence by international investors.

Recommendations

Business Transparency and Justice System

The result of the research indicated that business transparency and justice system in Ghana appears good. Nonetheless, Ghana is performing poorly as generally supported by the literature review. The government needs to do more to ensure that business transactions are free from bribes or unethical behaviors that will hinder development and growth. The judiciary system must be strengthened and ensured that the laws of the land are applied without fear or favor and must be independent from the government. In addition, parliament should enact legislation that will empower and protect the public “whistleblowers” to disclose any suspicious unethical business practices in relations to business transaction and unfair treatments or handling of business needs.

The Past and Present Financial Supervision The analysis shows financial supervision by the Ghana Stock Exchange is good. However, due to the globalization of the securities markets, the supervisory regulations of the exchange must be strictly enforced at the same level as the other markets in the world for investors to have confidence in Ghana’s market.

Investment Sentiments / International Standard of Reporting Ghana Stock Exchange must achieve higher standards that conform to international standards.

The research confirms that Ghana Stock Exchange is doing well in the provision of transparent and completeness of listed companies information, disclosure, and adaptation of international standard of reporting.

However, due to the wake of corporate accounting scandals and unethical business practices of Enron and WorldCom, investors are very careful and hesitant in making investment decisions. Therefore, for Ghana to build or win investors confidence there is the need for similar high level standards equivalent to Basel ?? and Sarbanes – Oxley Act of Europe and USA respectively. In conjunction with the local accounting or financial standards of reporting, the government should fully adapt to the International Financial Reporting Standards (IFRS), International Accounting Standards Board (IASB) as well as International Accounting Standards (IAS) of reporting.

Moreover, the individual financial professionals can set up or form committees or associations that will serve as independent oversight committees to ensure the full compliance with the international reporting standards by the listed companies.

Percentage of Profit Repatriation

Clearly, the analysis of the research indicated that investors repatriate 100 percent profit of their net income. This may be good for the investor. However, the government should look into other incentives for the investors to reinvest some of the profits in the Ghanaian economy. This will continue to support and sustain the growth of the economy.

Shareholders Rights

The analysis concluded that shareholders have voting and ownership rights. However, when investors are deciding to invest, they look at the ownership structure and investor relations. Base on these factors, I recommend that the Ghana Stock Exchange needs to clarify and describes the share classes, shareholders type and their voting rights and owners’ rights. These steps may prevent any conflict of interest, improve confidence, and in disclosures found in annual financial reports (Elliott and Elliott, 2007).

Preparation and Presentation of Companies Financial Reports The result of the research shows that company directors, auditors, external auditors and accountants are responsible for the preparation and presentation of the report. I recommend that to simplify and eliminate confusion, external auditors appointed by the board of directors should audit financial statements prepared by the executives of the company. The Chief Financial Officer should report the findings of the external report to the audit committee of the Board of Directors. The Chief Executive Officer and Chief Financial Officer should be held accountable for accuracy, responsible for any scandals or unethical encumbrances should one occur.

Overall Improvements of Operations and Legislative Framework There have been improvements in operations and legislative framework of the stock exchange in Ghana. For these reasons, the author offers the following recommendations: To curtail the immediate shortage of professionals, the stock exchange must recruit a few investment-banking professionals from outside Ghana to train Ghanaians. In the long term, the stock exchange must develop a training or certification program to train the professionals needed to run the operations of the stock exchange. This training can be done in conjunction with the University of Ghana Business School. The stock exchange should install modern technological electronic communication networks through partnership with other Stock Exchanges. The government should encourage the establishments of brokerage and investment firms. The rules and regulations of the stock exchange must be completely enforced and implemented

Conclusions For Africa to be part of the current on going global trend of effective and efficient capital markets operations, the governments of Africa and Ghana in particular must consider these recommendations in its economic development strategies. This study will contribute to the growing number of publications on emerging capital market developments in Africa. Further and continuous research in corporate governance will bring out significant innovative strategies for organizing and running efficient and effective emerging capital market operations in Africa as a whole, and Ghana in particular.

By: Stephen Asante Biney (MBA & MCIM)

Phone: 001- 425-275-1432. U.S.A Email: bineyak@yahoo.com

Edited By: Kwadwo Owusu Fordjour (AICP & MSc)

Phone: 001 – 206-234-1624. U.S.A Email: fordjourk@msn.com

For more information and further consultation, contact Stephen Asante Biney at bineyak@yahoo.com .