Private Companies Going Public And Corporate Governance

What does corporate governance entail?

Corporate governance involves established internal control systems for identifying, managing and monitoring risk. Corporate governance is a system by which companies are directed and controlled. Corporate governance can also mean a set of arrangements in place to make a company accountable to its stakeholders. In the current dispensation, good corporate governance is not only a statutory requirement but a necessity to attract investors. It needs to be in place to assure investors that potential risks facing the company are under control. Departments like internal audit control are located in the company to check compliance with internal standards and standards set by regulatory bodies. I believe most listed companies have these units but how autonomous is that function? Who do they report to? What happens to their findings? Are there personnel in this function with the requisite skills to detect such fraudulent activities? This article seeks to discuss the history and the need for corporate governance and its contribution to a sound financial performance. This article would make reference to certain listed companies on the Ghana Stock Exchange.

Corporate governance cannot be talked of without mentioning the relationship between Directors, Management, Company Secretary, Auditors, Shareholders and other stakeholders. The Enron scandal in the late 2000s is a clear example of how financial irregularities perpetrated by key management personnel have brought the issue of corporate governance into the global business frontier. Fraud by the directors of many UK companies in the early 1980s as well as the late 2000s in the US caused many companies to collapse and rendered many people unemployed. Fraud of this technical nature by directors causes people to lose confidence in financial reporting and auditing. This subsequently has an adverse effect on investment. The popular credit crunch was caused by some of these fraudulent activities that are difficult to detect by even the regulatory bodies of these advanced markets.

The issue of corporate governance has received serious attention because of the big corporate scandals involving the abuse of power by directors or even criminal allegations by corporate officers. The need to strengthen corporate governance has now become a fundamental requirement for growth if foreign or local investment needs to go up. This is because, research has proved that sound corporate governance promotes economic development. The UK government as well as the US government has come up with the Combine Code and the Sarbanes-Oxley Acts of 2002 that apply to companies that list on their respective stock exchanges. These governance codes did not just come in a vacuum -it came as a result of combined efforts of both the market regulators and the professional accounting bodies. In the case of the UK, the Financial Reporting Council, the London Stock Exchange and the accountancy profession set up a committee known as the Cadbury Committee whose main aim was to raise the standard of corporate governance and the level of confidence in reporting and auditing. So much emphasis is placed on financial reporting because most of the corporate scandals are financial in nature and auditors who have the capacity to detect them also get corrupted by the perpetrators of such crimes.

Auditors have the responsibility of ensuring that account prepared by a company gives a true and fair view of the company’s financial position. Shareholders do not have access to the books of accounts as auditors do. The onus now lies on them to ensure that they act in the best interest of the shareholders that appoint them by continuously holding integrity in high esteem. Investor considers what a company’s books reflect before making informed decisions. If company auditors are negligent make reckless remarks when it is actually not the case that could cause financial losses to individual investors as well as established funds that invest in shares of such company.

Almost all the companies on any stock exchange were once private before going public. Mostly, private companies do not have the system in place for good corporate governance because they regulate themselves and have fewer stakeholders that they are accountable to. In the recent dawn of the Ghana Stock Exchange requesting for blue chip SME’s to apply and get on the second list, the earlier these SME’s get acquainted with corporate governance issues the better for them. This is because there are enormous benefits accruing to companies that list on the stock market. They have access to capital for expansion, get noticed by both local and foreign investors and receive a much better credibility that can enable them win contracts which they will otherwise not win given their prior status.

How Private Companies are before going public?

No stringent disclosure of financials- Private companies is not required to publish account by any regulatory body.

Management style of private companies would definitely be different even as they are likely to go for can long term goals once the few stakeholders involved are comfortable. Most often, private companies are managed by their owners/ founders or people they have employed to manage the business for them. It so happens that these employees turn to rely mostly on their employer for instructions as to what to do next. This can stifle initiative creation and promote unnecessary reliance on employer for approval for things that can easily be done without bureaucracies.

Management preparing towards listing

For a company that is preparing itself to list on the exchange, its paramount responsibility would be to consider itself as a listed company and try to meet the entire membership requirement set by the exchange. They can do this by setting up an internal control department that would help them in the transition period to meet compliance standards that would in turn qualify them later.

Listing requirements: To meet the listing requirements, the company must ensure it meets the capital and financial requirement, technology and expertise required. These include audited financial statements for three years and the need for a company secretary that would file returns, take minutes at board meetings and countersign documents with the company’s seal. New listings on stock exchanges imply that the services of lawyers, underwriters or lead brokers, auditors, registrar and services of financial valuers be sought. The cost of printing prospectuses and other PR and marketing costs are also something to scare the company concerned. It also implies that the company in question is ready to pay all the listing fees and comply with the entire listing requirement spelt out by Securities and Exchange Commission, the Ghana Stock Exchange, the Registrar of Companies and even Bank of Ghana (where applicable).

Staying listed: It is not enough for a company to work hard and get listed on the stock exchange. It requires responsibility on the part of its directors and management to ensure that it continually trades as a listed company. Company secretaries are crucial to good company governance hence the need for a company secretary.

When a company finally gets listed it must comply with all the membership requirements in the Ghana Stock Exchange rule book. The rules set by the GSE and SEC is to protect the interest of both the investing public and the listed companies. It requires that the company must publish its account periodically (mostly quarterly).

When a company gets listed it has a wider scope of shareholders to manage and hence the need for statutory publication. Listed companies must publish account in a well circulated news paper; this is aimed at informing the investing public of the company’s financial performance. It is also required to print and circulate annual reports to all shareholders. I must also organize Annual General Meeting and Extraordinary General Meeting when there is a pressing issue to address. The cost involved in staying listed is enormous as it entails statutory fees, stationery cost, printing, postage, transport and press releases, among others.

Role of management and / Board of Directors

Board of directors are appointed to act on behalf of the shareholders to run the day to day affairs of the business. The board also appoints management to run the company.

A board's main purpose is to ensure the company's continuous prosperity by directing the company's affairs, whilst meeting the appropriate interests of its shareholders and relevant stakeholders.

? The board must simultaneously be entrepreneurial and drive the business forward but devoid of negligence and excessive risk taking.

? The board should be adequately knowledgeable about the core business of the company and to be answerable for its actions. This does not mean that they should over influence management of the company.

? The board must be sensitive to the pressures of short-term issues and yet be informed about broader, long-term trends.

? The board must be knowledgeable about local issues and the competitive landscape they are operating.

? The board is expected to be focused upon the commercial needs of its business while acting responsibly towards its employees, business partners and society as a whole.

Relationship between share price and corporate governance

Stock prices reflect the value of a stock at a given point in time. Investor perception about a company can adversely or favorably affect stock price. If stock prices are high, it gives investors value. Management would equally benefit if they have incentives or bonuses tied to the performance of the company’s share price. The company would as well benefits if they are seeking extra funding through right issue for example. If companies do not manage their relationship with investors, they have to do damage control after that has affected their stock price adversely on the stock market.

Cost management determines profit and dividend- if the company is able to manage its cost effectively and make informed investments, at the end of the financial year, its profits would increase, some portion ploughed back into the business and the rest paid out as dividend to shareholders. Cost can be effectively managed if the right corporate governance is in place to reduce fraud and wastage through negligence.

Corporate governance issues on the GSE.

GCB and SCB saga: Both Ghana Commercial Bank and the Standard Chartered Bank are stocks listed on the GSE. Over the past few months, these two companies have lost so much value of the market as a result of the issues relating to how their staffs concerns were not satisfactorily addressed. One of the duties of the board of directors is to meet the appropriate interests of its shareholders and relevant stakeholders. Staffs are also stakeholders whose concerns must be adequately addressed. If these people are not satisfied, it can adversely affect output and hence profit or fallen share prices. A similar case happened when some minority shareholder of CAL Bank felt the board members were not working in the best interest of the shareholders. During that period, the stock price was fluctuating.

Surprisingly most of the listed stocks on the GSE are government divestitures. They are GCB, PBC, SIC, CPC and others. Most of these companies are characterized by government interference which may have some adverse implication of good corporate governance. However, government divestitures that fall within the category of financial institutions are quite autonomous when it comes to certain decisions. Even though government interference is minimal, once the government appoints the board of directors for these companies, they still have some influence on the governance of these companies.

It is therefore fair to say that good corporate governance is key to attraction of local and foreign investors, as well as increasing profits and its positive effects on stock price. The issue of corporate governance should be taken seriously by private companies who are planning to go public as well are companies that are already public. It should also be the joint efforts of all industries stakeholders as well as the regulators. The UK came up with the Combine Code as a result of combined efforts of both the market regulators and the professional accounting bodies. Ghana can do likewise by coming up with a corporate governance code that will apply to all listed companies. This is important because one big corporate scandal can cause high levels of unemployment and even reduce GDP to a larger extent. Hope you remember the Enron scandal and its effect on the whole world. Where ever you work, do not wait to witness any bigger corporate scandal, may be this time round it may be your job or that remittance you are expecting from abroad that will suffer as a result.

Direct all comments and suggestions to skafuiteye@gmail.com,skteye@gmail.com. ©, Sophia Kafui Teye, Blog: www.skafuiteye.blogspot.com