The Role of State and Foreign Investors in Corporate Governance: Evidence of the Banking Sector Privatisation of Ghana

UoM administered thesis: Phd

  • Authors:
  • Enya Ameza

Abstract

The concept of corporate governance and its impact on sustainable growth and profitability of banks has been embraced worldwide. Whilst most studies on banks in Ghana were related the financial sector reforms to performance, no work has been done on the effect of the reform on corporate governance. Specifically, no study is known to have related privatisation to corporate governance of banks in Ghana. Meanwhile, such studies are relevant to evaluate whether the divestment of state ownership improved corporate governance of banks. Using the generalised agency theory combined with the institutional perspective, the study has established that the problems relating to privatisation and the corporate governance are complex and multi-dimensional. Using desktop analysis, questionnaire surveys and case studies, this study examined how corporate governance changed since the banking sector privatisation in Ghana between 1995 and 2000 and its possible effect (s) on the corporate governance outcomes. To effectively analyse how corporate governance in Ghanaian banks has changed since the sector privatisation, the thesis addressed the following research areas: the state of corporate governance before privatisation, how states continuous residual ownership affected corporate governance of banks, how foreign investors' involvement in privatisation affected corporate governance of banks and whether or not the ownership forms affected the internal control and risk issues differently. The state of corporate governance did not change significantly in state owned banks after the sector privatisation. The questionnaire survey and case studies showed that corporate governance weakness was widespread in state owned banks resulting in outcomes such as frauds, insider lending and the abuse of depositor's funds by agents of government prior to the sector privatisation before the sector privatisation. This however changed after divestment of government's shares some of these banks. All the banking forms studied experienced concentrated ownership due to the strategic privatisation adopted by government of Ghana. The studies confirmed that, the continued government influence adversely affected top management performance. For example COOP and NIB continued to use their pre-privatization top managers after privatization experienced more managerial entrenchment. Thus, continuity in top management from SOE to privatized firm reduced the likelihood of organizational restructuring, since managers lacked the skills or knowledge to introduce initiatives that enhance bank firm performance. It also confirmed that the continuous government residual ownership and interruption resulted in minimum restructuring and or persistence of old corporate structure, and limited management evaluations. As a result, corporate governance weaknesses such as poor internal control systems and poor risk persisted during and after the sector privatisation. These weaknesses led to problems such as related party transactions, frauds, abuse of depositor's funds and sectoral lending. Even in partially privatised banks, the activities of cartels led to collusion and fraudulent practices during the study period. Privatised banks in the foreign control reported stronger corporate governance structures before and after their acquisition of \government shares. Foreign investors who held sufficiently high proportion of a company's shares justified their combining ownership with degree of board control, in contrast to the state owned banks. FOBs studied registered no irregularities in top management after government buyout. FOBs Consistent with their reputation and experienced in the banking business, foreign investors maintained strict control of managers' actions and exerted close monitoring of management activities to ensure superior performance. Even the former SOB (SG-SSB) experienced no weaknesses after privatisation. This confirms that, when majority shareholdings were sold to foreigners, corporate governance improves. The findings also re-enforced the importance of the legal and regulatory enforcement in liberalised or privatised banking environments. Whilst it was the intention of the law to tackle agency problems between insider controller (controlling agents) and other stakeholders, the pre-privatisation regulation framework, paid insufficient attention to another type of agency problem. The empirical findings indicated weak and lax enforcement of the rules by the regulators. Poor enforcement of the regulation as reported by the cases negated any merits of the pre-privatization (1989) regulations. The corporate governance problems experienced appeared to have been curtailed by the post privatisation banking Act 673 of 2004, which was noted to be more robust and enforceable across ownership types. The new regulations, which set a new standard on the quality of bank owners, managers and internal control system, appeared be more effective in tackling corporate governance weaknesses in most banks, hence the near absence of poor corporate governance practices between 2004 and 2010.

Details

Original languageEnglish
Awarding Institution
Supervisors/Advisors
Award date1 Aug 2014