Board Governance of Ghanaian State-Owned Enterprises: A Blessing or a Curse?

Modern corporations are characterized by the separation of ownership and control. The owners are shareholders who provide the required resources and those at the helm of affairs are the managers who are supposed to use the firm’s resources to create value. However, because of the self-serving motivations of the managers, as Jensen and Meckling (1976) postulate, the resources are often not used to advance the firm’s value-maximizing goal. To help alleviate this concern, and to guarantee that managers act in firms’ best interests, shareholders appoint a group of people to act on their behalf to ensure that managers do not engage in detrimental actions. This group of people is referred to as the Board of Directors (hereafter, the board).

The board comprises executive directors and non-executive directors (mostly independent directors). The executive directors are appointed from within the company and the independent directors are hired from outside based on their expertise.

The board’s roles are advisory and monitoring. The board provides not only strategic advice to managers, but also monitors that managers’ actions align with shareholders’ interests. Other responsibilities of the board include setting the firm’s strategic aims, supervising the management of the business, and reporting to shareholders on its stewardship. Having an effective board is thus crucial for both short- and long-term performance.

Evidence suggests that firms do well when they have an effective board that cares about the value and performance of the firm. Though some boards are effective, others are, unfortunately, ineffective and often fail to perform their role(s). Firms with lower-than-average board effectiveness cannot deliver shareholders’ value since their board would not be responsive to specific strategic needs.

Compared with public companies whose boards are appointed by shareholders, the boards of state-owned enterprises (SOEs) are constituted by the government and have the ultimate responsibility for developing an appropriate corporate strategy and overseeing each SOE’s performance. An SOE board acts primarily as an intermediary between the state (i.e., the shareholder of the SOE) and the SOE’s management, i.e., they are typically answerable only to the state. Given that SOE boards are appointed by the state, they often lack the absolute independence to function; their work is influenced by the government and other state actors.

According to the World Bank’s 2014 report, SOE boards in most countries, both developed and developing, usually comprise government, political, and stakeholder representatives who have limited knowledge, experience, and expertise. SOE boards may comprise ministers and other politically connected persons, party executives, elected officials, and civil servants who ensure that the SOE responds to the government’s political and policy goals rather than necessarily improving the economic and financial health of the SOE.

A board cannot function effectively if its members lack the necessary technical and business experience to carry out their responsibilities. Board members are supposed to have, for example, knowledge about risk management, internal controls and audits to be able to monitor management and provide strategic guidance. Evidence suggests that appointing a board with unqualified directors can compromise a board’s objectivity and independence, making it succumb to the demands of individual politicians and government officials and unable to act in the SOE’s best interests. To prevent excessive government interference in the board’s work, many countries, according to the World Bank 2014 report, have taken the following major steps: (1) prohibited ministers and other political appointees from serving on boards (as is common in many OECD and non-OECD countries); (2) limited the number of government appointees on boards and increased the number of private sector members (India, for example, permits SOEs to have a maximum of two government representatives on the board, usually civil servants from a relevant ministry); and (3) restrained government officials with a regulatory role from serving on boards (e.g., Malaysia has made government-linked corporations more independent from politics and has removed government officials with a regulatory role from SOE boards).

Unlike other jurisdictions, in Ghana, SOE boards are appointed by the ruling government to help the government advance its economic policies and programs. Therefore, individuals appointed to the boards are those who are sympathetic to government policies but do not have, in most cases, requisite skills and knowledge to function as a board. Simpson (2014) finds in his study on corporate governance that board appointments, the mix of executive directors and non-executive directors, and other board characteristics in state-owned enterprises deviate from the norm. It is, therefore, not surprising that some SOEs are not living up to expectations. If boards are supposed to make strategic decisions, but lack the expertise and independence to do so, then the performance of firms on whose boards they serve will be adversely affected. Badu and Assabil (2021), in the Ghanaian context, provide an interesting conclusion that effective and appropriate board composition matters for firm outcomes. In general, and according to the international best practice, an effective board must comprise highly qualified, competent directors capable of exercising objective, independent judgment to guide strategy development and monitor management. These characteristics help to ensure that the board has the autonomy and the independence to perform its functions. Where there is political interference in the appointment of boards, good practice suggests additional safeguards be instituted. These include, but are not limited to, the following: (1) appointments should not lead to any conflict of interest; (2) appointments should be made on the basis of relevant skills and experience; (3) appointees should be subject to similar performance evaluation as are other board members, including dismissal, where necessary; (4) appointees should be responsible for maintaining similar skills and governance abilities as other board members; and (5) appointees should not be chair or deputy chair of the board (see the review by Hamilton and Alexander).

In conclusion, board governance is crucial for the effective performance of organizations, particularly SOEs, and needs proper attention. Much needs to go into the selection of board members who must be carefully screened to be thoroughly devoid of politics. Board members should not be selected because of their political connections, but should be selected on their experience and expertise.

Evidence suggests that boards comprising government representatives and/or politically connected individuals lack the objectivity, independence, and skills necessary for a well-functioning board. Until Ghana, as a country, downplays politics in SOE board appointments and give chances and opportunities to deserving candidates who have the capacity to serve, SOE boards will not be able to function effectively.

If the government cannot reduce political interference, given the nature of the governance structure, then international best practice as highlighted in this article should be adopted as the guiding principle to make SOE boards effective. SOE board governance is a very broad topic and cannot be completely covered in a single submission, so I have focused on only board composition and political interference. Other aspects of board governance including size, diversity, expertise, and other attributes will be examined in the near future.

Mohammed Aminu Sualihu, PhD, CPA (Australia), FHEA

Assistant Professor of Accounting, Zayed University

P O Box 144534, Abu Dhabi, United Arab Emirates

Senior Fellow, Advocacy and Policy Alternatives Forum

P O Box WJ 1025, Weija-Accra, Ghana