May 2017 Q5 a.
Ghana Approval Authority (GAA) is a public sub-vented organisation established in 1995 as a standard approving authority for industrial, medical and food substances in Ghana. Dr. Kamkam was appointed as the Chief Executive Officer (CEO) four years ago and he reports to a seven-member Board of Directors. GAA derives its powers from an Act of Parliament that was passed over two decades ago. The CEO upon resumption of office found that the enabling enactment of the Authority is out of date and could not regulate the activities of the board effectively. He therefore introduced a lot of innovations and initiatives to run the Authority effectively and efficiently, however some of his initiatives were inconsistent with the provisions of the enabling enactment. His initiatives despite their inconsistency with the law produces great results for the Authority.
Dr. Kamkam has very good relationship with the Board of directors over the period resulting from fat allowances and kingly treatment he offers them, especially the board chairman who is a personal friend to him. This empowers him to make unilateral decisions knowing that the board is under his full control and dominance. The board meets fewer times than required by the enabling Act of the GAA. Furthermore, internal audit is not given the required attention by management and the audit committee has not been constituted in the last four years.
The Authority outsourced most of its supporting services to the private sector. The CEO has ensured that all of these services are outsourced to companies owned by his close friends and relatives. In some cases, the services are outsourced to companies in which the board chairman has significant interest. Past records supports the action of the CEO that outsourcing to close associates produces better services than an “arm’s length” sourcing. The Authority is also not able to meet information disclosure requirements due to the policy of the CEO to operate on the blind side of the public in order to reduce visibility and nose-poking behaviours of the media.
Required:
i) Explain FOUR symptoms of defective corporate governance that can be identified in GAA. (6 marks)
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- Rule of law. Corporate governance is based on rule of law. The law establishing GAA should be respected at all times. The CEO has undermined the law establishing the authority and decided to run the authority in his own way. This claim that good outcome is achieved through his innovation and initiatives does not weaken the argument that the existing law must be observed.
- Ineffective board. Effective boards are critical in corporate governance. However, the board of GAA seem to be ineffective. Firstly, the board fails to meet regularly and secondly, the independence of the board is also under threat as the CEO seems to control and dominate the board. This renders the board weak and ineffective.
- Conflict of interest. Avoidance of conflict of interest is very important in good corporate governance. There is clear evidence of conflict of interest in GAA. The vendors of outsourced services are close friends and relatives of the CEO which places him in a conflict of interest situation. Further, some of the services were outsourced to companies in which the chairman of the board has significant interest.
- Lack of internal and external scrutiny. Good corporate governance allows for scrutiny and review of its activities to achieve value for money. However, internal audit function in GAA is neglected and audit committee is completely absent resulting in weak scrutiny and review of the entity’s operations.
- Lack of transparency. Accountability and transparency are very important principles of corporate governance. However, GAA fails to provide much public information on the operation of the Authority with the excuse that it wants to operate on the blind side of the public and the media. GAA is a public entity and therefore public accountability and transparency is required.
ii) Identify FOUR responsibilities expected of the Board of Directors of GAA to promote good corporate governance. (4 marks)
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- Keep themselves abreast with the organization’s business.
- Exercise fiduciary duty of care not to put themselves in a position where there is a potential conflict between their own personal interest and their duty to the organization.
- Ensure critical review of all proposals and other issues placed before the Board/Council.
- Prepare for Board/Council meetings, study working papers and be prepared to ask pertinent questions at meetings.
- Periodically update themselves on corporate governance.
- Have the general knowledge, skills and experience that may reasonably be expected of a Board/Council member carrying out the specific duties in relation to the organization.
- Undertake to act for the organization in a relationship of trust and confidence.
- Ensure that, decisions are made methodically and promptly and that the reasons for such decisions are recorded and when necessary, seek expert advice