Mr. Frimpong Dogbe is the Leader, Founder, Chief Executive Officer and Board Chairman of Awurade Hwe Ltd. He single-handedly appointed a board of five executive and two non-executive directors. No formal performance targets are set for the senior managers in the company and no review of board policies is carried out. Mr. Frimpong Dogbe is the one who sets Board salaries based on his assessment of all the board members, including himself, and not their actual performance.
Internal controls in the company are monitored by the Senior Accountant, although detailed review is assumed to be carried out by the external auditors. Awurade Hwe Ltd does not have an internal audit department.
Required:
Describe FIVE corporate governance weaknesses faced by Awurade Hwe Ltd which do not comply with corporate governance principles and for each weakness recommend a solution to overcome the weakness. (10 marks)
View Solution
- Weakness
Mr. Frimpong Dogbe is both the Chief Executive Officer and the Chairman of the Board of Directors. Corporate governance codes indicate that there should be a clear division of responsibilities between running the board of directors and running the company’s business so that no individual has unfettered powers of decision.
Recommendation
Awurade Hwe Ltd should appoint a separate chairman who meets the independence criteria set out in the codes. This should ideally be an independent non-executive director. - Weakness
Awurade Hwe Ltd has only two non-executive directors compared with five executive directors. This means that non-executive directors comprise less than half the Board. This is clearly not an appropriate balance to ensure that board decisions are questioned and ultimately taken in the interests of the shareholders, and to prevent executives pursuing their own interests.
Recommendation
Awurade Hwe Ltd should appoint three more non-executive directors so that there is an equal number of executive and non-executive directors. - Weakness
At present there are no formal targets or reviews of board policies/performance carried out. This means that Awurade Hwe Ltd does not have any means by which to appraise directors’ performance and to identify training needs or poorly performing directors.
Recommendation
The board should set performance targets for each director and undertake a formal and rigorous review of its own performance and that of individual directors on an annual basis. The performance evaluation of the chairman should be undertaken by the non-executive directors. The fact that the review takes place should also be stated in the annual report. - Weakness
Mr. Frimpong Dogbe decides the remuneration for all directors including himself. Furthermore remuneration is not based on performance. Directors should not set their own remuneration due to them having a clear self-interest which may prompt them to award themselves excessive pay packages.
Recommendation
A remuneration committee comprising at least three non-executive directors should be set up to determine the level of directors’ remuneration. The remuneration of non-executive directors should be determined by the board itself (or the shareholders if required by the articles of association of the company). The remuneration policy should be fair and transparent. - Weakness
Mr. Frimpong Dogbe does not have an internal audit department. This may mean that there are weaknesses in the way in which Awurade Hwe Ltd is directed and controlled as the internal audit department forms an important part of the entity’s internal control system.
Recommendation
Awurade Hwe Ltd, should review the need for an internal audit department at least annually. Given the lack of formal controls at the company, an internal audit department should be established as soon as possible. It is not clear whether Awurade Hwe Ltd has an audit committee. If there is no audit committee then one should be established immediately and comprise at least three non-executive directors. The head of internal audit should report to the audit committee.