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AFRICA DEVELOPMENT AND RESOURCES RESEARCH INSTITUTE (ADRRI) JOURNAL

ISSN: 2343-6662 ISSN-L: 2343-6662

VOL. 26, NO. 1(4), NOVEMBER, 2016

PUBLISHED BY AFRICA DEVELOPMENT AND RESOURCES RESEARCH INSTITUTE

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ADRRI JOURNALS (www.adrri.org)

ISSN: 2343-6662 ISSN-L: 2343-6662 VOL. 26, No. 1(4), November, 2016

Board Monitoring: Corporate Governance and Performance of Venture Capital Financed

Firms in Ghana

Lawrence Madewe Atuna

School of Business and Law, University for Development Studies, P.O. Box U P W 36, Wa

Campus. Tel: 0245284061/0205144993; Email: [email protected]

Available Online: 30th November, 2016

URL: https://www.journals.adrri.org/

[Cite article as: Atuna, L. M. (2016). Board Monitoring: Corporate Governance and Performance of Venture

Capital Financed Firms in Ghana. Africa Development and Resources Research Institute Journal, Ghana: Vol. 26,

No. 1 (4), Pp. 1-15, ISSN: 2343-6662, 30th November, 2016.]

Abstract It is known that Venture capitalist play a vital role in Small and Medium Enterprise development

through the provision of patient capital from the infant state of investee firms to when they are weaned

off (existed). The governance of nascent firms is critical for their performance and safety of shareholder

interest. Recent corporate frauds and scandals have greatly highlighted the increasing influence of

principles of corporate governance in Ghana. Boards of directors are mandated to safe guard and boost

investor interest. Board structure characteristics (Board size, composition and Chief Executive Officer

Duality) are vehicles for transmitting their oversight responsibilities. The study assesses the impact of

board of directors monitoring on the governance and performance of Venture Capitalist investee firms.

Primary data obtained through a questionnaire of thirty portfolio companies are analyzed with

multiple linear regression models while controlling for firm Age and Size, this study establishes

positive significant relationship between the proportions of shares held by institutional investors and

governance and also positive significant relationship between board size and Chief Executive Officer

duality on performance of Venture Capital Financed Companies. The study recommends Small and

Medium Enterprises to adhere to governance standards and encourages future studies to pay attention

to cross country analysis.

Keywords: Venture Capitalist, Corporate governance, Performance, Board Monitoring, SMEs

http://www.adrri.org/

mailto:[email protected]

https://www.journals.adrri.org/


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INTRODUCTION

The barriers to Small business development have been well documented. Fairchild (2009)

indicates that most entrepreneurs are not able to raise or obtain capital for their business

initiatives. Gockel and Akoena (2002) earlier identified poor managerial skills, poor records

keeping and accounting practices and information disclosure as barriers to small businesses

obtaining formal financing. Traditional financial intermediation have been criticized for its

role in the development of Small Micro and Medium scale enterprises; Diamond (1984),

Stiglist (1985) and Fama (1985) earlier posited that, the central idea behind the traditional

financial facilitation model is to minimize or at best eliminate manager-stakeholder agency

costs.

The role of venture capitalists VCs in Small scale business development have now been

established, Studies suggest that VCs support extend beyond financial support associated

with traditional financial intermediaries such as banks, they provide equity finance, strategic

managerial guidance and value-added services to early-stage companies (Hellmann and Puri,

2002 ;Fairchild, 2009;Mbhele, 2011 and Jun, 2014). In the U.S, high-tech companies such as

Digital Equipment Corporation Apple, Federal Express, Compaq, Sun Microsystems, Intel,

Microsoft, Amazon.com, Yahoo, Cisco Systems and Genentech have developed through

venture capital financing (Gompers and Lerner, 2001; NVCA, 2010). VCs are also noted for

creating jobs and driving economic growth (Kortum and Lerner, 2000; Global Insight 2007).

Gompers, Ishii and Metrick (2003) maintain that firms can sustain their development by

improving on their governance quality and performance. Companies with sound governance

and performance increase their access to outside capital (Klock, Mansi and Maxwell 2005).

Corporate governance reduces transaction cost reinforces property rights and reduces the

exposure of firms to market vulnerabilities. Poor governance on the other side discourages

outside investment and lowers general investor confidence. Extant literature shows that good

corporate governance have led to significant increase in Economic Value Added in companies

(Aldamen and Duncan 2012).

In Ghana VC financing is still evolving, Act 680 of parliament established the Venture Capital

Trust Fund (VCT Fund) in the year 2004 to provide financial resources for the development

and promotion of SMEs in priority sectors of the Ghanaian economy. The fund has partnered

with the private sectors to establish various Venture Capital Financing Companies (VCFCs)

which include Activity Venture Finance Company Limited, Bedrock Venture Capital Finance

Company Limited, Fidelity Equity Fund II Limited (FEF II), Ebankese Venture Fund Limited

and Gold Venture Capital Limited (Venture trust fund report 2011). The players of the

venture capital market consist of (VCT Fund), VCs, business angels network and SMEs.

Currently the fund is providing financing for high-tech firms, educational institutions with

high growth potentials, advance medical and pharmaceutical service centers, food an agro-

processing firms, capital intensive animal husbandry and financial services (Venture trust

fund report 2011).


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Organisations with sound corporate governance culture have more propensities to entice and

attract capital providers than loosely governed organisations. Kaen (2003) indicates that “the

actual value of a corporate business is what capital providers or investors will make available

to the corporate business on the basis of its anticipated returns to its owners”. Agyeman and

Castellini (2013) contends that the increasing influence of principles of corporate governance

worldwide have been greatly highlighted by recent corporate frauds and scandals. These

developments are largely results of failure of compliance by corporations, and regulators

effectively enforcing codes and standards. Ghana is no exception to compliance and

regulation of governance provisions. In 2010, the World Bank barometer on the compliance of

Corporate governance provision, revealed that in terms of compliance with the Organisation

for Economic Cooperation and Development (OECD) principles, Ghana’s average percent of

implementation for the board fell, in large part due to low awareness of and compliance with

Securities and Exchange Commission Corporate Governance Guidelines (SEC CGG). When

compared to other countries in Sub-Saharan Africa, Ghana performed well in terms of

transparency and disclosures but lags in equitable treatment of shareholder and, especially

responsibility of the board of directors (World Bank, 2015).

The Ghanaian system of corporate governance is “Anglo-Saxon”, or the “outsider control

model” (Agyemang, Aboagye and Ahali, 2013). The principles of the system highlights the

protection of shareholder rights and assign board of directors as gatekeepers in ensuring the

rights of shareholders since the board is regarded as the representatives of shareholders

(Adegbite 2012). The system also spells out the mechanism for corporate control (i.e. Board

Composition, Independence of the board, the Leadership structure (CEO-chairperson

separation), Board committees and Access to information (Agyeman et al., 2013). Engel,

Gordon & Hayes (2002) contend that Venture capitalist directly monitor their portfolio

companies through their board representation. This study will therefore explore the evidence

of the impact of venture capitalist monitoring and corporate governance of portfolio

companies in Ghana. The professionalism of VCFCs influences corporate goals. This paper

will further examine the impact of VCs board monitoring on the performance of their

portfolio companies in Ghana.

The objective of this paper was to assess the impact of venture capitalist on the corporate

governance of their investee firms and further assess the impact of venture capitalist on the

performance of investee firms. The study answered the following questions; Does venture

capital finance promote corporate governance of investee firms in Ghana?, to what extent

does institutional investors impact corporate governance of venture capital financed firms in

Ghana?, does venture capital finance promote investee firms performance in Ghana? And

finally is there any relationship between institutional investment and corporate performance

of investee firms in Ghana?

Theory and Evidence

This work is grounded on the principal agent theorem. The theory proceeds on a simple

organizational setup where the boss herein the Venture capitalist engages the agent-portfolio


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company. The relationship is described as a “contract”. Where the principal is busy to do a

job hence hires an agent. Been busy also means that the principal cannot monitor the agent

perfectly. Cole, McWilliams and Sen (2001) posit that Agency theory focuses on the

occurrences and resolution of conflicts among the principals and the agents. Agency theory

asserts that firms can employ various mechanisms to align the interest of agents and

principals and to monitor the agents. Governance mechanisms are adopted to align the

interest of the agent (investee firm) with shareholder (investors/ capitalist) aspiration.

Institutional ownership

Chung and Zhang (2011) report that corporate governance has become an important

investment criterion of institutional investors, their results show that institutional ownership

increases monotonically with governance scores after employing comprehensive measures of

corporate governance quality that are constructed from 50 governance factors for a large

number of U.S. companies. They further contend that, investor activism will depend on

whether such investors are either Institutional or individual. Institutional investors (e.g.,

banks, insurance companies, and pension funds) have strong fiduciary responsibilities hence

tend to priorities companies that have better governance structure than individual investors.

Due to these fiduciary obligations, it provides extra incentives for institutional investors to

choose companies with good governance structures. Institutional investors therefore have a

much stronger incentive to monitor companies that they own than individual investors

because of their larger stakes in those companies.

Monitoring

Engel, Gordon and Hayes (2002) find that venture capitalists directly monitor managerial

behaviour documenting that firms with greater VC involvement display a weaker pay-

performance association than comparable companies. Strong VC oversight substitutes for the

pay-performance relationship since managers are directly monitored by venture capitalists. In

comparison, entrepreneurial firms without VCs supervision may have to rely on various

performance measures in annual compensation grants to incentivize CEOs. As shown by

Gompers (1995), VCs frequently require seats on the boards of portfolio companies as

monitoring covenant, since this allows better access to information and ongoing oversight on

managerial decision-making. Bonini, Alkan and Salvi (2009) show in their study on the impact

of differential levels of capital injection and different regions of incorporation of portfolio

companies and report that as the percentage of funding increases board decisions and board

appointments grows accordingly.

Board Structure

The boards of directors are charged with oversight of management on behalf of shareholders.

Agency theorists argue that in order to protect the interests of shareholders, the board of

directors must assume an effective oversight function which is influenced by factors such as

board composition, size of board, duality of chief executive officer, board diversity and board

culture (Brennan, 2006). Uadiale (2010) indicates that, the issue of structure of the board of

directors as a corporate governance mechanism has received considerable attention in recent


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years. This is as a result of conflicting views from academics, market participants, and

regulators as to the impact of board structure on the control and performance of firms while at

the same time the empirical evidence is inconclusive.

CEO Duality

Coles, McWilliams and Sen. (2001) in establishing the relationship between governance and

performance, characterized the relationship of the CEO to the Chair of the Board of Directors,

firms that have joined the two titles into one position as having a combined leadership

structure, whereas firms that have not joined the titles are referred to as separated structure

firms. The combined structure has been criticized as an inappropriate way to design one of

the most critical power relationships in the firm as Jensen (1993) argues. This view asserts that

the CEO who is also Board chair will have a concentrated power base that will allow the CEO

to make decisions at the expense of shareholders. This view supports the use of a separate

leadership structure. Rechner and Dalton (1991) find that separated structure firms

outperformed the combined structured firms. However, Baliga, Moyer and Rao (1996) find

little evidence to support a performance distinction between separated and combined firms.

While the empirical evidence is mixed the expectation is that the firm’s managers will be

better monitored when two individuals occupy the Chair and CEO roles.

Board Composition

Tricker (1994) in defining board composition distinguishes between those directors who hold

management positions in the company and those who do not. Those with management

positions are referred to as insider directors in the United States or executive directors in

United Kingdom and Australia. However, an independent director is one who has no

affiliation with the firm except for their directorship (Clifford and Evans 1997). The top person

in the board is the chairman. He could be an executive or a non- executive of the company. If

the CEO happens to be a director on the board, then he is an executive director. Board

composition refers to the number of independent non-executive directors on the board

relative to the total number of directors. Empirically, Dehaene, Vuyst and Ooghe (2001)

established that the percentage of outside directors is positively related to performance in

their study of Belgian companies. However, two separate studies by Weir, Laing and

mcKnight, (2002); Haniffa and Hudaib, (2006) find no significant relationship between

performance measures and the proportion of non-executive directors. Haniffa and Hudaib

(2006) documents that high proportion of non-executive directors may engulf the company in

excessive monitoring, be harmful to companies as they may stifle strategic actions, lack real

independence, and lack the business knowledge to be truly effective. The leadership debate

tilts towards boards with significant outside directors as they will make different and perhaps

better decisions than boards dominated by insiders.

Board Size

The results of empirical studies are mixed. Large boards could provide the diversity that

would help companies to secure critical resources and reduce environmental uncertainties

(Pfeiffer, 1987; Pearce and Zahra, 1992; Goodstein et al., 1994). However, coordination,


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communication and decision-making may counter company performance when the number

of directors’ increases, as an extra member is included in the board, a potential trade-off exists

between diversity and coordination.

The remainder of the paper is organised as follows. Section two contains the methodology

which includes data source and tools, variable descriptions and measurement, empirical

models specification. Section three presents the results of data analysis. Section four offers a

discussion of the results and their implications and conclusion to this paper is contained in

section five.

METHODOLOGY

The primary data for the study was obtained through a questionnaire. The respondents

comprised thirty (30) venture capital financed firms who were randomly selected from the

five venture capital companies in Ghana. The study considered the degree of homogeneity of

the population in determining the sample size (Mothomogolo, 2012). A heterogeneous

population will require a larger sample size compared to a more homogeneous population

(Shaw, 2008). The population to be studied was heterogeneous given the diversity of industry

and activities they engaged in, thus a sample size of 30 was chosen out of about 40 investee

firms. These firms were selected from across industry and activities. The questions were pre-

tested among the portfolio companies of Fidelity Equity Fund II; this informed the final

design of the questionnaire.

Variable description and measurement

Corporate governance

There is no consensus in the measurement of corporate governance (Brown, Beeks and

Verhoeven, 2011). Yet what is agreed is that good governance does not however, mean

uniform governance across firms. Filatotchev, Toms and Wright (2006) argue that firms

governance are driven by their needs and how they negotiate the interface of decision making

, control and monitoring governance attributes. The governance measure should therefore

capture the aggregate governance climate of the firm than adopt a “one-size-fit-all”

dimension. The study computes an index which allows firms more or less of individual

governance attributes as they see appropriate but still reflects the aggregate governance

climate for the firm. Aldamen and Duncan, (2012) construct their index using fourteen

individual governance proxy measures into a single variable. Brown and Caylor (2006)

construct their index using fifty one governance standards out of sixty one included in the

International Shareholders Service ISS database. Chung et al. (2010), select twenty four

governance standards that are mostly closely related to financial and operational

transparency. This work computes governance index, by using thirty individual governance

proxy measures that are transformed to a binary scale denoted by 𝑪𝑮 (Gov_score), assigning

one (1) point for each governance provision that meets the minimum standard and zero (0)

otherwise provided in ISS Corporate Governance: Best Practices User Guide and Glossary

(2003) and SEC CGG (2010) (see appendix).The thirty governance provisions included in the


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index captures the multi-faceted concept of corporate governance under seven dimensions;

Board standards, Audit standards, Charter provisions, Ownership standards, Progressive

standards, State provisions and Compensation standards. A value of thirty indicates strong

corporate governance and a value of zero indicates weak corporate governance.

Institutional Ownership

Prior research, defines institutional ownership as the fraction of a firms share that are held by

institutional investors (Chung and zhang, 2010). The variable is denoted by 𝐼𝑛𝑠𝑂𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝

and measured by firms ratio of shares held by institutional investors to the total number of

shares outstanding (Chung and zhang, 2010). .

Board Size

The size of the Board denoted by 𝐵𝑆𝑖𝑧𝑒 measured by the number of directors on the board

Board Composition

Board Composition represented by 𝐵𝑜𝑎𝑟𝑑𝐶𝑜𝑚 represent the proportion of outside directors

sitting on the board.

CEO Duality

𝐶𝐸𝑂 Value zero (0) if the same person occupies the position of the chairman and the chief

executive and one (1) for otherwise.

Performance

𝑃𝑓𝑜𝑟𝑚, This study employed Return on Capital Employed ROCE as a proxy for

performance.

Control variables

In addition to the model constructed, the study includes two control variables that have

previously been important in determining governance and performance, Firm Size and Firm

age. Aside being a standard control, a firm’s size is an important factor which influences

governance. Firm size denoted by 𝑓𝑖𝑟𝑚𝑆𝑖𝑧𝑒𝑖 is measured as the log of total assets (Pittman

and Fortin, 2004). Firm age is a potential confounding variable in explaining governance and

performance. A company’s age can influence its corporate governance structure and

performance. Firm age, denoted by 𝑓𝑖𝑟𝑚𝐴𝑔𝑒𝑖 is measured as the log of the number of years of

its existence (Aldamen and Duncan, 2012).

Specification of Empirical models

For the purpose of empirical analysis, this study uses descriptive statistics and linear multiple

regression as the underlying statistical tests. The regression analysis is performed on the

dependent variable, 𝐶𝐺𝑖and 𝑃𝑓𝑜𝑟𝑚 to test the relationship between the independent variables

(board structure characteristics). The regression models utilized to test the relationship

between the board characteristics and corporate governance on one hand and performance on

the other are stated below.


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𝐶𝐺𝑖 = 𝛽0 + 𝛽1𝐼𝑛𝑠𝑂𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝𝑖 + 𝛽2𝐵𝑜𝑎𝑟𝑑𝐶𝑜𝑚𝑖 + 𝛽3𝐵𝑆𝑖𝑧𝑒𝑖 + 𝛽4𝐶𝐸𝑂𝑖

+ 𝛽5𝑓𝑖𝑟𝑚𝑆𝑖𝑧𝑒𝑖+𝛽6 𝑓𝑖𝑟𝑚𝐴𝑔𝑒𝑖 + 𝜀𝑖

𝑃𝑓𝑜𝑟𝑚𝑖 = 𝛽0 + 𝛽1𝐼𝑛𝑠𝑂𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝𝑖 + 𝛽2𝐵𝑜𝑎𝑟𝑑𝐶𝑜𝑚𝑖 + 𝛽3𝐵𝑆𝑖𝑧𝑒𝑖 + 𝛽4𝐶𝐸𝑂𝑖

+ 𝛽5𝑓𝑖𝑟𝑚𝑆𝑖𝑧𝑒𝑖+𝛽6 𝑓𝑖𝑟𝑚𝐴𝑔𝑒𝑖 + 𝜀𝑖

𝛽0 is a constant coefficient and β is the coefficient of in dependent variables while ε is the

residual error of the regression with i being firm(s) involved.

RESULTS

With reference to the sample size of 30 investee firms, 30 questionnaires were sent out. 28

(93.33 %) questionnaire were completed, 2 (6.67%) were not completed- Two firms exited

within the period.

Table 1: Descriptive Statistics of Regression Variable

Variable Observations Mean Standard Dev Mode Variance Min

Maxi

Board Size 28 . 82 . 3900 1 .152 0 1

Board Comp 28 .93 .26227 1 .069 0 1

CEO Duality 28 1.00 .0.00000 1 .000 0 1

Institutional share 28 54.8107 19.09612 - 364.662 0

100

Total Gov 28 19.54 4.0222 23.00 16.184 0

30

Performances 28 .12 .076325 - .006 0 -

Table 1 shows the descriptive statistics of the study. The mean for board size is 82% and its

standard deviation is 0.3900. This shows that on the average, 82% of the 28 investee firms

satisfied board size provision that is Boards should not have fewer than 6 members or more

than 15 members. The board composition variable has a mean of 93% and a standard

deviation of 0.26227 indicating that 93% firms satisfied the provision for bard composition.

The minimum standard is that at least two thirds 2/3 of the directors on the board should be

independent. All firms in the sample practiced the separated structure. Average total

governance score is 19.54 and each firm’s performance averaged 12%.


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Regression model I

Table 2: summary of descriptive Statistic of regression model I

Predictor- Independent variable Coefficients std. Error t-statistic

significance

constant 7.356 5.723 1.285 .211

Institutional share .084 .039 2.169 .041*

Board Composition 7.838 6.081 1.289 .210

Board Size .270 .714 .378 .709

Chief Executive Officer Duality .464 .193 2.402 .240

R .860

R Squared .739

Adjusted R Square .701

Observations 28

Dependent Variable: Corporate Governance

From table 2, R. Square is a test of goodness of fit of the specified model. The estimated results

in the table showed a relatively high R. Square of 0.739. This indicates that 73.9% of the

variations in governance scores are explained by the independent variables. The estimates

show a strong positive correlation between the explained variables (governance score) and the

explanatory variables as indicated by the value of R obtained as 0.860 in the table. This means

that overall the two sets of variables move in the same direction.

Regression (Table 2), shows that at the least, the governance score of an investee firm will

increase by at least (7.356) all things equal. The coefficient of 𝐼𝑛𝑠𝑂𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 was .084. This

indicates that governance score of a firm will increase by .084(8.4%) if the shares of

Institutions investing in firms increase by a unit. Institutional share has a high significant

(0.04) effect on governance scores. The second variable 𝐵𝑜𝑎𝑟𝑑𝐶𝑜𝑚 obtained a coefficient of

7.838 as indicated in Table 2.this implies that governance score will increase by 7.838 if the

proportion of outside or Independent directors on the board increase by one unit this

however, has no significant effect on the governance score (.210), The coefficient of 𝐶𝐸𝑂 was

.464. 𝐶𝐸𝑂 as specified in the model was a dummy variable with a value of 1( firm had a

separated structure) and 0 (firm had a combine structure). Thus a firms governance score

increased by .464 if it had a separated structure and when a firm has the combine structure its


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governance score reduced by .464 all things being equal. This is not significant at the 5%

confidence level having shown a significance of 0.24.

Regression Results Model II

Table 3: summary of descriptive Statistic of regression model II

Predictor- Independent variable Coefficients std. Error t-statistic

significance

constant .055 .120 .455 .653

Institutional share .001 .001 .880 .388

Board Composition -.159 .127 -1.245 .226

Board Size .930 .326 2.849 .009*

Chief Executive Officer Duality 5.197 1.910 2.721 .012*

R .830

R Squared .689

Adjusted R Square .652

Observations 28

Dependent Variable: Firm Performance

Results from table 3 indicates that for every member added to the board of an investee firm

the chance of performance increases by .930 and this is statistical significant effect (.009) on

performance. The performance of a firm increases by (5.197) if an investee firm adopts the

separated structure. However, for firms that practice the combine structure performance will

be reduced by (5.197) this variable also has a statically significant effect on performance.

DISCUSSIONS

The study reveals that the fraction of a firm’s shares that are held by institutional investors

increases with comprehensive measures of the quality of the firm’s governance. The study

confirms that outside board of directors or Independent directors impact positively on the

corporate governance of investee firms as in the work of Uadiale (2010). The study further

confirms that large board’s size impacts positively the governance of firms. The results of the

study also indicate that the separated structure has a positive impact on the governance

quality of a firm.


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Results from the study indicate that there is positive association between board size and

corporate financial performance. This is consistent with the findings of Dehaene et al. (2001).

The study however, reveals a negative association between outside directors sitting on the

board and corporate performance. The result is inconsistent with previous studies of Connelly

and Limpaphayom (2004), Dehaene et al. (2001), Rosenstein and Wyatt, (1990). However, the

result is consistent with the studies of Weir et al (2002) that there is no significant relationship

between performance measures and the proportion of non-executive directors. In addition

the study reveals positive association between ROCE (performance) and CEO duality and

supports the thesis of Rechner and Dalton (1991),

CONCLUSIONS

This study analysed the relationship between venture capital finance and the governance of

their portfolio companies, the study conjecture that venture capitalist impact on the

governance of investee firms through board monitoring, the monitoring role is transmitted

through board structure characteristics such as board size, board composition and CEO

duality the study further analysis the role of institutional investors. Results from the analysis

show that the proportion of shares held by institutions in a firm impacts positively on

corporate governance, board size and board composition also impacts positively on

governance. Results from the analysis suggest that the separated role between board

chairman and CEO has a positive relationship on governance. The findings above provide as

with answers that indeed VCs impact positively on investee firms through institutional

ownership.

The study further examines the relationship between board monitoring of venture capitalist

and the performance of their portfolio companies. Employing similar board structure

characteristics (i.e. board size, board composition and CEO duality) and institutional shares of

portfolio companies, the results show that all board characteristics except board composition

impacts positively on the performance of the portfolio companies. The results also show that

institutional investors impact positively on performance of investee firms. The study

highlights that VCs positive impact on the performance of portfolio companies is through

increase in board size and firms adopting the separated roles between the CEO and the

Chairman of the board.

RECOMMENDATIONS

Based on the evidence shown in the analysis above, this paper makes the following

recommendations; large board size should be encouraged. However, expansion of boards

should be in line with International governance provisions. The composition of outside

directors as members of the board should be sustained and improved upon based on requisite

competencies in board composition and rigorous board membership requirements.

Implementation of board self-assessment should be encouraged to engender sound board

performance. The study also recommends that institutions should be encouraged to invest in

venture capital financed firms. In addition, the government should increase the institutional

capacity of regulators, as well as improving the administrative and judiciary system while


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reforming the legal framework of the SEC. This study may be improved upon by including

more variables that may affect corporate governance and firm performance. A comparative

analysis could be performed between Ghana and other developing countries to further draw

concrete conclusions.

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Appendix

ISS Governance Categories and Standards Used to Construct GOV SCORE

Board standards

1. The current minimum standard is that at least 2/3 of the directors on the board should

be independent.

2. Nominating committee of the board should be composed solely of independent

directors.

3. Compensation committee of the board should be composed solely of independent

directors.

4. Governance committee meets at least once during the year.

5. Directors should be elected by shareholders on an annual basis.

6. Boards should not have fewer than 6 members or more than 15 members.

7. Shareholders should have the right to vote on changes to expand or contract the size of

the board.

8. Shareholders should have the right to cumulate their votes for directors.

9. In addition to serving on his own company’s board, the CEO should not serve on

more than 2 other boards of public companies.

10. Outside directorships should be limited to service on the boards of 5 or fewer public

companies. A service limit of 4 or fewer public company boards is considered even

better.

11. Former CEOs should not serve on the board of directors.


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12. The positions of chairman and CEO should be separated or a lead director should be

specified.

13. Board guidelines should be published in the proxy on an annual basis.

14. Management should take action on all shareholder proposals supported by a majority

vote within 12 months of the shareholders’ meeting.

15. Directors should attend at least 75% of board meetings.

16. Shareholders should be given an opportunity to vote on all directors selected to fill

vacancies.

17. CEOs should not be the subject of transactions that create conflicts of interest as

disclosed in the proxy statement.

Audit Standards

1. Audit committee should be composed solely of independent directors.

2. Consulting fees (audit-related and other) should be less than audit fees.

3. The company should disclose its policy with respect to the rotation of auditors.

4. Shareholders should be permitted to ratify management’s selection of auditors each

year.

Charter

1. Company has no poison pill.

2. A simple majority vote is required to amend charter/bylaws (not supermajority).

3. A simple majority vote is required to approve a merger (not supermajority).

4. Shareholders may act by written consent and the consent is non-unanimous.

5. Shareholders should be permitted to call special meetings.

6. Board cannot amend bylaws without shareholder approval or only under limited

Voting circumstances.

7. Company is not authorized to issue blank check preferred stock.

8. Common stock entitled to 1 vote per share. There is no dual class in place.

State

1. Incorporation in a state without any antitakeover provisions.

Compensation

1. An option-pricing model is used to measure the cost of all stock-based incentive

plans.

2. Shareholder approval should be sought prior to repricing underwater stock options.

3. Option repricing did not occur within last 3 years.

4. All stock-based incentive plans should be submitted to shareholders for approval.

5. No interlocking directors should serve on the Compensation Committee.


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6. Directors should receive a portion of their compensation in the form of stock.

7. Nonemployee directors should not participate in pension plans.

8. Company expenses stock options.

9. Average options granted in past 3 years as percentage of share outstanding (i.e., burn

rates) are less than 3%.

10. New loan programs under stock option plans are prohibited. Company does not

provide any loans to directors.

Progressive

1. A retirement age or term limits serve as useful tools for ensuring that new board

talent is regularly sought.

2. Performance of board should be reviewed regularly.

3. Outside directors meet without CEO and disclose the number of time they met.

4. A board-approved CEO succession plan should be in place and evaluated by the

directors periodically.

5. A policy authorizing the board to hire its own advisors should be disclosed.

6. A policy requiring directors to resign upon a change in job status should be disclosed.

Ownership

1. All directors with more than 1 year of service own stock.

2. Executives are subject to stock ownership guidelines.

3. Directors are subject to stock ownership guidelines.

4. Officers and directors should have a significant ownership position (at least 1% but

not over 30%).

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