What drives corporate governance quality in emerging African economies? Evidence from Ghana

Abstract

This paper investigates the determinants of good corporate governance across Ghanaian listed firms for the study period 2000 to 2009. The Ghanaian Code of corporate governance introduced in 2003 was the first attempt to make official corporate governance guidelines on best practices not backed by the force of law of which the Ghanaian firms were encouraged to comply with its provisions. As such, firms listed on the Ghana Stock Exchange are expected to comply with the recommended governance provisions in order to promote good corporate governance. Some of the key provisions in the code are separating the posts of the Chief Executive Officer and the Chairman of the board of directors, limiting the board size to between eight and sixteen directors, having at least one-third of the total membership of the board to be independent directors, and the establishment of separate board committees to be responsible for audit and executive remuneration. Other provisions call for improvement of the relationship between shareholders and managers, and provisions on financial affairs, auditing and disclosure practices. We develop a corporate governance index and its six subindices to measure firm-level governance quality. Annual reports of the Ghanaian listed firms are scored according to their governance disclosure during the whole period, 2000–2009 and pre 2003 and post 2003 introduction of the Ghanaian Code. A panel data analytical framework was used to find the determinants of strong corporate governance in Ghanaian listed firms. The empirical results over the whole period, 2000–2009 show statistically significant and positive relationship between external financing needs, firm size, institutional shareholdings and governance quality measured by the Ghanaian corporate governance index. While we find no relationship between external financing needs, director shareholding and governance quality pre 2003, the result is positive and statistically significant for post 2003. The most consistent relationship we find concerns firm size and institutional shareholdings. However, growth opportunities and firm performance measures appear to have no association with strong governance in Ghanaian firms. The results have important implications for the Ghanaian firms and regulators. In particular, the Ghanaian firms with high external financing needs would have to improve their governance structures in order to attract such facility. For regulators, it is important to have clear code of corporate governance guidelines in place where firms’ governance practices can be benchmarked. In addition, the study contributes to our understanding of the firm attributes affecting strong corporate governance in emerging African economies.