What is Corporate Governance? I was called to the Bar in Ghana in 2006 having met all the requirements for admission including passing Company Law. Corporate Governance as a course of study was not on offer as part of my legal education.
Seven years later, I gained admission to Harvard Law School (HLS) to pursue a Master of Laws (LL.M.) degree with a Concentration in Corporate Law, Finance & Governance.
Of the 165 students who graduated with an LL.M. in 2014, only 11 of us belonged to the said Concentration.
In my application, I had expressed an interest in studying Corporate Law simpliciter. Thus, when I discovered that the Concentration came with Finance & Governance as well, my interest was piqued.
I also took Corporations (as it is called at Harvard and on the New York Bar Exam), which is in some ways similar to Company Law in Ghana and is also referred to as the Law of Business Organizations or simply as Corporate Law.
As a Concentrator, I was introduced to and delved into the pith of Corporate Governance. Indeed, I cross-registered at Harvard Business School (HBS) where together with some fellow LL.M. candidates, third year Juris Doctor students and final year MBAs, we took Boards of Directors & Corporate Governance for a full semester.
It became clear to me that although they are related, Company Law is not one and the same thing all over as Corporate Governance.
The former in a technical sense, refers to how companies are formed and dissolved, the legal requirements for their continuous existence, which positions it must have at a minimum (such as directors, auditors etc.), the means by which it must make certain decisions (such as by resolution), who has the right to sue for a wrong done to the company (for example as between directors and/or shareholders) and such matters as are usually a matter for black letter law.
The latter tends to address the strategies, tactics, systems, manner, ethics, involuntary norms, skills (such as a basic appreciation of the company’s financial statements), best practice and those qualities that set ordinarily skillful persons apart from other ordinarily skillful persons.
To be sure, there are aspects that begun as Corporate Governance recommendations, which are fast becoming Corporate Law imperatives in certain jurisdictions such as the types and number of board committees, the tenure of directors, etc.
In a sense, Company Law is the floor (you cannot do less than it provides) but Corporate Governance is the ceiling (you can give more than the required minimum).
As a practical example, Company Law may provide for a minimum number of times that directors must meet but it is Corporate Governance, properly exercised, that determines whether the minimum suffices.
If the directors meet 15 times in a particular year where diligence dictates that 4 to 6 meetings would optimise performance, Company Law may not have been violated but a Corporate Governance question arises.
Company Law was well in place in the UK in the 1980s and 1990s when business scandals shook investor confidence leading to the publication of the Cadbury Report in 1992 with the intention to foster a Corporate Governance ecosystem to address the chaos.
Corporate Law was firmly in place in the US when corporate accounting fraud at companies like Enron and 1 WorldCom in the early 2000s led to the passing of the Sarbanes-Oxley Act in 2002, as it was when the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 “to reshape financial regulation and prevent another economic crash.”
Company Law was firmly in place in Ghana when the banking crisis of 2017-2019 led to sundry Corporate Governance measures including the issuance of the Corporate Governance Directive 2018 by the Bank of Ghana.
The above examples may have accentuated the move to give Corporate Governance a strong footing, but they did not mark the genesis of the effort. As far back as the 18th Century, Adams Smith had warned of the “negligence and profusion” of managers (Adams Smith, On Joint Stock Companies (from book V. Chapter 1), “The Wealth of Nations,” 5th ed. Version, 1789 (first pub. 1776).
In the 1930s, Adolf Berle and Gardiner Means raised issues with weakening control by dispersed shareholders and even stronger managers. The excesses of the robber barons in the Gilded Age served as early warning signs too.
In the words of Jay Lorsch, my late professor at HBS, when it comes to Corporate Governance, “one size does not fit all.”
The Cadbury Report defines it as “the system by which companies are directed and controlled” and also highlights the voluntary adoption of best practices in governance as well as the “comply or explain” principle. (Neeta Shah and Christopher J. Napier, “The Cadbury Report 1992: Shared Vision and Beyond” accessed on 11th October, 2019 @12:09am at www.data.unibag.it).
The various editions of the UK Corporate Governance Code, the OECD Guidelines on Corporate Governance of State-Owned Enterprises (developed in 2005 and updated in 2015) and other publications emphasize accountability, openness, fairness, responsibility, responsiveness, participation, efficiency, inclusiveness, equity, consensus, integrity, ethical conduct, regular self-evaluation, and others as the principles of Corporate Governance. (see Robert Nii Arday Clegg, “Corporate Governance: The Boardroom, The Bottom Line & Beyond” (self-published, 2019).
Writing with the “large public firm in the wealthy West” in mind, my LL.M. Paper Supervisor at HLS defines it as “the relationship at the top of the firm – the board of directors, the senior managers, and the stockholders,” and adds that, “by taking governance to mean the relationships among the triumvirate at the top – and not taking it to mean their relationships with say, the firm’s employees or its labour unions – I right away give the analysis an American cast, not a European one.” (Mark J. Roe, “The Institutions of Corporate Governance,” Handbook of New Institutional Economics (Claude Ménard & Mary M. Shirley, eds.)(Kluwer, 2005) Harvard Law and Economics Discussion Paper No. 488).
Under Ghana’s Corporate Governance Directive 2018, Corporate Governance from a banking perspective, refers to the manner in which the business and affairs…are governed by its board and senior management, including how they set…strategy and objectives; determine…risk tolerance/appetite; operate business on a day-to-day basis; protect the interest of depositors, meet shareholder obligations, and take into account the interest of other stakeholders, and align corporate activities and behaviour with the expectation that the regulated financial institution will operate in a safe and sound manner, with integrity and in compliance with applicable laws and regulations.”
I was called to the Bar in New York in 2023 having met all the requirements for admission. Corporations was one of the required study subjects, but Corporate Governance was not.
By Robert Nii Arday Clegg
