Monday, 24 August 2009

Rethinking Corporate Governance in Nigerian Banks

On Saturday, 22nd August, I wrote this letter to the editor of NEXT in response to the on-going regulatory actions of the Central Bank on the 5 bailed -out banks in Nigeria.

Dear Editor,

Regarding Uddin Ifeanyi's excellent article on (Governance in the new financial sector), I write to express a view on some of the points highlighted by the writer in the wake of last week's intervention by the CBN Governor. Though the role of non-executive directors was briefly touched upon in the said article, please grant me some space to respond in light of their actions in the events leading to the sack of their boardroom colleagues.

Following the bank recapitalization programme in 2005, the CBN declared in its annual report that "ownership of banks has been diluted and this should...tame the monster of insider and corporate governance abuse". However, in Mr Sanusi's speech on the 14th of August, he declared that a major finding from the examination of the 5 banks was "excessively high level of non-performing loans...attributable to poor corporate governance practices".

Between then and now, the Central Bank had in 2006 published an extensive Code of Corporate Governance for Banks in Nigeria Post Consolidation, and made compliance with the code's provisions mandatory. Despite these efforts to instill a sound corporate governance culture through a board of directors independent enough to exercise its oversight functions, the reverse seems to have happened (at least in the case of the infamous five).

As a result, a level of ambiguity was generated by his decision to leave the non executive directors in place, while their executive colleagues on the boards of the 5 rescued banks were axed. I initially wondered if they were left as mere placeholders while the CBN governor decides on what to do with them. But all Mr Sanusi did was appeal to the boards of the affected banks to “cooperate with the newly appointed Executive Management”. He needs to go further than that.

Having led these institutions to their current troubled state and what Sanusi himself called "a grave situation", why leave the grave diggers in place while trying to breathe new life into these banks?Why is it that despite the presence of non-executive Chairmen and other non-executive directors, oversight of the management was almost non-existent? Or does the CBN governor know something that he is not sharing about the valiant and courageous attempts of these non-executive directors at calling the CEOs to order or where that failed, blowing the whistle?

Uddin Ifeanyi appears to give this section of the bank's board a mere slap on the wrist. The writer asked “how much of the nature of risks taken by these institutions in recent times did the non-executive members of the boards of directors of Nigerian banks really understand? And how much power did they have to restrain managements with excessive risk appetites?” I believe that the new banking edifice that hopefully comes out of the ashes of this episode needs to be built on the foundation of sound corporate governance practices. A board’s competence, knowledge and their ability to truly keep management on the straight and narrow is key in this regard.

A good number of the non-executive directors on these bank boards are honourable men and women and of good standing in society. But if the CBN governor has avoided saying it to their hearing, they need to hear some home truth and acknowledge their failure in carrying out their fiduciary responsibilities or at least, being seen to do so. If as it also appears, they choose to stay on in their positions, what guarantee exists that they won’t just continue in their assumed role as rubberstamps to the decisions of the CBN appointed management teams and thus increase the likelihood of a second round of oversight failures.

First thing would be for Mr Sanusi to reexamine the current provisions of the law with a view to strengthening them. He needs to interpret Sections 33 and 35 of the Bank and other Financial Institutions Act of 1991 more liberally than he has done so far.

The CBN governor should also take another look at sections 2 and 3 of the Code of Corporate Governance for Banks in Nigeria Post Consolidation with a view to strengthen the weaknesses and address the challenges highlighted therein. Aspects of this Code need to be enforced more strictly. Section 4.2 for example calls for the “installation of a committed and focused Board of Directors which will exercise its oversight functions with a high degree of independence from management and individual shareholders“. This needs to be fully enforced.

Mr. Lamido Sanusi has a track record as a stickler for corporate governance regulations. His indictment of a section of the boards of these 5 banks puts a big question on the members left there. Even if the rules in their current form are not explicit on what to do with this remnant group, he is not totally bereft of options. He should not give the impression that he is.

Thanks & Kind Regards,

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