The issue of weak corporate governance in the banking industry came to the fore recently with the disclosure by the Governor of the Central Bank of Nigeria, Godwin Emefiele, that corporate governance practices in the industry leaves much to be desired, a development that is capable of undermining financial stability by heightening vulnerability of financial institutions to external shocks.
Speaking at this year’s edition of the CBN-Financial Institutions Training Centre (FITC) Continuous Education Programme for Directors of Banks and Other Financial Institutions, he noted that ‘’the financial industry still harbours weaknesses in governance, exemplified by instances of unclear rendition of returns, corporate governance abuses, such as unreported losses, huge exit packages for Directors, insider non-performing loans, over-domineering executive management, contravention of regulatory/prudential guidelines and lending limits, poorly appraised credits and weakening of shareholders’. This he blames on the failure of banks’ boards in carrying out their oversight functions.
Corporate governance is all about the process and structure used to direct and manage the affairs of an organization. In the banking industry, it involves a set of relationships between a bank’s board, management, shareholders and other stakeholders. Corporate governance is particularly important for banks in view of the nature of the risks they face and the fact that they are in custody of other people’s money. The expectations regarding good corporate governance are specified in some detail in the Corporate Governance Code for Banks and Discount Houses issued by the CBN in October 2014. The revelations by the CBN Governor point to the fact that the Code has been observed more in the breach. Little wonder the industry is characterized by high non-performing loans in excess of the regulatory threshold of 5 per cent with some of the deposit money banks reported to be operating at lower than the minimum liquidity requirement.
It is actually the responsibility of the board of a bank to ensure that policies, procedures and controls are put in place to manage the various types of risks with which it is faced. With respect to banks’ boards, the CBN Code is consistent with best practice which places a lot of premium on the independence of the board. It prescribes a minimum and maximum board size of five and twenty Directors respectively with greater number of non-executive Directors two of whom must be independent Directors. Given this provision, the real challenge for the apex bank is how to promote independent objective boards. The Code requires an annual formal evaluation, conducted by an independent consultant, regarding the effectiveness of the board as a whole and the contribution by each member to the effectiveness of the board. The Code also requires the board to disclose in its annual report the total number of meetings held in the financial year and attendance by each Director. The CBN should monitor compliance with this requirement in order to ensure that only committed individuals serve on the boards of the banks.
In pursuit of good corporate governance, banks are encouraged to make sufficient disclosures beyond the statutory requirements. Disclosure in the annual report is expected to include material information on loan quality, related party transactions, insider-related credits, frauds and forgeries as well as all regulatory/supervisory contraventions during the year under review and infractions uncovered through whistle blowing. Section 5.3 of the CBN Code provides that ‘’banks shall have a whistle-blowing policy made known to employees and other stakeholders’’. Customers should therefore take advantage of this provision by ensuring that all actions by their banks bordering on poor corporate governance which come to their knowledge is promptly reported to regulatory authorities. The CBN should continue to harp on the need for banks to disclose all material information in their interim and annual reports especially with regard to asset quality.
Good corporate governance practices in the banks also have a lot to do with knowledgeable, skilled and competent staff expected to develop and deliver satisfactory banking products and services to the customers. To this end, a competency Framework for the Nigerian Banking Industry, with inputs from the Bankers’ Committee, was issued in November 2012 by the CBN. The Framework defines the minimum knowledge, skills and competencies needed for various tasks in the banking industry. Several months after the gestation period of 24 months allowed by the CBN, ‘significant influence functions’ which materially impact on the activities of banks are still being performed by people without the requisite minimum qualification in some of the banks. The observed loopholes in the Framework may have given room for this practice.
For example, the minimum qualification for the position of a Deputy Managing Director is ‘a first degree or its equivalent in any discipline’ as well as ‘relevant higher degree and professional certifications such as ACIB’. But in the case of the Chief Executive Officer/Managing Director (a higher significant function), the minimum qualification specified in the Framework is ‘a first degree or its equivalent in any discipline’ while ‘relevant higher degree and professional certifications such as ACIB may be an added advantage’, implying that the possession of a professional qualification is not a compulsory requirement for the position of MD/CEO. This is an anomaly. It is imperative to redirect the banking industry towards the path of professionalism in support of good corporate governance. The CBN should therefore ensure that only fit and proper persons man the different job roles and control functions within the banking industry.
Aside the platform provided by the Bankers’ Committee, the apex bank should devise ways of communicating major supervisory concerns to the banks. In Hong Kong for instance, the Monetary Authority (HKMA) meets the full board of Directors of each bank every year. Such meetings afford the HKMA the opportunity to convey first hand its views on the bank’s current financial position and quality of its risk management/internal controls. The board also gets the opportunity to convey its opinion directly to the HKMA. The CBN is well advised to consider adopting this model as a means of strengthening the communication between it and the banks operating in Nigeria.
The CBN Code provides that ‘’returns on the status of each Institution’s compliance with the code shall be rendered to the CBN at the end of every quarter or as may be specified from time to time by the CBN’’. It is time to activate the provisions of Section 8.1 which states that ‘’failure to comply with the code will attract appropriate sanctions in accordance with Section 60 of BOFIA 1991 as amended or as may be specified in any applicable legislation or regulation’’. To this end, the CBN will do well to follow the Supervisory Guidance on Dealing with Weak Banks issued in March 2002 by the Basel Committee on Banking Supervision which enjoins monetary authorities to act promptly in tacking challenges in the banking industry.