August 15, 2012 / Kingsley Ighomwenghian/ Daily Independent

As part of efforts to ensure that the nation’s banks are properly run and become enduring institutions like many others across the globe today, the Central Bank of Nigeria (CBN), last week published a draft of a new corporate governance code for the industry.

The document, published on its official website, the CBN said, “is to strengthen governance practices, eliminate perceived ambiguities in, and align the code with current realities and global best practices.”

A major requirement in the code, to which stakeholders are required to make comments and imputes, is that external auditors of banks and discount houses, “must have adequate experience and competence in corporate governance,” and are to henceforth report annually on the extent of compliance with the provision of the code to the CBN.

The code

Banks and discount houses are now to have annual board appraisals to be conducted by an independent consultant, the report of which “shall be presented to shareholders at the Annual General Meeting (AGM), and a copy forwarded to the CBN.”

The code also requires banks to have their own individual codes of conduct to be developed by management and employees, which must be clear to users like advisers, consultants and contractors. The code to be reviewed regularly should be such that would promote the making of ethical and responsible decisions, while helping to maintain confidence in the bank’s integrity, among others.

To allow for immediate remedy, the code requires that banks must file returns on compliance with the code on a quarterly basis, or as specified from time-to-time by the CBN.

Apart from formulating a charter that details their functions and responsibilities, containing also, the board, which shall be responsible for the affairs of the bank, in line with the Companies & Allied Matters Act (CAMA), shall make a formal statement of areas of authority delegated to management.

The code, for example, expects that the board shall have between five and 20 members, with a ratio of 4:6 of executive to non-executive directors.

Subject to changes in the final draft, executive directors, being employees, are barred from receiving seating allowances or directors’ fees, just as directors must attend up to two-third of meetings in the financial year to qualify for re-election at the AGM.

Among others, the code also requires that bank board’s should put a succession plan in place for the chief executive, executive directors and top management staff, besides setting “limits of authority, specifying the threshold for large transactions which it must approve before they take place.

“There shall be no exception for such large transactions, (as) members of the board are severally and jointly liable for the activities of the bank,” the code added.

The board shall also have at least two non-executive directors as independent directors in accordance with the CBN guideline.

Banks and discount houses must also publish in their annual financials, details of significant shareholding (5 per cent and above, either individuals or joint), insider related credits, lending and borrowing to and from subsidiaries and associate companies.

They are also to report on frauds and forgeries in their annual accounts, in addition to stating the bank’s capital structure and adequacy, regulatory contraventions, as well as publish details and reasons for planned share-buy-back.

Also to be disclosed in annual report are such information as the bank’s remuneration policy for board members and executives, remuneration of non executive directors, like fees and allowances, executive compensation, details of directors and significant shareholders.

“Every bank shall have a risk management framework specifying the governance architecture, policies, procedures and processes for identification, measurement, monitoring and control of the risk inherent in its operations,” the code stressed.

Compared with 2003 code

Expectedly, the document has elicited both positive and negative reactions from analysts, former bank chiefs and sundry stakeholders.

Dr. Boniface Chizea, a financial consultant, commentator and chief executive of BIC Consulting, for instance, commended the CBN for the draft code, which he said, is richer in content, and far reaching in originality. This, he said, is evident in the area of the outlined whistle-blowing procedures and practices.

According to some observers, the code has been greatly enriched by the events that occurred, and observations highlighted in the wake of the 2009 stress-test that led to the sack of members of executive management teams of eight banks for recklessness and mismanagement in August 2009, by the CBN.

Specifically, the new code is seen as establishing strategic objectives and a set of corporate   values, clear lines of responsibility and accountability.

The document is also seen as an improvement on the 2003 code for the post-consolidation banking industry that became effective on April 3, 2006, which, for instance, only noted the need to put in place “a committed and focused Board of Directors which will exercise its oversight functions with a high degree of independence from management and individual shareholders.”

That code also, only noted the need for “a proactive and committed management team, (and) adequate procedures to reasonably manage inevitable disagreements between the board, management and staff of the bank.”

The old document also required the board to “have full and effective oversight on the bank and monitor its executive management, (and the need for a) well-defined and acceptable division of responsibilities among various cadres within the structure of the organisation.

“There is balance of power and authority so that no individual or coalition of individuals has unfettered powers of decision making… The Articles of Association should clearly specify those matters that are exclusively the rights of the Board to approve apart from those for notification.

It also merely requires that “the number of non-executive directors should exceed that of executive directors. All directors should be knowledgeable in business and financial matters and also possess the requisite experience. There should be a definite management succession plan. Shareholders need to be responsive, responsible and enlightened.”

The document also expressed desire for “a culture of compliance with rules and regulations. Effective and efficient Audit committee of the board… External and internal auditors of high integrity, independence and competence…”

In what could serve as a review of the CBN governance code, immediate past chief executive of the Nigeria Deposit Insurance Corporation (NDIC), Ganiyu Ogunleye, at a retreat by the Bank Directors Association of Nigeria (BDAN), in August 2010, regretted that soon after the 18-month consolidation exercise, the non-adherence to the code became glaring.

He described as regretable happenings in the industry at the time, despite the several codes, which also included the one in 2003 by the Securities & Exchange Commission (SEC) for quoted companies, of which there were 21 banks at the time.

His words: “We (the regulators) had great expectations that bank consolidation, based on strong capital base and diversified ownership structure, would enhance corporate governance in banking institutions.  Hence, a new code of corporate governance was issued in April 2006.  The code sought to remove executive duality, encourage team-work and consensus building as well as accountability.

“However, a few months after consolidation, certain unsavoury developments emerged which (also) included:

• non-adherence to pre-merger agreements

• discriminatory treatment of merger partners

• board polarisation

• non-disclosure of true condition of legacy banks

• questionable capitalisation processes

“As you are aware, the board is the directing mind of an organisation.  It has a primary duty of setting strategic direction.  In this connection, the board is expected to ensure sound governance by ensuring prudent utilisation of resources, effective delegation of authorities, efficient internal control mechanism, sound risk management, sufficiency of capital, et cetera.

“However, post-consolidation examination of banks revealed certain worrisome practices.  For example, some banks embarked on rapid expansion without developing the capacity to manage such growth. There was the seeming competition for size rather than focusing on asset quality and risk management.  There were evidences of poor financial reporting, insider dealings, use of subsidiaries for non-permissible activities and non-adherence to corporate governance code.  The response to the requirement to develop a risk management framework was inadequate.

Continuing, Ogunleye noted that the result of the ineffective board oversight was the latest CBN intervention, a situation, he said, was avoidable. He urged bank boards to go beyond policy formulation, by taking active interest in the risk appetite or disposition of the managements.

Stakeholders react

With such score-card as the above, according to Chief Lawson Omokhodion, a former bank chief executive, now into private business in Lagos, there is no guaranty that there would be sanity in the industry even with the latest code.

One analyst, who craved anonymity, while agreeing with Omokhodion on Monday, insisted that the new code, or anyone for that matter, “may not stop the unwholesome activities and fraud that take place daily in banking or any other industrys.”

In an e-mailed reaction sent to our correspondent last week, Chizea expressed discomfort with the requirement in the draft code that bank boards “put in place a charter that details their functions and responsibilities, and that there shall be a formal statement of areas of authority delegated to management.

“I thought this is an area whereby the CBN could provide details of such responsibilities, as these functions are the same for most banks and not particularly, in my opinion, size or area of focus specific.”

This same observation, he continued, should apply to the section where the banks are required to specify the terms of reference of each of the three committees they must statutorily establish.

Nothing will be lost, he believes, “if the CBN dictates these terms of reference for purpose of uniformity.”

Chizea also doubts the workability of the mandatory attendance at board meetings, and thinks a provision in the code for proxy representation during board meetings, will not be a bad idea. It is possible, for example, he thinks also, to provide some guidelines on “what will constitute an adequate and appropriate representation to ensure that proxies have the capacity to represent effectively.”

He hopes for a situation where banks “align executive and board remuneration with the long term interest of the bank and its shareholders.”

For the expert and public commentator, this is very vague and does not amount to much, except if more specific guidelines are provided, including a categorisation of banks. Bands of remunerations could therefore be fashioned for each specified category.

Otherwise, he noted, the code “as it is now is as good as not saying anything!”

Analysts are equally worried that regulators have continued to pay lip service to the issue of adequate protection for minority shareholders.

Idowu Ogedengbe, a stockbroker with Vintage Wealth Managers Limited, expects that the CBN would be more explicit on how the board should protect minority investors, because that much has been enshrined in the Banks & Other Financial Institutions Act (BOFIA) 2004.

“Protection of minority shareholders is not the issue, but the need for the CBN to ensure that the banks operate in a transparent manner, which is the whole idea of the International Financial Reporting Standard (IFRS). There should, ordinarily, be no dichotomy between minority and majority shareholding. True disclosure is critical to investors. Let the banks, basically adhere to true disclosure and the BOFIA,” Ogedengbe added.

For Chizea also, protecting minority investors is “easier said than done, (because) board membership is reflective of the power of shareholding. Except if specific provision is made for such minority interests to have recourse to an independent body, may be the CBN, to seek redress.”

Another knotty issue in the new code, is the requirement for banks to demonstrate good sense of corporate social responsibility, which the expert stressed, “does not say much,” despite its being an important area where banks should be encouraged to be proactive. “It might not be too much to attempt a notional specification of what percentage of the annual budget banks should be encouraged to spend in this important area of endeavour,” he said.

Specifically, the CSR spend for banks, he stressed, can be “as small as 0.05 per cent of the budget,” while commending the CBN for the far reaching guidelines provided in the area of whistle blowing. This, he added, is part of efforts “to improve on the ethics now prevalent in banking to help stem the tide of future crisis in the industry.”