In 2019 the
Further to this directive, the CBN released a Statement explaining that the dissolution of the board was premised on its failure to obtain CBN's approval before the removal of its MD/CEO. The CBN in its decision also considered some infractions by the bank such as the failure of the bank to restructure its insider loans most of which were not backed up by collateral, and the failure of the bank to comply with the directive of the CBN to divest itself of shares held in non-financial entities.
Like the 2019 cases, the circumstances of the CBN's actions raise core corporate governance issues, and questions the lens with which both the banks and the CBN view corporate governance mechanisms. Are they applied in good time as practical tools which can fundamentally enhance disclosure, accountability and risk management or are they largely cosmetic tools being applied in a box ticking compliance exercise?
- CORPORATE GOVERNANCE AS IT RELATES TO BOARD MEMBERS
Corporate Governance in financial institutions refers to a set of standards and principles that create management checks and balances, and establishes the way such institutions are directed and controlled. The banks have rigorous corporate governance procedures which guide the actions of their directors. These laid down procedures are encapsulated in various governance documents (e.g. the Articles of Association, Shareholders' Agreement or Board Charter), laws such as the Companies and Allied Matters Act, 2020 (CAMA), the Banks and Other Financial Institutions Act, 2020 (BOFIA), in guidelines such as the Guidelines for Tenure of Managing Directors of Deposit Money Banks, 2010, and codes such as the Code of Conduct for Bank Directors, Code of Corporate Governance for Banks and Discount Houses, 2014 (Bank's CG Code), and the Nigerian Code of Corporate Governance, 2018.
The Bank's CG Code states that the procedure for appointment to the board shall be formal, transparent and documented,1 and strict adherence to the Code of Conduct for Bank Directors is mandated.2 In line with the CBN Revised Assessment Criteria for Approved Persons' Regime for Financial Institutions (2015), the bank's
To maintain objectivity in the decisions made by the board, non-Executive Directors are appointed and can serve for a maximum of three (3) terms of four (4) years each.5 Executive and Non-Executive Directors cannot serve on the board of both the bank and its holding company at the same time.6 The Code equally provides that directors and the board are subject to an annual appraisal and the report of such appraisal will be submitted to the shareholders at an AGM and forwarded to the CBN.7
For the purpose of setting up risk management procedures, the Corporate Governance Code for banks requires that the board should have an audit committee which is expected to meet at least once every quarter to review the integrity of the bank's financial reporting and oversee the independence of the bank's external auditors.8 The external auditors should deliver to the CBN a report on the bank's risk management systems, internal controls and level of compliance with the directives of the CBN.9
There are also corporate governance mechanisms which address conflict of interest situations for board members. For instance, officers of a bank can only receive loans or credit facilities from their bank only after a full disclosure to other board members and in some cases the disclosure must be made to the CBN.10 Directors are also required to abstain from voting on matters in which they have or may have a conflict of interest.11
These are just some of the corporate governance mechanisms that are set up to ensure transparency and accountability. A meticulous application and adoption of these corporate governance mechanisms will ordinarily create an institution that is structured to be failure proof.
- CBN Powers to set aside the bank's corporate governance policies on board appointment and removal
Despite the autonomy in operation of the bank's corporate governance mechanisms, the CBN can exercise its overriding powers where it has reason to believe that a bank is showing signs of potential failure and must be rescued from imploding to the detriment of depositors' funds and investors' interests.
The provision of section 34 BOFIA clearly states that where a Special Examination,12 has been carried out by the CBN and the CBN has confirmed that the bank is failing and is in a grave situation13, the CBN Governor can exercise powers to rescue the bank. One of the ways it can do this is to remove and appoint directors. The CBN must have confirmed any of the following conditions before activating its rescue powers to remove and appoint the directors of a bank:
- The bank is likely to become unable to meet its statutory obligations as set out in the Act;
- The bank is about to suspend any payment
- The bank is insolvent and unable to pay its debts
- In the interest of the public, the CBN has ordered a special investigation of the books and affairs of a bank to determine the extent of its failing.
CBN's dissolution of
The more fundamental question that these set of facts pose is whether the exercise of the CBN's power as authorized by BOFIA is unconstitutional. Indeed, can the most important requirement for the removal of a director - the notification of removal- 16 which derives its legal application from the constitutional right to fair hearing,17 be dispensed with by a subservient law?18 The
- CBN's supervisory power in ensuring compliance with corporate governance mechanisms
In what other ways could the CBN have exercised its supervisory powers to achieve the result of maintaining financial stability and sustaining investor confidence?
The function of a sectoral regulator in a highly regulated industry like the financial industry is to ensure accountability by incorporating deterrence measures with the ultimate aim that such actions will promote investor confidence and create an enabling environment for sustainable business operations. The regulator must exercise its powers properly to ensure that all that can possibly be done to guide, prompt, encourage and if necessary, demand compliance is done as regularly as required. The regulator must not wait till all risk management procedures have failed before swinging into action to save the day. This may have unintended overarching effects that diverge from the ultimate objective of instilling confidence in investors.
The dissolution of the entire FBN board, and its attendant impact on operational continuity, connotes that the knowledge required to run the day-to-day operations of the bank and its holding company may not be readily available. In the circumstance, the Regulator could have appointed interim directors to assist in the day-to-day business operations while the Nomination and Governance committee sets in motion the process of appointing board members to fill the casual vacancies.20 These appointments could then have been approved by the shareholders at their next Annual General Meeting; giving a sign of stability and bringing confidence to the market.21 The appointment of an interim board also ensures that minority shareholders are afforded the opportunity to participate in the appointment of their bank's directors. This is what the CBN did in the 2019 cases; recognizing the board appointees, sequel to the CEO's removal, as interim management who were expected to run the banks until a new management team was appointed. Without such a backstop in place, the share price of FBN holdings on the
Our CBN can borrow a page from the playbook of the
Conclusion
Corporate organizations should strive to institutionalize their corporate governance procedures and mechanisms. That way, even without the exercise of the regulator's sanctioning powers, the organization is well insulated against any form of corporate failure, which can have a long term negative effect on the financial system and in extreme cases, the economy. Such corporate governance mechanisms for monitoring insider trading, related party transactions and conflicts of interest, will promote good ethical conduct and investor confidence.25
Regulators should also ensure that their supervisory oversight on the corporate governance mechanisms of Financial Institutions are not only brought to bear in the form of sanction, with the attendant spectacle serving as a deterrent to other institutions. Their oversight functions should demand rigorous day to day accountability and disclosure, such that compliance with corporate governance mechanisms is substantive and not cosmetic. Such early stage oversight functions will ensure that the institutions guard against the risk of systemic failure or collapse, at every step of their business operations.
The regulator can also adopt the 'comply and explain' principle of corporate governance which recognizes that 'a one size fits all' approach may not be effective. This principle allows a financial institution to deviate from a set of standards, but mandates the requirement of disclosure of the explanation to market investors. This principle anticipates that where investors are dissatisfied with the explanations, they may at their discretion dispose of their shares, or depositors may withdraw their funds. This in itself creates a formidable market sanction. Even in dire situations, market sanctions can engender financial stability, as opposed to legal sanctions which have the potential to erode stakeholder confidence if improperly managed.
The ultimate objective of any regulatory regime is promoting trust, transparency, and accountability. Both the regulator and corporate institutions would be better served when the principles of corporate governance underlie every action both in form and substance.
Footnotes
1 Section 2.4.1 Bank's CG Code
2 Section 2.1.9 Bank's CG Code and Section 18 (6) BOFIA 2020
3 Section 12.2 Nigerian Code of Corporate Governance; Section 2.2.2 Code of Corporate Governance for Banks and Discount Houses.
4 Section 2.1.6 Bank's CG Code
5 Section 2.4.3 Bank's CG Code
6 Section 2.4.6 Bank's CG Code
7 Section 2.8 Bank's CG Code
8 Section 5.2.5 and 5.2.6 Bank's CG Code
9 Section
10 Section 17 BOFIA.
11 Section 7.2.4 Bank's CG Code
12 Section 33 BOFIA
13 A grave situation will mean that the bank has been carrying on its business in a manner detrimental to the interest of the public, depositors and creditors, the bank has insufficient assets to cover its liabilities or the bank has contravened the provisions of BOFIA or any other relevant law - Section 33 (1) (a) - (d) BOFIA.
14 The Corporate Governance Code for bank directors also empowers the board to remove any director with insider non-performing loans and any action of a director which weakens the shareholders' funds.
15 CBN sacks
16 This principle was established in the case of
17 Section 36 of the 1999
18 Section 34(2) of the BOFIA clearly states that the CBN can remove a director notwithstanding any other provision in another law.
19 Section 1 (3) 1999
20 Section 274 (1) CAMA
21 Section 274 (2) CAMA
22 https://leadership.ng/board-dissolution-fbn-holdings-shares-drop-by-6-75/
23
24 Speech given by
25 Principle 25 of the Nigerian Code of Corporate Governance 2018.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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