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Central Bank of Nigeria CORPORATE GOVERNANCE IN THE BANKING SECTOR Presented by SANUSI LAMIDO SANUSI Governor, Central Bank of Nigeria AT ALL AFRICA 2010 PUBLIC RELATIONS ASSOCIATION CONFERENCE, AGM & AWARD NIGHT 18 - 20 MAY, 2010 7/20/2015 Central Bank of Nigeria OUTLINE Introduction Meaning and origin of corporate governance Corporate Governance In Banks Attempts at entrenching good corporate governance in the Nigerian financial system CBN Efforts To Entrench Corporate Governance In Banks Problems of entrenching corporate governance in the Nigerian banking system Conclusion 7/20/2015 2 Central Bank of Nigeria Introduction Corporate Governance has become topical globally in the light of huge corporate mismanagement in Europe and America. This has led to the collapse of several companies, including: - Barings Bank (1997) - Worldcom (2002) - Peregrine Systems Limited (2002) - Adelphia Communication Company Limited (2002) - Tyco International Limited (2002) - Enron (2001) - Lehman Brothers (2008) - Northern Rock (2008) 7/20/2015 3 Central Bank of Nigeria Introduction (Contd.) In Nigeria corporate culture is characterized by inordinacy of the executive management of some financial institutions. Public Relations experts have a role to promote advocacy in achieving a paradigm shift by executives of financial institutions. Thus the topic - Public Relations and Corporate Governance in Africa – is appropriate and timely. 7/20/2015 4 Central Bank of Nigeria MEANING AND ORIGIN OF CORPORATE GOVERNANCE Corporate governance is a new phenomenon in many jurisdictions and thus is defined variously by experts. The various definitions include; - A structure through which objectives are set (in the interest of the company and its shareholders), determination is made as to how to attain the objectives and performance monitored. - A framework for rules, relationships, systems and processes within and by which fiduciary authority is exercised (Wikipedia, 2004). - A phenomenon with descriptive content and aspirational usage (Anya, 2003). - A vehicle for building partnership with key players in managing divergent aspects of risk-prone sectors of an entity (Greuning and Bratanovic, 2003). 7/20/2015 5 Central Bank of Nigeria Corporate Governance Definitions (contd.) - A process and structure employed to direct and manage a business, enhance shareholders value and ensure financial stability (Roberts, 2003). - A system by which companies are directed and controlled in order to align economic and social goals with those of the individuals and the community (Cadbury, 1999). - An internal means by which corporate entities are directed and controlled (Organization of Economic Cooperation and Development-OECD, 2004). 7/20/2015 6 Central Bank of Nigeria Corporate Governance Definition (contd.) Roberts (ante) sees corporate governance as the act of entrenching accountability, credibility, transparency, integrity and trust in an organization. This paper aims to situate corporate governance within the context of the OECD perspective, which seeks to devolve the responsibilities of transparency, integrity and accountability to the various stakeholders within the entity and the external auditors. 7/20/2015 7 Central Bank of Nigeria C.G Definition (contd.) The OECD Code of Corporate Governance was the first comprehensive code of corporate governance issued for companies (2000). In that code the board and executive management are central to effective implementation of any code of governance. For any governance standard to thrive, there must be cordial relationship among stakeholders. The relationship of the board with shareholders should be one of candour, the one with employees should characterize fairness while that with the community/government should symbolize good citizenship and compliance, respectively. 7/20/2015 8 Central Bank of Nigeria CORPORATE GOVERNANCE IN BANKS ■ The financial sector of any country serves as the engine for its economic transformation. ■ This underscores the efforts of the CBN to reform the sector and place it in motion to pilot economic development. ■ The soundness or otherwise of any financial institution depends on the efficacy of its corporate governance principles. 7/20/2015 9 Central Bank of Nigeria ATTEMPTS AT ENTRENCHING GOOD CORPORATE GOVERNANCE IN THE NIGERIAN FINANCIAL SYSTEM Attention on Corporate Governance is of recent occurrence in Nigeria. A 17-man committee was inaugurated by SEC in 2000. The Committee produced the 1st Code of Corporate Governance for Nigerian Companies issued in 2003. Before then, various legislations in Nigeria provided the framework for good corporate governance – CAMA, ISA, BOFIA. 7/20/2015 10 Central Bank of Nigeria ATTEMPTS AT ENTRENCHING GOOD CORPORATE GOVERNANCE IN THE NIGERIAN FINANCIAL SYSTEM (contd.) The Bankers Committee, also appointed a 15-member committee in 2000 to develop the Code of Conduct for Bankers, issued in 2001. This code was a reflection of the growing concern over incidents of unethical and unprofessional conduct in the industry. The Bankers Committee further inaugurated a SubCommittee on Ethics and Professionalism to handle complaints arising from banker-customer relationship with a secretariat at the Chartered Institute of Bankers of Nigeria, Lagos. 7/20/2015 11 Central Bank of Nigeria CBN EFFORTS TO ENTRENCH CORPORATE GOVERNANCE IN BANKS In furtherance of good governance, CBN approves appointment to board and top management positions in banks in line with the requirement of Section 44 of Banks and Other Financial Institutions Act (BOFIA), 1991, as amended. In considering such appointments, the CBN ensures that prospective appointees are fit and proper persons with unblemished records. In the same vein, bank directors receive code of conduct forms with clauses that constitute pledges that the appointee will not engage in conducts considered unethical during his/her tenure as a director. 7/20/2015 12 Central Bank of Nigeria CBN Actions on Corporate Governance (contd.) The CBN issued a Code of Corporate Governance for Banks in Nigeria in April 2006, specifying a number of governance thresholds. Key highlights of the code include; The establishment of strategic objectives and a set of corporate values with clear lines of responsibility and accountability; The installation of a committed and focused Board of Directors, which will exercise oversight functions with high sense of independence; Ditto for management; That the Board should meet at least four times a year; A well- delineated organogram; 7/20/2015 13 Central Bank of Nigeria CBN Actions on Corporate Governance (contd.) Highlights of the CBN Code (contd.) That power and authority should be devolved for ease of decision making; That the number of non-executive directors should exceed that of the executive directors; That all directors should possess sound knowledge with adequate experience; That there should be a management succession plan in place; The code canvassed the need for informed shareholders and a culture of compliance ; 7/20/2015 14 Central Bank of Nigeria CBN Actions on Corporate Governance (contd.) ■ Highlights of the CBN Code (contd.) It mandated an effective audit committee with integrity, and independence and competence of external auditors of banks; - Sound internal controls; and - A sound management information system. 7/20/2015 15 Central Bank of Nigeria Other Provisions of the CBN Code ■ The code further pegged equity ownership of government at a maximum of 10% as at December 31, 2007 while that of any other investor of up to 10% and above would be subject to prior approval of CBN. The code discourages executive duality, especially the positions of chairman and chief executive officer. It further precludes members of any one family from occupying positions of chairman, executive director and chief executive officer of the same bank. The code also limits the tenure of non-executive directors to 12 years – i.e. three terms of 4 years each and those of the chief executives was subsequently fixed at two five-year terms. 7/20/2015 16 Central Bank of Nigeria Other Provisions of the CBN Code (contd.) ■ The CBN took steps to address the problem of bad management in banks by limiting directorship roles in any banking institution to a maximum of two. ■ The maximum directorship role an individual can play in Nigerian banking system is two. ■ Public officers are also prohibited from membership of bank boards. 7/20/2015 17 Central Bank of Nigeria Issues on the CBN Code ■ Inappropriate executive capacity was also touted as one of the root causes of governance challenges in Nigerian banks. In order to address this, CBN issued guidelines on qualifications and other pre-conditions for top management appointments in Nigerian banks on January 4, 2001. ■ The guidelines specified that applicants aspiring to occupy such positions should have relevant academic/and or professional qualifications, banking experience and top management experience. ■ It is interesting to note that a few months after the circular; the industry became awash with reports of staff poaching amongst banks. 7/20/2015 18 Central Bank of Nigeria Issues on the CBN Code (contd.) Such development opened opportunities for experienced but stagnant staff of some banks to advance their career but it also introduced fresh challenges to other traditional banks that did not favour accelerated advancement. The resultant loss of skilled manpower compelled such banks to complain leading to the CBN circular of November 22 2001, restricting poaching among banks. The intent of the circular was to encourage banks to develop the culture of recruiting, training, developing and retaining staff to top management grades as a way of building capacity for the industry. 7/20/2015 19 Central Bank of Nigeria Issues on the CBN Code (contd.) Insider-related credits, guarantees and other counter-party transactions impact significantly on the risk profile of banks. Experience overtime shows that disclosure on such activities was inadequate in assessing the extent and effect of insiderrelated credits on the banks’ overall operations. In order to promote transparency and disclosure to stakeholders, banks were directed by the CBN to disclose in their financial statements, details of director-related borrowings. In addition, auditors and audit committees were required to include in their reports, comments on the disclosure, as a basis for their audit opinion. 7/20/2015 20 Central Bank of Nigeria Issues on the CBN Code (contd.) The CBN has also committed various banks to appoint compliance officers of senior cadre (General Managers and above) who will account to regulators on compliance matters. The CBN has embarked on the harmonization of corporate governance codes with other regulators in the financial system under the auspices of the Financial Sector Regulation Coordinating Committee (FSRCC), to eliminate arbitrage and broaden its depth. 7/20/2015 21 Central Bank of Nigeria Issues on the CBN Code (contd.) The CBN is working out some modalities for fit and proper persons requirements for top bank appointments, directors and major shareholders, which may include personal interviews. Also, senior bank officers will soon be required to declare their assets before employment and afterwards. 7/20/2015 22 Central Bank of Nigeria PROBLEMS OF ENTRENCHING CORPORATE GOVERNANCE IN THE NIGERIAN BANKING SYSTEM ■ Even after the last banking consolidation, the ownership structure of banks is still skewed in favour of individual families whose influence in those banks impair entrenchment of good corporate governance practices. ■ Although the CBN has the mandate to enforce appropriate code of governance on banks, there is no specific legislation supporting its enforcement. ■ Getting suitable personnel to serve as independent directors is a tall order as most appointees in this capacity may get compromised in the process while directors with ownership interest tend not to be objective and fully independent in their judgment. 7/20/2015 23 Central Bank of Nigeria PROBLEMS OF ENTRENCHING CG (contd.) ■ ■ ■ Shareholder activism has not achieved the desired impact as shareholder groups have tended to be dominated by a few noisy and self-serving persons, most of whom tend to pitch tent with executive management even on matters in respect of which the latter has been sanctioned for official misconduct, by regulators. Some public relations practitioners share in the blame for accepting odious officers as role models in the industry for personal gains The criminal justice system is slow and expensive thus, making it difficult to bring to justice, bank officers that have betrayed public trust. 7/20/2015 24 Central Bank of Nigeria Conclusion Good corporate governance is imperative for organizational survival. It is the only means by which banks can obtain enduring results. In the financial sector, the CBN as a lead regulator has responsibility to ensure that fiduciary responsibilities are carried out transparently. This process is achieved partly through appropriate consultation with partners under the auspices of FSRCC, CIBN and the Bankers Committee. 7/20/2015 25 Central Bank of Nigeria Conclusion (contd.) ■ CBN remains open to institutions like the Nigerian Institute of Public Relations (NIPR) that crave for insight into the various initiatives being undertaken so as to make contributions. ■ It is expected that the Nigerian Institute of Public Relations and indeed, the African Public Relations Association will leverage this window to make informed contributions targeted at entrenching good corporate governance in the Nigerian Banking System. 7/20/2015 26 Central Bank of Nigeria Thank you for listening. 7/20/2015 27