Governance in the new financial sector

By Uddin Ifeanyi

August 14, 2009 09:08PM

If the public's response to the sack by the Central Bank of Nigeria (CBN) of five bank directors last week is anything to go by, then Mr. Sanusi Lamido Sanusi, the bank's new governor, might be on to something. The jury will be out for a while yet on the ethical weight to accord these developments, but not many will challenge their seismic importance. From denying just a few months back that impaired loans could be a major problem, to concerted efforts at playing down the systemic significance of these "toxic assets", banks have moved pretty rapidly during the current financial year to make provisions for credit extended in relation to the last bubble in the stock market, which may no longer be recoverable. The euphemisms deployed to explain the size and sudden emergence of these "exceptional items" in the few annual reports that have been released are hilarious at best.

Less risible is the fact that these "items" draw attention to a more serious detail. The subtle point made here is that Nigeria is not failing because the laws and regulations necessary for success are lacking. It is instead punching way below its weight in every possible department, because a few of our compatriots are able to act in utter disregard of the law; and then get away with it. While we're on the subject, it helps to note that the legal structure of the joint stock company plays strongly to this disadvantage.

Joseph Schumpeter's description of the process resulting from capitalism's substitution of "a mere parcel of shares for the wealth of and the machines in a factory" remains one of the stronger indictments against the capitalist mode of production. Not just does this "process" take "the life out of the idea of property"; the "dematerialised, defunctionalised, and absentee ownership does not impress or call forth moral allegiance as the vital form of property did". Schumpeter did imagine that "eventually, there would be nobody left who really cares to stand for it (capitalism)", because the process of dematerialisation loosens the "grip from property which previously drove the holder of a title to it to fight, economically, physically, politically for ‘his' factory and his control over it, to die if necessary on its steps".

To put it simply, the point is that the putative owners of Nigerian banks - the shareholders - haven't the foggiest idea about what goes on in those ‘hallowed' premises. More bothersome is the possibility that they may not even care.

To their credit, the banks, on account of the mouth-watering returns they have declared in recent times, have contributed immensely to the development of a shareholding culture in the country; but, because of their very recent introduction to this responsibility, these shareholders are singularly unsuited to the governance responsibility accruing to their "parcel of shares". For a great many of them, it is not uncommon to find a strong faith in the central bank's responsibility for ensuring that these banks are properly run, which truly is more appropriate to the expectations of depositors enjoying deposit insurance.

We have seen only too graphically in the last one year how pernicious the feedback loop between the financial sector and the rest of the economy can be, when it turns negative. Sadly, ultimate responsibility for the management of these institutions still lies with shareholders, through their proxies, the board of directors.

Now, because executive management has the largest window of opportunity when it comes to driving dodgy practices, the responsibility for ensuring that it is denied the incentive to do so lies with the non-executive members of the boards of directors. But 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?

In this environment, Lord Walker, in his July 16 2009 "review of corporate governance in UK banks and other financial industry entities", believes; "the most critical need is for an environment in which effective challenge of the executive is expected and achieved in the board room before decisions are taken on major risk and strategic issues". The key lesson, apparently, is that an excessively dominant chief executive officer is as distasteful as a board peopled by quislings.

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Reader Comments (4)

Posted by beems on Aug 14 2009

This article has touched a raw nerve. Truly it is important that regulators and operators in this sector and other sectors in the financial services industry take note of the grave dangers we have in putting wrongly or poorly equipped individuals in sensitve positions such as "board members", "CEO", "CFO", "COO", etc. Who is playing the role of the impartial judge in assessing their behavioural tendencies in these roles. Can we simply trust that once a person's "CV" looks good, then he or she will fill such positions adequately to satisfy the stringent but important requirements of the essence of good corporate governance. I recommend credible and scientific assessments that show us "what we can't" see readily before individuals are appointed into the positions mentioned above. I recommend it is mandated by CBN as part of annual "checks" and then we also don't lose sight of the important dictum: physician, heal thyself! CBN should also check itself, for one wonders why a bank could have such capital "in"adequacy and we are only just learning about it. What are investigative journalists doing? What are the economists and researchers studying? Who is publishing reports on reliability and predictability of projections of publicly quoted companies? Its about time we take corporate governace to a higher and deeper level, not only in corporates, but also in SMEs and family businesses. Then, we can assure concerned parties of our readiness for serious developmental steps towards clear national goals. Nigeria - we shall not relent. We dey kampe!

Posted by Loomnie on Aug 15 2009

Nice analysis.

Posted by Prof. Hindu on Aug 15 2009

Good analysis. But you heap way too much responsibility on shareholders without pointing out the abdication by the regulators of their oversight role. Where are the SEC and NSE in this process? Both (the NSE as a quasi-self regulating entity) are responsible for ensuring that company reports, representations made to the investing public, are honest. When practically all the banks engaged in a gigantic pump-and-dump scheme by financing the purchase of their own shares, did the NSE do anything other than play chief cheerleader? Didn't the SEC sign off on all the cookie cutter applications that declared that "30% of proceeds will be used to improve IT."? When executive and non-executive board members engage in blatant self- dealing, in violation of their fiduciary duties to other shareholders (as occurs at probably 100% of publicly traded and the majority of private companies in Nigeria), where are the regulators? How can we hear that major firms licensed by the SEC have failed to meet their underwriting obligations to publicly traded companies, and the whole affair for months is swept under the rug by CEOs who won't push too hard for fear that their own fraudulent misrepresentations might come to light and bring the whole house of cards down? Yet all these applications are approved by the NSE and SEC. Forget CAMA and SEC acts and their toothless N5,000 sanctions, Nigeria needs the equivalent of a Sarbanes-Oxley Act - legislation that makes it clear that violations of the investing public's trust will be met by sanction with teeth - disgorging of profits, HEFTY fines AND jail time! Only when stock manipulators and other crooks are jailed instead of given leadership roles (look at the NSE Council President and Vice President) will all those poor taxi drivers who were hoodwinked into providing cushy lifestyles for executhieves receive some redress for the misadventures in the capital markets.

Posted by GENTLE/ on Aug 18 2009

when the foundation is destroyed what can the righteous do.THE CBN itself has beendoing avery bad job monitoring the affairs of the bank.nigerian banks top mangement cannot be reached on any issue especially mr akingbola.you cannot report any top staff to any md and expect a reaction from the md because the md himself is the brain behind the unethical practice on the part of the top staff whom you have reported.at the end of the day you are made to look like the fool.akingbola will even ask the reported staff to call you to tell you that he is too busy to be distracted by your complaint.such is level of the seething mees nigerian banks are enmesshed in.ACESS BANK will confirm that you are indeed a shareholder in their records but will rather brief a lawyer to challenge you in court rather than settle after discovering that your claims are true.most of the banks are being advised by lawyers whose interest is to get a cut from the fee of external solicitors.as for now i do not have a kobo share in any nigerian bank and im really grateful for that.CBN SHOULD SET UP A MONITORING TEAM TO VET THE LEGAL STAFF OF ALL THE BANKS.