Corporate governance (“cg”) in banks and financial institutions – reporting lines
A major cause of the unfortunate performance of some Nigerian financial institutions is poor Corporate Governance practice resulting from unwholesome exercise of power by their corporate leaders. A significant contribution to that is inadequate and unclear reporting lines.
Reporting lines should not only be seen to equate to organisational or hierarchy charts; effective CG should in addition, define contributions and roles of all stakeholders, and not just the Board, in a company to ensure each’s interest is protected. One of the most important aspects of a CG mechanism is the monitoring process; the inability of Boards as well as regulatory agencies to ensure enforcement and monitor compliance plays a great role in the failure of many businesses. It is imperative that the CG framework clearly articulates the division of responsibilities among different stakeholders to avoid the overbearing influence of a Chairman or Managing Director, passive shareholders, conflicts between Management and Board, amongst others.
Where are we now?
Prior to the advent of mandatory CG provisions by regulators, some financial institutions had Management teams that ran companies without requisite input from their Boards, Boards were concerned with approval from the shareholders on their compensation, whilst the shareholders focused on dividends. This resulted in unchecked and frivolous actions such as, regular disregard of borrowing limits stipulated by the Central Bank of Nigeria. Directors’ misconduct was identified as the center of corporate governance problems in Nigeria such as directors’ excesses in family owned banks and lack of disclosure of interests in loans and contracts. Following the global meltdown, several reviews led to the introduction of various CG Codes, each industry specific, however, multiple Codes raises questions of effectiveness of CG mechanisms as enforcement tends to be difficult when determining which Code supersedes. This position thus necessitates the use of compliance checklists by financial institutions.
All existing Codes currently require that the position of the Chairman must be separate from that of the Chief Executive Officer (“CEO”) and both positions must not be occupied by members of the same extended family to ensure transparency in the reporting lines. It is critical that a balance is made between ensuring independence of a role whilst maintaining a check and balance mechanism. For example, the role of the Internal Auditor who monitors CG compliance; this position should be filled by the Board but report to the Audit Committee whilst having a direct line of communication to the CEO. On the other hand, questions can be raised about the reporting line of the External Auditor who verifies records of directors and reviews the work of the internal auditor; this position is filled by shareholders but answers to Board. Arguments have been made that the External Auditor should report directly to the shareholders at a General Meeting to curtail any possible overbearing influence by the Board.
Where are we going?
The Financial Reporting Council of Nigeria released an Exposure Draft of the proposed National Code for stakeholders’ input this year. Key issue of the National Code is to address the conflicting provisions of existing Codes on similar subject matter (e.g. board composition, family quota, independent directors and concurrent directorship) and unify all Codes. Compliance will be mandatory and non-compliance subjects the offender to fines. Different sectors may require different modalities in their CG framework, hence in the long-term, the National Code may not be applicable in sector-specific circumstances. In addition, new proposals are introduced as follows in the National Code:
Role of a Senior Independent Non-Executive Director (“NED”) who is to act as a sounding board for the Chairman and meet annually with NEDs to appraise the Chairman. Possible issue – overbearing influence over the Chairman.
Meeting votes: where majority of the independent NEDs dissent on an issue decided by the Board, such decision can only be valid where at least 75% of the full Board vote in favour of same. Possible issue – seeming operation of a 2-Tier Board system (Supervisory & Management).
Sanctions, against BOTH company and persons directly. Possible issue – lifting the veil doctrine/principle.
Reporting lines which define contributions and roles of each stakeholder are essential for a strong and effective CG framework which will in turn help a country like Nigeria develop its market to attract domestic and foreign direct investment.
OLUBUKOLA OLABIYI
Excerpts from Olubukola Olabiyi – Senior Associate, Odujinrin & Adefulu, whilst speaking at the Corporate and M&A session at the International Bar Association Conference in Vienna, October 2015.