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Corporate Governance Directive 2018 • Implications for rural banks

By: Joseph Akossey
Lack of appropriate experience and competencies of some board members no doubt affect their performance which translate into poor performance of their respective banks.
Lack of appropriate experience and competencies of some board members no doubt affect their performance which translate into poor performance of their respective banks.

THE Bank of Ghana has released new corporate governance directive for Banks and Specialised Deposit-Taking Institutions regulated under the Banks and Specialised Deposit-Taking Institutions Act 2016, (Act 930).

Stakeholders in the banking industry have been looking forward to receiving the new corporate governance directive to regularise the industry.

This was based on the regulator’s (Bank of Ghana) assurance of coming out with new corporate governance guidelines to promote good corporate governance in the banking industry.

In fact, the release of the Corporate Governance Directive 2018 is timely. This is because some banks and specialised deposit-taking institutions are not performing well because of poor corporate governance practices.

It is noteworthy that one of the challenges facing scores of Rural and Community Banks (RCBs) is good corporate governance. Therefore, we expect that the new corporate governance directive will go a long way to promote sound corporate governance in the rural banking industry when it is enforced.

This article will, therefore, discuss some key highlights of the Corporate Governance Directive 2018 and their implications for RCBs.

Before I begin with the main article, I would like to consider the objectives of the corporate governance directive as stipulated by the Bank of Ghana.

I.  “To require regulated financial institutions to adopt sound corporate governance principles and best practices to enable them to perform their role in enhancing economic growth in Ghana.”

II. “To promote and maintain public trust and confidence in regulated financial institutions by prescribing sound corporate governance standards which are critical to the proper functioning of the banking sector and the economy as a whole”.

III.    “To minimise the possibility of regulated financial institution failures that are usually rooted in poor corporate governance practices”.

Some key highlights and their implications
1. Board’s qualification and composition
Section 32 and 33 of the Banking Business – Corporate Governance Directive 2018 mentioned the fact that board members “shall possess individually and collectively appropriate experience, competencies and personal qualities including professionalism and integrity”. It further said that the competencies of Board of Directors shall be diverse to facilitate effective oversight of management and shall ideally cover a blend of the following field; Banking, Law, Finance, Accounting, Economics, I.T, Business Administration, Financial Analysis, Entrepreneurship, Risk  Management, Strategic Planning and corporate Governance and other areas that the Bank of Ghana deem fit”.

Currently, some RCBs do not have board members with backgrounds of the fields mentioned above. This tend to affect quality of decisions at the board room. They also find it difficult to understand certain key financial indicators such as capital adequacy ratio, liquidity ratio, profitability ratios, and operational efficiency indicators among others which will help them to appreciate the state of their bank.

Lack of appropriate experience and competencies of some board members no doubt affect their performance which translate into poor performance of their respective banks. In fact, banking today is increasingly becoming risky and complex and, therefore, requires competent and qualified board members which can formulate policies and strategies to manage risk exposure and also make RCBs competitive.

Hence, this directive by the regulator when implemented will no doubt improve the performance of RCBs. Let me point out the fact that the importance of high integrity and self-sacrifice attitude on the part of board members cannot be overemphasised. This is because self-interest and lack of integrity can make professional and academic qualifications counter-productive. The interest of the bank should precede self-interest.

The board is responsible for providing oversight of senior management and hence need to be qualified and knowledgeable. The directive emphasised the point that board members should have a clear understanding of their role in corporate governance and be able to exercise sound and objective judgment about the affairs of regulated financial institutions. This is vitally important considering the fact that poor corporate governance was a major contributing factor to the failure of giant banks such UT Bank and uniBank.

2. Tenure of MD/CEO
According to section 41 of the Corporate Governance Directive 2018, the tenure of MD/CEO of the bank, SDI or FHC shall be in accordance with the terms of engagement with regulated financial institution which shall be subjected to a maximum of 12 years. Such tenure may be split into three (3) terms not exceeding four (4) years per term.

This implies that General Managers of RCBs have to occupy their position for a maximum of 12 years.

The positive implication is that it will propel General Managers of RCBs to improve on their performance in order to have an impressive/strong track record which might enable them to get a new appointment after they have finished serving their 12 years term.

It will also do away with the situation where some retired General Managers who are no longer effective are given contract to continue to work because they have the favour of the board.

More importantly, it will pave the way for young ones who have the energy, passion and drive to come in with new ideas to make RCBs competitive in this dynamic and competitive banking landscape.

According to one astute rural banker, some long-serving General Managers/ CEOs of some RCBs tend to feel that they are champion (All-knowing) and, therefore, dictate to the board and the management team. He opined that the directive will solve the above mentioned problem.

The flip side is the fact that General Managers who are star performers, experienced and still active might not get the opportunity to continue working after retiring at the age of 60 years.

Another negative implication is that some managers are likely to become corrupt in order to secure their future and also maintain their present life-style.

3. Tenure of Directors
Section 42 of the directive says that directors shall have a maximum tenure of three (3) terms of three (3) years per term. Per this directive, directors of the RCBs will have a maximum of nine (9) years to serve if they are re-elected by shareholders.

The positive implication is that directors who are not effective and efficient but are able to influence shareholders to vote in their favour will not get the opportunity to serve forever so to speak. It will also help to get rid of some directors who are domineering and think the bank is their personal property and work for personal gains and not for the interest of shareholders. Above all, this directive will pave way for new entrants who are likely to infuse fresh ideas.

My research has revealed that some directors of some RCBs have been on the board for over two (2) decades. There is the tendency for some of these long time directors to fall prey to over-reliance on past experience and not avail themselves of development in the banking industry. Examples of these developments are Basel III Supervisory Framework, IFRS 9, Banks and Specialised Deposit-Taking Institution Act, 2016 (Act 930) among others.

This will no doubt affect their ability to make meaningful contributions when it comes to boardroom decisions. The negative implication of capping the tenure of directors is the fact that experience and high performing directors have to step down at most nine (9) years of service.

4. Tenure of the chairperson of the board
Section 48 of the Corporate Governance Directive 2018 for Banks and Specialised Deposit-Taking Institution says that “The Board Chair shall be proposed for re-election within the maximum tenure of two (2) terms consisting of three (3) years per term”. In other words, there is capping for the tenure of the board chairperson at maximum of six (6) years.

Currently, some RCBs have board chairpersons who have served for over a decade. This directive will make it possible for new entrants who also have good leadership skills and traits to get the opportunity at most every six years to provide leadership to the board of rural banks.

It will also enable RCBS to have new board chairpersons who will bring in fresh ideas and also ensure that decision are taking on a sound and well-informed basis.

Furthermore, the directive will help to get rid of board chairpersons who tend to hijack the board because they feel they have significant shareholding or for any other reason.

Moreover, it will regulate chairpersons who take decisions without even informing other members of the board for their selfish and personal gains.

The negative implication is that good and high performing board chairpersons will not get the opportunity to lead the board after six years.

The introduction of the Banking Business-Corporate Governance Directive 2018 will no doubt improve corporate governance and risk management practices of RCBs. Therefore, RCBs should do their utmost to comply with the directives. Bank of Ghana should also enforce the Corporate Governance Directive 2018 in order to promote stability and confidence in the financial system. — GB

The Author is the Head of Proven Trusted Solutions, an employee training and development and marketing research firm.
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