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In 2019 the Central Bank of Nigeria (CBN), the regulator of financial institutions, took a radical step by removing the CEOs and Executive Directors of five Nigerian banks – Fin Bank, Intercontinental Bank, Afribank, Oceanic Bank and Union Bank. It is worth noting early on that of the five banks, only Union bank is still in existence. This perhaps indicates that CBN's investigations into the affairs of these banks were not premised on speculation as opined in some quarters, but on real pointers to systemic failure which required urgent intervention. On the 29th of April 2021 history seemed to repeat itself when the CBN approved and gave directives on the removal of the Directors of the First Bank of Nigeria Ltd and First Bank Holdings PLC (FBN).
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 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 Nomination and Governance Committee shall ensure that only fit and proper persons are recommended to the board for appointment.3 The board is also expected to determine a succession plan for its CEO, executive directors and top management staff.4
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.
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:
CBN's dissolution of First Bank's board was premised on findings pursuant to the exercise of its powers of special examination in Section 34 (1) (d) of the BOFIA. A target examination conducted on the bank as of December 31, 2020, revealed that insider loans taken by the officers of the company were materially non-compliant14 with restructure terms of the CBN. The bank's corporate governance practices were below acceptable standards and in all, the bank had significantly contravened the provisions of BOFIA.15 BOFIA clearly gives overriding powers to the CBN to 'interfere' in appropriate circumstances in spite of whatever risk management procedures the bank has put in place.
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 Constitution is supreme and any law inconsistent with its provisions shall be void19. To this extent, it is debatable whether the provisions of section 34 (e) and (f) are not unconstitutional. It could be argued conversely that the queries issued by CBN to the board members at different times prior to the dissolution, can be construed as giving them the opportunity to justify their actions. Whether such queries constitute significant notice is again debatable.
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 Nigerian Stock Exchange dropped by 6.75% following the dissolution of the board. This calls to question whether the confidence of investors and depositors has indeed been managed to the utmost possible extent.22
Our CBN can borrow a page from the playbook of the Prudential Regulation Authority (PRA) which regulates the Bank of England (the UK Central Bank) on prudential issues. The PRA uses a good mix of both the proactive and interventionist approach in its supervisory functions. The proactive approach ensures that the PRA through its “Proactive Intervention Framework” (PIF) detects a bank's 'proximity to failure' using not only capital and liquidity parameters, but such other parameters as management and governance risks, business risk, risk management and controls.23 The PRA is also authorized by law to enforce the Senior Managers' Regime (SMR); a collection of laws, rules and processes designed to improve governance and accountability in financial firms in the UK. Substantive compliance is encouraged on such areas as the assessment of the fitness and propriety of senior staff, giving conditional and time-limited approvals, and the clear specification of the roles of senior managers of the firms the PRA regulates.24
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 5.2.10 Bank's CG Code
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 First Bank, Holdco's boards, reinstates Adeduntan – Businessday NG
16 This principle was established in the case of LONGE V FBN Plc (2010) 6 NWLR (Pt 1189) SC1.
17 Section 36 of the 1999 Constitution
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 Constitution
20 Section 274 (1) CAMA
21 Section 274 (2) CAMA
22 https://leadership.ng/board-dissolution-fbn-holdings-shares-drop-by-6-75/
23 Selmin Hakki and Ben Kingsley of Slaughter & May, 'Banking Regulation in the United Kingdom', April 2019 accessed 13th May, 2021 on https://www.lexology.com/library/detail.aspx?g=4e55a6bc-5f01-4abd-b242-d6e0bdf3f405
24 Speech given by Miles Bake, Head of Legal, Enforcement & Litigation Division at Financial Services Lawyers Association, London on 16th July, 2019. Accessed 12th May, 2021 on https://www.bankofengland.co.uk/-/media/boe/files/speech/2019/the-pras-approach-to-enforcement-speech-by-miles-bake.pdf?la=en&hash=DB4A4DCFF019C37C7D60AF063135A4E5D7D53A34
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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