Guard against Key-man Risk, Emefiele

Tells BanksObinna Chima

Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, tuesday identified key-man risk in the banking sector as a huge challenge, just as he advised financial institutions to guard against it.

Emefiele pointed out that while appreciable momentum had been attained in corporate governance practices in the Nigerian Banking industry, the regulators as well as operators ought not rest on their oars as vulnerabilities were still evident.

He noted that the recent economic recession had shown that the financial industry still harbours weaknesses in governance, exemplified by instances of unclear rendition of returns, corporate governance abuses such as unreported losses, huge exit packages for directors, insider non-performing loans, over-domineering executive management, contravention of regulatory/prudential guidelines and lending limits, poorly appraised credits and weakening of shareholders’ funds, etc.

Emefiele said this in a keynote address he presented at the 2017 edition of the CBN-FITC Continuous Education Programme.

The 12th edition of the programme was titled: ‘The Next Level of Corporate Governance Practice.’
“The task before us is to determine how best to move our corporate governance regime to the next level as a sector and a country in general. On its part, the CBN shall continue to deploy more robust and risk-sensitive supervisory framework in line with global best practices in consonance with the rapidly changing environment to nip potential crisis in the bud.

“To this end, we have stepped up capacity building in our supervisory departments to ensure that our examiners are equipped with the requisite skills and tools to effectively supervise banks and other financial institutions,” he said.

The CBN governor noted that given the crucial financial intermediation role which banks and other financial institutions play in the economy, corporate governance for financial institutions was arguably, of great importance in contrast to governance in non-financial companies.

According to Emefiele, it was a truism, therefore, that failure of the board in carrying out its oversight functions by checking management excessive risk taking, conflict of interest, undue concentration on short term gains and excessive executive compensation, would fundamentally affect the ability of financial institution to meet their core mandates.

He pointed out that safe and sound financial system largely depends on the quality of corporate governance practices which in turn depends on the quality of the board of directors and their ability to discharge their responsibilities honourably.

Emefiele said the failure of organisations such as Enron, Allied Irish Bank, WorldCom, Lehman Brothers, Northern Rock, etc, was largely caused by weak corporate governance practices.
“This underscores the importance of effective corporate governance practices to the survival of businesses and indeed economies. Coming home, the challenges we have had in the banking system resulting in regulatory interventions are substantially attributable to governance failure.

“Prior to the global financial crisis of 2007 to 2009, it was taken for granted that the banking sector in Nigeria was safe and sound. However, this trust proved to be misplaced as it was realised that none of the 25 banks that scaled the CBN consolidation exercise was immuned from failure if they operated in a poor corporate governance environment,” he disclosed.

He said the central bank beyond strengthening its corporate governance code, had issued a Competency Framework for the banking industry in Nigeria and a revised Circular on Approved Persons Regime to ensure that only Fit and Proper Persons are appointed on the boards of financial institutions. Some other improvements introduced include review of Board of Directors Charters and fixed tenure for CEO/MD of banks and other executive directors. Recently, the CBN exposed to external stakeholders, the draft Codes of Corporate Governance for six Other Financial Institutions (OFIs), which will soon be issued to the industry.

“The role of the independent directors on ensuring sound corporate governance practice is equally significant. The expectation from them is not just their independence from the management of the business but more importantly vast technical and managerial expertise.

“The CBN will in the near future conduct studies to evaluate the effectiveness of independent directors on the board of financial institutions since the practice came into being in 2010.
“Without prejudice to the outcome of this programme, it is my conviction that the next level of corporate governance practice by financial institutions in Nigeria is a call for collaborative thinking for a joint action.

“The commitment to excellence in corporate governance matters is a shared responsibility. Regulators and operators should always bear in mind that the credibility, resilience, soundness and efficiency of the financial industry rest squarely on good corporate governance regime,” he said.