By Nkunimdini ASANTE-ANTWI
In 2017, Ghana’s financial industry experienced significant events. Just under a year after a new administration came into power, officials made a daring yet contentious choice to clean up the market by removing financially unstable institutions. These entities’ operations had endangered the assets of those who deposited money with them.
What became known as the “financial sector crisis” led to the revocation of operational licenses for 349 microfinance institutions (Tier 2 NBFIs) and 29 micro-credit organizations (Tier 3 NBFIs).
Certainly, this was a crisis—the culmination of financial disparities accumulated over previous years characterized by extensive credit growth and discrepancies between assets and liabilities. This situation arose due to inadequate corporate governance structures and, in certain instances, lax regulatory oversight.
After undergoing an extremely painful and financially draining resolution process, the Bank of Ghana implemented several measures as part of a comprehensive initiative aimed at preventing another large-scale financial crisis in the future. These actions significantly altered the regulatory environment without question. Among these initiatives was the introduction of the Corporate Governance Directive in 2018.
Following four years since its introduction, queries regarding the efficacy of reforms after crises in curbing the accumulation of systemic risks appear to be emerging. Addressing these concerns and examining the available evidence—whether based on anecdotes or data analysis—may help assess how effectively the Bank of Ghana’s micro-prudential regulatory measures have influenced banking practices and their overall effect on financial stability. This investigative approach forms the basis of our discussion here.
In this piece, I aim to address a primary query, which stems from three subsidiary questions.
Initially, the key questions are as follows:
- Is the present restriction on term lengths for CEO positions and boards of directors potentially risky for non-bank financial institutions?
- Is the Fit-and-Proper directive assisting or obstructing boards in the NBFI sector in cultivating a pool of qualified individuals for board roles?
- Considering the variations throughout the industry with respect to ownership and control, business models, and governance structures, is adopting a uniform minimum board size an appropriate policy?
If I can adequately address the fundamental issues, the main question would become: should the Bank of Ghana reconsider its prudential regulatory framework for the non-banking financial institutions sector?
While we’re at it, let me also offer you an additional treat by sharing some insights from my expertise regarding the assessment of disclosure boards. Initially, I considered incorporating a thorough critique of OFISD’s on-site inspection framework into this piece; however, doing so would be like adding excessive sweetness to your ‘kooko,’ which isn’t necessary right now. Thus, addressing these mentioned queries should suffice for now.
What you must know
To ensure clarity, let me openly state that I have dual roles. Firstly, I examine the topics presented here from the perspective of an analyst focused on macroprudential policies and their synergy with other areas like fiscal, monetary, and structural policies.
Secondly, in my consulting work, I have assisted multiple non-bank financial institution (NBFI) boards. My contributions include conducting board evaluations, offering training sessions, and supplying resources aimed at bolstering their three lines of defense functionalities.
Therefore, the topics I aim to clarify (along with the fundamental questions) largely originated from my professional engagements with directors. Some of these individuals voiced significant worries regarding the new risks arising for them due to specific elements of the Corporate Governance Directive of 2018.
Addressing the Issues
Question 1: Are there potential risks associated with imposing term limits on CEO and board positions?
According to the Corporate Governance Directive from 2018, CEOs at regulated financial institutions are allowed to hold their position for a maximum of 12 years, with each term lasting 4 years.
On the contrary, directors are granted 9 years, whereas board chairpersons receive 6 years, which consists of two terms, each lasting three years.
According to my observations—which might be considered more anecdotal than scientifically verified—a number of CEO-owner-managers, often referred to asFounder-CEOs—are finding it challenging to step away from their roles. This difficulty stems largely from personal beliefs rather than issues related to leadership transitions or strategic planning for handing over responsibilities.
Most of the time, there is a thoroughly documented succession plan in place. However, it’s quite challenging for a CEO who is also the majority shareholder to consider giving up control to another individual—likely a crucial member of the management team—who doesn’t have any “skin in the game.”
To clarify, numerous studies document the beneficial effects that founder-CEOs can have on business performance and organizational outcomes, such as the long-term viability and durability of the company.
In one of these studies, two Pakistani researchers (Khan and Siddiqui, 2020) created a matched set of 91 companies and evaluated their performance through both accounting and market-oriented metrics. They utilized independent sample t-tests for empirical analysis to examine the contrasting hypotheses. Their findings revealed a statistically significant disparity in performance between enterprises headed by entrepreneurs and those not managed by them.
The primary cause behind the contentious nature of limiting CEOs’ tenures lies in its infrequent public discussion. An entrepreneur-turned-CEO who holds a majority stake in a regulated financial firm faces a significant challenge: they have only 12 years to establish, guide, and fund their own venture before potentially stepping down for someone more suited to managing rather than founding enterprises. This scenario prompts doubts regarding its feasibility.
The probable outcome might be, under the most optimistic circumstances, that a CEO transitions to a non-executive director position (like becoming a board chairman). In the worst-case scenario, they might retreat from active view but still exert influence behind the scenes as an unofficial ‘shadow’ director. The detrimental effect this can have on corporate governance efficacy, associated-party risks, accuracy of financial disclosures, among others, should not be underestimated.
The dynamics might vary somewhat for non-executive directors and board chairs, particularly considering their shareholding in the RFI. Unlike CEO-founders who typically serve indefinite terms, these individuals often have limited tenures which could minimally affect governance efficiency when addressing strategic risks at the board level. Therefore, what approach should micro-prudential policies adopt? This remains an ongoing topic for discussion among stakeholders.
Is the Fit-and-Proper directive assisting or obstructing boards […] in cultivating a pool of qualified individuals for board roles?
In the past two years, I’ve undertaken evaluations for various non-bank financial institutions. A key metric under compliance for the board’s performance involves ensuring there are at least five directors serving on whichever committees the board decides to establish. These must notably include two compulsory committees: an audit committee and a risk committee.
It is typical to observe that many boards within the NBFI sector consist of fewer than five actively participating directors. Despite this, they often provide documentation proving that information about all directors has been submitted to the Bank of Ghana for fit-and-proper evaluation. However, when conducting on-site inspections, the Bank of Ghana tends to regard this shortfall as an acceptable exception.
The primary concerns are twofold. Firstly, the process of conducting fit-and-proper evaluations typically exceeds six months in many instances, with communication of outcomes to the RFI taking additional time. This delay leads to insufficient staffing levels for filling positions within the board committees.
Later on, you’ll encounter a specific board committee, often the audit committee, broadening its focus to include aspects outside what is outlined in the board charter. In discussions with numerous directors during my assessment tasks, they’ve found this expansion disagreeable yet inevitable since these “issues fall outside their jurisdiction.”
The second hurdle that boards face, particularly within the non-bank financial institutions (NBFI) sector, is that recruiting talented individuals for their boards has become as daunting as scaling Mount Afadjato. During a discussion with an experienced director, they revealed just how tough it is these days “to convince people” to take up a board position. Adding to this sentiment, another director remarked wryly, “What makes things even harder is finding candidates who satisfy the stringent requirements outlined in the Bank of Ghana’s Fit-and-Proper Persons Directive from 2019.”
To be objective, the standards for evaluating the suitability and competence of a director, as well as the thoroughness required to perform such assessments, can be quite rigorous considering the stringent regulatory demands.
To avoid any ambiguity, the Fit-and-Proper Persons framework serves as an international guideline aimed at ensuring that solely individuals who excel both professionally and ethically are responsible for shaping the future of the financial industry.
However, since recruiting competent independent non-executive directors has grown challenging for boards, the sole option left is often resorting to non-executive directors regardless of potential compromises to their impartiality. This unfortunate situation could inadvertently impact the overall quality of corporate governance within the industry.
Question 3: Considering the variations within the industry with respect to ownership, control, business models, and governance structures, is implementing a uniform minimum board size appropriate as a policy?
The principle of proportionality serves as an essential tool for crafting policies and regulations that are appropriately tailored to the scale, intricacy, and range of services offered by various market participants. However, I’ve observed a peculiar pattern that causes me to doubt whether we should apply this concept without careful consideration. According to the Corporate Governance Directive, boards are required to consist of at least five members but cannot exceed thirteen members.
This aspect is also documented in the Business Rules and Sanctions for MFIs. Notably, it appears that most RFIs, especially those in Tier 2 and Tier 3 categories, do not exceed level 5 regardless of the magnitude of their balance sheets, risk profiles, or business model complexities.
The notion that five directors are split between two functioning committees (with three being uncommon) could lead to crucial aspects like capital planning and risk evaluation going overlooked—a perilous situation indeed. A robust three-tier defense strategy for managing corporate risks necessitates an adequate number of members within the board to supervise typically under-addressed sectors including capital planning, the Internal Capital Adequacy Assessment Process (ICAAP), and balance sheet control. Ultimately, this comes down to accessing a rich reservoir of high-caliber professionals who can help cultivate a solid succession plan for future board positions.
In summary, for regulated financial institutions facing substantial gaps in regulatory capital, the minimum number of board members should be increased to seven, along with establishing another oversight committee—on top of the risk and audit committees—to monitor the Capital Management Plan. Institutions within the Non-Bank Financial Intermediaries (NBFI) sector ought to consider investing in the public equity markets as a means to bolster their Core Equity Tier 1 capital. Regulatory bodies could facilitate this shift by promoting appropriate changes in corporate governance structures.
Standardizing Board Evaluation
Metis Decisions Limited has created a specialized tool for assessing board effectiveness. This assessment approach utilizes a series of Board Performance Indicators (BPIs), organized into seven distinct sections. The importance attributed to each section mirrors the perspective of the assessor regarding how significantly those areas impact overall organizational success.
For example, factors such as Board Oversight and Board Processes, each carrying weights of 45% and 20%, respectively, are considered stronger indicators of board effectiveness compared to elements like Disclosures, which only holds a weighting of 5%. However, since the regulatory body has offered minimal direction in this domain, our methodology—which we consider both technically accurate and methodologically solid—might differ from those used by other service providers.
The potential issue here is that, due to the lack of standardization, it may become challenging for the Bank of Ghana to determine if the board evaluations (meta-assessments) throughout the industry are effectively identifying deficiencies in corporate governance and possibly predicting the accumulation of systemic risks.
Final Thoughts
Overall, the post-crisis reforms have positively impacted the corporate governance landscape, yet further action is necessary. Should the Bank of Ghana reconsider its stance on micro-prudential regulations within the Non-Bank Financial Institutions sector? Absolutely. The concerns outlined in this piece provide an excellent starting point. Here are my recommendations:
- Involve stakeholders by issuing a Call for Papers, or soliciting feedback on topics such as term limitations, leadership transition strategies, and so forth.
- The root causes leading to postponements in carrying out the fit-and-proper evaluation for RFI directors ought to be reconsidered.
- Organize a gathering with stakeholders and include companies renowned for their board assessments to kickstart the harmonization effort. Following this meeting, release an initial version of the directive on Board Assessment for RFIs and gather input from the public to refine the document.
The founder and CEO of Metis Decisions Limited is also serving as a research fellow at the Institute for Macroprudential Policy.
To arrange for board training or assessment, reach out to him at 0242564143.
Provided by SyndiGate Media Inc.
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