By Nkunimdini ASANTE-ANTWI
The year 2017 was a momentous one in the history of Ghana’s financial sector. With less than a year following the election of a new government, the authorities took a bold but controversial policy decision to purge the system of insolvent financial intermediaries whose activities had put depositors’ funds at risk.
In what has come to be known as the “financial sector crises”, the operating licenses of 349 Microfinance companies (Tier 2 NBFIs) and 29 Micro-Credit companies (Tier 3 NBFIs), were revoked.
Indeed, a crisis it was; the eventual materialization of financial imbalances built up during prior years of credit expansion and asset-liability mismatches, amidst weak corporate governance systems, and in some cases, regulatory forbearance.
Following a very painful (and fiscally burdensome) resolution process, the Bank of Ghana, as part of a broad-based effort to avert another financial crisis in the future (at least one comparable in scale), enacted a slew of directives, most of which have transformed the regulatory landscape, undoubtedly. One of such instruments is the Corporate Governance Directive, 2018.
After 4 years of implementation, questions about whether post-crises reform has been effective in mitigating the build-up of systemic risks, seem to be welling up. Surfacing some these questions, and analysing the evidence, whether anecdotal or empirical, may aid in understanding the impact of Bank of Ghana’s micro-prudential policy tools on market conduct, and its broad implications for financial stability. It is that spirit of inquiry which guides this paper.
In this article, I will attempt to answer one overarching question, with roots founded in three underlying questions.
First, here are the underlying questions:
- Does the current limit on tenure of office for CEOs and board of directors, pose any risks to non-bank financial intermediaries?
- Is the Fit-and-Proper directive helping or hindering boards in the NBFI sector, from developing a pipeline of good candidates for board positions?
- Given the disparities across the sector regarding ownership and control, business model, and governance architecture, is the ‘one-size-fit-all’ approach to minimum board size a reasonable policy?
If I am able to sufficiently answer the underlying questions, then the principal question will then be: should the Bank of Ghana re-think its micro-prudential regulatory framework for the Non-Bank Financial Institutions sector?
And whilst at it, I will throw in a ‘bonus’ by sharing my expert observations concerning disclosure board evaluation. I was tempted to include in this article, a critical review of OFISD’s on-site examination model, but that will be akin to putting too much sugar in your ‘kooko’, so the aforementioned questions are sufficient for now.
What you must know
For transparency’s sake, I must fully disclose, that I wear two hats. First, I approach the issues discussed herein as an analyst with interest in macroprudential policy and how it complements other policy domains such as the fiscal, monetary and structural.
Second, I have worked with several NBFI boards in my practice as a consultant, providing services such as board evaluation, training, and tools for strengthening their 3 lines of defence functions.
Hence, the issues that I seek to elucidate (and the underlying questions) were mostly (but not all) sparked by professional interactions with directors, some of whom expressed deep concerns about the emerging risks they face as a result of certain aspects of the corporate governance directive, 2018.
Addressing the Issues
Question 1: Does the current limit on tenure of office for CEOs and board of directors, pose any risks?
Per the Corporate governance directive, 2018, CEOs of regulated financial institutions have 12 years in total, made up of 4 years per term to serve as CEOs.
Directors on the other hand have 9 years, whilst board chairpersons have 6 years, made up of 2 terms, with 3 years per term.
Based on the trend I have seen (and this may count only as anecdotal evidence hence not statistically valid), some of the CEOs, who are owner/managers (aka Founder-CEOs), are struggling to transition out of the role, for reasons that are mostly philosophical, and has little to do with succession planning.
In most cases, a well-documented succession plan exists, but the idea of a CEO who is also the majority shareholder (mind you), ceding control to someone (most likely, a key management person) with no ‘skin-in-the-game’, is a difficult proposition to swallow.
To be clear, there is copious evidence in scholarly literature attesting to the positive impact that founder-CEOs have on business performance and organizational outcomes, including longevity and sustainability of the economic enterprise.
In one of such studies, two Pakistani researchers (Khan and Siddiqui, 2020) developed a matched sample of 91 firms and compared their performance using both accounting and market-based measures. Independent sample t-tests were used to empirically test the opposing predictions. The results indicated a statistically significant difference in performance between entrepreneur-led and non-entrepreneur led firms.
This is the core reason why CEO tenure limit has become such a thorny issue, albeit hardly broached publicly. The fact that an entrepreneurially-minded CEO who is the majority shareholder of a regulated financial institution, has 12 years to build, lead and finance an enterprise he/she founded, and thereafter step aside to make way for (most likely) a non-entrepreneur CEO type, raises questions about the practicality.
The likely result will be, (and this is the best-case scenario), a CEO may switch to a non-executive director role (board chair, perhaps), or, worst case scenario, recede into the background and control board and management decisions as a ‘shadow’ director. The insidious impact that this could have on corporate governance effectiveness, related party risks, reliability of disclosures, etc, cannot be overemphasized.
The dynamics may be a bit different for non-executive directors, and board chairpersons, depending on their equity stake in the RFI. Undoubtedly, unlike CEO-founders, the latter’s capped tenure of office, may have little or no material impact on governance effectiveness within the boarder context of managing strategic risks. So how should micro-prudential policy respond? That’s an open question for stakeholder consultation.
Question 2: Is the Fit-and-Proper directive helping or hindering boards […] from developing a pipeline of good candidates for board positions?
Over the last 2 years, I have conducted evaluation assignments for several NBFIs. One of the board performance indicators (under the Compliance), is having at least, 5 directors to serve on whatever committees you choose to have as a board, which must include two mandatory committees; audit, and risk committee.
It is common to see most boards in the NBFI sector having less than 5 active directors, and yet, possessing documentary evidence which shows that details of the other directors have been submitted to the Bank of Ghana for fit-and-proper assessment. Meanwhile that lacuna is raised as an exception during on-site examinations, by the same Bank of Ghana.
There are two issues here. First, on average, it takes more than 6 months (in some cases, even more), for fit-and-proper assessments to be completed, and the results communicated to the RFI. The effect is that, the headcounts needed to fill board committee roles, becomes inadequate.
Subsequently, you will find one particular board committee, usually the audit committee, extending its scope to cover areas beyond its remit as specified in the board charter. For most directors that I have engaged with during my evaluation assignments, this phenomenon is unpleasant but unavoidable because the “matter beyond their control”.
The second challenge that board of directors are having (emphasis on the NBFI sector), is that, attracting talent to the board is now akin to climbing Mountain Afadjato. In a conversation with one director, she confided how difficult it is “now adays” to get people to accept a board offer. “And what is even more challenging” quipped another director, “is getting people who meet the strict criteria set out in Bank of Ghana’s Fit-and-Proper Persons Directive, 2019” he said.
To be fair, the criteria for assessing fitness and propriety of a director, and by extension, the due diligence needed to conduct same, may be very demanding given the high regulatory expectations.
And for the avoidance of doubt, the Fit-and-Proper Persons framework is a global policy standard designed to ensure that only the best and brightest (and also the morally upright), are entrusted with the fate of the financial sector.
But because it has become difficult for boards to recruit, preferably, independent non-executive directors, the only alternative is a recourse to non-executive directors, whether or not their independence is impaired, one way or another. Unfortunately, this adverse selection may have unintended consequences for corporate governance effectiveness across the sector.
Question 3: Given the disparities across the sector regarding ownership and control, business model, and governance architecture, is the ‘one-size-fit-all’ approach to minimum board size a reasonable policy?
The proportionality principle is useful in ensuring that policy and regulation is responsive to size, complexity and business mix of market actors. Unfortunately, I have seen a certain curious trend that makes me question the wisdom in blindly applying this principle. Per the corporate governance Directive, the minimum number of directors a board must have, is 5, whilst the maximum is 13.
This is also captured in the Business Rules and Sanctions for MFIs. Interestingly, it turns out that most RFIs, particularly Tier 2 and Tier 3s, never venture above 5, no matter the size of their balance sheet, risk profile or business model complexity.
The idea that 5 directors, divided among 2 active committees (3 is rare), and yet critical areas of board oversight such as capital planning, risk assessment are neglected, is a dangerous affair. An effective 3 lines of defence approach to enterprise risk management requires that sufficient headcount at the board level is available to oversee traditionally neglected domains such as capital planning, Internal Capital Adequacy Assessment Process (ICAAP), and asset-liability management. But again, it boils down to having access to a deep pool top talent that allows a board to develop a strong pipeline of candidates for board roles.
The bottom line is this: regulated financial institutions that have significant shortfalls in terms of regulatory capital, should have their minimum directors ramped up to seven, and an additional committee (besides risk and audit) mandated to oversee the Capital Management Plan. RFIs in the NBFI sector must begin to look at the public equities market to strengthen their Core Equity Tier 1 capital, and one way the regulators can help is to influence the governance mechanisms in that direction.
Standardizing Board Evaluation
Metis Decisions Limited has developed a proprietary tool to evaluate board performance. Our evaluation methodology relies on a set of Board Performance Indicators (BPIs) which are grouped into 7 categories. The weights assigned to each category reflect the evaluator’s view concerning the degree on influence of that category on organizational performance.
For instance, Board Oversight and Board Processes which are weighted 45 percent and 20 percent respectively, are deemed to be more significant predictors of board effectiveness than say, Disclosures, which is assigned a weight of 5 percent. Unfortunately, because the regulator has provided little or no guidance in this area, our approach, which we believe is technically sound and methodologically robust, may be different from other providers.
Here is risk: without standardization, it will be difficult for Bank of Ghana to assess whether or not the quality of board evaluations (meta-evaluation) across the sector, is helping to uncover corporate governance weaknesses and maybe, even predict the build-up of systemic risk.
Final Thoughts
In sum and substance, the post-crises reforms have had a positive effect on the corporate governance environment, but more needs to be done. Should the Bank of Ghana re-think its approach to micro-prudential regulation in the Non-Bank Financial Institutions sector? Yes. The issues highlighted in this article is a good place to start. I recommend the following:
- Engage stakeholders by putting out a Call for Papers, or request for comments on matters related to tenure limits, succession planning, etc.
- The underlying factors that cause delays in conducting fit-and-proper assessment for Directors of RFIs should be re-examined.
- Convene a stakeholder conference and invite firms known for board evaluations, to begin the process of harmonization. After the conference, publish an exposure draft directive on Board Evaluation for RFIs, and harvest community feedback to finalize the document.
The author is the Founder and CEO of Metis Decisions Limited. He is also a research fellow at Institute for Macroprudential Policy. For board training or evaluation contact him via 0242564143.
