From the foregoing discussions, it is clear that poor corporate governance practices lead to bank distresses and failures. The problem of distress can affect a single bank as well as many banks within the banking industry. The weaknesses in corporate governance practices and distresses and failures are not only peculiar to Ghana, but it cuts across the entire world both developing and developed economies. Erkens et al (2013) provided evidence that weak corporate governance practices affected the performance of financial firms during the 2007-2008 global financial crises.
They posited that corporate governance had an important impact on banks’ performance during the crisis through firms’ risk taking and financing policies. The impact of poor corporate governance practices on the distress in the Ghanaian banking system, was manifested in loss of confidence by the banking public, liquidity squeeze on the part of distressed banks and non-performing risk assets which resulted in high loan loss provisions that impacted negatively on banks’ capitalization policy. It is therefore imperative that Bank of Ghana and SEC should take steps to improve on corporate governance practices in the banking sector to prevent the wide spread of distresses and failures experienced in the late 1980s.
In particular, we know that bank distress in Ghana and other economies have been caused in partly, by excessive exposure concentration, macroeconomic instability, weak corporate governance practices, lending to connected parties and poor risk management practices. The Ministry of Finance and Economic Planning which has the overall responsibility must take immediate steps to develop, implement, and supervise the corporate and financial governance super structure in Ghana. The continuous nature of distress in the banking sector, to a large extent, such as basic risk management failures reflect a break down in corporate governance practices in the banking sector.
They reflect poor management of conflict of interest, inadequate understanding in the board room of key banking risks and poor oversight by boards of the mechanism for managing their banks, such as enterprise wide risk management system and internal control and internal audit arrangements. In some cases, a lack of truly independent directors on the boards of banks was also significant factor in weakening the effectiveness of boards. There must be a proper definition and qualification of board independence
Adherence to corporate governance is the foundation for effective risk management. It is evident that sound corporate governance is essential to the well-being of a bank and protection of interests of other stakeholders, particularly its shareholders and creditors. Practice of good corporate governance is not just a vital factor at the level of individual bank; it is also a critical ingredient in curbing distress in banks, promoting and maintaining a sound financial system and stability which in turn ensures a robust economy. To this end, the Ministry of Finance and Economic Planning through the regulatory authority (i.e. Securities and Exchange Commission) has taken keen interest in reviewing and emphasizing the adherence to the year 2010 revised code of corporate governance in order to curb future corporate distress in Ghana. The Bank of Ghana should urgently develop and implement its own code of corporate governance for all universal banks, savings and loan companies, micro-finance companies as well as other NBFIs.
Recommendation
Based on the theoretical and empirical findings in this study the following recommendations are made:
(1) Since corporate governance has a significant improvement on the prevention of bank distress; banks should be able to demonstrate that rigorous internal policies were in place and that procedures exist for identifying and managing conflicts of interest to avoid its adverse consequences on their customers and other stakeholders. Insider abuse, conflict of interest and widespread manipulations are at the heart of a nation’s financial sector crisis. Such crisis connived at or orchestrated by management and board, should be captured by internal and external auditors and regulators so as not to reach serious proportions.
The Bank of Ghana should ensure that board of directors do not abdicate their oversight responsibilities over senior management of Ghanaian banks including the review and approving the bank’s strategic plans on a regular basis and also evaluate the risk management practices including the strict observance of the bank’s risk appetite and tolerance levels, liquidity and capital planning in a manner which are consistent with the banks’ strategic plans. The Bank of Ghana should ensure also that ethical tone at the top by overseeing the development and implementation of code of conduct for all directors, senior management team and employees and that these addresses the treatment of breaches or lapses in ethical behaviors including inside abuses and dealings with the view of improving on the quality of assets to reducing loan loss provisions
(2) The study shows that corporate governance has the capacity to significantly improve the performance of the Ghanaian banking sector. Therefore, in addressing the role of corporate governance in curbing distress, the central bank should review the fit and proper person’s regime in order to ensure that only credible persons of impeccable financial, personal and professional character are allowed as major shareholders, directors and managers of banks. The central bank should also strengthen its on-site and off- site supervision functions in recognition of the need for an effective supervision of the banking sector.
(3) The Bank of Ghana should implement a mandatory code of corporate governance for all banks and NBFIs. For example, to ensure that there is a clear division between the chief executive officer and the managing directors. The Bank of Ghana should ensure that the term for the CEOs or MDs does not exceed 10 years. The tenure of non-executive directors should be set for initial 4 years with the upper limit of 8 years. The term independent directors should be properly defined to avoid any ambiguities.
Persons occupying these positions should be properly approved by the apex body i.e. Bank of Ghana and such persons must be knowledgeable in business and financial matters with requisite experience in the banking field. The code of corporate governance must be made mandatory with the appropriate sanctions for the defaulting banks. Of critical importance must be requirement that the Bank of Ghana should also ensure that Governors, Deputy Governors, Directors and Assistant Directors from the central bank do not accept board membership on the universal banks’ boards after their retirement until a lapse of time limit of 10years as done in other jurisdictions.
(4) The Bank of Ghana must also ensure that banks should establish committees within their banks so as to oversee the management of risk, audit and credit. This is also to forestall any potential risk and prevent the bank from any imminent or future distress. The board should appoint members to these committees with the goal of achieving an optimal mix of skills, competencies and experience that, in combination, allow the committees to fully understand the factors and causes of distress and objectively evaluate the strategies to address issues and bring fresh thinking into all the relevant issues concerning bank distresses.
The Bank of Ghana must ensure that audit committees must be constituted of people with back ground in accounting, auditing, banking and finance while the risk committee must be comprised of finance, economics with econometric, mathematics, statistics, accounting and banking backgrounds. There is therefore the need to strengthen boards through initial and ongoing screening and training programs’ and to encourage continued improvement programs for all directors
(5) Bank of Ghana and other regulators in the Ghanaian financial sector need to adopt a zero-tolerance posture against cases of unsound corporate governance practices. This will ensure that the banks are well run and administered. Identifying, preventing and managing conflict of interest should be at a very heart of corporate governance. The Ghanaian bank boards should ensure that policies to identify potential conflicts of interest are developed and implemented.
(6) The Bank of Ghana and relevant professional bodies such as Chartered Institute of Bankers of Ghana (CIB. Gh) and Institute of Chartered Accountant Ghana should ensure that bank workers do not hold vital position in the banks but rather bankers who have proven competence and track records after the completion of the relevant professional courses should be given full backing to operate.
(7) In view of the low awareness of corporate governance practices in the banking business and most shareholders lack of knowledge rights including the minority, regulators like Bank of Ghana, SEC and Ghana Stock Exchange (GSE) should educate the shareholders on Shareholder Activism especially for institutional investors such as SSNIT which has significant shareholdings in nine universal banks operating in Ghana.
For example, at the annual general meetings there is not enough probing of directors on the operations of banks they have invested in. Shareholder associations should be encouraged so that members can be educated on their rights and responsibilities (FINSSP, 11, 2012). Shareholder activism allows shareholders to impose control through involvement and engagement in company management; it also provides a secondary control system that can complement the existing governance structure of companies including banks with poor governance practices. This activism can play important role in reducing the agency costs by closely monitoring of company management through voting powers; the power to file a suit in court, and the selling of interests in the firm, thus aligning the interests of managers and shareholders in order to ensure corporate sustainability and longevity (Thomas, 2008)
(8) In addition to good corporate governance practices in the banks, the government and Bank of Ghana must restore macroeconomic stability through an ambitious and sustained fiscal consolidation, prudent debt management strategy with improved fiscal transparency and effective monetary policy framework that go a long way to improve on high non-performing loan losses and distresses in the banking system. Lower inflation and interest rates, combined with a stable exchange rate environment would help to improve on loan losses provisions that banking system had been experiencing over the last decade.
(9) Pro-active approach to banking supervision should be advocated for banks and non-banking financial institutions. Bank of Ghana should identify banking system vulnerabilities through continual assessment on liquidity and solvency. This will allow the regulatory authority to classify whether the institution is suffering liquidity or solvency when a banking problem surfaces and the implications of the failure would be. Implementation of the Basel Committee on Banking Supervision and Surveillance (enterprise wide risk management framework) and corporate governance issues (internal audit and internal control) should be practiced rather than to be continually on paper or the book shelf.
