March 29, 2018//- The recent invitation of the directors of the defunct UT and Capital banks by the Economic and Organised Crime Office (EOCO) in Ghana must serve as lessons for corporate governance in Ghana, Africa and rest of the world.
Here are the reasons
The early 2000s have been described as the period of corporate accounting and financial scandals in Europe, North America and other parts of the world due to weak compliance with corporate governance rules and principles as well as backslidden regulatory oversight. Same was the case during the global financial crisis of 2007-2009, which started in the United States.
The report of the Special Forensic Audit by Bank of Ghana in 2015 revealed same reasons for the Ghanaian financial sector. Anytime the financial sector, especially, the banking sector shows apparent signs of crisis, regulators respond with new regulations which sometimes make regulatory compliance complex and very expensive. In some cases too, it leads to regulatory overload.
In response to the recent microfinance crisis and turbulence in the banking sector, the Depositors Protection Law and Act 930 were quickly enacted.
Normally, the implementation of regulatory response can be difficult for the regulators because of signaling effects and incoherent information management.
It becomes even more difficult in environments where politicians feature strongly in the activities of the sector making it an unchecked place for effective supervisory work by central banks. On the part of banks, compliance cost and ever increasing number and types of requirements by the regulators can be daily frustration.
In dealing with regulatory management, we should not forget that all the challenges faced by non banking sector regulators such as inadequate number of personnel, monitoring and supervisory cost, weak response time, among others, can be associated with financial sector regulators too.
The requirements of the new Act 930, when well understood, could discourage many from taking appointments as Directors of Commercial Banks. If care is not taken, it will be difficult for such appointed directors to escape personal liability during crisis. The reason is simple.
All reports, including internal audit reports, are directly presented to the board of directors, so it becomes very difficult for directors to claim innocence during crisis.
The law also requires that individual directors and top management teams of commercial banks also complain in writing to other members of the board when they become aware of anything that may negatively affect the proper management of the bank, especially, when it affects the tenets of corporate governance, risk management, internal controls and liquidity issues as well as conflict of interest.
It is further required that when the matter is not addressed to the satisfaction of the member/complainant, he/she must write to the regulator, failure to exercise these options as a director makes it difficult to immune such directors from personal liability.
This, I believe, is the time for all board members of commercial banks to start asking themselves if they are indeed ready for the duties of active board members of commercial banks.
Perhaps, Bank of Ghana should direct that all commercial banks be given proper training about the duties and liabilities of a director under Act 930, if it is not yet done. This, if done effectively, may lead to some voluntary resignations from boards so as to allow only active and result oriented people to be on boards of banks.
The lessons are very clear for potential and existing directors. Do not accept appointment to the board of a bank and any financial institution if you are not clear in your mind what your duties and responsibilities are, as well as the enhanced personal liabilities in the new regulation.
The collapse of a bank may be caused by external factors such as the economy, regulatory weakness and internal factors such as disregard for corporate governance principles and imprudent management decisions of directors.
Even though the collapse of a bank may not be caused by just one factor, it becomes important to investigate the role of directors and actions of other persons resulting in the collapse, especially when the management of the crisis or collapse implies fiscal cost to government (taxpayers).
It is sad , however, that the investigation may not include investigating the regulatory role of sector regulators in the entire process. In effect, the results may produce a portfolio of good corporate management lessons and at least provide new energy for proactive regulatory management.
The benefits of Act 930, when implemented, will improve corporate governance, active directorship, improve regulatory compliance, seriousness with risk management and overall soundness of banks.
The fact remains that, sound and stable banking sector demands a mix of appropriate regulatory management, monitoring and timely enforcement on one hand and seriousness with corporate governance by directors, anchored on proper management of the overall economy so as to reduce lending rates to affordable and acceptable thresholds.
By Prof. John Gatsi, University of Cape Coast, Ghana
