The Bank of Ghana (BoG) has entered into a partnership with the International Finance Corporation (IFC) to promote sound corporate governance in the country’s banking sector.
“I believe this laudable initiative will go a long way to engender sound corporate governance principles in our banking system, to further enhance public trust and confidence,” said the second deputy governor of the Central bank, Dr. Johnson Asiama at the Ghana Corporate Governance programme organized by the IFC and the Bank of Ghana.
Commending the IFC’s impressive contribution towards “deepening the financial sector in Ghana,” Dr. Asiama noted that corporate governance still remains a topical issue globally, not because of the apparent negative impact of bad governance, but also the benefits “we accrue when institutions are well governed.”
“It is for this reason that we have congregated here as people charged with the governance of banks, to chart a course towards building a stronger governance framework for the industry,” he added.
Touching on the challenges with the global economy, he stated that studies have shown that the main causes are weak monitoring structures. He said the global financial crisis that came to a boil in 2008 was a reminder, “roughly, of how debilitating bad governance could be.”
“The underlying cause of the crisis, as we are all aware, stems from poor corporate governance practices, ranging from weak internal and external audit controls, poor risk-taking judgement, to weak Board oversight, to mention just a few. Sadly, the effect of the crisis still lingers on, with the problems of global financial institutions like Lehman Brothers, Northern Rock and the insurer, AIG, erasing, completely, the notion that organisations can get to a point where they become “too big to fail,” he stated.
Below is the full speech delivered by the Second Deputy Governor, Dr. Johnson Asiama at the Ghana Corporate Governance programme Tuesday, November 08, 2016
I feel deeply honoured to be invited as a Guest Speaker and for the privilege to share some thoughts on the theme: “Board Leadership and Excellence”. You will agree with me that corporate governance still remains a topical issue globally, not only because of the apparent negative impact of bad governance, but also the benefits we accrue when institutions are well governed.
The purpose of today’s gathering is to officially launch the Bank of Ghana’s partnership with the International Finance Corporation (IFC), on promoting sound corporate governance in our banking sector. It is for this reason that we have congregated here as people charged with the governance of banks, to chart a course towards building a stronger governance framework for the industry.
First off, let me commend the IFC for putting together this novel initiative, which forms part of its broader governance agenda for Africa, dubbed: “African Corporate Governance Program”. The programme is aimed at improving corporate governance practices across markets within our sub-region. I believe this laudable initiative will go a long way to engender sound corporate governance principles in our banking system, to further enhance public trust and confidence. I must also commend the IFC, as a development partner, for its impressive contribution towards deepening the financial sector in Ghana, especially in the area of capacity building.
Mr. Chairman, corporate governance rose to prominence in the last two decades, starting with the UK’s Cadbury Report in 1992. Sir Adrian Cadbury, who chaired “The Committee on the Financial Aspects of Corporate Governance”, that evolved into the Cadbury Report, noted that: (quote) “Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal
goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.” (end of quote)
Since then, there has been a continuous stream of reforms, culminating into the development of the UK Corporate Governance Code, which, as a voluntary code, is anchored on “comply or explain principles”. In 1994, the famous Kings Report emerged from South Africa, to provide corporate governance guidelines for listed companies. The code has undergone a series of revisions, from Kings I to Kings III, and today it is touted as one of the best corporate governance codes in the world.
Mr. Chairman, we cannot leave out the contributions of the Organisation for Economic Corporation and Development (OECD) and the Basel Committee to good governance at the global level. The Basel Committee’s Guidelines has provided the needed platform for governance frameworks to develop, so as to ensure the stability of banking systems.
Mr. Chairman, I would like to turn my attention to the impact of governance failures. Careful studies of the main causes of global corporate scandals and failures have attributed the causes to weak Board oversight, generally.
The global financial crisis that came to a boil in 2008 was a reminder, roughly, of how debilitating bad governance could be. The underlying cause of the crisis, as we are all aware, stems from poor corporate governance practices, ranging from weak internal and external audit controls, poor risk-taking judgement, to weak Board oversight, to mention just a few. Sadly, the effect of the crisis still lingers on, with the problems of global financial institutions like Lehman Brothers, Northern Rock and the insurer, AIG, erasing, completely, the notion that organisations can get to a point where they become “too big to fail”. Mr. Chairman, once the governance structure is bad, failure is inevitable.
Ladies and gentlemen, the crisis brought into sharp focus, the need for banks to strengthen their corporate governance practices and for Regulators to ensure that sound corporate governance principles were thoroughly embedded in the operations of banks.
4. Why the need for good Corporate Governance in banks
Mr. Chairman, banks play a special role in the allocation of resources in the economy. They are highly leveraged institutions and through their intermediary roles and functions, become accountable to depositors by default.
In the case of Ghana, the financial system is predominately bank-based, with assets to GDP ratio of about 40.32% as at December 2015. This gives an indication of the critical role the banking sector plays in the national economy.
Mr. Chairman, sound corporate governance practice is critical to improving economic efficiency and growth of the banking system as it serves as a deterrent to mismanagement and infuses discipline in the decision-making process at the Board level. Adherence to the principles of good corporate governance fosters investor confidence and attracts domestic, as well as foreign investors.
In contemporary banking, sound corporate governance is particularly important as the rapid changes brought about by globalization, deregulation and technological advances are increasing the risks in banking. Moreover, unlike other companies and institutions, most of the funds used by banks to conduct their business belong to their creditors, in particular to their depositors. Linked to this is the fact that the failure of a bank affects not only its own stakeholders, but also may have an adverse systemic impact on the stability of other banks, as well as the economy as a whole.
Again, banks need sound corporate governance practices in order to build public trust and confidence, as well as credibility in their operations, so to promote the safety and soundness of the entire banking system. Without sound governance structures, banks stand the chance of eroding public trust and ultimately put shareholders’ investments and depositors’ funds at risk.
5. Efforts by Bank of Ghana in promoting good corporate governance
Distinguished ladies and gentlemen, upholding the tenets and principles of sound corporate governance practices in the banking industry falls within the remit of the Bank of Ghana, as regulator of the banking industry. The corporate governance principles of integrity, transparency, accountability, fairness, probity and responsibility are the main drivers of most corporate governance codes and frameworks that have been adopted internationally, including the UK Corporate Governance Code, the OECD Corporate Governance Principles and Basel Principles for Enhancing Corporate Governance. These have also underpinned the work that we do at the Bank.
Mr. Chairman, recognising the critical role that corporate governance plays in the soundness of banks, the Bank of Ghana issued a Corporate Governance Exposure Draft in 2014 to elicit comments and constructive contributions from the industry. The draft document has incorporated suggestions from industry, including a review by the IFC, and remains work-in-progress that would be issued appropriately when completed.
However, I would crave your indulgence to share key aspects of the draft document with you.
And here they are:
(i) The tenure of CEOs will be capped at a maximum of three terms of 5 years per term;
(ii) Non-Executive Directors shall have a tenure of three years for no more than two terms, and shall be in the majority on every Board;
(iii) At the minimum, every bank shall have at least two Board sub-committees, Audit and Risk committees.
(iv) The Risk and Audit committees shall be chaired by a Non-Executive Director;
(vi) In the case of foreign banks, the positions of Managing Director and Board Chair cannot be occupied concurrently;
(vii) Competencies for board membership shall be explicitly defined in accordance with Basel requirements;
(viii) The size of bank Boards shall be limited, as well as the retiring age for Directors prescribed;
(ix) Disclosure of attendance at Board meetings by Directors in annual accounts;
(xi) Additional directorship engagement will be limited to no more than five (5);
(xii) Evaluation of individual Director’s performance and collective performance by external agents;
(xiii) A cooling-off period for Directors switching jobs in the industry.
These are about a few of the governance reforms that will be adopted in the industry once the Guidelines are issued.
Mr. Chairman, recognising the centrality of risk management and compliance systems in corporate governance frameworks, the Bank of Ghana is also reviewing its Risk Management Guidelines for adoption. A revised exposure draft would also be circulated once consultations have been held with industry and the Ghana Association of Bankers.
To underscore the importance of corporate governance in the industry, the new Banks and Specialised Deposit-taking Institutions (SDI) Bill, which has been passed by Parliament, has explicit provisions on corporate governance, which suggests a shift from a principle-based approach to that of rule-based. I must say that the Bank of Ghana will adopt a combination of the two approaches in developing a sound and effective corporate governance framework for the industry.
I am also reliably informed that the College of Supervisors of the West African Monetary Zone (WAMZ) is in the process of developing a common
corporate governance framework for the WAMZ. The Bank of Ghana has contributed immensely towards this agenda, taking cognisance of our peculiar circumstance. It is our hope that the WAMZ framework will become the reference guide for the development of governance frameworks for other member countries of the WAMZ and that supervisory authorities in the zone will abide by the requirements.
Mr. Chairman, to further strengthen and promote sound governance in the industry, a number of guidelines and directives have been prepared by the Bank of Ghana. These include:
These guidelines are necessary to ensure the proper conduct of banks and to enhance safety and soundness of the banking system. We need sound corporate governance principles to enhance banking stability, as we need banking stability to drive financial stability.
Mr. Chairman, the frontiers of banking are rapidly changing and developments in the industry have necessitated the need for the adoption of a sound and effective corporate governance framework for the industry.
The Board excellence that we crave for will become an illusion should we fail as stakeholders to recognise our role and duties as Directors of banks. We must be upright in our dealings, avoid putting ourselves in conflict of interest situations, exercise due care in our relationships, and, as well, have strong oversight over management activities. For, we can only prevent corporate failures when our Boards are up to speed with developments within the bank and possess the requisite know-how to interrogate management on the day-to-day operations of the institution. I will use this opportunity to advocate for the National Banking College to design capacity building programmes for Directors of banks to enhance the operations of Boards.
In this regard, the Bank of Ghana and the IFC, have lined-up a series of quarterly training programmes for Boards of banks, board sub-committees and internal auditors of banks, among others. This, I believe, will contribute significantly to enriching the quality of Board deliberations.
In conclusion, Mr. Chairman, I would like to reiterate that sound corporate governance practices are key ingredients to a bank’s ability to manage its risks and withstand external shocks. As regulators, we will continue to direct our resources towards ensuring that banks improve their internal controls and risk management systems.
It is therefore imperative that the banking sector adopts sound corporate governance practices in order to provide the needed impetus for continuous growth. In this era of rapid globalisation, which is characterised by technological advancements, liberalisation of markets, product and customer sophistication, sound governance practices remain the only toolkit that can guarantee continued corporate existence.
At this point, I would like to mention that no amount of regulatory and supervisory interventions can fully institutionalise corporate governance in banks unless Boards and senior management of banks appreciate the value of sound corporate governance practices to their productivity and competitiveness.
Finally, let me remind the banking fraternity that placed on their shoulders is a charge to maintain public trust in all they do. Failure to employ sound governance practices can easily erode that trust and further threaten the
existence of their institutions. Further consequences of this, Mr Chairman, l need not repeat, as l have already stated many.
As the regulator, we will continue to do our part by crafting guidelines and regulations that will seek to safeguard the interest of all stakeholders. The rest is the collective responsibility of maintaining sound ethical standards in our day to day operations. I am looking forward to the outcome of today’s discussions and wish you all the best of endeavours.
Thank you for your attention.
