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Why the CBN Policy on the Tenure of CEOs is Wrong

By ValueFronteira Limited

The issue of tenure of Bank CEOs is something that has been in the burner for sometime and the industry apparently has been aware or has anticipated that this development would crystallize at some point. However there are deep seated concerns as to whether the CBN is actually right and is the most appropriate agency to bring that expectation to reality. The first borders on the limits of the rights which the CBN can exercise over the banks. The second has to do with the possible infringement on the private property rights of the boards of the banks as the legitimate authority exercising that right in determining how long their CEOs stay in that position. Or is the CBN merely copying what the Federal Government did in fixing the tenure of its directors without closely examining the underlying disparities in the institutional and political contexts.

There is no doubt whatsoever that the CBN is pursuing a worthwhile objective by taking the decision but it is wrong in the path which it has taken this time. The acceptability of the noble goal of enthroning the highest level of corporate governance within the financial system does not excuse apparent infractions on the rights of entrepreneurs. The failure of corporate governance in the Nigerian financial system and its exacerbation over the time was due to the failure of the central bank of Nigeria to exercise its supervisory, monitoring and sanctioning roles effectively. It was not a failure that was substantially tied to the tenure of bank CEOs. The reason being that corporate governance is best achieved in an environment of full disclosure and effective monitoring that ensures that the disclosures are indeed authentic and at desired level and on desired items. Therefore the CBN should be more concerned with establishing the rules and procedures that ensure the safety of depositors funds as well as healthy competition within the financial market, ensures that the parameters that enable itself (as the regulators) and the market to guage participant's performance and compliance with these procedures are clear and known, disclose levels of actual performance and compliance as well as infractions, punish or reward violations where applicable. All these information will equally allows the market to determine who to penalize or reward with its patronage.

The action of the CBN is a transfer of the penalty or blame due to itself over its inability to appropriately monitor, supervise and sanction the system over to entrepreneurs that have successfully steered their organizations over these years. We should not loose sight of the fact that the innovations and the progress made by this industry in the last decade have been triggered by the foresight and resilience of these CEOs whose incentive was that they saw these banks as their own property, nurtured it as well as triggered the much needed competition that eventually brought about lots of the positive changes that have brought the financial system where it is today. It was actually the because of grossly poor monitoring, supervision, sanctioning and high levels of complicity and tolerance of corporate governance violations on the side of the CBN itself that the competition over-stepped the bounds of professionalism and industry ethics which led to the degrees of gross abuses that are witnessed today.

One of the arguments is that ten years is reasonable enough for any person that wants to transform a system to stay in office. But the questions is: if I have set up a system and running it successfully within the provisions and expectations of the law why should someone tell me when to step aside. What both the CBN and depositors want is the safety of their funds. And if one runs a finance shop and conducts its operations such that depositors do not have cause to worry about their funds while the other stakeholders are pleased with the quantum of created value why should the central bank bother itself? The argument could be that when these banks transformed to Plcs they now ceased to be one man or family banks. But then this should be left in the hands of the enlarged board and active general meetings. As a matter of fact, what the central bank should be concerned with here is to ensure that banks have virile boards that can effectively take decisions against or for their CEOs whenever they should. It can do this by setting out some rules on board composition and decision making procedures that will not give the CEO any special advantage over the rest of the members.

One advantage of this tenure-pegging action aside the corporate governance goal is the role it is expected to play in depersonalizing the sector. But the reality of it too is that treating any entrepreneurial engagement with great sense of ownership helps in strengthening commitment to the cause of that business. The ownership incentive is a great force that at a larger scale triggers wider-scale prosperity as every participating business agent strives to create more and more value for itself thereby creating much value for the society at large. The banks that have been running systems where CEOs succeeded themselves, prior to the advent of these newer generation banks were not doing fantastically well relative to the ones that were motivate by that ownership incentive. Thus although they depersonalised the operations of the banks they were not at pace that with developments in other parts of the world.

Furthermore, it is a bit short-sighted to think that with 10 years pegged tenure corporate governance infractions are over. In fact somebody who is a CEO can actually perpetrate gross violation and gross abuse within the two out of the ten years and use the rest of the years to polish out the abuses so that the incoming regime does not know of it. The central bank is obviously missing the focus here.

A popular example that is always cited is GTB's succession arrangement. I may however not be wrong if I say that the succession between Fola Adeola and Tayo is something they probably worked out and agreed even at the earliest point of the commencement of that business. If the CBN is excite by that model, then it should focus rather on getting the banks to put in place 'going forward' arrangements that enable the transition of leadership not 'retroactively'. Going backwards is aside being military negates the principles of liberty upon which the market economy should sit. Thus I find it ridiculous that we the CBN is preaching a market system and yet frustrating the foundations upon which that system should be predicated. It is also important to point out that the argument that bankers or employees who have been recruited by CEOs that have exceeded 10 years in their offices now have loyalty differs to the CEOs rather than the institution is unacceptable. What the CBN should be doing is to ensure that the various banks put in place and agree processes and procedures that are consistent with upholding the highest standards of corporate governance without infringing on the private property rights of the owners and decision makers in those banks. In addition to that, the CBN should put in place adequate mechanisms to ensure that banks comply with the specifications of those procedures and processes.

Martin Oluba, Ph.D, DBA is the President of ValueFronteira Limited. [email protected]

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