You are here: HomeNews2018 03 30Article 638945

Opinions of Friday, 30 March 2018

Columnist: Prof. John Gatsi

Directors of defunct UT and Capital Banks invited by EOCO: Lessons for corporate governance

The early 200s 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 of America. The report of the special forensic audit by Bank of Ghana in 2015 revealed same reasons.

Anytime the financial sector especially the banking sector shows apparent signs of crisis, regulators respond with new regulations sometimes making 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, depositors protection law and Act 930 were quickly enacted.

Normally the implementation of regulatory response can be difficult for the regulators because of signalling effects and incoherent information management. It becomes even more difficult in environments where politics finds comfortable and unchecked place in the licensing and supervisory work of 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 can discourage many from taking appointments as directors of commercial banks. If care is not taken it will be difficult to escape personal liability as a director.

The reason is simple. All reports including internal audit reports are directly presented to the board of directors and become very difficult to claim innocence.

The law also requires that individual directors and top management teams of commercial banks are to 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 failed to exercise these options as a director makes it difficult to be at distant from personal liability.

This is the time for all board members of commercial banks to start asking themselves if they are indeed ready for the duties of an active board member of commercial banks.

Perhaps, Bank of Ghana should direct all commercial banks to be given proper training about the duties and liabilities of a director under Act 930 if it is not yet done, maybe this may lead to some voluntary resignations from boards so as to allow only active and result oriented people to be on boards.

The lessons are very clear. Don’t 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 regulation.

The collapse of a bank maybe caused by factors external to directors the economy, regulatory weakness and this regard for corporate governance principles management and directors.

Even though, the collapse of a bank is not caused by just one factor, it is important to investigate the role of directors and other persons leading to the collapse especially when the management of the crisis or collapse implies fiscal cost to government, though it is sad the investigation does not include investigating the regulatory role in the entire process, the results may produce a portfolio of good corporate management lessons.

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.

However, sound and stable banking sector demand a mix of appropriate regulatory management, monitoring and timely enforcement on one hand and seriousness with corporate governance by directors anchored in proper management of the economy deliver less stressful lending rates.