Banking debacle: The way forward

Yet again another spate of a banking debacle. Following the recent fiasco regarding some banks in our country, it can only be stated that unfortunate situations like these can be good if only they are made good.

They can be made good when in the financial turbulence, it is realised that serious changes must be implemented and enforced in our corporate governance laws and practices.

This is not the first time there has been a banking crisis in Ghana. In 2000, the Bank for Housing and Construction suffered a similar fate. One would wonder whether lessons were not learned.

To succeed in the future, we must learn from our past mistakes. However, this goes without saying that the process of investigations must continue regarding all shareholders, directors, key management of all banks involved, the auditors as well as the central bank as there must have been lapses in its supervisory role.

Depending on the outcome of these investigations, restitution of all the misappropriated bailout funds and others must follow. The assets of all who are culpable must be retrieved to defray all the liabilities incurred and the corporate veil where appropriate must also be lifted and prosecution effected where necessary.

In doing this, we will start the process of instilling trust into the system and sanitise the industry.

Flaws in the Application of the Agency Theory

The principals, owners of a company, otherwise known as shareholders appoint or delegate agents known as directors, to ensure the company is run well on their behalf – the basic elements of the Agency Theory.

The board of directors then have a fiduciary responsibility to the shareholders of the company usually described through company law as 'operating in the best interests of the shareholders'.

The board’s objectives such as a desire for high salary or fees, large bonus and status for a director will differ from the shareholder's objectives which is wealth maximisation of their investment. In these instances, we realise that some of the shareholders were also directors and were looking out for large salaries, board fees as well as maximising wealth.

The focus then shifts to self rather than the well-being of the company. What we are faced with is that the agency theory principle has been violated whereby in some cases the shareholders and the directors were one and the same.

There must be a clear separation between shareholders and directors for better governance of accountability, responsibility and trust.

One way to address this situation is that directors and shareholders should look at a more sustainable way of achieving their desired outcome.

Focus should shift from the bottom to the triple line. Bottom line has a singular focus on profits whilst triple line places emphasis on Profit – the earning power of the company; People – the most valued resources and Planet – the community in which it operates i.e. 3Ps.

Having such a broader view invariably instils an integrated thinking approach into the decisions and processes of the company.

This helps those at the helm of affairs to develop a more effective way in achieving sustainable wealth for the institution by driving stakeholders’ wealth up and not only that of shareholders’ which has a short-term effect and usually dovetails into complex governance challenges resulting in financial irregularities.

The lesson here is that the direct application of the agency theory focuses more on stakeholders rather than shareholders.

Long lasting benefits come with the increase in wealth of other stakeholders!

Accountability, Responsibility and Transparency

The Banks and Specialised Deposit-Taking Institutions Act 2016 (Act 930) Section 120, provides that where misconduct through illegal or fraudulent activities by significant shareholders, directors and key management has been proven, the Bank of Ghana is to initiate civil action to claim damages and restitution.

The aim is to ensure that all ill-gained wealth is recovered; be it immovable assets, or liquid assets to reduce the financial exposure created by this very act.

Therefore, BOG is not a toothless bull dog anymore with ACT 930; it can bite! According to a report by Boulders Advisors Limited, various instances of supervisory weaknesses, regulatory breaches, corporate governance failures, insider dealings, and accounting/financial improprieties, among others have been cited as reasons that contributed to the collapse of these banks.

The question is, where do we go from here? I would suggest that an appropriate body conducts a thorough investigation into the issue with the following included in the outcome:

1) any weakness in the entire operations i.e. regulatory, supervisory and compliance identified, should be analysed with effective interrogatory tools such as the 5 Whys model (uses countermeasures rather than solutions to prevent the problem from arising again) to ensure that the cause and effect of each lapse is explored in detail.

The aim here is to strengthen the processes and prevent such disasters from happening or not at this scale in future.

The central bank, Bank of Ghana, must without fail, do an internal assessment to unearth any rot or collusion to ascertain whether the lapses were flouted for personal gain or there were genuine weaknesses in the regulations.

2) any person found culpable of perpetuating any form of crime should be brought to book without fear or favour and the Court must lift or pierce the corporate veil where necessary. When a company is formed, the company assumes a corporate legal entity of its own.

Therefore, the owners of the company and the company are not one and the same. As such there is a ‘veil’ that separates the company from its owners.

There are however, situations such as fraud, misuse and abuse that may cause a court to lift the veil, making the shareholders and the company one and the same person where the individuals will not be allowed to take shelter behind the corporate veil.

There are provisions made in the Banks and Specialised DepositTaking Institutions Act 2016 (Act 930) in Sections 152 to 154. The goal here is to create a deterrence for people to engage in this despicable act.

Following the 1980s and early 90’s savings and loans crisis in the US, more than a thousand bankers were convicted by the Justice Department and jailed.

One key tool that was used was criminal referrals from regulators to government prosecutors. This helped sanitise the system until 2008 when the US was hit with another financial crisis mainly due to deregulation of the financial sector.

During the US financial crisis of 2008, the Attorney General, Andrew Cuomo, led the most aggressive investigation of American International Group (AIG) and other financial institutions in the country with mixed success.

In late 2010, Mr. Cuomo sued the accounting firm Ernst & Young, accusing it of helping its client Lehman Brothers “engage in massive accounting fraud.”

His office also investigated the bonuses that were paid out by giant banks just after the bailout, and he considered bringing a case to try to claw back some of that money.

But ultimately, he chose to publicly shame the companies by releasing their bonus amounts. The lesson here is that a much tougher supervisory and regulatory framework, coupled with a credible whistle blower mechanism would help address some of the challenges we are grappling with now.

In this regard it is instructive that section 57 of Act 930 imposes duties on a director to report in writing to BOG of any event likely to have adverse impact on a bank, the intention of which must be known to the board prior to writing to the BOG.

It is also refreshing to note that BOG has issued a Corporate Governance Directive that prescribes rules regarding how banks should be governed in line with section 56 of Act 930.

Some of the key highlights of the Directive are; term limits for CEOs and Directors, specific reports which shall be regularly made to the Board on non-performing loans, related party transactions, constitution and roles of board sub-committees and management committees.

The BOG has also issued a ‘Fit and Proper Directive’ for shareholders, directors, and key management staff. These directives must be strictly enforced to secure the much-needed sanity in the banks and SDIs. Self-Worth and Not Net-Worth The regulator should provide a proper oversight role.

In my view, ACT 930 has enough principles laid out, but its enforcement must be paramount. An effective whistle-blower system as part of management information systems in the banks should also be established and promoted to provide the necessary checks and balances to ensure effective and efficient running of these financial institutions.

There must also be strong internal control policies addressing various risk exposures. The rules must be enforced without fear or favour. Regardless of an individual’s wealth or societal standing, as a nation, we should be brave enough to hold truth to power, separate societal personalities from corporate responsibilities and do away with pluralistic ignorance.

Scrutiny must be applied by the supervisory body to the directors and managers to ensure that there is a clear separation such that the Agency Theory is applied effectively.

It is also daunting to begin to imagine what hidden skeletal rots awaits us in the microfinance sector nevertheless, we must go there sooner than later.

Finally, in appointing directors, crucial elements in the individual should be sought – a person who can help the company attain its objectives and focus on stakeholder’s wealth (the application of the ‘Fit and Proper Directive’).

Warren Buffet put it succinctly when he said, “In looking for people to hire, look for three qualities: integrity, intelligence and energy. If they do not have the first one, the other two will kill you’.

In the final analysis, reputational gain is worth far more than monetary gain, in other words what matters is self-worth and not net worth.