The Governor of Central Bank of Nigeria (CBN), Godwin Emefiele, has said weak corporate governance can undermine financial stability by heightening vulnerability of financial institutions to external shocks.
However, the apex bank revealed that it will in the near future conduct studies to evaluate the effectiveness of independent directors on the board of financial institutions since the practice came into being in 2010.
Besides, CBN stated the recent economic recession has shown that the financial industry still harbors weaknesses in governance, exemplified by instances of unclear rendition of returns, corporate governance abuses such as unreported losses, huge exit packages for directors, insider non-performing loans, over-domineering executive management, contravention of regulatory/prudential guidelines and lending limits, poorly appraised credits and weakening of shareholders’ funds, etc. Overall, the huge challenge of “key-man” risk abound in our industry
Emefiele said that the credibility, resilience, soundness and efficiency of the financial industry rest squarely on good corporate governance regime.
He disclosed this at the 12th edition of the CBN-FITC Continuous Education Programme for Directors of Banks and Other Financial Institutions in Lagos.
According to him corporate governance is undoubtedly an essential pillar in financial system stability. It encompasses the protection of minority shareholders, disclosure provisions, the role and structure of the board, complexity on the definition of related parties, compensation structures and much more.
Therefore, he said weak corporate governance can undermine financial stability by heightening vulnerability of financial institutions to external shocks.
He said what is evident from corporate performance of our financial system is that, institutions with sound corporate governance and effective board oversights are more resilient to shocks and operate more profitably.
“Given the crucial financial intermediation role, which banks and other financial institutions play in the economy, corporate governance for financial institutions is arguably, of great importance in contrast to governance in non-financial companies,” he disclosed.
“The challenges we have had in the banking system resulting in regulatory interventions are substantially attributable to governance failure. CBN beyond strengthening its corporate governance code, has issued a Competency Framework for the banking industry in Nigeria and a revised Circular on Approved Persons Regime to ensure that only Fit and Proper Persons are appointed on the boards of financial institutions,” he added.
Emefiele said while appreciable momentum had been attained in corporate governance practices in the Nigerian Banking Industry, we need not rest on our oars as vulnerabilities are still evident.
On its part, the CBN shall continue to deploy more robust and risk-sensitive supervisory framework in line with global best practices in consonance with the rapidly changing environment to nip potential crisis in the bud.
“The role of the independent directors on ensuring sound corporate governance practice is equally significant. The expectation from them is not just their independence from the management of the business but more importantly vast technical and managerial expertise,” he said.