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I am delighted to be in your midst today to participate in the 2009 Forum of the Bank Directors Association of Nigeria (BIDAN).  I wish to commend the organizers of this event for selecting a very relevant theme to our present circumstances.  The theme “Building A Great Board: Critical Issues for Consideration” is in tandem with the current Banking Reforms initiated by the Central Bank of Nigeria.

 2.     Let me seek your indulgence to make a few comments on the bank consolidation programme that was concluded barely 3 years ago.  We had great expectations that bank consolidation based on strong capital base and diversified ownership structure would enhance corporate governance in banking institutions.  Hence, a new code of corporate governance was issued in April 2006.  The code sought to remove executive duality, encourage team-work and consensus building as well as accountability.

 3.     However, a few months after consolidation certain unsavory developments emerged which included:

-                     non-adherence to pre-merger agreements

-                     discriminatory treatment of merger partners

-                     board polarization

-                     non-disclosure of true condition of legacy banks

-                     questionable capitalization processes

-                     non-adherence to corporate governance code

Consequently, a lot of energy was dissipated on merger-related issues rather than setting strategic direction and crafting business strategies for some of the consolidated banks.

 4.     As you are aware, the Board is the directing mind of an organization.  It has a primary duty of setting strategic direction.  In this connection, the Board is expected to ensure sound governance by ensuring prudent utilization of resources, effective delegation of authorities, efficient internal control mechanism, sound risk management, sufficiency of capital, etc.

 5.     However, post-consolidation examination of banks revealed certain worrisome practices.  For example, some banks embarked on rapid expansion without developing the capacity to manage such growth. There was the seeming competition for size rather than focusing on asset quality and risk management.  There were evidences of poor financial reporting, insider dealings, use of subsidiaries for non-permissible activities and non-adherence to corporate governance code.  The response to the requirement to develop a risk management framework was inadequate.

 6.     The foregoing observations raised doubts about the effectiveness of Board oversight of their respective banks.  It was against the background that the recent Bank Reform Programme0 was initiated.  Its objectives include ensuring sound risk management, identifying systemic risks and proactively addressing same, ensuring that banks are adequately capitalized in tandem to their risk exposures and ensuring sound corporate governance of banking institutions.

 7.     Perhaps, if Board oversight had been effective, the recent regulatory intervention in five banks could have been avoided.  In keeping with the theme of the 2009 BIDAN Forum, what are the critical issues for consideration?  Without pre-empting the eminent Guest Speaker, I wish to suggest that you consider the following issues:

 7.1   Balancing stakeholders interest:-  Bank managements seem to have focus most on shareholders interest in terms of returns on investment.  Undue shareholder pressure can induce excessive risk-taking that could result in avoidable losses.  It is indisputable, that depositors hold the largest stake in a bank.  Therefore, any action detrimental to depositors’ interest should be avoided.

 7.2   Strong capital base:-  The Board should ensure that shareholders’ fund do not only meet regulatory requirements but continue to grow in tandem with the risk profile of their banks.  There have been incidences of recourse to depositors’ fund for capital projects or branch expansion.  This is objectionable and unacceptable as such expansion should be financed from capital.

 7.3   Effective risk management:- Banking essentially is risk management given the array of risks inherent in banking business.  The Board, apart from formulating appropriate policies, should take active interest in the risk appetite or disposition of their bank’s managements.

 7.4   Devolution of powers:-  It is essential that Board establish committees to oversee critical areas of operation.  It should also ensure that delegated authorities across the bank are not abused.  It is objectionable for a Chief Executive Officer to override the Board.

 7.5   Management succession:-  A proactive Board should put in place a mechanism for smooth management succession.  In particular, the tenure and other terms of appointment of CEOs should be well articulated in a binding contract.

 8.0   In my view, for a Board to be considered great, it must perform its oversight function effectively.  It must set strategic direction for the bank and formulate policies designed to ensure the bank’s long-term viability.  A bank’s performance should not be measured in terms of profitability alone.  The parameters for assessing a great Board would include the bank’s quality of service delivery and contribution to economic development.

I thank you for your attention.

SEPTEMBER 29, 2009