On Monday July 4, 2016, the Central Bank of Nigeria (CBN) released a Press Statement on Skye Bank to inform the public of its decision to effect key changes on the board and management of Skye Bank Plc because the bank had fallen short of minimum thresholds in critical prudential and adequacy ratios. The statement further revealed that Skye Bank Plc had earned a permanent feature at the CBN lending window and that the bank’s liquidity and Non-Performing Loan (NPL) ratio had been below the required thresholds for some time. In an obviously shocking twist, a reliable financial analyst reporter, nairametrics.com published a damning report showing the huge Non-performing loans directors of Skye Bank had granted themselves. According to the report, NPL of directors accounted for 59.34% of the entire NPL on the balance sheet. This is a huge failure in corporate governance and regulatory oversight considering the fact that there ought to be independent directors, audit committee, and risk committee.
Since the incidents of Enron, WorldCom, Arthur Anderson, Lehman Brothers and other notable corporate failures, there have been efforts across the globe to improve corporate governance and check infractions that are detrimental to the interest of companies and their stakeholders. In this regard, Nigeria has made some effort particularly in the banking industry following consolidation of banks in 2005. The Central Bank adopted Code of Corporate Governance for Banks in 2006 and revised same in 2014. However, the effect of these mandatory codes is yet to be felt in the system in view of the latest corporate failure by Skye Bank Plc.
In 2011, the Federal Government of Nigeria nationalised three banks through Asset Management Corporation of Nigeria (AMCON) in a bid to rescue the affected institutions from imminent collapse. After a period of intervention by AMCON to stabilize the affected banks, they were sold to preferred investors who were existing financial institutions and which have now taken over their operations and management. Incidentally, Skye Bank Plc successfully acquired erstwhile Mainstreet Bank Ltd which itself acquired the assets and liabilities of defunct Afribank Plc, one of the three banks rescued by AMCON. The management of Union Bank Plc was replaced with interim management and fortunately, Union Bank Plc was commendably rescued by the Funke Osibodu led management team. A few other banks like Intercontinental and Oceanic were acquired by existing financial institutions. In all of the aforementioned cases, there was a huge loss in shareholder value. This is worrisome for any economy that desires to be taken seriously by investors, whether local or foreign.
Unfortunately, it appears that the embarrassing cycle of corporate disasters in Nigeria continues unabated. The reason for this, in my view, is that those who are responsible for the corporate disasters which always lead to huge loss of shareholder value never really get penalised or punished for their deliberate acts of recklessness, abuse of office and gross mismanagement of funds. The existing corporate laws do not seem to provide any tough sanctions to deter people from engaging in practices that lead to corporate failures. In fact, the proposed national corporate governance code leaves much to be desired when it comes to the issue of enforcement and sanctions and there is no clear indication of what to expect where certain infractions occur. The Companies and Allied Matters Act, 2004 (CAMA) also needs review especially with regards to corporate governance related infractions as the law either fails to stipulate penalties or the penalties for offences are simply unrealistic for the present realities. The introduction of Corporate Governance Index by the Nigerian Stock Exchange has also not yielded any tangible result. In fact, it is yet to be fully operational.
In corporate administration, there are two key organs of decision making – the Board of directors and company in a general meeting. The guiding principle of operation is the principle of democracy, therefore the decision of majority shareholders would usually be upheld. Where the board fails to live up to its responsibility, the company in a general meeting can provide checks to ensure that directors carry out their duties. In view of this, the responsibility is now on the majority shareholders of Skye Bank Plc (which is the company itself) to take action against the former directors for their acts of dishonesty and gross abuse of office.
It is against the law for directors to be granted personal loans from a company (See S. 270 CAMA). Where this occurs, the directors who authorised the loan would be liable to indemnify the company against any loss arising therefrom. This implies that Skye Bank Plc is entitled to recover the huge sums which have been recklessly granted to the former directors of the bank. Thus, Skye Bank Plc can sue the former directors to recover all the amounts that have been illegally received as personal loans. This is a civil remedy available to the company.
Furthermore, and this appears to be a more potent approach given that shareholder activism in Nigeria is virtually non-existent; the Economic and Financial Crimes Commission (EFCC) should swing into action and enforce the relevant provisions of the Failed Banks (Recovery of debts) and Financial Malpractices in Banks Act by virtue of S. 7 (2)(c) of the EFCC Act which grants appropriate powers to the EFCC for this purpose. S. 15 (1) (c) & (d) of the Failed Banks (Recovery of debts) and Financial Malpractices in Banks Act provides –
“Any director, manager, officer or employee of a bank who grants, approves the grant or is otherwise connected with the grant or approval of a loan, an advance, a guarantee or any other credit facility to any person in contravention of any law for the time being in force, any regulation, circular, or procedure as laid down, from time to time, by the regulatory authorities or by the bank; or receives or participates in sharing, for personal gratification, any money, profit, property or pecuniary benefit towards or after the procurement of a loan, an advance, a guarantee or any other credit facility from any person whether or not that person is a customer of the bank … is guilty of an offence and liable on conviction to a term of not less than 5 years imprisonment”. In addition to the conviction, the EFCC can obtain court order to have the convicts forfeit assets which are proceeds of crime.
One wonders why it took the CBN this long to identify and proactively address the issue with Skye Bank Plc considering the fact that based on their press release, the issues with Skye Bank Plc have gone on for some time. It may well be that there is need for a shake-up in the CBN as the regulator may be suffering from regulatory capture which is a normal regulatory challenge especially when risk based approach to regulation is adopted. Whatever the case, Nigeria must begin to put in place systems and measures that would forestall continuous recklessness of directors of corporate entities in order to safe-guard the interest of investors and the economy as a whole. As it is, based on the current legal regime, it appears that not much can be done where the corporate entity is not a financial institution. This also needs to be reviewed. The other regulators like Nigerian Stock Exchange and Securities & Exchange Commission also need to improve oversight functions in order to foster healthier public companies.