Explainer: Should CBN determine bank directors’ tenure?

The Central Bank of Nigeria (CBN) recently reviewed the tenure of executive management and non-executive directors of deposit money banks and financial holding companies.

Nigeria’s apex bank pegged the cumulative tenure limit of executive directors, deputy managing directors, managing directors and non-executive directors across the banking industry at 20 years.

“It is unclear what specific objective the CBN is seeking to achieve with the new rule and the evidence suggesting that such a move will provide the desired result,” said Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria.

The global best practice across various sectors is to prescribe a retirement age for executive and non-executive positions, he said.

“Imposing a limit based on years of experience is likely to have the unintended consequence of depriving the banking industry the much-needed quality experience at the highest level of leadership,” Oyedele said.

For Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, it all depends on the laws applicable in those other countries/jurisdictions.

In Nigeria, the appointment, tenure and removal of directors of companies are spelt out in the Companies and Allied Matters Act (CAMA).

But in the case of banks, there are sector-specific legislations, which limit the application of CAMA, in the CBN Act and the Banks and Other Financial Institutions Act 2020 (BOFIA).

For example, Section 53 of BOFIA states that its provisions will apply to banks, notwithstanding the provisions of CAMA.

Because banks come under the regulations of the CBN, the BOFIA has given the CBN the power to determine the tenure of the board and even remove members of the board of directors.

The central bank has the power under BOFIA to implement corporate governance and issue corporate governance codes for financial institutions under its regulation.

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The recent action of the CBN on the tenure of bank directors is in line with such power, Uwaleke said.

“The central bank is the regulator of the banking industry and can implement policy that it thinks will promote and strengthen the system,” said Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited.

Harvard Law School Forum on Corporate Governance said a growing number of countries, such as the United Kingdom and France, have adopted tenure-related guidelines or tenure restrictions for independent directors. Most countries adopt a comply-or-explain approach to regulating tenure, recommending a maximum tenure for a corporate director between nine and 12 years.

According to the Harvard Law School Forum, in the United States, however, where explicit limits are absent, a recent survey by GMI Ratings, an independent provider of global corporate governance and research, shows that 24 percent of independent directors in Russell 3,000 firms have continuously served in the same firm for 15 years or more.

“We argue that long-tenured directors are superiorly skilled individuals who provide tangible value added to their firms. An extension of tenure length allows directors to accumulate information about past events in the firm and about responses to exogenous market shocks that help firms weather crises and discontinuities. In support of the view that the effectiveness of one independent director is also the result of a long build-up process,” William George, a Harvard Business School professor and independent director, said.

Mandatory term limits are even more unpopular. Seventy percent of directors say their board would not adopt term limits of 12 years or less. Just 7 percent have such a policy in place, and less than a quarter (23 percent) think their board would be willing to adopt it.

“Overtime, banks have evolved and now play a special role in an economy. It is the reason for the compact between the government and banks. So, the term limit placed on board directors in this case is within the purview of the central bank. It is possibly an outcome of local peculiarities to instill corporate governance so that a bank does not implode, owing to bad practices, which will require government intervention,” said an industry analyst who did not want to be identified.

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