The banking sector in Ghana has witnessed the withdrawal of licenses of seven indigenous commercial banks by the Bank of Ghana. These banks were in serious financial distress that they had to be taken over by another bank. UT bank and Capital Bank were taken over by the GCB Bank in 2017 because they were in serious financial distress. The Bank of Ghana in August 2018 created the Consolidated Bank Ghana Limited to take over Unibank, Beige Bank, Sovereign Bank, The Royal Bank and Construction Bank for similar reasons.
Different views about who or what was to blame for the crisis have been advanced, but many commentators agree that senior bankers and the Bank of Ghana had failed to recognize the early signs or ignored the indicators until it was too late. When companies collapse, there is often evidence of poor corporate governance.
Required:
Discuss FOUR (4) ways in which the difficulties faced by these banks may have been attributable to weak or inadequate corporate governance systems. (10 marks)
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Inadequate corporate governance systems
- It is a requirement of good corporate governance that the board of directors should review the effectiveness of the system of internal control (either financial control only or financial, operational and compliance control) and risk management. However, it is quite probable that, in some banks at least, the systems of control were inadequate for their purpose. Perhaps because of the complexity of many aspects of banking, the board of directors might not have had the knowledge or understanding to carry out a sufficient review, with the result that banks were exposed to excessive uncontrolled risk. It would certainly appear that not all banks were fully aware of the business risks that they were taking.
- It is possible that some banks were led by dominant chief executives, board chairpersons and/o majority shareholders, and that the non-executive directors did not act sufficiently well as a counter-balance to the power and influence of the dominant individual or group of individuals.
- Lack of supervisory effectiveness on the part of non-executive directors. A consequence may have been that some banks pursued high-risk strategies without sufficient challenge from the NEDs. This also raises the question about how effective the annual performance evaluations of the NEDs were, and the assessment of what they were contributing to the board and it’s decision-making.
- Transparency in financial reporting and other reporting is another aspect of good corporate governance. The financial statements of major banks are complex and difficult to understand even for many experienced investors. The lack of clarity and transparency in financial reporting may possibly have resulted in a situation where shareholders were not properly aware of the financial position of the banks and the security of their investment.
- Lack of adequate knowledge and expertise of board members to effectively supervise management of the failed banks.
- Ineffective or poor independent scrutiny by external auditors.
- Failure of the regulator (Bank of Ghana) to perform its oversight functions effectively and to supervise the behavior of internal actors.