Can corporate governance be blamed for listed bank failure?

One morning in August, 2017, Ghana wakes up to be greeted with the news of the collapse of two indigenous banks UT and Capital banks. The news did not just surprise many in the financial sector, knowing the strides these banks have made over the period, but also sent reminder across the sector on the helpless collapse of Bank for Housing and Construction and Co-operative Bank Ghana Limited in 2000. As if that was not enough, two years later in 2017, the Bank of Ghana (BoG) announces another shocking collapse of five other major indigenous banks Unibank, Beige, Sovereign, Construction, and Royal Banks. It is worth noting that these occurrences are not unique to Ghana alone but its characteristically a global phenomenon. Backdoor in Nigeria, between the year 2000 and 2005, 89 existing banks was reduced to 25 larger, better-capitalized banks (PwC, 2018; Hesse, 2007, OECD, 2006).

The phenomenon has been attributed to several factors including asset securitization, mortgages, bank capitalization, dilution of non-traditional banking activities (DeYoung and Torna, 2013; Berger and Bouwman, 2013). Studying bank failures in 11 East Asian markets, Lin and Yang, (2016) found that weak bank fundamentals largely contributed to bank failure. This included capital inadequacy, low asset quality and liquidity challenges. Additionally, their study fo und undesirable economic conditions (relating to GDP growth rates, inflation rates, and real interest rates) weakened the survival of banks. Berger et al (2016) studied over 300 banks and found that key governance characteristics including ownership and management structure - high shareholdings of lower-level management and non-chief executive officer(non-CEO), increase failure risk of banks significantly. Other studies (including Cole and White 2012; Schaeck 2008) have attributed bank failure to accounting variables such as capital ratios, nonperforming loan (NPL) ratios, earnings among others.

Among these studies, there seem to be the prominence of regulatory inefficiencies and laxity, weak bank fundamentals and accounting variables as the main contributor to the phenomenon of bank failure. The role of corporate governance seems almost absent in the discourse of bank failure. Particularly in the case of Ghana, the recent failure of banks (at an unsubstantiated levels) been attributed to corporate governance failure and laxity of regulatory processes.

Accountability, integrity, efficiency and transparency are critical principles of a good corporate governance system. A good corporate governance system is linked to firm survival. Empirical evidence, however, on the Africa continent is non-existent. This paper reviews how accountability, integrity, efficiency and transparency contribute to banks failure in sub-Sahara Africa, using UT Bank as a case study. Specifically, our analysis of corporate governance-bank failure nexus is based on Mardjonos (2005) framework, highlighting the propositions of failure attributes, fundamental best practice of firms governance, and the area of violations. Table 2 summaries the result. Our findings suggest that earlier to UT Bank Limiteds failure; it largely acknowledged the need for predominant good corporate governance framework to enhance accountability, integrity, efficiency and transparency. These predominant good governance frameworks, however, were superficial to gain legitimacy to access critical resources required for survival for the primary benets of dominating shareholders. Like Enron and HIH, UT Bank violated the key principles of best practice of corporate governance (Mardjono, 2005) and thus, failed. Violation, in this respect, means inappropriate implementation of best practices in pursuance of nancial benets for the majority shareholders. Possible explanations are not far fetch. First, we speculate that the three out of six board members appointed by the majority shareholders are expected to take orders from their benevolent autocrat bosses who double as co-founders. Implementations of these orders during the board meetings, however, are most likely to set aside the prevailing corporate governance rules and in this way, advance and preserve the interest of the majority shareholders. This interpretation is in line with Hofstedes power distance (grade of 80) insight on Ghana, emphasising that subordinates are expected to do what the boss have asked him to without any further justification with the existing corporate governance rules. Second, an alternate explanation of this finding is anchored on the collectivistic society of Ghana (grade of 15). From this point, we expect those three directors mentioned in the aforementioned sentence demonstrate absolute loyalty to their parent, UT holdings and related companies including UT Logistics, UT Properties, UT Collections, UT Private Security, UT Financial and UT Life Insurance, at the expense of over-riding most of the prevailing corporate governance rules and regulations of the bank. Thirdly, the banking industry in Ghana is driven by competition, achievement and success. Here, success is defined as the best in the banking sector. Here too, UT Bank branded itself as award-winning brand from its inception to the grave (see table 1), implying setting aside the prevailing corporate governance rules in pursuance of prestigious awards including best bank of the year and best bank financial performance was highly probable. This interpretation is also in line with Hofstedes Masculine dimension of culture, emphasising that wanting to be the best is the fundamental issue here is what motivates firms and/or people. Finally, supervisory weaknesses on the part of the Central Bank in part contributed to violation of corporate governance failures including regulatory breaches, insider dealings and financial indecencies. This interpretation is in line with the findings of Boulders Advisors Limited.

As a student of corporate governance and an interested party to the banking sector, engage class mates one the following conversation;

1. What Corporate Governance elements was deficient on the collapsed/consolidated banks?
2. What infractions could have possibly caused these deficiencies identified above?
3. What would you have done to correct the deficiencies?