Following an excruciating (and fiscally burdensome) insolvency resolution process, the Bank of Ghana, as part of a broad-based effort to avert another financial crisis in the future (at least one comparable in scale), enacted a slew of directives, most of which have transformed the regulatory landscape, undoubtedly. One of such instruments is the Corporate Governance Directive, 2018. After four years of implementation, questions about whether post-crisis reform has been effective in mitigating the build-up of systemic risks seem to be emerging.
Key Question: Does the current limit on tenure of office for CEOs and the board of directors pose any risks?
Per the Corporate Governance Directive, 2018, CEOs of regulated financial institutions have a total of 12 years in total, made up of 4 years per term to serve as CEOs. Directors, on the other hand, have 9 years, whilst board chairpersons have 6 years, made up of 2 terms, with 3 years per term. Based on the trend I have seen (and this may count only as anecdotal evidence, hence not statistically valid), some of the CEOs, who are owner/managers (aka Founder-CEOs), are struggling to transition out of the role, for reasons that are mostly philosophical and have little to do with succession planning. In most cases, a well-documented succession plan exists, but the idea of a CEO who is also the majority shareholder (mind you), ceding control to someone (most likely, a key management person) with no ‘skin-in-the-game’, is a difficult proposition to swallow. To be clear, there is copious evidence in scholarly literature attesting to the positive impact that founder-CEOs have on business performance and organizational outcomes, including longevity and sustainability of the economic enterprise. In one such study, two Pakistani researchers (Khan and Siddiqui, 2020) developed a matched sample of 91 firms and compared their performance using both accounting and market-based measures. Independent sample t-tests were used to empirically test the opposing predictions. The results indicated a statistically significant difference in performance between entrepreneur-led and non-entrepreneur-led firms. This is the core reason why the CEO tenure limit has become such a thorny issue, albeit hardly broached publicly. The fact that an entrepreneurially-minded CEO who is the majority shareholder of a regulated financial institution has 12 years to build, lead, and finance an enterprise he/she founded, and thereafter step aside to make way for (most likely) a non-entrepreneur CEO type, raises questions about the practicality. The likely result will be (and this is the best-case scenario), a CEO may switch to a non-executive director role (board chair, perhaps), or, worst-case scenario, recede into the background and control board and management decisions as a ‘shadow’ director. The insidious impact that this could have on corporate governance effectiveness, related party risks, reliability of disclosures, etc, cannot be overemphasized.
The dynamics may be a bit different for non-executive directors and board chairpersons, depending on their equity stake in the RFI. Undoubtedly, unlike CEO-founders, the latter’s capped tenure of office may have little or no material impact on governance effectiveness within the broader context of managing strategic risks. So how should micro-prudential policy respond? That’s an open question for stakeholder consultation.