Nigeria's banking sector is undergoing a significant recapitalisation process through mergers, rights issues, and public offers. While the sector is undergoing this significant phase, the importance of strong corporate governance cannot be overstated. This period is critical not only for the survival of individual institutions but also for the stability of the entire financial system. Maintaining robust corporate governance practices is crucial for the sector's stability, investor confidence, and long-term success as this transformation unfolds.
Effective board oversight is essential in safeguarding the interests of shareholders and ensuring that management actions align with the institution's long-term goals. During recapitalisation, boards must be particularly vigilant, as decisions made can have far-reaching consequences. The board’s role in this period includes approving strategic decisions such as mergers and rights issues, which can fundamentally alter the bank’s direction.
However, increased board oversight can slow down decision-making, potentially missing out on favourable market conditions. While this is a valid concern, the risk of hasty decisions that could jeopardise the bank's future outweighs the need for speed. Ensuring an independent and proactive board can help balance these concerns and protect the bank’s long-term viability.
Transparency in financial reporting and disclosures is another cornerstone of corporate governance, especially during periods of recapitalisation. It helps build trust with investors, regulators, and the public by providing a clear picture of the bank’s financial health and strategic direction.
During recapitalisation, banks must disclose the rationale behind mergers, rights issues, or public offers. For instance, when Access Bank and Diamond Bank merged in 2019, Access Bank’s transparent communication about the benefits of the merger helped maintain investor confidence and supported the seamless integration of both institutions.
However, full transparency could reveal sensitive information that competitors might exploit. While this concern is legitimate, the long-term benefits of maintaining investor trust and regulatory compliance far outweigh the risks. Ensuring transparency during recapitalisation strengthens the bank’s reputation and promotes market stability.
Also, recapitalisation often involves significant risks, including integration challenges, cultural clashes, and potential financial instability. Effective risk management is crucial in identifying, assessing, and mitigating these risks to protect the bank’s assets and stakeholders.
Risk management frameworks should be updated to reflect the new realities of a merged entity or a bank with increased capital. Banks that had robust risk management systems in place during the 2009 financial crisis were better equipped to absorb shocks and protect depositors’ funds.
Critics may argue that the focus on risk management can lead to overly cautious decision-making, potentially stifling growth. However, in a sector as vital as banking, erring on the side of caution ensures that the bank remains solvent and capable of fulfilling its obligations. Strengthening risk management during recapitalization is essential for maintaining the bank’s resilience.
Furthermore, ethical leadership is the foundation of strong corporate governance. Leaders who prioritise ethical behaviour set the tone for the entire organisation, ensuring that all actions taken during recapitalisation are in line with the bank’s values and legal obligations.
For example, during the 2004 banking consolidation, some banks faced sanctions due to unethical practices, such as inflating their capital base to meet the new requirements. These actions led to penalties and eroded public trust in the banking sector.
Critics believe that in the high-stakes environment of recapitalisation, there is pressure to cut corners to achieve quick results. However, the long-term damage caused by unethical behaviour far outweighs any short-term gains. Ethical leadership ensures that the bank’s actions are sustainable and that the institution remains in good standing with regulators and the public.
Furthermore, managing with stakeholders, including employees, customers, and shareholders, is vital in maintaining stability and trust during this period. Effective communication and involvement of these groups can help mitigate uncertainties and align their interests with the bank’s objectives.
During the 2011 recapitalisation of some Nigerian banks, institutions that actively engaged with stakeholders were better able to manage the transition, minimising disruptions to their operations. On the other hand, extensive stakeholder engagement can be time-consuming and divert resources from critical tasks. While this is a potential drawback, the benefits of maintaining trust and ensuring smooth operations far outweigh the costs. Effective stakeholder engagement ensures that the bank emerges from the recapitalisation process stronger and more unified.
Ensuring strong corporate governance during Nigeria’s banking recapitalisation is not just a regulatory requirement; it is a strategic imperative that can determine the success or failure of the process. Focusing on board oversight, transparency, risk management, ethical leadership, and stakeholder engagement, will make banks navigate this period with confidence and emerge stronger. As the sector continues to evolve, these principles will remain essential in maintaining stability, protecting stakeholders, and fostering long-term growth.
Research & Advocacy Department,
Chartered Institute of Directors (CIoD),
28, Olawale Edun Road, (Formerly Cameron Road), Ikoyi, Lagos.