A literature review of corporate governance

Literature Review

Corporate governance refers to the processes, structures and information used for directing and overseeing the management of an institution (Duncan and Cameron, 2005). A good corporate governance framework establishes the mechanism for achieving accountability between the board, senior management and shareholders, while protecting the interests of relevant stakeholders and they also set structure through which the division of power in the organization is determined (Duncan and

Cameron, 2005). Donaldson and Davis (2003) averred that corporate governance is a system by which corporate entity is directed. It relates to the functioning of the board of the company and the conduct of the business internally and externally. Theoretically, the control of a company is divided into two namely: the board of directors and the shareholders through the annual general meeting.

Unlike in small private companies, the board of directors in a public company tend to exercise more of a supervisory role, and individual responsibility and management are usually delegated downward to individual professional executive directors (such as a finance director or a marketing director) who deal with particular areas of the company’s affairs (McNamara, 2009). Governance is therefore considered as that organ of small or big organizations or even the large society, which is charged with the

responsibility of controlling resources of all types, within the spheres of its influences, and also having power to rule over the human and material resources of the organization or community (Ogundele, 2005). The governing of a business organization is vested in the headship of such enterprise usually the board of directors that formulate policies, to guide the behaviour of the members of the organization and relevant associates of the organization. The objective of corporate governance is to achieve corporate excellence and enhance shareholders’ value, while not neglecting the need to balance the interests of all stakeholders (Chukwudire, 2005). Tricker, (1994) associated corporate governance with managing the organization in the interest of the shareholders. This implies the agency in the context of the separation of ownership and management in corporations. Dress and Lumpkin (2002) noted that modern corporation has the feature of the separation of ownership and management.

But there is a separation between those that own the corporation and those that manage, control, and direct it. It is from those who own the corporation that the boards of directors are elected during the annual general meeting. Duncan and Cameron, (2005) asserted that shareholders at the company’s Annual General Meeting legally appoint the directors. Hence, the directors individually and the board collectively should be responsible and answerable to the shareholders for their activities and practice.

Furthermore, the directors should be willing to act as stewards of the corporation’s assets and consequently work to maintain and enhance the value. Frank and Graeme, (2005) asserted that corporate governance is seen as a set of processes, rules to be complied with, rather than the desired outcome of directors, that is the authority exercised with probity and unquestionable integrity over the corporations’ affair. This means that the corporation has nurtured an opportunity for management to act more in its own interest rather than the shareholders’ interest and this is the genesis of Modern Corporation in the Companies’ Act of 1844. It was not accidental that the 1844 Companies Act required annual accounts and reports which must be audited which will better protect the interest of shareholders.

Effective stewardship relies on justice, trust of the owners in, and in the probity of the stewards (Frank and Graeme, 2005). However, when the managers are not the owners, agency problems drag firm performance in as much as the managers as the decision makers are not the residual claimants of wealth and as such, these managers may have a tendency to act for their own interests (Fama 1980).

Alex Otti explains Diamond Bank’s plan to revive Nigerian economy

 

“Must do better” was the IMF’s recent verdict on the Nigerian banking system. Many reforms were “highly commendable”, it said, but more still needs to be done to strengthen the central bank’s oversight.

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Image: Alex Otti

Dr Alex Otti, CEO of Nigeria’s Diamond Bank, discusses the challenges for Nigeria’s banking sector, the impact of the country’s dependence on oil, and his hopes for the Nigerian economy.

Here’s a transcript of the conversation between Dr Alex Otti and a World Finance representative, Nick:

World Finance: What challenges still remain for Nigeria’s banking sector?

Dr. Alex Otti: The challenges that we face today are more in line with the socioeconomic challenges that the country faces generally. Here we are talking about power, we are talking about order infrastructure, we are talking about challenges with data capturing, reliable data, that is not that valuable. We also have challenges with the security situation. We have challenges with the very long drawn out judicial process and we also have challenges with the security situation. We have challenges with the re-emergence of challenged-risk assets. That’s bad loads. Even though the establishment of the bad bank, AMCON, helped a great deal in soaking up the bad debts of most of the banks. As things stand today, there are chances that banks are going to face hard times again with respect to very poor quality risk assets.

World Finance: And how does Diamond Bank work to minimise the impact of these challenges?

Dr. Alex Otti: Diamond Bank has always tried to navigate the challenges irrespective of the problems that face them.  One of the ways we’ve done that is, in terms of power, we’ve tried to create alternative sources like the solar and the water, and we power some of our branches without necessarily relying on public power supply or generic generators that are expensive. In terms of security, we try to partner the police and the military to ensure that our branches are secured and that our customers are also secured. In terms of data, data-ing, we, because we play very heavily in the small and medium scale enterprises and in retail banking generally, the importance of data can not be over emphasized, so what we’ve done is to partner other organisations, international organisations, like the IFC and EFInA, to help us generate data and research and analytics that will help us in taking decisions that we believe are reliable so that we can avoid bad loans, creating bad loans. We have also tried to set up a system where we also help entrepreneurs and people who play int he retail segment of the market in terms of training, in terms of providing them with other advice for services, so that’s what we’ve done and we’ve done that well.

World Finance: Nigeria’s dependence on it’s energy sector leaves it highly vulnerable to oil price volatility. So how are banks protected from this?

Dr. Alex Otti: The only way to go for a bank is to also begin to think of diversification. Because the Nigerian economy itself and the managers of the economy are working very hard towards diversifying the base of the economy and this is more so where our alternative sources have developed by the US and other importers of oil today. So that they have reduced, the importer for US for instance, which used to be the largest importer of oil from Nigeria, has developed a share gas and today India has become the largest importer of oil. So for the banks, looking at funding the other parts of the economy other than oil and gas is one of the ways to protect itself.

World Finance: So the need to diversify the economy is a real one. Which sectors do you see driving this change?

Dr. Alex Otti: Nigeria is blessed with a lot of economic activities, think of agriculture and statistics has it that seventy percent of the population is employed in the agriculture segment of the economy. Even though a large chunk of that is in subsistence level. But then it has manufacturing, there is solid minerals, and transport, power also, there are so many things to find in Nigeria. I think the problem was that oil and gas took it from the oil and gas took a prominent space because of the higher oil prices. So like you rightly said, if oil prices go down then the economy will suffer so banks like ours are looking at all the sectors other than oil and gas.

World Finance: What is Diamond Bank doing to support these businesses?

Dr. Alex Otti: The loan book of the bank is properly diversified. What we are doing is now to put some energy in supporting the micro and small scale enterprises to reduce the level of unemployment in the country. And also to ensure that the bank is running on on a healthy balance sheet footing.

World Finance: Finally, how do you see the economy developing over the next few years and the vision for Diamond Bank within the economy?

Dr. Alex Otti: The economy has been growing at the rate of over six percent in the last five years so in terms of GDP growth inflation has come down to single digits as of last month and it is believed that it will continue in that frame for the rest of the year. The economy has witnessed foreign revenue of about forty-eight billion dollars and that covers some eleven months of imports so we can safely say that the economy is quite healthy. What is left today is now to link the growth in the economy with developments and that is why we are encouraging support of infrastructure, agriculture, manufacturing, and other areas. So for Diamond Bank we are well positioned to take advantage of the growth that we are expecting to see over the next couple of years. Our strategy is centred on people, and we pride ourselves as having one of the best people in the economy in the bank industry today. And we have strong propositions and processes, technologically driven, that would support the growth that we aspire to see in the next couple of years. So Diamond Bank is very well positioned to take advantage of that and also to support the economy as it grows and becomes one of the power houses by the year 2020.

World Finance: Dr. Otti, Thank You

Dr. Alex Otti: Thank you very much, Nick

What every ‘smart’ banker craves to learn from Warren Buffet

 

Banker

It’s reasonable to argue that the greatest banker in the United States today isn’t a banker at all—he’s an insurance guy.

You might have heard of him.

His name is Warren Buffett!

As the chairman and CEO of Berkshire Hathaway, an insurance-focused conglomerate based in Omaha, Nebraska, Buffett oversees one of the largest portfolios of bank investments in the country.

Berkshire owns major stakes in a Who’s Who list of historically high-performing banks:

  • 9.9 percent of Wells Fargo & Co.
  • 6.8 percent of Bank of America Corp.
  • 6.3 percent of U.S. Bancorp
  • 5.3 percent of The Bank of New York Mellon Corporation
  • 3.7 percent of M&T Bank Corp.

That Buffett made such substantial investments in banks isn’t a coincidence.

If there are two things he appreciates at a visceral level, owing to his experience in insurance, it’s leverage and cycles—the same two qualities that make banking so unique.

This is why it’s worth listening to Buffett when he opines on banking, as he often does in his annual letters and media interviews.

This is from his 1991 shareholder letter:

“When assets are 20 times equity—a common ratio in [the bank] industry—mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the ‘institutional imperative:’ the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.”

Buffett is referring to the havoc wreaked on banks during a pronounced downturn in commercial real estate in the early 1990s, when Berkshire bought 10 percent of Wells Fargo.

His point is that it’s critical for bankers to maintain discipline, especially when all of those around you are not.

Another thing Buffett talks about a lot is competitive advantage.

Here he is in a 2009 interview with Fortune magazine:

“If you’re the low-cost producer in any business—and money is your raw material in banking—you’ve got a hell of an edge. If you have a half-point edge . . . half a point on $1 trillion is $5 billion a year.”

And here‘s a selection from his 1987 shareholder letter flushing out the idea more fully, though in the context of the insurance industry, which faces nearly identical competitive dynamics to banking:

“The insurance industry is cursed with a set of dismal economic characteristics that make for a poor long-term outlook: hundreds of competitors, ease of entry, and a product that cannot be differentiated in any meaningful way. In such a commodity-like business, only a very low-cost operator or someone operating in a protected, and usually small, niche can sustain high profitability levels.”

One nuance about efficiency in banking is it doesn’t just boost profitability directly by freeing up more revenue to fall to the bottom line; equally important is its indirect effect.

This is a point U.S. Bancorp’s chairman and CEO Andy Cecere made in a recent, albeit unrelated, interview about the bank with BankDirector.com

Efficient banks needn’t stretch on credit quality to generate satisfactory returns, which reduces loan losses at the bottom of the credit cycle, Cecere says. And as a corollary, efficient banks can compete more aggressively for the most creditworthy customers, further limiting credit losses in tough times.

It isn’t a coincidence, in turn, that U.S. Bancorp has consistently been one of the industry’s most efficient banks and disciplined underwriters since its transformative merger nearly two decades ago.

And while neither Buffett nor his philosophy came up during the interview with Cecere, Berkshire Hathaway is one of U.S. Bancorp’s biggest shareholders.

A final lesson about banking that can be gleaned from Buffett involves his approach to mergers and acquisitions.

Buffett has said repeatedly in the past that he’d rather pay a fair price for a wonderful company than a wonderful price for a fair company. Also, all things being equal, Buffett has always preferred for existing management to stay and continue on their path of success.

“Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a ‘cheap’ price. Instead, our only interest is in buying into well-managed banks at fair prices.”

It’s a style reminiscent of the uncommon partnership approach to mergers and acquisitions used by John B. McCoy, who dined annually with Buffett, to transform the former Bank One from the third largest bank in Columbus, Ohio, into the sixth largest bank in the country, before later merging into JPMorgan Chase & Co.

In short, although it’s true that most people don’t think of Buffett as a banker, that doesn’t mean bankers can’t learn a lot from his observations on the industry.

CBN refunds N6.8bn excess charges to retail bank customers

 

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The Central Bank of Nigeria, CBN, yesterday, disclosed that commercial banks have refunded N6.8 billion excess charges to their customers in the first half of 2018 (H1’18), the Vanguard reports.

The apex bank disclosed this in its half year, 2018 economic review report.

The CBN report showed that the N6.8 billion excess charges refunded in H1’18 was 6.0 percent lower when compared to N7.21 billion returned to customers in H1’17.

“The Bank received 1,439 complaints from consumers of financial services in H1’18, compared with the 1,141 in the corresponding period of 2017,” CBN noted in the report, adding that the complaints were, mainly, in respect of excess charges, frauds, dishonored guarantees and unauthorized deductions/ transfers, among others.

“A total of 2,451 complaints, including those outstanding from 2017, were resolved in the review period, compared with 1,270 complaints resolved in the corresponding period of 2017,” CBN added.

“Total claims in the review period in local and foreign currencies amounted to N20.5 billion, $163,479.00, £2,889.98 and €32.82, compared with N14.72 billion, $2.42 million and €6,940.00, in the corresponding period of 2017.

“The sum of N6.80 billion, $119,349, £2,889.98 and €32.82 were refunded by financial institutions to their customers, compared with the sum of N7.21 billion, $2.40 million and €6,940.00, refunded in the corresponding period of 2017.”

The compliance examination was conducted on 21 banks in H1’18, to ascertain their level of compliance with consumer protection regulations, particularly the Guide to Charges by Banks and Other Financial Institutions (GCBOFI). The exercise revealed 100.0 per cent compliance in the areas of outward telegraph/SWIFT and related charges of 0.5 per cent, current account maintenance fee charges on savings account and validation of refunds.

“Compliance levels in other areas were: interest rate on executed offer letters (95.3 percent); directives issued after the last examination and other directives (90.0 percent); application of SMS charges (52.4 percent); and outstanding complaints (22.6 percent). Overall, the examination revealed improvement in the compliance level in most areas, while the CBN directed banks to implement specific remedial actions, including refunds to customers, where applicable, in areas of non-compliance,” CBN explained.

JPMorgan expanding to Kenya and Ghana

JPMorgan Chase & Co, the world’s 6th largest bank by total assets, said it plans to expand its African presence into countries including Ghana and Kenya, Chief Executive Jamie Dimon said in an interview on Wednesday.

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“You’ll see us open in some countries we are not in, in Africa you’ll be hearing about some of that stuff,” Dimon told Bloomberg Television on the sidelines of the World Economic Forum meeting in Davos, Switzerland.

Dimon said the bank would target Ghana and Kenya, two countries in which local regulators have previously blocked the U.S. banking giant’s expansion plans, according to media reports at the time.

The announcement follows JPMorgan’s unveiling of a $20 billion investment plan on Tuesday which will see it hike wages, hire more, and open new branches as it takes advantage of sweeping changes to U.S. tax law and a more favorable regulatory environment.

The five-year plan will see the America’s largest bank ramp up overseas investment in addition to its domestic growth plans, after it finished cleaning up troubled mortgages following the 2007-09 financial crisis.

How Bank of America’s retro banking is paying off

Heritage isn’t just about history, Bank of America would love to admit, having started the first nationally licensed credit card program which was previously referred to as BankAmericard. The innovation attracted rapid and widespread adoption; growth and increased sales followed, and sooner than expected, the program was eventually renamed Visa after gaining global acceptance.

Bank of America has, under the leadership of its founder A. P. Giannini, played an invaluable role in transforming the United States. It not only brought a new meaning to general banking but honorably financed important public/private works around California in its early years.

California has been the nation’s symbol of hope and inspiration thanks to some remarkable deals handled by Bank of America.

Giannini was born in 1870 in San Jose. He started a business career as a 12-year-old working for his stepfather who traded fruits, produce and dairy products. His parents were immigrants.

The young man traveled a lot in California and had special interest in networking. He worked directly with small-scale traders, farmers and peddlers, all of who helped him develop a lifelong respect for the working class.

It wasn’t until 17 October 1904, after resigning from the board of a San Francisco bank over its policy of ignoring working-class customers, that Giannini opened Bank of Italy.

The private bank was later renamed Bank of America in a remodeled saloon.

Giannini had loyal and hardworking employees who went door-to-door, marketing their business and products to workers, immigrants, and others disrespectfully ignored by other banks.

Following its actions during the 1906 San Francisco earthquake and fire which destroyed lives and property, Bank of America gained transformation from a new bank to a revered institution. It swung into action after it realized that people needed immediate assistance so, an outdoor desk [a wooden plant atop two barrels] was assembled to serve as an outpost where loans were offered to people without collateral.

Giannini knew people needed to rebuild although they had no money. He perfectly understood the roles banks could play in touching people’s lives and the man dedicated himself to it. This act endeared him to banking.

Although Nations Bank, a Charlotte-based bank acquired Bank of America in 1998, the name was retained except its headquarters which moved to North Carolina.

Three years after the acquisition, Bank of America ranked as one of the world’s largest corporations with an estimated revenue of nearly $53 billion. A profit of $6.8 billion was also reported.

As Fortune magazine rightly explained, no sooner had Brian Moynihan taken the helm of Bank of America at the start of 2010, than the giant lender suffered great losses. Mostly affected was it mortgage portfolio.

From the start, Moynihan championed a highly conservative strategy of growing with today’s customers instead of courting risky new ones. The idea was to attract more business from the folks who already banked mainly with BofA, and let go the customers who got their mortgage, and deposited their paychecks, at the cross-town competitor.

If revenues grew with the overall economy, costs remained flat, and BofA avoided the steep credit losses that plagued it in the past––specifically by sticking with those reliable customers. Moynihan claimed, it could become a money machine. Essentially, he advocated a return the 1950s style, bedrock banking that had been highly successful prior to the financial crisis, and he said, could rise again.

Judging from the third quarter results that Moynihan announced on October 13, what he calls “responsible growth” is finally succeeding, and could be on the cusp of succeeding in a spectacular fashion. Here are key takeaways from the financials and earnings call.

IT’S ALL ABOUT OPERATING LEVERAGE

Moynihan is a demon on expenses. He’s shrunk the branch network, lowered headcount, and promoted digital banking that’s radically lowered the cost of every day transactions. From Q3 2016 to Q3 2017, total expenses dropped by 2.2% to $13.1 billion. Revenues rose just 1% because of a decline in trading, but because costs fell and expense for bad loans improved, BofA’s net income jumped 12%. That combination of moderate revenue growth, few bad loans, and falling costs provides what Moynihan most prizes, “operating leverage” that propels earnings far faster than revenues.

THE CONSUMER BANK POINTS THE WAY

BofA’s biggest business is consumer banking, comprising its branch network and credit card franchise. Its principal strength is its gigantic, low cost base of deposits, cash primarily sitting in checking accounts. On average, BofA pays just 0.04% on each dollar of those funds; it’s those “sticky,” incredibly cheap balances that attracts its biggest shareholder: Warren Buffett’s Berkshire Hathaway. Both the deposit base and the loan portfolio are now growing briskly, generating big operating leverage. In the third quarter, revenues showed year over year growth of 9.2%, and costs dropped 2%, driving pre-tax income almost 14% higher.

Rising interest rates are poised to swell the consumer bank’s profits. BofA reckons that every 1 point increase in short-term rates drives an extra $3.2 billion in pre-tax income. So look for revenues to keep waxing, and for operating leverage to get stronger as Moynihan fulfills his pledge to drive down costs well into next year, then hold the expense line steady thereafter as loans and interest income keep growing.

IT STILL ISN’T FIRST IN CLASS

For the first three quarters of 2017, BofA earned $15.7 billion. On an annualized basis, that $21billion is getting close to the performance that Moynihan predicted in 2011—albeit many years late. But BofA is still trailing its two main rivals, Wells Fargo and JP Morgan Chase. Despite a downtick in Q3, Wells’ quarterly earnings have outpaced BofA’s. And for the first nine months of the year, JP Morgan booked net profits of $20.3 billion 29% more than BofA.

Hence, BofA still has plenty of catching up to do. What’s impressive is how far it’s already come, and the potential of deploying an incredibly low cost deposit base––think of manufacturer with minimal cost-of-goods-sold––in a time of rising loans and rates.

In fact, BofA recently reached a milestone even its fans couldn’t have predicted. Its $271 billion market cap narrowly exceeds that of Wells Fargo, which held a seemingly insurmountable lead just eighteen months ago. Wells championed a go-go sales strategy that backfired, BofA just kept plodding. Moynihan is proving that building an old-fashioned plodder––updated for the digital age––is the way to go.

HSBC May Lose Its Banking Licence in the US due to Panama Papers Scandal.

There’s fear that one of the biggest banking giants in the world HSBC may lose its US banking licence.

 

This will depend on the reaction from the Oval Office regarding the bank’s role in its overall banking activities on the Panama records. If the US government probes the bank and nails it for illegal activities over the Panama Papers tax leaks, then there’s a great chance that the HSBC will not be spared.
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