Stakeholder interests ignored in ZABG plan

Dr Alex T Magaisa

AFTER Reserve Bank governor Gideon Gono’s proposal at the end of October 2004 to merge banking institutions currently under curatorship into the Zimbabwe Allied Banking Group (ZABG) c

onglomerate, I argued in an article published in this paper that the success of that plan was dependent on a number of factors.

Chiefly, I argued that it depended on whether the ZABG was properly designed and equipped for the task in light of the legal and economic environment. At the time, the governor confidently announced that the ZABG would be operational from the beginning of January this year.

This has not happened. It is time to reflect upon the situation and consider why the promise has not been fulfilled and what lessons may be learnt for the future.

Firstly, while in principle there was nothing particularly wrong with the idea of

pursuing the merger of banks to preserve assets, save some jobs and restore confidence in the market by protecting depositors and creditors and reducing systemic failure, insufficient attention was paid to the reality that this is a process, not an event. As such, the authorities were too hasty in making ambitious promises about the commencement of the bank operations.

This process in fact requires considerable time, effort and patience because several things need to be accomplished, not least the setting up of a proper legal framework that recognises the rights of key stakeholders. Setting unrealistic targets, as the RBZ did in this case, has only served to do what they sought to avoid — reduce confidence in the market by creating confusion and uncertainty.

Secondly, one of the key elements in a merger process is the carrying out of due diligence by the relevant professionals. It is important to identify the asset base and crucially the size of the non-performing loan problem in individual institutions. This is vital because some institutions may have a huge NPL problem which will inevitably have debilitating effects on the rest of the group. Therefore, it requires a proper audit, preferably categorising the institutions according to their capitalisation requirements or NPL burden with the result that those that have no reasonable prospects should be allowed to go into liquidation.

In my opinion, the lack of due diligence was at the heart of the problem in the merger of CFX Merchant Bank and Century Bank at the end of last year. It is inconceivable that with due diligence having been done properly, the merged entity would have collapsed so soon after celebration of its birth. In that case, the professionals who were responsible for due diligence failed in their duty and could potentially face legal action from aggrieved stakeholders. Here I must point out that, it is the failure to take legal action by concerned stakeholders that breeds a culture of complacency among key players in the corporate sector.

On the other hand, one can refer to due diligence having been carried out properly when Old Mutual withdrew from merger talks with Trust Bank during early 2004. Therefore, in respect of the ZABG, the crucial question is whether the responsible authorities have carried out the necessary due diligence to ensure that they do not end up with a replica of the CFX debacle.

Hard as it may be to accept, not all ailing banks can be merged successfully and some will have to be excluded if their inclusion will jeopardise the whole group. There might also be room for separate mergers compared than creating a huge conglomerate which will be hard to manage and integrate, given the divergence of management cultures and operational systems.

The third issue concerns compliance with the legal requirements. At the time of the announcement of the proposal, the necessary legal instruments were not set up. This was a gross miscalculation on the part of the RBZ because the enforced merger of banks has the potential to affect the rights of various stakeholders all of whom may take legal recourse to protect their rights, hence derailing the plan.

It is curious that even though the Troubled Financial Institutions Resolution Bill was passed by parliament, it had to wait for President Mugabe (who was on holiday) to be signed into law, even though Vice-President Mujuru was the acting president during the relevant period. Given the urgency and importance of the situation, there is no good reason why acting President Mujuru could not exercise the presidential powers she held at the time.

Additionally, the merger impacts on the rights of shareholders, employees and creditors who include small depositors. It has been reported that shareholders are considering taking legal action to protect their rights in their investments.

On the face of it, one can see why shareholders would question the nationalisation of their investments which might be contrary to Section 16 of the constitution which protects property against compulsory acquisition.

However, questions are also bound to be asked of these shareholders. In particular, (save for Time Bank which has done so), why did they not challenge the placement of their institutions under curatorship as they are entitled to do under the law?

Secondly, what steps did they take to try to save their institutions? Did they not have at least a moral/ethical responsibility to inject resources to save their institutions? (It looks like some bankers just jumped off and got on with their lives and nothing has been done to recover from them).

Did they not plead for liquidity support and did that support change the state of their institutions? Or were these banks in fact technically insolvent at the time? If the banks were insolvent, any person entitled under the law could apply for liquidation and presumably, after paying off creditors, shareholders would have taken the residue if any.

The controlling shareholder-managers may have some questions to answer, though I must add, it is minority shareholders, who were not involved in the daily management that may have greater cause for complaint. Otherwise greater attention ought to be paid to outside creditors whose rights are at risk in this situation.

The government is taking over on the basis of the liquidity support that was poured into ailing banks last year. Yet in doing so, it is placing itself as a more superior creditor than the rest of the existing creditors who under the law have equal rights to pursue alternative action to protect their rights eg pursue judicial management or liquidation.

The question is whether the government and the RBZ have consulted and taken into account the views of other creditors in this situation. In such situations, creditors could call on the state to give them guarantees that their rights will be protected regardless of how its reconstruction through the ZABG goes. Besides protecting creditors, it will also give a massive incentive to the government and management of the ZABG to perform better.

In addition, there were bound to be concerns about the rights and welfare of employees, being major stakeholders on corporate governance systems. The labour laws protect the rights of employees upon the transfer of their employer from one owner to another. Clearly here, there is a transfer of ownership and control, and it is necessary to ensure that rights of the multitude of employees are given due recognition.

Given the complaints of the employees, this seems to have been the least of the authorities’ priorities when this idea was mooted. The major shortcoming is the lack of transparency in the whole process. The key stakeholders are not being told what is happening and a “top-down” approach seems to be in operation. This is bound to cause problems now and in the future of the organisation.

In conclusion, it is always essential that there is a level of detachment between the supervisor and the supervised entities to ensure independence. The close involvement of the RBZ, the supervisory authority, in the formation of the ZABG is therefore a source of worry given the potential for conflicts of interest.

This is why we have argued before that it is necessary to create an independent and integrated financial supervisory authority. That way, the RBZ could be involved in reconstruction but a different body would be responsible for supervision. Connected to this is the composition of the board and management structures at the ZABG. There is no indication of the process that was used to select and appoint these members. Indeed some of them are coming from the very institutions that went down. The market would have expected change and a demonstration of will to change the culture.

One of the problems cited in corporate governance is that often directors and managers are beholden to the controlling shareholder-managers. Therefore, if the present directors and managers are beholden to the governor of the RBZ or other related authority, there is no difference.

The question that must be asked is whether the governor will be compromised in the supervision of his selected candidates? Alternatively, will the candidates be compromised in their positions as far as their allegiance to the governor is concerned?

These are some questions that will continue to haunt this conglomerate. I maintain that it is as a matter of principle, a fairly good idea but the implementation, structure and operation might prove to be its undoing.

I have referred to only a few of the issues that are likely to derail the plan and indeed cause failure in the long-run, if careful steps are not taken at the earliest opportunity.

Above all, the pursuit of economic interests must avoid infringing on the rights of individual citizens.

-Dr Alex T. Magaisa is a Lecturer in Law at the University of Nottingham. Contact: