Telescope: 2009 Financial Services Sector Governance report card Part 1

THE re-awakening of Zimbabwe’s financial services sector rests, to a large extent on a clear demonstration of sound governance of these main pillars of the economy.

Eroded institutional moral authority owing to years of unbridled greed needs rehabilitation. Levels of disclosure of corporate governance practices are one of the key drivers of the imperative image-makeover process. We studied recent integrated corporate reports of financial institutions as published in the media. What is striking about these reports, with respect to corporate governance reporting, is the varying degree of disclosure. Our assessment of the levels of disclosure against current benchmarks of best practice in corporate governance forms the basis of the scorecard.

Board Attendance
The main boards of financial institutions met an average of five times in the past year. According to global best practice, boards are expected to meet at least four times a year. In terms of range, main boards met between four to 12 times per year, possibly a reflection of the operational, capital and liquidity challenges wrought by the dollarisation of the economy, necessitating the councils of the wise to meet often. The same trend was replicated with respect to board committees with the exception of the human resources (HR) related committees. HR-related committees clocked an average indaba attendance rate of three times per year. On a range basis the HR indabas or dares met between zero and four times across the financial services sector. In sharp contrast, committees with a financial risk management remit such as loans and review, audit, assets and liabilities, risk and compliance recorded an average congregation rate exceeding the minimum best practice rate, four.
It would appear that financial institutions are giving greater attention to financial risk issues at the expense of human capital issues judging from the attendance patterns.  
In terms of attendance of individual directors, main boards and financial risk oversight committees recorded good turn-out rates, above 95%. In terms of HR-related committees’ attendance ranged from 0 to 100%, with an average individual attendance rate of 75%.
Attendance is an input indicator. Other areas of governance shed light as to the extent to which this input translated into desired output and impact.

Board composition and structure
The types of committees recorded are main board, audit, HR and nominations, remuneration, credit, loans review, assets and liabilities, risk and compliance, governance and executive. Two types of main board were recorded, the holdings and the divisional or strategic unit. This is in line with best practices and the boards of financial institutions have done well in this respect. However, a quarter of the institutions were explicit in disclosing the difference between the board committees and executive committees with respect to role separation. For instance in one case the loans and review committee was said to be run by senior management and in some cases it was not clear, in terms of the board and senior management role separation.   One institution had a dedicated board committee mandated to focus on governance. We applaud this effort to go beyond current best practice. If only other boards could demonstrate this high level of visionary moral authority.

Independence and diversity
Less than 50% of the institutions attempted to make explicit statements in respect of the deemed degree of independence of their chairpersons and individual directors. Only two institutions identified each director in terms of being an independent non-executive director. Perusing through other parts of the reports in search of information giving evidence of independence yielded very little substance. Only two institutions gave information pertaining to director shareholding levels. In one case the chairperson owning a few thousand shares belonging to the company on whose board they sit, was explicitly referred to as independent. For a very discerning non-expert reader or customer this might appear as a contradiction to the claim of independence. While the shareholding level is too negligible, when placed alongside the entire issued share capital of the company in question to warrant any material breach of independence, it would have been appropriate for the board to give a clear pre-emptive statement to justify the claimed independence, in the interest of the non-experts, in view of the diversity of stakeholders other than the shareholder. Affairs of financial institutions are not of special interest to shareholders only and thus official corporate communication should be alive to this reality.
Tenure of individual directors was not given so as to help readers form an opinion concerning individual director independence. Simply put, the number of years a director has been serving on the board should have been disclosed. Current thinking argues that directors who have been serving on boards for long periods of time tend to become less independent.
Vested interest is deemed to compromise director independence, consequently objectivity. Emerging practice entails giving a detailed record of each director in terms of their shareholding interests in different companies, to unravel any corporate interlocks. This was not the case in all the reports.
One might use space constraints as an argument in favour of brevity and would probably ask readers to get hold of the detailed individual shareholder report. However not all stakeholders are shareholders. It would have been wise for the boards to indicate how interested stakeholders can get hold of such information.
Gender balance is a key corporate governance issue. None of the financial institutions gave explicit statements concerning the state of gender balance. Our analysis and investigation shows that the female representation on the boards was less than half, pointing clearly to male dominance 30 years into political independence. A further investigation shows that boards are dominated by professionals with a finance background.

Board accountability and director enhancement
The buck stops with the board. Only one financial institution disclosed that it made a deliberate effort to inform and educate individual directors concerning their personal liability.
This is not to suggest that other financial institutions did not do the same. They were virtually mum on the issue. It makes a whole lot of difference if a company makes an explicit statement about a certain issue as it gives a clear indication concerning the weight it places on the matter in question. In the same vein only a quarter of the institutions referred to their board charter and how they had applied its provisions.
Although the RBZ requires boards to evaluate the performance of committees and individual directors, less than half of the financial institutions mentioned undertaking the evaluation. It is vital that any board discloses how it is faring in terms of holding
each committee and board member accountable all the time and make disclosure to that effect.

Readers Forum: Do you think that boards of our financial institutions are independent? Visit http://humancapitaltelescope.blogspot.com to share your thoughts.

 

Brett Chulu

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