Business Ethics & Legal Compliance: Anchor To A Good Corporate Governance Practice — “The First Bank Of Nigeria Limited Debacle”

By Boluwatife Onipede

INTRODUCTION

Corporate Governance refers to the system by which companies are
governed. It encompasses the practices and procedures structured to
ensure that a company achieves its objectives while also complying
with all relevant regulations. Aspects of corporate governance
include, the rights of shareholders and other interest groups,
power-sharing between the directors, and how the holders of power
should be held accountable for all their actions. Essentially, poor
corporate governance sets a company up for failure in achieving its
objectives, and an overall collapse of the company, while
shareholders suffer. The overall responsibility to achieve all of
the company’s objectives, and compliance with regulatory directives
lies on the board of directors as they are said to be “the hand and
brain” of the company; they determine how successful the business
will be. This places a lot of expectations on the board, and being
entrusted with such a task, they owe a fiduciary duty to the
company at all times. One of the most recent cases of alleged
mistrust on the part of the board of a company is the First Bank of
Nigeria (FBN) and Central Bank of Nigeria (CBN) story, which shall
be examined in the subsequent paragraphs.

BACKGROUND

Recently, the Banking Industry has been the focus of many
corporate law enthusiasts and the general public alike.
Particularly, the cause for agitation is the Central Bank of
Nigeria (CBN) and First Bank of Nigeria Holdings (FBNH) saga which
has generated a lot of corporate governance questions.

ON the 28^th day of April 2021, in a statement by the
bank’s Chairman, FBN announced the removal of its MD/CEO, Dr.
Adesola Adeduntan and appointed Mr. Segun Shobo as the new MD/CEO;
a decision that set the board of FBN and CBN on a collision course.
The apex bank challenged this decision and released a statement
that the action of the board was taken without due consultation
with the regulatory authority. The crux of the issue that
culminated to the event of the 28^th  was that the
Board of FBN had repeatedly disregarded a CBN regulatory directive
via a letter directing the Bank to divest its interest in Honey
Well Flour Mills and Bharti Airtel Nigeria Ltd. It was further
revealed that Honey Well Flour Mills is indebted to the Bank to the
tune of N75, 000, 000, 000. 00(Seventy-five Billion Naira) and the
CBN in its final letter to the Bank issued a 48-hour ultimatum for
Honey Well to repay its debts “failing which the CBN will take
appropriate regulatory measures against the insider borrower and
the bank”. In his press statement, the CBN Governor stated inter
alia:

“The insiders who took loans in the Bank, with controlling
influence on the board of directors, failed to adhere to the terms
for the restructuring of their capital facilities which contributed
to the poor financial state of the bank. The CBN’s recent target
examination as at December 31, 2020, revealed that the insider
loans were materially non-compliant with restructure terms (e.g.,
non perfection of lien on shares/collateral arrangements) for over
3 years despite several regulatory reminders. The Bank has not also
divested its nonpermissible holdings in non-financial entities in
line with regulatory directives.”

One would wonder who the “insider borrower” is, and the answer
is not far-fetched. The Honey Well loans are related to the
Chairman of the FBNH (The holding company to FBN), who is also the
founder and chairman of Honey Well Flour Mills. The Chairman
obtained billions of unpaid loans to finance his business from the
Bank. As a Systemically Important Bank (SIB), the Bank despite its
accumulation of bad, non-performing loans, poor capital adequacy
ratios, had enjoyed regulatory forbearance by the CBN, to enable it
sort out its non-performing loans. In essence, the Apex Bank had
relaxed some of the strictest rules that Banks are ordinarily
mandated to comply with. Rather than put their house in order, the
Board abused this privilege, and the Chairman who was also a
non-Executive Director refused to subject herself to this
regulatory control.

Given the foregoing, the CBN was constrained to sack the entire
Board of First Bank of Nigeria (FBN) and FBN Holdings Plc,
retaining the few officers who were not directly involved in the
collapse of governance and the alleged insider abuse.

Ethical Culture: A Key Corporate Governance
Principle

Many issues of concern have been raised from the scenario, one
of which is the gross violation of some provisions of the Nigerian
Code of Corporate Governance, on the Directors’ duty to act in
utmost good faith and the best interest of the Company.

Generally, under the Companies and Allied Matters Act, 2020 (as
amended), Companies are prohibited from granting loans to
directors, save with some exceptions. Section 296
provides thus:

“(1) It is not lawful for a company to make a loan to any
person who is its director or a director of its holding company, or
to enter into any guarantee or provide any security in connection
with a loan made to such a person as earlier mentioned by any other
person

Provided that nothing in this section applies—

• subject to subsection (2), to anything done to provide any
  such person as mentioned in this subsection with funds to meet
  expenditure incurred or to be incurred by him for the purposes of
  the company or for the purpose of enabling him to properly
  discharge his duties as an officer of the company; or
• in the case of a company whose ordinary business includes
  the lending of money or the giving of guarantees in connection with
  loans made by other persons, to anything done by the company in the
  ordinary course of that business…”

Granted, the Bank carries on the business of lending as one of
its objectives and is allowed to grant loans to its directors.
However, the problem arises where the principal sum and the
interest accruing remain unpaid and un-serviced over a period of
time, and no action is taken by the Company to recover the debt.
Such loan becomes a non-performing loan (NPL). The IMF Financial
Soundness Indicators Compilation Guide, 2006 recommends that loans
are categorized as “non-performing” when payment of the principal
sum and interest are past due by 3 (three) months or more and in
this case, the loan is said to be more than 3 years. The
appropriate action the Board should have taken was to recover the
loan sum and interest.

The trite law is that the powers to manage the affairs of a
company are given to the Board of Directors, and they are
responsible for the monitoring of the overall performance of the
Company. However, this is not an avenue for the directors to
mismanage the affairs of the company or abuse their powers.

As shown by the facts, the focal point that eventually
degenerated was the loan acquisition by the

Chairman of FBN Holdings, Oba Otudeko, and the refusal of the
FBN Chairman and members of the bank’s board to obey the CBN’s
directives. While insider-lending in itself is not illegal, it is
subject to regulations, one of which is that insiders should not
get any special treatment, incentives or privileges not accorded to
regular customers of the bank.

It would appear that the Directors involved clearly did not act
in the best interest of the company, and were in breach of their
fiduciary duty to the company.

The Code of Corporate Governance for Banks and Discount Houses,
2014 (as amended) on responsibilities of the Board and Management,
provides thus:

“The Board is accountable and responsible for the performance
and affairs of the bank.

Specifically, and in line with the provisions in the Companies
and Allied Matters Act (CAMA) 1990, Directors owe the banks the
duty of care and loyalty to act in the interest of the bank’s
employees and other stakeholders.”

The 2018 Nigerian Code of Corporate Governance (NCCG) for
companies directs the Board of every company to develop and
establish mechanisms to foster a strong ethical culture. Principle
25 of the NCCG, provides thus:

“ The establishment of policies and mechanisms for
monitoring insider trading, related party transactions, conflict of
interest and other corrupt activities, mitigates the adverse
effects of these abuses on the company and promotes good ethical
conduct and investor confidence.”

Based on the foregoing, it is apparent that the failure of the
board of FBN to call in a nonperforming loan of Seventy-Five
Billion Naira was inimical to the overall interest of the bank and
its shareholders.

CONCLUSION

The aim of every officers of a company should be to achieve the
objects for which the company was formed, but more importantly
while doing so, to ensure strict compliance with all ethical
standards, best practices and relevant laws. Doing otherwise
reveals a very weak corporate governance structure, and also
exposes the company to operational, financial and reputational
risks. The fiduciary duty the board owes to the company, as well as
compliance with regulatory directives is imperative to business and
non-negotiable. Failure to comply with regulatory laws and
directives come with attendant consequences for the board,
including losing investors’ trust, stunted growth of the company
and stiff penalties against individual officers.

Boluwatife Onipede is an Associate with Pistis
Partners _LLP

By Boluwatife Onipede

INTRODUCTION

Corporate Governance refers to the system by which companies are
governed. It encompasses the practices and procedures structured to
ensure that a company achieves its objectives while also complying
with all relevant regulations. Aspects of corporate governance
include, the rights of shareholders and other interest groups,
power-sharing between the directors, and how the holders of power
should be held accountable for all their actions. Essentially, poor
corporate governance sets a company up for failure in achieving its
objectives, and an overall collapse of the company, while
shareholders suffer. The overall responsibility to achieve all of
the company’s objectives, and compliance with regulatory directives
lies on the board of directors as they are said to be “the hand and
brain” of the company; they determine how successful the business
will be. This places a lot of expectations on the board, and being
entrusted with such a task, they owe a fiduciary duty to the
company at all times. One of the most recent cases of alleged
mistrust on the part of the board of a company is the First Bank of
Nigeria (FBN) and Central Bank of Nigeria (CBN) story, which shall
be examined in the subsequent paragraphs.

BACKGROUND

Recently, the Banking Industry has been the focus of many
corporate law enthusiasts and the general public alike.
Particularly, the cause for agitation is the Central Bank of
Nigeria (CBN) and First Bank of Nigeria Holdings (FBNH) saga which
has generated a lot of corporate governance questions.

ON the 28^th day of April 2021, in a statement by the
bank’s Chairman, FBN announced the removal of its MD/CEO, Dr.
Adesola Adeduntan and appointed Mr. Segun Shobo as the new MD/CEO;
a decision that set the board of FBN and CBN on a collision course.
The apex bank challenged this decision and released a statement
that the action of the board was taken without due consultation
with the regulatory authority. The crux of the issue that
culminated to the event of the 28^th  was that the
Board of FBN had repeatedly disregarded a CBN regulatory directive
via a letter directing the Bank to divest its interest in Honey
Well Flour Mills and Bharti Airtel Nigeria Ltd. It was further
revealed that Honey Well Flour Mills is indebted to the Bank to the
tune of N75, 000, 000, 000. 00(Seventy-five Billion Naira) and the
CBN in its final letter to the Bank issued a 48-hour ultimatum for
Honey Well to repay its debts “failing which the CBN will take
appropriate regulatory measures against the insider borrower and
the bank”. In his press statement, the CBN Governor stated inter
alia:

“The insiders who took loans in the Bank, with controlling
influence on the board of directors, failed to adhere to the terms
for the restructuring of their capital facilities which contributed
to the poor financial state of the bank. The CBN’s recent target
examination as at December 31, 2020, revealed that the insider
loans were materially non-compliant with restructure terms (e.g.,
non perfection of lien on shares/collateral arrangements) for over
3 years despite several regulatory reminders. The Bank has not also
divested its nonpermissible holdings in non-financial entities in
line with regulatory directives.”

One would wonder who the “insider borrower” is, and the answer
is not far-fetched. The Honey Well loans are related to the
Chairman of the FBNH (The holding company to FBN), who is also the
founder and chairman of Honey Well Flour Mills. The Chairman
obtained billions of unpaid loans to finance his business from the
Bank. As a Systemically Important Bank (SIB), the Bank despite its
accumulation of bad, non-performing loans, poor capital adequacy
ratios, had enjoyed regulatory forbearance by the CBN, to enable it
sort out its non-performing loans. In essence, the Apex Bank had
relaxed some of the strictest rules that Banks are ordinarily
mandated to comply with. Rather than put their house in order, the
Board abused this privilege, and the Chairman who was also a
non-Executive Director refused to subject herself to this
regulatory control.

Given the foregoing, the CBN was constrained to sack the entire
Board of First Bank of Nigeria (FBN) and FBN Holdings Plc,
retaining the few officers who were not directly involved in the
collapse of governance and the alleged insider abuse.

Ethical Culture: A Key Corporate Governance
Principle

Many issues of concern have been raised from the scenario, one
of which is the gross violation of some provisions of the Nigerian
Code of Corporate Governance, on the Directors’ duty to act in
utmost good faith and the best interest of the Company.

Generally, under the Companies and Allied Matters Act, 2020 (as
amended), Companies are prohibited from granting loans to
directors, save with some exceptions. Section 296
provides thus:

“(1) It is not lawful for a company to make a loan to any
person who is its director or a director of its holding company, or
to enter into any guarantee or provide any security in connection
with a loan made to such a person as earlier mentioned by any other
person

Provided that nothing in this section applies—

• subject to subsection (2), to anything done to provide any
  such person as mentioned in this subsection with funds to meet
  expenditure incurred or to be incurred by him for the purposes of
  the company or for the purpose of enabling him to properly
  discharge his duties as an officer of the company; or
• in the case of a company whose ordinary business includes
  the lending of money or the giving of guarantees in connection with
  loans made by other persons, to anything done by the company in the
  ordinary course of that business…”

Granted, the Bank carries on the business of lending as one of
its objectives and is allowed to grant loans to its directors.
However, the problem arises where the principal sum and the
interest accruing remain unpaid and un-serviced over a period of
time, and no action is taken by the Company to recover the debt.
Such loan becomes a non-performing loan (NPL). The IMF Financial
Soundness Indicators Compilation Guide, 2006 recommends that loans
are categorized as “non-performing” when payment of the principal
sum and interest are past due by 3 (three) months or more and in
this case, the loan is said to be more than 3 years. The
appropriate action the Board should have taken was to recover the
loan sum and interest.

The trite law is that the powers to manage the affairs of a
company are given to the Board of Directors, and they are
responsible for the monitoring of the overall performance of the
Company. However, this is not an avenue for the directors to
mismanage the affairs of the company or abuse their powers.

As shown by the facts, the focal point that eventually
degenerated was the loan acquisition by the

Chairman of FBN Holdings, Oba Otudeko, and the refusal of the
FBN Chairman and members of the bank’s board to obey the CBN’s
directives. While insider-lending in itself is not illegal, it is
subject to regulations, one of which is that insiders should not
get any special treatment, incentives or privileges not accorded to
regular customers of the bank.

It would appear that the Directors involved clearly did not act
in the best interest of the company, and were in breach of their
fiduciary duty to the company.

The Code of Corporate Governance for Banks and Discount Houses,
2014 (as amended) on responsibilities of the Board and Management,
provides thus:

“The Board is accountable and responsible for the performance
and affairs of the bank.

Specifically, and in line with the provisions in the Companies
and Allied Matters Act (CAMA) 1990, Directors owe the banks the
duty of care and loyalty to act in the interest of the bank’s
employees and other stakeholders.”

The 2018 Nigerian Code of Corporate Governance (NCCG) for
companies directs the Board of every company to develop and
establish mechanisms to foster a strong ethical culture. Principle
25 of the NCCG, provides thus:

“ The establishment of policies and mechanisms for
monitoring insider trading, related party transactions, conflict of
interest and other corrupt activities, mitigates the adverse
effects of these abuses on the company and promotes good ethical
conduct and investor confidence.”

Based on the foregoing, it is apparent that the failure of the
board of FBN to call in a nonperforming loan of Seventy-Five
Billion Naira was inimical to the overall interest of the bank and
its shareholders.

CONCLUSION

The aim of every officers of a company should be to achieve the
objects for which the company was formed, but more importantly
while doing so, to ensure strict compliance with all ethical
standards, best practices and relevant laws. Doing otherwise
reveals a very weak corporate governance structure, and also
exposes the company to operational, financial and reputational
risks. The fiduciary duty the board owes to the company, as well as
compliance with regulatory directives is imperative to business and
non-negotiable. Failure to comply with regulatory laws and
directives come with attendant consequences for the board,
including losing investors’ trust, stunted growth of the company
and stiff penalties against individual officers.

Boluwatife Onipede is an Associate with Pistis
Partners _LLP