CBK Sorts out Governance, Finally

Once upon a time, an organization was formed with a CEO and a Board. Part of the mandate of the board, as clearly articulated in the formative documents, was that the board would constantly review the performance of the CEO in discharging his CEO duties and in ensuring that the organization achieved its objectives. Well, the CEO undertook his role judiciously. The Chair of the board, however, had great difficulty ensuring that an agenda item of reviewing the CEO’s performance appeared in the Board’s last quarterly meeting. Why? Primarily because the Chairman and the CEO were the same person as stipulated in the formative documents of the organization. As a result, the formative documents created a governance weakness of significant proportions. The CEO could never be questioned or held to account. He could make difficult issues disappear off a meeting’s agenda. He was, in simple terms, a demi-god.

The Central Bank of Kenya, created by Cap 491 of the Laws of Kenya, is that organization. Section 10 of the Act provides for management of the organization through a Board whose duties are well established through subsections (a) through to (g). Thus the Board is responsible under S. 10 (d) for keeping under constant review the performance of the Governor in discharging the responsibility of that office while S. 10 (e) for keeping under constant review the performance of the Governor in ensuring that the Bank achieves its objectives. Let’s call a spade a spade. The Kenya Shilling debacle of 2011 where the currency hit an all time low of 107 to the dollar should have been the current Governor’s career waterloo. At that point, an independent Chairman would have initiated a difficult conversation at board level along the lines of “Prof: What the heck do you think you are playing here, monopoly?” and a visibly agitated group of non-executive directors would have been bobbing their heads in vigorous agreement making clucking sounds of disaffection. As we all know, that never happened and I’d give a month’s salary to be a fly on the wall during the Central Bank board meetings that year and listen to what kind of challenge the five non-executive directors and the Treasury Permanent Secretary at the time gave their Chairman about his “performance in discharging the responsibilities of his other office of Governor” especially when the entire banking industry was up in arms about the reckless statements and irrational actions being made and taken by the irreverent Professor.

Needless to say, the draft Central Bank of Kenya Bill 2014 has now attempted to correct this corporate governance failure. It provides for separation of roles between the Chairperson of the Central Bank of Kenya Board and the Governor. Quite interestingly, the drafters of the Bill have made a notable oversight in that they provide for two appointing authorities for the Chairperson. After the usual convoluted process of interviews and shortlisting of candidates, Section 35 (9) provides that the President shall nominate a chairperson and submit that name to the National Assembly for approval. But skimming further down the Bill, Section 38 (2) provides that the Chairperson of the Board shall be elected from amongst the non-executive directors for a non-renewable period of two years on a rotational basis.

So is the Chairperson to be a Presidential appointee or to be elected by the Non-Executive Directors themselves? The disparity becomes even more glaring as Section 33 (5) provides for presidential intervention again in the event of the death of the Chairperson while in office, wherein the President shall appoint another person.

Confusion aside, the Bill now provides for a formal process of evaluation of the Governor’s performance driven primarily by the Chairperson of the Board. Section 43 (2) (g) provides that the Chairperson shall formally initiate and oversee the annual performance evaluation of the Governor and Board members. It is noteworthy that the Central Bank, which requires banks under its supervision to perform their own annual Board self-evaluations, is practicing what it is preaching by requiring the same of its own board.

The composition of the Central Bank Board requires some review. Under the current Central Bank Act, the Board consists of the Governor, the Deputy Governor, the Principal Secretary Treasury and 5 non-executive directors. Thus, as currently constituted, it has 5 independent directors. The Central Bank Prudential Guidelines require that Financial Institutions should have not less than three fifths of their directors as non-executive and at least one third of the directors should be qualified independent directors. The draft Bill matches this requirement by allowing for a Chairperson, a Governor, two Deputy Governors, the Principal Secretary in the Treasury and five non-executive directors. Counting the Chairman, seven out of ten board members are non-executive directors. It is also notable that at least six members of the board or two thirds, if well appointed, will be independent directors.

Will all of this corporate governance drive some level of transparency and accountability in the country’s bastion of monetary policy? The composition of the Board as envisaged by the Bill speaks to this. But recent events at a Government owned bank where the proposed Managing Director seems to have passed the Central Bank’s Fit and Proper test yet he allegedly has loans in default with the very institution he is supposed to be heading has left a lot of egg on the faces of both the Treasury Cabinet Secretary and the Central Bank Governor. The draft Central Bank Bill does require that proposed directors to the Bank’s Board should be fit and proper, but as recent events have shown us fit and proper is a matter of interpretation despite being clearly defined. Knowing full well that the Treasury Cabinet Secretary will choose the non-executive directors, his recently botched handling of the above mentioned Managing Director recruitment doesn’t engender confidence in his selection criteria. Neither, for that matter, does the subsequent validation process by the National Assembly provide hope that any selection mistakes will be corrected.

Twitter: @carolmusyoka