I was surprised and very distressed after reading about the resolution issued by the Central Bank of Egypt (CBE) last weekend setting a maximum of nine years, consecutive or otherwise, for CEOs to maintain their position at banks.
If this period is exceeded, the CEO will continue until the adoption of the annual financial statements by the banks’ auditors. The CBE justified the decision by stating that current conditions have prompted the need for modernising the banking sector and employing younger officials.
Why would the CBE intervene in the bank’s shareholders’ right to appoint whomever they deem fit to achieve their own interests? Is the CBE exercising its patriarchy over shareholders, and does it presume to know their interests better than them?
These were the questions that crossed my mind as I recalled, one by one, the CBE’s resolutions over the past period. I tried to discover a logical explanation for these resolutions, but I have so far been unable to do so.
The CBE has far exceeded the authorities granted to it in the text of Article 43 of the Central Bank, Banking Sector and Money Law, which states: ”Without bias to the authority of the general assembly of the bank, the governor of the central bank shall be consulted on the appointment of the chairmen and members of banks’ boards of directors, as well as the executive directors in charge of credit, investment, portfolio management, and external transactions, including swaps and internal audits.
“The governor shall be consulted on a list of candidates presented by the concerned parties, for submission to the board of directors of the central bank. Following the submission of the issue to the board of directors, the governor of the central bank may ask for the removal of one or more of those mentioned in the previous clause if, through inspection on the banks, it is established that they have violated the safety rules for depositors’ funds and the bank’s assets.
If the requested removal does not take place, the governor may issue a substantiated decision to discharge any of them from his/her work. The concerned party may complain to the board of directors of the central bank against the decision within 60 days from the date of notification.”
Where, in this article, is the CBE’s authority to set a maximum limit for officials outlined? The CBE’s authority is, in the first place, to make sure that candidates for these positions meet the rules of professional competence, integrity and financial soundness without the expansion of the CBE’s authority to intervene in the bank’s decision to nominate whomever it deems appropriate for these positions.
In my opinion, the CBE may be influenced by the results of studies that are applied in global financial markets about the maximum limit for a CEO to hold the position. The most prominent of these studies are the CEO succession planning studies, which include studies for the position of CEO based on companies listed on the S&P 500 index. This index includes the shares of 500 large US financial companies from banks and financial institutions.
If my opinion is true, then this is a disaster, because the economic and legal environment and the business environment are two very different things. Moreover, the size of companies and banks covered by the study outweigh banks and companies in Egypt, resulting in flawed reasoning and invalid conclusions.
Another possibility is that the CBE was influenced by a similar experience in the Central Bank of Nigeria in January 2010. The experience failed when a resolution was issued setting a maximum tenure of 10 years for CEOs in banks. This resolution was based on banking reform in Nigeria after the spread of corruption and abuse of power by CEOs. However, the scenario there is quite different from the conditions of the Egyptian banking sector.
Researchers widely acknowledge that individuals and companies often learn through work and practice. In other words, with more experience, they become more efficient and effective. Therefore, setting a maximum tenure for CEOs contradicts this model. It suggests that CEOs remaining in office after the end of the maximum tenure would lead to a negative impact on the bank, while in reality the opposite is true. On the contrary, encouraging CEOs to stay in office can actually motivate them to make better decisions that will enhance the efficiency of the bank and maximise shareholder value.
The levels of learning and the accumulation of managerial skills may vary from one CEO to another and from one bank to another. In practicality, experimental studies have generally shown that experience and skills are not fixed values. Therefore, the maximum tenure for the CEO position should not be applied uniformly across all CEOs and banks.
Even if we assume that the CBE adheres to imposing the maximum tenure for CEOs, the enforcement of this must vary depending on the conditions and specific characteristics of banks, as well as the performance standards that apply to the officials in this position. For example, standards such as the nature and size of bank’s business, ownership structure, the complexity and size of transactions, the degree of risk associated with the markets where the bank operates and the customer base and banking products should be taken into consideration.
On the other hand, limits imposed by the CBE on the tenures of CEOs are unrelated to the best international practices in corporate governance. For example, the recommendations of both the Organization for Economic Cooperation and Development and the Basel Committee on Banking Supervision do not contain any text about setting a maximum tenure for CEOs or the role of regulators to intervene to regulate this. Instead, the Basel Committee states that the Board of Directors bears ultimate responsibility for the bank’s business and the development of risk strategy and financial soundness, as well as how the bank manages its business.
Finally, I call on the CBE to reconsider its decision and leave it to the general assembly of shareholders to set the maximum tenure for CEOs, while keeping in consideration the need to make better decisions for their own interests and maximising shareholder value.
Hany Aboul Fotouh is a banking expert.