Friday, February 23, 2018

Why First Citizens board must go


BIG BUY: Philip Rahaman

Mark Fraser

The Attorney General in his recent press conference shifted the blame for the First Citizens situation to the management of the IPO process as well as to the need for management to “take a hard, clinical look to improve control”. 

He also indicated it was “okay” had Philip Rahaman purchased the shares in his own right. To his credit, he characterised the chairperson’s comments on the matter as “clearly injudicious, premature, somewhat prejudicial”. Yet he affirmed that “there is no case for asking any board member to resign”.

The facts are: The IPO management process was circumscribed by the prospectus. It could not be subverted by the team. The share allocation was made on August 30. On December  31, 2013 the board signed the annual report which noted the shareholdings of all parties. They affirmed “the governance system is effective” and that with respect to compliance risk the chain of command ended with the board.

On February 14 the chairperson in response to reporters’ questions defended the purchase of shares as “perfectly legitimate”. In response to a direct question re possible sale of said shares by the employee she affirmed that this was “the employee’s private business”. 

Unknown to the reporter but later disclosed, First Citizens had, on January 14,  2014, breached Rule 604 of the TTSE (a matter that the AG confirms ought not to have happened). Is this due care and attention exercised by any bank chairperson? 

Did the board act promptly once aware? At the very latest, they knew on December 31, 2013. If that is so when was the audit committee advised to act? According to newspaper reports, the CEO had discussions with the employee about his non-compliance with policy. When did this take place? How then could the chairperson be putting such a spin on the story up to a month ago?

Between August 30 and December 31 did the risk committee of the board take the same position as the AG that such a purchase by an employee was okay? In a paper on corporate governance in bank failures in the 2008 financial crisis, it was noted high shareholdings of employees at V-P level increased default risk significantly.  

A banking expert noted in another study, disclosures about the foreseeable risk factors and about the systems for monitoring and managing risks were lacking in such banks. The nature of the First Citizens risk committee membership is instructive to understanding why this may have escaped their scrutiny or understanding. Not one has any banking experience and therefore cannot appreciate that the business of banking is the management of risk.

Apart from one individual who has been in banking at a non-board level, there is nobody on the board with significant banking experience. When one couples that with the intemperate words of the chairperson, it leaves one to wonder about the quality of discourse in the boardroom. It is no small wonder the AG looks to the management for the improvement of controls. In other banks, the maze of complexity in modern transactions requires a board that monitors effectively and gives advice to the management. 

The Walker UK Bank Report of 2009 affirms that “vital chairman leadership skills, if not demonstrated at the time of appointment, might not be readily acquired if the candidate does not already have them…a bank cannot afford to rely on a process of learning leadership on the job”. 

A Wharton scholar said, “Good governance comes down to the quality and character of the people who are the chairpersons and chief executives”. Are we happy with ours? Can we expect better to come at a time when Moody’s tells us the bank will have constrained times ahead? Can we depend on this board to take the institution through the times ahead? Or are we happy that we have a chairman of the board who, like Frank Sinatra, sings “I did it my way”? 

I would hope for the sakes of all of us we are not since the last failure has cost us $20 billion and counting.

Noble Philip

via e-mail