Introduction
The National Bank of Ethiopia (NBE) has implemented a series of directives aimed at bolstering the capacity and stability of financial institutions amidst global and local economic challenges. Among these directives is the Bank Corporate Governance Directive, designed to introduce stronger governance measures. Its primary goals include fostering balanced risk-taking, enhancing business prudence, and promoting corporate accountability. The ultimate objective is to realize long-term shareholder value while safeguarding the interests of customers and other stakeholders. This directive’s purpose is clearly outlined in its preamble and Article 4, which detail the general principles of banking corporate governance.
Key Updates by the New Banking Corporate Governance Directive
Independence Requirements: At least one-third of the board members must be independent directors. This change is perhaps intended to ensure that the board can make unbiased and objective decisions. In the newly revised banking corporate directive, at least 1/3rd of the board shall be filled with independent directors. This is a huge reform introduced by NBE and it is expected to enhance the neutral and efficient decision making of board of directors in banks.
Inclusion of Executive and Non-Executive Directors: The revised directive allows for a maximum of two bank employees, including the Chief Executive Officer (CEO) and senior executive officers (but excluding the company secretary), to be elected to the board. However, these employees or executive directors cannot serve as the chairperson of the board.
The reason to introduce such changes by NBE may include enhancing the independence and effectiveness of the board by including non-executive directors who can provide oversight and strategic guidance without being involved in the day-to-day operations of the bank. The directive seeks to balance the board composition to ensure diverse perspectives and expertise, contributing to better governance and decision-making in the banking sector of Ethiopia.
Mandatory Inclusion of Female Board Members: the directive seems to aspire to change the trend of male dominant board structure and the revised directive has made it clear that it is mandatory to include at least two female members in every bank’s board of director.
Development in Board Committees: the new directive has also clearly governed and included various board committees, which were recognized as sub-committees in the previous directives, each dedicated with specific area of task within the scope of the board’s scope of responsibility. This might enhance the quality and efficiency of the bank board’s performance in good corporate governance. Thus, the revised directive introduces important updates to the governance framework of banks, particularly in the structure and function of board committees. The Audit Committee, composed of at least three directors at least one of them shall be independent and all the three directors shall be non-employee, is tasked with overseeing financial reporting, internal and external audits, and ensuring timely and accurate disclosures.
The Risk Management and Compliance Committee focuses on identifying, assessing, and mitigating various risks, while ensuring the bank adheres to regulatory requirements. The Nomination and Remuneration Committee is responsible for setting remuneration policies for executives, reviewing director performance, and promoting board diversity by identifying and recommending qualified candidates for directorships and senior management. Additionally, the Credit Committee oversees the bank’s credit risk management policies, approves significant credit proposals, and monitors the overall credit portfolio. These committees are designed to operate autonomously, free from managerial interference, thereby enhancing governance, oversight, and accountability within banks
Remuneration of Directors
The National Bank of Ethiopia (NBE) maintains a strict stance on capping the maximum salary for board members, a position deemed unfair and unreasonable by many. Critics argue that the cap does not reflect the level of commitment and risk undertaken by board members, especially given the substantial profits generated by banks in Ethiopia. Directive No. SBB/67/2018 sets an annual board compensation cap at ETB 150,000. And the new directive doesn’t amend that salary limitation of board directors. Considering the essential role directors play and the possibility of attracting qualified independent directors into the banking governance system, the NBE’s consistent stance in restricting the remuneration of board members is to be put into question and it implies inconsistency.
Conclusion
The new Banking Corporate Governance Directive by the National Bank of Ethiopia introduces significant reforms to enhance board independence, diversity, and effectiveness. Key updates include mandatory independent directors, inclusion of executive and non-executive directors, compulsory female board members, and well-defined board committees. Despite these advancements, the directive maintains a contentious cap on board member remuneration, raising questions about its alignment with modern governance standards and the need for competitive compensation to attract high-quality directors.
Disclaimer: This brief legal update and notes are provided solely for general informational purposes. Million Alemu Legal Services does not assume any responsibility or liability for actions taken based on the information contained in these legal notes. They are not intended to constitute legal advice or a legal opinion, and users should not rely on them as a substitute for professional legal counsel.
This is brief is compiled by Yideg Sale, an Associate at the Million Alemu Legal Services. You can access the full version of Directive No. 91/2024 from SBB/91/2024 BANK CORPORATE GOVERNANCE - National Bank of Ethiopia (nbe.gov.et).