Should there be limits on the tenure of bank CEOs?

11 July 2011

That's the question being posed - and answered - by Deakin's Three Minute Thesis winner, Toni Aburime.

In recent times, bank CEOs have come in for a lot of flack, not just in Australia but around the world - and particulularly in Nigeria where the government has legislated to restrict their time in the job.

And that has provided Deakin University PhD student Toni Aburime with the opportunity to investigate the thorny issue of how long CEOs should stay in their role with Nigerian banks.

It also provided him with a pleasing victory in the final of Deakin's Three Minute Thesis competition.

Toni will now head to Western Australia to compete against other universities in the Three Minute Thesis Final on Thursday, September 29th.

A thrilled Toni said he was glad to have been given the "golden opportunity"  to present  his complex research in a simple way, the essence of the competition.

“I really want to say a big thank you to Deakin University, my principal supervisor - Professor Charles Corrado - my lovely wife, my daughter, and all my mentors and well-wishers, for making this possible,” he said.

“I also must admit that the outstanding research environment at Deakin University has helped bring out the very best in me.

“I feel like one of the lucky ducks I showcased during my presentation.”

Toni said, while his thesis looked at the issue of CEO tenure and the link to bank efficiency in Nigeria, the question he was investigating could be asked of other bank and non-bank CEOs in other countries.

“Although regulating tenure limits is conventional and universal in how countries are governed, it is rather novel in the world of Chief Executive Officers, as their tenure has always been the exclusive preserve of the boards that appointed them,” he said.

“Should CEO tenure limits now be promoted for adoption as a best practice for corporate governance in various countries of the world?”

Toni said the idea for the thesis had been sparked in 2010 when the Central Bank of Nigeria (CBN) announced a fixed tenure policy for bank CEOs in Nigeria.

The new policy meant bank CEOs could only serve a maximum of two terms of five years each (i.e. 10 years).

“As you would expect, the policy raised lots of questions, particularly around the practices of the CBN itself and its governance of Nigeria’s banks; but it also raised other concerns,” he said.

“Firstly, it cut across the rights of banks’ boards of directors and shareholders to appoint and decide the tenures of their Chief Executives.

“The ruling usurped the powers of bank boards and shareholders and showed a gross disregard for the role of shareholders in freely determining who should manage the affairs of their investments and the terms and conditions under which they should continue to do so.

“This circumvents a fundamental principle of corporate governance.”

Toni said another issue was that the policy disregarded CEO experience, which may be a driving force for bank efficiency in Nigeria.

“Indeed, researchers widely acknowledge that individuals and entire corporations often learn by doing, that is, with more experience they become more efficient,” he said.

“Placing a cap on bank CEO tenure in Nigeria negates this paradigm and implies that CEOs remaining in office beyond the cap has adverse implications for the performance of the banks they manage. “

Toni said other issues involved how quickly it took for CEOs to learn and acquire the management skills to do the job and then perform in it, as well as the nature of the tenure ruling itself.

“Must the tenure limit be two terms of five years each? Why not three or four terms of five years each?” he asked.

Toni said his initial analysis indicated that CEO tenure had a detrimental impact on the technical efficiency of banks in Nigeria from the second until the seventh year. Efficiency indicators then recorded significant improvement until about the eighteenth year.

“Perhaps it is appropriate to argue that the tenure of a bank CEO should be extended up to the point where the performance (efficiency and profitability) benefits to be derived from any further tenure extension becomes lower than the costs of the extension,” he said.

“In other words, every bank CEO should exit when the performance ovation is loudest so their banks can keep making satisfactory progress.”

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