Should CBK Introduce Term Limits for Bank CEOs?

Term limits for bank CEOs vary widely across different countries, reflecting diverse regulatory frameworks and cultural norms. While some countries have implemented explicit limits, others rely on market forces or internal corporate governance practices.

Some countries with explicit term limits include Nigeria, where the Central Bank of Nigeria (CBN) has imposed a 10-year term limit for bank CEOs.

In South Africa, the Reserve Bank of South Africa (SARB) has guidelines suggesting a maximum tenure of 10 years for bank CEOs.

On the other hand, the Reserve Bank of India (RBI) has no specific term limits, but it encourages banks to adopt good corporate governance practices, which may include limiting CEO tenures.

Market-based term limits for bank CEOs 

There are countries that rely on implicit or market-based limits to manage term limits. These include United States where there are no explicit federal regulations governing bank CEO term limits, but market forces and shareholder pressure often play a significant role in determining CEO tenure.

In United Kingdom, the Financial Conduct Authority (FCA) does not mandate term limits for bank CEOs, but it expects banks to have robust corporate governance practices in place.

Elsewhere, the European Central Bank (ECB) and national regulators have no specific requirements regarding CEO term limits, but they emphasize the importance of good governance and risk management.

Also Read: Why Bank CEOs Deserve the Millions They Earn as Monthly Salary

In Kenya, the general tenure of bank CEOs varies, but is typically around 5-7 years.

However, there is no specific regulatory requirement for term limits in the Kenyan banking sector.

What this means is that the proposal of introducing term limits for bank CEOs by the Central Bank of Kenya (CBK) is bound to be a complex issue that comes with both potential benefits and drawbacks.

Kenya’s regulatory framework

At the onset, any development of a regulatory framework and implementation of term limits in the Kenyan banking space should be influenced by existing corporate governance standards, market forces and the existing cultural norms.

As this proposal is discussed and iterated, and in addition to developing the regulatory framework, CBK must incorporate at a minimum shareholder preferences.

This is important because taking this route of CEO term limits means the rights of bank boards and shareholders to appoint and decide the tenures of their CEOs is curtailed.

Attempting to usurp the powers of bank boards and shareholders, would be 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. Essentially this would circumvent a fundamental principle of corporate governance.

Are there potential benefits to term limits?

Yes- Term limits can prevent CEOs from becoming too entrenched in their positions, potentially leading to a decline in performance or a lack of innovation.

Knowing their time in office is limited, CEOs may be more accountable to shareholders and regulators, as they will be less likely to engage in risky or unethical behavior.

In addition, term limits can encourage the development of a pipeline of talented executives within banks, as they may be more likely to seek out new opportunities if they are unable to ascend to the top position.

Also, term limits can strengthen corporate governance by preventing CEOs from accumulating excessive power and influence within their organizations.

The flip side of term limits

Are there potential drawbacks that CBK will need to address? I believe so.

First, the frequent changes in leadership occasioned by the term limits can disrupt the continuity of a bank’s strategic direction and operations, potentially leading to instability.

Experienced CEOs often possess valuable institutional knowledge that can be difficult to replace.

Also, term limits may reduce the incentives for CEOs to focus on long-term performance, as they may be more concerned with short-term gains.

If term limits are not implemented carefully, they could lead to an increase in “golden parachute” arrangements, where CEOs receive substantial severance packages upon leaving office.

Maybe a case study might help

Nigeria has been at the forefront of implementing term limits for bank CEOs, providing valuable insights for other countries considering similar measures.

Some of the lessons learned include the importance of setting clear and transparent guidelines for term limits that not only ensure fairness but predictability.

This has to be coupled with transparency, where there is public disclosure of the criteria for determining terms limits.

Also Read: How and Why Kenyan Banks Are Consistently Making Profits

Another key lesson learned is the need for balancing continuity and renewal. This requires implementing effective succession planning strategies that have helped mitigate the potential disruptions associated with frequent leadership changes.

In fact, an initial analysis indicated that CEO term limits 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.

Efficiency and profitability

Could it then be appropriate to argue that the term limits 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?

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

Another key lesson from the Nigerian term limits case study is the need to institutionalize a robust knowledge transfer framework.  This has been defined as a critical lesson where banks ensure a smooth transition of knowledge between outgoing and incoming CEOs, crucial to maintain institutional memory.

In conclusion, ultimately, the decision of whether or not to introduce term limits for bank CEOs is a complex one that requires careful consideration of the potential benefits and drawbacks.

The CBK would need to weigh these factors against the specific needs and circumstances of the Kenyan banking industry.

My take – Consider an approach like South Africa’s that provide guidelines rather than a mandatory term limit like Nigeria. Encourage and require shareholder accountability in balancing continuity and renewal.

If term limits must be set – extend them 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.

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