STUART THEOBALD: On the Money 266

Posted in: Economics, i-Blog on May 16, 2019

Running a bank, you might think, is largely about the numbers. Ratios of capital to liabilities, of non-performing loans to performing ones, of short to long term funding, of provisions to book size. Yet the studies of banking collapses ultimately find explanatory power not in the numbers, but in the people. The report on the collapse of African Bank by advocate John Myburgh released last week is no exception. In it, the outsized personality of CEO Leon Kirkinis looms large over the bank’s fortunes and failure.

Kirkinis was, in the view of Myburgh, guilty of hubris, the “overestimation of one’s own competence, accomplishments or capabilities”. That allowed him to ignore others in the bank who argued that more caution was wise. Kirkinis was described as “extremely charismatic”, “very amicable”, hands-on and likeable. His personality enabled him to talk people around when they raised objections to his decisions for the bank. Kirkinis was right, others were wrong, and most believed it, including himself.

Kirkinis was certainly likeable compared to the usual stuffiness of other bankers. When I first met him 16 years ago it was in African Bank’s open plan executive suite. On first encountering him, he was wearing cowboy boots, hoisted up on his desk, while he leaned back in his chair on the phone in jeans and open-necked shirt. He never read newspapers, he proudly told me, after I’d arrived to interview him for a profile in the Financial Mail. His laughter boomed across the floor, infecting those around him. He believed with the zeal of a convert that the bank was doing good in the world by bringing finance to people who’d not been able to access it before. He was unlike any other banker I’d met.

But Myburgh’s report reveals how this positivity was required of those around him too. In the February before the bank collapsed in August, he emailed a large group of employees telling them that, “We need to find ways to lift the spirits and the energy of the people we lead and grow our unique culture positively” and “Our people need to be led by a committed leadership team that is united in our purpose. Neutrality is not an option.” The optimism-by-fiat approach is nauseating. Actually, what African Bank needed was some good old fashioned banking values that emphasised prudence.

It is striking to draw a comparison of the picture painted to Myburgh’s last report on a collapsed bank, that of Regal Treasury in 2001. The CEO of that bank, Jeff Levenstein, was an irrational tyrant, who yelled at and threatened anyone who challenged him, summarily firing staff at will. Myburgh described his management of that bank as “incompetent and amateurish” adding that “he confused corporate governance with thuggery”.

But while Kirkinis and Levenstein were on opposite ends of the likeability spectrum, the result was the same. They were both convinced they were right and no one challenged them. Perhaps the most egregious example in the case of African Bank was the decision to purchase furniture retailer Ellerines in 2007, which Myburgh shows was made by Kirkinis alone, without even obtaining board approval. It was a devastatingly bad decision that contributed substantially to the bank’s later difficulties. Kirkinis also convinced everyone that the bank was right to only set aside provisions for bad loans after clients had missed four months of payments rather than one as some other banks did. Toward the end he argued that the bank needed to raise less capital than it did and that it could still keep paying dividends, all because he firmly believed things were going to be better in future. His view of reality was clearly rose-tinted.

There has been much baying for blood in the African Bank collapse, but Myburgh does not recommend anyone should be prosecuted. He found the bank was run negligently and recklessly by the board, but that this was down to their incompetence rather than intent. The findings are in that respect also strikingly different to the case of Regal. Levenstein is currently behind bars after being found guilty of fraud and contravening the companies act.

The lessons for the management of banks are clear. No individual should ever be in a position to run a bank unquestioned. The CEO has a job to do, but so does everyone else. A bank needs to have capable and independently minded people, empowered to challenge decisions they don’t believe are correct. Bankers need a constant reality check, a test of whether their reading of the market is correct or not. The board of a bank, particularly, needs to exercise clear scrutiny of management and always act to protect other stakeholders, including depositors, funders and shareholders. A bit of boring, conservative, banking is not too bad a thing.

• Theobald is chairman of Intellidex.

RELATED ARTICLES

STUART THEOBALD: If only we could shrug off labels and base policy on evidence

November 11, 2019

The strands of ideology that shape SA’s political economy are deep. Sometimes we are not even conscious of them. One of the most important is Marx’s theory of history, a vision of the world that... read more

PETER ATTARD MONTALTO: Action, reform, decisiveness needed, but pragmatism in short supply

November 4, 2019

Moody’s has been very clear that it is up to government now to consolidate expenditure and undertake growth boosting reform before February or … or […] read more

STUART THEOBALD: Investors’ eyes are on Ramaphosa over needed reforms

October 29, 2019

What is needed instead is evidence of genuine structural reform; the kind that will make analysts return to their models, change parameters, and deliver to their clients forecasts of better economic... read more