ABSTRACT
The main objective of this study is to ascertain the impact of corporate governance on bank performance in Nigeria. The data used for the study were gathered from a random sample of ten (10) banks. The data were extracted from the annual reports of these banks from 2005 – 2014. Pearson Correlation and the regression analysis were used. Regression analysis was used to analyze the relationship that exists between corporate governance and the financial performance of the studied banks while Pearson correlation measures the degree of association between the considered variables. The profitability variables used to measure the financial performance of the banks is the accounting measures of performance such as Return on Equity (ROE) and Return on Asset (ROA). The results of this study revealed a positive relationship between the directors’ equity holdings, corporate governance disclosure and bank performance, while board size, board composition with proportion to non-executive directors and audit committee size have negative significant relationship with bank performance in Nigeria. Director’s equity holdings revealed a positive relationship with bank performance and this shows that individuals with stock ownership who are also part of the bank management have compelling business interest to run them well. Corporate governance disclosure index also shows a positive relationship with bank performance and this shows that bank which disclose more perform better. The results are consistent with previous literature that the correlation between corporate governance and bank performance is still not clearly established and the impact of corporate governance on bank performance in Nigeria is still relatively scarce. The study recommends that board size should not be neglected even though the relationship is not significant statistically, it is important to consider board size when taking financial decisions. The study also suggests that efforts to improve corporate governance should focus on the value of the stock ownership of board members since it relates positively to both the probability of disciplinary management turnover and future operating performance in poorly performing banks. The study evolves two models to examine the relationship that exists between corporate governance and performance of banks in Nigeria. The study developed a unique corporate governance index as its study specific to ascertain the level of compliance by the studied banks.
TABLE OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Abstract vi
Table of Content vii
List of Tables x
List of Figures xi
Appendices xii
CHAPTER ONE: INTRODUCTION
1.1 Background of the study 1
1.2 Statement of problems 3
1.3 Objectives of the study 5
1.4 Research Questions 6
1.5 Research Hypothesis 7
1.6 Scope of the study 7
1.7 Significance of the study 8
1.8 Limitations of the study 8
1.9 Definition of Major Terms 9
1.10 Organisation of the study summary 10
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction 11
2.2 Conceptual Framework 11
2.2.1 Bank Performance in Nigeria 12
2.2.2 Corporate Governance in Nigeria 14
2.2.3 Corporate Governance Actors 16
2.2.3.1 Shareholders 16
2.2.3.2 Debt holders 17
2.2.4 Corporate Governance Mechanism 18
2.2.4.1 Internal Mechanism 20
2.2.4.2 External Mechanism 22
2.3 Theoretical Review 23
2.3.1 Stewardship Theory (ST) 23
2.3.2 Stakeholder Theory 24
2.3.3 Resources Dependency Theory (RDT) 25
2.3.4 Agency Theory (AT) 26
2.3.5 Agency Problem/Cost 27
2.4 Empirical Review 29
2.4.1 Bank Performance and Board Size 29
2.4.2 Bank Performance and Board Composition 30
2.4.3 Bank Performance and Directors’ Equity Holding 33
2.4.4 Bank Performance and Audit Committee Size 34
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction 36
3.2 Research Design 36
3.3 Population of study 36
3.4 Sample Size and Sampling Technique 37
3.5 Data Source 37
3.6 Model Specification 37
3.7 Measurement of Variables 38
3.8 Data Analysis Technique 39
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction 40
4.2 Data Presentation 40
4.3 Data Analysis 42
4.4 Inferential Analysis 43
4.4.1 Pearson’s Correlation Coefficient Analysis 43
4.4.2 Regression Analysis 47
4.5 Hypotheses Testing 48
4.6 Discussion of findings 51
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction 56
5.2 Summary of Findings 56
5.3 Conclusion 57
5.4 Recommendations 57
5.5 Contributions to Knowledge 58
References 59
LIST OF TABLES
Table 4.1 Level of Corporate Governance Disclosure
Index of Listed Banks 41
Table 4.2 Descriptive Statistics for model 1 and 2 42
Table 4.3 Pearson’s correlation coefficient matrix for model 1 44
Table 4.4 Pearson’s correlation coefficient matrix for model 2 45
Table 4.5 Regression Result
for ROE and ROA> 47
Table 4.6 Coefficient model for ROE 49
Table 4.7 Coefficient model for ROA 49
LIST OF FIGURES
Figure 1.1 Corporate Governance Mechanism 19
Figure 2.2 Agency Theoretical Perspective 28
APPENDICES
Appendix I: Sampled Banks, Data Collected and their
Corporate Governance Disclosure check list 69
Appendix II Corporate Governance Disclosure Issues 79
Appendix III Comprehensive Result of Regression
Analysis 81
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Corporate governance has become a most topical issue in the modern business world today. Financial institutions around the world, irrespective of the size, are concerned about financial performance, increasing profitability and shareholders’ return is usually a main concern.
Corporate governance has been defined as the way by which an organization certifies a fair return on the investment of its owners or shareholders and also meets the expectations of other stakeholders (Johnson & Makus, 2001). It is the means of directing and controlling the affairs of a business so as to protect the rights of all stakeholders (Sullivan, 2009). Corporate governance is perceived by the narrow view as the matter relating to shareholders protection, suppliers of finance to corporation, management efficiency, agency problems relating to economic theory, roles of board of directors, independence of external meetings etc. (Oyejide & Soyibo, 2001 and Asekunowo, 2006).
From the foregoing, corporate governance can then be seen as the process of protecting shareholders’ rights. The shareholders have zero tolerance for poor performance. It is posited that the product of good governance is good performance (Tandelilin, 2007; De Andres, 2008; Aebi, Sabato & Schmid, 2010; Cunliffe, 2011)
The worldwide financial crisis of 2008, which began in the United States, was attributable to United States banks’ excessive risk-taking. Consequently, for the people’s attention to be drawn to the consequences of agency problem within banks and to control such risk, certain statements were made by bankers, related authorities and officials of Central Bank highlighting the importance of effective corporate governance in the banking industry since 2008 till now (Bharwani & Henry, 2010; and Hatch & Chung 2012). Emphasis is not just on how well the organization succeeds in its profitability goal, but how well it is managed, run and internally regulated, both formally and informally (Parker, 2006). Inotherwords, any similar crisis occurred or may occur in the future might be explained to be the result of bank governance failure.
In Nigeria the collapsed banks in 2008, which were believed to be run efficiently or on sound policy, demonstrate that there will always be discrepancies or misalignments between the various organizational stakeholders’ interests (Sanusi, 2010). Therefore, managing these conflicting interests to produce mutually satisfying outcomes for all stakeholders is at the hub of the good corporate governance.
Corporate governance issue has been given the front burner status by all sectors of the economy. The government set up the Peterside Committee on Corporate Governance in public companies through Securities and Exchange Commission (SEC) in its effort to ensure good corporate governance. A sub-committee on corporate governance for banks and other financial institutions in Nigeria was also set up by the Bankers’ Committee. This is in recognition of the vital role of corporate governance in the growth of financial sectors (Okeke, 2006).
Financial economists like Aebi, Sabato & Schmid, (2010) have been concerned with ways to deal with the problems which results from conflict of interest between equity owners and managers. The literature emanating from such efforts has grown and much of the econometric evidence has been built on the theoretical works of Mallon (1980), and Newman (1984).
Daniel and Morgan (1998) acknowledged that the principal-agent theory which was also adopted in this study is generally considered as the starting point for any debate on the issue of corporate governance. The governance mechanisms as identified in agency theory such as board size, board composition, directors’ equity holding have been proposed to ameliorate the principal-agent problem between managers and their shareholders (Muktar, Gerkings & Butt, 2003). Some studies have focused on banks’ corporate governance (see Broad, 2013; Capiro, Leaven, & Levine, 2007; Drabenstott & Tsai, 2013). This study focuses on banks operating in Nigeria as a developing country so as to provide empirical evidence on the impact of corporate governance on bank performance.
1.2 Statement of the Problem
Corporate governance is particularly important in the Nigeria Banking Industry because of the past financial failures, frauds and questionable business practices which had adversely affected investors’ confidence. The deterioration of the banks’ asset portfolios, largely due to distorted credit management was identified to be the main structural sources of the crisis (Kashif, 2008 and Sanusi, 2010). To a large extent, this problem resulted from poor corporate governance in the country’s financial sectors.
In Nigeria, there was lingering distress in the banks due to inadequate supervisory structures and issues of official recklessness of the managers and directors, while the industry was notorious for ethical abuses (Akpan, 2007). As a result of the manifestation of weak corporate governance inform of poor internal control systems, absence of risk management processes, excessive risk taking, disregard for cannons of prudent lending and insider abuses, fraudulent practices remain a worrisome feature of the banking system. Poor corporate governance was identified in almost all known instances to be a major factor of bank distress in the country. This view was supported by the Nigerian Security and Exchange Commission (SEC) in April 2004 in a survey which shows that corporate governance was at a basic stage, as existing corporate governance codes is recognised by only about 40% of quoted companies including banks (Soludo, 2004).
The year 2009 recorded series of cases of accounting improprieties in the Nigerian
Banking Industry (example, Oceanic Bank, Afri Bank, Union Bank, Fin Bank and Spring Bank) and this was due to the board of directors’ lack of vigilance in their oversight functions, the board relinquishing control to corporate managers who pursued their own self-interests and the board being negligent in its accountability to stakeholders (Kriesel & Uadiale, 2010).
Prior studies / researches conducted to ascertain the relationships between different aspects of corporate governance and its impact on the banks’ financial performance yielded mixed results. Some studies established that smaller board size leads to higher performance, (Daniel, 2000; Muktar, Namara & Usman, 2008; and James & Okafor, 2011); others show that the better the performance when a higher number of directors sit on the board (Cooper, 2006; Adams & Mehran, 2010). Jonker & Mills (2001) argued to the contrary that the significance of board size and bank performance relationship is sensitive to the estimation methods used.
Pearce & Zahra (1992) and Ogus (1998) also discovered that boards of directors dominated by outsiders have better performance while some researchers find no such relationship in terms of accounting profits or firm’s value. This study therefore seeks to contribute to the debate by examining the impact of corporate governance on financial performance of banks in Nigeria.
Among the empirical studies on corporate governance are the studies of Muktar, Namara & Usman (2008) and Okeke (2006) that studied the corporate governance mechanisms and firm’s performance. This study seeks to ascertain the code of corporate governance level of compliance in Nigerian banks. Some studies developed corporate governance index but this study built a unique corporate governance index as its study specific. This study therefore, seeks to examine the impact (if any) of corporate governance on performance of banks in Nigeria.
1.3 Objectives of the Study
The main objective of this study is to determine the impact of corporate governance mechanisms on the financial performance of banks in Nigeria. The specific objectives are to:
i. examine the impact of board size on return on equity of banks in Nigeria;
ii. find out whether the impact of board composition determine on return on equity of banks in Nigeria is significant;
iii. examine if the impact of directors’ equity holding on the return on assets of banks in Nigeria is significant;
iv. ascertain whether the impact of the level of corporate governance disclosure on return on equity of banks in Nigeria is significant; and
v. determine the relationship between audit committee size and return on assets of banks in Nigeria.
1.4 Research Questions
The study would examine the following research questions:
i. To what extent does board size impact return on equity of banks in Nigeria?
ii. Is the impact of the proportion of non-executive directors on return on equity of banks in Nigeria significant?
iii. Is the impact of directors’ equity holding on return on assets of banks in Nigeria significant?
iv. Is the impact of the level of corporate governance disclosure on return on equity of banks in Nigeria significant?
v. To what extent does audit committee size affect return on assets of banks in Nigeria?
1.5 Research Hypotheses
The following hypotheses are formulated and tested:
H01: Board size has no significant impact on return on equity of banks in Nigeria;
H02: The proportion of non-executive directors has no significant impact on return on
equity of banks in Nigeria;
H03: Directors’ shareholding does not significantly affect the return on assets of banks in Nigeria;
H04 The level of corporate governance disclosure does not significantly affect return on equity of banks in Nigeria;
H05: There is no relationship between Audit Committee size and return on assets of
banks in Nigeria;
1.6 Scope of the Study
The study focuses on corporate governance and bank performance in Nigeria. The data used for this study were secondary data derived from the published financial statements of the ten (10) selected banks from 24 banks listed on the Nigerian Stock Exchange (NSE) between the ten (10) years period of 2005 to 2014. Corporate governance is proxied by board size, director’s equity holding, corporate governance index and board of directors’ composition as the independent variable while financial performance is proxied by return on equity and return on asset as the dependent variable.
1.7 Significance of the Study
The research study is of great benefit to the bank regulators, other relevant stakeholders, investors, academics, business practitioners, and the general public as it explains the impact of corporate governance on the financial performance of banks. This study provides an insight to bank regulators into understanding the degree of compliance by banks reporting on their corporate governance to different sections of the codes of best practice and where they are experiencing difficulties. The study is of great value to boards of directors who will use the information provided to benchmark the performance of their banks with that of their peers.
This study provides investors with knowledge on how their investments with the financial institutions are being managed and a decision whether to invest more or not. Moreso, the study provides future researchers with an alternative summary measure and the achieved result will also serve as a data base for further researchers in this field of research.
1.8 Limitations of the Study
a. Time: Limited time was one of the major difficulties encountered in this research study. One would have expected that a research of this nature and magnitude should take at least not less than 10-12 months. But considering the status of the researcher as a student with a job and family to be bothered with, the time frame could not have been sufficient.
b. Inadequate Library Facilities: Lack of adequate library facilities also contributed its part of the setbacks on this research study in some ways. The library is meant to provide at least sufficient if not adequate literature materials. But this was not the case, as the researcher had to contend with the problem of out sourcing the internet.
c. Financial Constraint: The hash economic condition in Nigeria has it’s negative toll on the researcher’s financial potency. The planned estimates of funds needed for this research were not met. This is as a result of the fact that the scope (in terms of volume, data sourcing, sample size and literature materials) were limited to the extent which the available finance could effectively cover but this study was completed through borrowing from a corporative society.
Despite these limitations, we equally concluded this research study through the use of secondary data which were generated from the respective audited financial reports of the available banks.
1.9 Definition of Major Terms
For this research purpose, the underlisted terms will be defined as it is applied to the study.
1. Board Composition: This has to do with the disparity between inside and outside directors, and it is usually expressed as the percentage of outside directors on the board.
2. Board Size: This represents the total number of directors on the board of any corporate organization both executive and non-executive directors. It is very important for an organization to determine the ideal board size because the quality and number of directors in a firm influences the proper functioning of the board and hence corporate performance.
3. Return on Assets: This is expressed as a percentage of a firm's profitability, equal to a fiscal year's earnings divided by its total assets.
4. Return on Equity: This shows how well reinvested earning is used by an organization to generate additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but before common stock dividends) divided shareholder’s equity, expressed as a percentage.
5. Agency Theory: Agency relationship occurs when “one or more persons (principal) engages another person (agent) to carry out some functions on their behalf, which involves delegating some decision- making authority to the agent”.
1.10 Organization of the Study
This research study is organized into various chapters. The logical organization of the study gives it uniqueness and makes it very simple and clear for readers and researchers. The orderliness is as follows:
Chapter one talks about the introduction to the investigation. Also included in this chapter is the statement of the research problem, objectives of the study, the research hypotheses, scope of the study, significance of the study and definition of terms among others. Chapter two talks about the various literature reviews related to the study. Here, emphasis is on the conceptual, theoretical and empirical reviews of literature.
Chapter three talks about the research methodology used in the study.
Chapter four covers the data presentation and analysis of various secondary data used in the study while chapter five summarizes, concludes and makes recommendations for the study.
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