ABSTRACT
This study
investigated the relationship between corporate governance structures and firm
financial performance in the Nigerian banking industry. Other objectives tested
include, to examine the relationship between board size and financial
performance, to investigate if there is a significant difference in the
financial performance of banks with foreign directors and banks, to appraise
the effect of the proportion of non- executive directors on the financial
performance of banks in Nigeria, to investigate if there is
any significant relationship between directors’ equity interest and the
financial performance of banks in Nigeria among others. Pearson’s Correlation
coefficient and regression were employed to analyse the work. The results
showed that there is no
significant relationship between Board
size and financial performance of banks in Nigeria, there is no
significant difference in the means of the financial performance of Nigerian
banks with foreign directors and banks without foreign directors. The
relationship between the proportion of non-executive directors and the
financial performance of Nigerian banks is not significant. The research
recommends that the efforts to improve corporate
governance should focus on the value of the stock ownership of board members, since it is positively
related to both future operating performance and to the probability of
disciplinary management turnover in poorly performing banks. Proponents of
board independence should note with caution the negative relationship between
board independence and future operating performance. Also, banks should be allowed to
experiment with modest departures from the current norm of a “supermajority
independent” board with only one or two inside directors.
TABLE OF CONTENTS
Title i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of Contents vi
List of Tables x
Abstract xi
CHAPTER ONE
INTRODUCTION
1.1 Background
of the Study 1
1.2 Statement
of Problems 3
1.3 Research
Objectives 6
1.4 Research
Questions 7
1.5 Research
Hypotheses 7
1.6 Scope
of the Study 8
1.7 Significance
of the Study 9
1.8 Definition
of Terms 9
CHAPTER TWO
REVIEW OF RELATED
LITERATURE
2.1
Conceptual Framework 12
2.1.1 Concept of Corporate Governance 12
2.1.2 Historical Overview of Corporate
Governance 14
2.1.3 Principles for Corporate Governance 16
2.1.4 Benefits of Good Corporate 17
2.1.5
Corporate Government Codes 18
2.1.5.1
Provision of New Codes that Pertain to Shareholders 18
2.1.5.2 Provision of New Codes to
Directors includes 18
2.1.6 Corporate Mechanism 19
2.1.6.1 Shareholders 19
2.1.6.2 Debt Holders 19
2.1.6.3
Board of Directors 20
2.1.6.4
Management Team 20
2.1.7
Corporate Governance and Banks 20
2.1.7.1 Regulations and Supervision as
element of Corporate Governance in Banks 21
2.1.7.2 Corporate Governance in First Bank
Nigeria Plc 21
2.1.7.3
Corporate in Guaranty Trust Bank 22
2.1.7.4 Corporate in United Bank of Africa 23
2.1.8
Corporate and Financial Performance 24
2.1.9
Performance Proxies 25
2.1.9.1 Return on Asset (ROA) and
Financial Performance 25
2.1.9.2 Return on Equity (ROE) and
Financial Performance 25
2.1.9.3 Earning Per Share (EPS) and
Financial Performance 26
2.2 Theoretical Framework 26
2.2.1 Stakeholders Theory 27
2.2.2 Stewardship Theory 28
2.2.3 Agency Theory 30
2.2.3.1 Agency
Relationship in the context of the firm 32
2.2.3.2 Agency
Problems
32
2.3 Empirical Review 33
CHAPTER
THREE
RESEARCH
METHODOLOGY
3.1
Research Design 36
3.2
Study Population 37
3.3
Sample Size 37
3.4
Data Gathering Method 38
3.4.1
Types and Sources of Data 38
3.4.2
Research Instruments 38
3.4.3
Method of Data Presentation 38
3.5
Model Specification 39
3.6 Data Analysis Methods 40
3.6.1 Content Analysis 43
CHAPTER FOUR
DATA PRESENTATION, DATA ANALYSIS AND
DISCUSSION OF FINDINGS
4.1
Data Presentation and Analysis 46
4.2 Data Analysis 47
4.2.1 Pearson’s Correlation Coefficient
Analysis 47
4.2.2 Regression
Analysis 52
4.3 Test
of Hypotheses 56
CHAPTER FIVE
SUMMARY, RECOMMENDATIONS AND
CONCLUSION
5.1 Summary of Findings 62
5.2 Conclusion 67
5.3 Recommendations 68
REFERENCE
List of Tables
Table
1: Descriptive Statistics for
model 2
46
Table
2: Pearson’s Correlation
Coefficients Matrix for model 1 49
Table
3 : Pearson’s Correlation
Coefficients Matrix for model 2 50
Table 4 : Regression Results for
Panel Data
53
Table 5 : T- Test: Two
Sample Assuming Equal Variances 55
Table 6:
T- Test: Two Sample Assuming Equal
Variances 56
CHAPTER ONE
INTRODUCTION
1.1
Background
to the study
The Nigerian banking environment is a vibrant and
challenging environment and is endemic with systematic governance problems, capacity
constraints and defaulting in compliance and implementation of laws has
inhibited economic growth (Suberu and Aremu, 2012). This requires enhanced
investigations and more detailed reporting of activities. The penalties of
organizational collapse are very expensive for an emerging economy such as
Nigeria (Mohammed, 2014).
Mmadu, (2013) reports that the global economic crisis
and the decline in the value of investment collections of deposits money banks
particularly in Nigeria are due to distorted management and this problem can be
traced to poor cooperate governance. Schjoedt, (2000) as cited in Mmadu, (2015)
also observed that this was a result of the association amongst the financial
institutions, politicians and large sized enterprises. Prior to the
introduction of new prudential guidelines in Nigeria, which culminated in the
consolidation of banking industry; there were about 89 active banks with dull
performances, cases of negligence, reckless managers and directors and the
reign of ethical abuses (Mmadu, 2016).
In Nigeria the issue of cooperate governance gained
importance in the post-structural adjustment program (SAP) era. The country
witnessed a very high rate of cooperate governance code for committee in the
year 2000, whose reports was first to articulate a corporate governance code
for companies in Nigeria. This was followed by a similar code by the central
bank of Nigeria in the year 2000 (CBN,2016) to address cooperate governance
practices in Nigerian banks. However,
lessons from the cooperate
failure and losses in the last few decades have highlighted the role of
cooperate governance pr4actices can play in maintaining viable entities and in
safeguarding stakeholders interest.
The importance of a vibrant, transparent and healthy banking
system in the mobilization and intermediation of fund, for the growth and
development of the economy need not be overemphasized. Worthy of note is the fact that the
level of functioning of the financial sector on the perception and patronage of
the citizens towards its services (Al-Faki, 2016). The situation where the
public loses confidence in the financial institutions’ can result in panic and
consequential financial and economic woes. The absence of confidence in any
organization is attributable to opaque management practices with deleterious
effect on its performance. The measure of performance in this case is not
limited to the financial aspects (turnover and profit) but also customer
satisfaction, employee welfare and social corporate responsibility.
Corporate governance is all about running an
organization in a way that its owners as well as the stakeholders receive fair
return on their investments. It is a vicious circle that links the shareholders
to the board, the management, the staff, and customers and to the community at
large (Clarkson and Deck, 1997). They observed that a company is a separate
legal entity which no one actually owns. A typical firm is characterized by
numerous owners of equity are large in number and an average shareholder
control a minimize proportion of the firm. This gives rise to shareholders no
interest in monitoring managers, who are left to themselves and may pursue
interest different from those owners.
Globalization and technology makes the financial arena
become more open to new products and services
invention. However, financial regulators everywhere are scrambling to assess
the changes and master the turbulence (Patel and Lilicare, 2015). A national
wave of mergers and acquisition has also swept the banking industry. In line
with these changes, the fact remains unchanged that there is need for Nigeria
to have sound resilient banking system with good corporate governance, this
will strengthen and upgrade the institution to survive in an increasingly open
environment (Qi, Wu and Zang, 2000, Koke and Renneboog, 2015 and Kashif 2018).
The academics alike Financial measures have long been used to effectively
evaluate the performance of commercial organization. Most of the corporate
failures that were recorded in Nigeria banking industry are examples of the
risk posed by corporate governance breakdown.
Cooperate governance therefore refers to the process
and structure used to direct and manage business affairs of the company towards
enhancing prosperity and corporate accounting with the ultimate objective of
realizing shareholders ultimo ate desire of maximizing returns on their investment (CAMA Act 1999). Corporate performance is
an important concept that relates to the way and manner in which financial,
material and human resources available to an organization. It keeps the
organization in business and creates a greater prospect for future opportunities.
The overall effect of good governance should be the strengthening of investors’
confidence in the economy of Nigeria.
Corporate governance can also be defined as a system
of checks and balances both internal and external to companies which ensure
that companies discharge their accountability to all their stakeholders and act
in socially responsible way in all areas of their business activity (Solomon
and Solomon, 2004). Corporate governance is therefore about building
credibility, ensuring transparency and accountability as well as maintaining
and effective channel of information disclosure that will
foster good corporate performance. It is therefore crucial that banking sector
observe a strong corporate governance ethos (Rogers, 2018). Rogers (2018),
further opined that corporate governance is about how to build trust confidence
among the various groups that make up an organization.
In Nigeria, among the few empirical feasible studies
on corporate governance are the studies by Sanda and Mukailu and Garba, (2015)
and Ogbechie, (2016) that studied the corporate governance mechanisms and
firms’ performance. In order to address these deficiencies, this study examined
the role of corporate governance in the financial performance of Nigerian
banks. Unlike other prior studies, this study is not restricted to the
framework of the organization for economic corporation and development
principles, which is based primarily on shareholders’ sovereignty. It analyzed
the level financial performance of the listed banks in compliance with code of
corporate governance in Nigerian banks.
1.2
Statement
of the Problem
In Nigeria, before the consolidation exercise, the
banking industry had active banks whose overall performance led to lagging of
customers’. There was lingering distress in the industry, the supervisory
structures were inadequate and there were cases of official recklessness
amongst the managers and directors, while the industry was noted for ethical
abuses (Akpan, 2014). Poor corporate governance was identified as one of the
major factors in virtually all known instances of bank distress in the country. The pre-consolidation
era was characterized by poor organizational governance which manifests in form
of inadequate internal control mechanisms, fraudulent practices,
non-existence of risk management procedures and override of internal control
measures (Mmadu, 2015). Thus, the current investigation focuses on the
relevancy of organizational governance on earnings in the context of the
Nigerian banking sector.
Corporate governance was seen manifesting in form of
weak internal control system, excessive risk taking, override of internal
control measures, absence of or non-adherence to limit of authority, disregards
for cannons of prudent lending, absence of risk management processes, internal
abuses and fraudulent practices remain a worrisome features of a banking system
(Soludo, 2014). This view is supported by the Nigerian Securities and Exchange
Commission (SEC) survey in April 2004, which shows that corporate governance
was at a rudimentary stage, as only about 40% of quoted companies including
banks had recognized codes of corporate governance in place. This, as suggested
by the study, may hinder public trust particularly in the Nigerian banks if
proper measures are not put in place by regulatory bodies.
The Central Bank of Nigeria (CBN) in July 2006,
unveiled new banking guidelines designed to consolidate and restructure the
industry through mergers and acquisition. This was to make Nigerian banks more
competitive and able to succeed in the global market. However, the successful
operation in the market requires accountability, transparency and respect for
the rule of law. In section ‘one’ of the codes of corporate governance banks in
Nigeria post consolidation 2006, it was stated that the industry consolidation
poses additional corporate governance challenges arising from integration process,
information technology and culture. Despite all these measure the problem of
corporate governance still remains unresolved among consolidated Nigerian
banks, thereby increasing the level of fraud (Akpan, 2007). He further
disclosed that data from the National Deposit Insurance Commission Report
(2006) shows 741 cases of attempted fraud and forgery involving five
billion, four hundred million naira (N5.4b). Soludo, (2014) also opined
that a good corporate governance practice in the banking industry is
imperative, if the industry is to effectively play a key role in the overall
development in Nigeria.
In 2009, the Central Bank of Nigeria in collaboration
with Nigeria Deposit Insurance Corporation (NDIC) conducted audit and
investigation to determine the soundness of the Nigerian banks. Their result
showed that eight (8) banks were unhealthy, three (3) of which were
nationalized and taken over by Asst Management Company (AMCON) Abadebo, (2014).
Unfortunately, these banks had hitherto showed evidence in their financial
statement buoyancy and prosperity with hidden unimaginable loan portfolio.
Following these, their Chief Executive Officers and Executives Directors sacked
between August and October 2009 due to issues related to poor corporate
governance practices in the affected banks and replaced by CBN appointed
directors (Adedebo, 2014).
Furthermore, according to Sanusi, (2010), the current
banking crisis in Nigeria banking industry in 2009 (e.g. Oceanic Bank,
Intercontinental bank, Union bank, Afri bank, Fin bank and Spring bank) has
been linked with governance malpractice within the banks or as a result of lack
of vigilant oversight function by the board of directors, the board
relinquishing control to corporate managers who pursue their own self-interest
and the board being remiss in its accountability to stakeholders.
Sanusi, (2010) further opined that corporate
governance in many banks failed because boards ignored these practices for reasons
including been misled by executive management, participating themselves in
obtaining unsecured loans at the expense of depositors and not having the
qualification to enforce good governance on bank management.
The failure of large numbers of banks in Nigeria leave
much to be desired with the attendant torture to the stakeholders and the
general threat to the economy give more impetus to the good corporate
governance for financial intermediaries especially the banking sector. In 1995
and 1998, for example twenty-five banks failed and their licenses revoked by
CBN (Akingunola, Adekunle and Adedipe, 2013). In the same vein between 1998 and
2002 about twenty-three banks faced distress and the CBN revoked their licenses
(Akingunola et al, 2013). As a result, various corporate governance reforms
have been specifically emphasized on appropriate changes to be made to the
board of boards in terms of its composition, size and structure (Abidin, Kamal
and Jusoff, 2018).
It is in the light of the above problems that this
research reviewed annual reports of the listed banks so as to examine the
effect of corporate governance mechanisms on the financial performance of banks
in Nigeria.
1.3 Objectives of the Study
Generally,
this study seeks to explore the relationship between corporate governance
structures and firm financial performance in the Nigerian banking industry.
However, it is set to achieve the following specific objectives:
1a) To examine the relationship between board
size and financial performance of banks in Nigeria.
1b) To investigate if there is a significant
difference in the financial performance of banks with foreign directors and
banks without foreign directors in Nigeria
2)
To appraise the effect of
the proportion of non- executive directors on the financial performance of
banks in Nigeria.
3)
To investigate if there is any significant relationship between
directors’ equity interest and the financial performance of banks in Nigeria.
4)
To empirically determine if there is any significant relationship
between the level of corporate governance disclosure and the financial
performance of banks in Nigerian.
5)
To investigate if there
is any significant difference between the profitability of the healthy banks
and the rescued banks in Nigeria.
1.4 Research Questions
This study addressed issues relating to the following pertinent
questions emerging within the domain of study problems:
1a) To what extent (if
any) does board size affect and the financial performance of banks in Nigeria?
1b) Is there a
significant difference in the financial performance of banks with foreign
directors and banks without foreign directors in Nigeria.
2) Is the relationship
between the proportion of non-executive directors and the financial performance
of listed banks in Nigeria statistically significant?
3) Is there a
significant relationship between directors’ equity holdings and the financial
performance of banks in Nigeria?
4) To what extent does
the level of corporate governance disclosure affect the performance of banks in
Nigeria?
5) To what extent (if
any) does the profitability of the healthy banks differ from that of the
rescued banks in Nigeria?
1.5 Research Hypotheses
To proffer useful answers to the research questions and realize the
study objectives, the following hypotheses stated in their null forms will be
tested;
Hypothesis
1a:
H0: There is no significant relationship between board size and financial performance of banks in Nigeria.
Hypothesis
1b:
H0: There is no significant
difference in the financial performance of banks with foreign directors and
banks without foreign directors in Nigeria.
Hypothesis 2:
H0: The relationship between the proportion of non-executive
directors and the financial performance of Nigerian banks is statistically not
significant.
Hypothesis 3:
H0: There is no significant relationship between
directors’ equity holding and the financial performance of banks in Nigeria.
Hypothesis 4:
H0: There is no
significant relationship between the governance disclosures of banks in Nigeria
and their performance.
Hypothesis 5:
H0: There is no
significant difference between the profitability of the healthy and the rescued
banks in Nigeria.
1.6 Scope of the
Study
This study undertakes to research into the
determinants of financial performance of selected commercial banks in Nigeria.
The study will only concentrate on the selected Nigerian commercial banks and
their activities for the periods between 2005-2018.
Considering the year 2006 as the year of initiation of
post consolidation governance codes for the Nigerian banking sector, this
investigates the relationship between corporate governance and financial
performance of banks. The study therefore covers three key governance variables
which are board size, board composition and audit committee.
The selected Nigerian commercial banks considered
under this study are First Bank of Nigeria Limited, Guaranty Trust Bank Plc and
United Bank for Africa. The central focus for the analysis is the banking
system within the Nigerian Economy. This therefore, necessitates that a study
such as this would be done in the contest of the Nigerian domestic economy.
1.7 Significance
of the Study
This study will be of immense value to bank
regulators, academics and other relevant stakeholders. The study provides future
researchers with an alternative summary measure. It also provides a picture of
where banks stand in relation to the code and principles on corporate
governance introduced by the central banks of Nigeria. It further provides an
insight into understanding the degree to which the banks that are reporting on
their corporate governance have been compliant with different sections of the
codes of best practices and where they are experiencing difficulties. Board of
directors will find the information of value in bench marking the performance
of their banks, against that of their peers. The result of this study will also
serve as a database for further researchers in this field of research.
This study will add to the general body of knowledge,
on the impact of corporate governance and financial performance of banks in
Nigeria; which is a very sensitive and vital sector (it also expands the body
of literature in terms of its scope in integrating both bank internal factor,
regulatory factor and the economic factor) that may mitigate bank performance.
1.8 Definition of
Terms
Acquisition: An acquisition is when a larger company
purchases a smaller company
Bankruptcy: A proceeding in a federal court in which
an insolvent debtors’ assets are liquidated and the debtor is relieved of
further liability.
Board composition: This is defined as the proportion
of representation of non-executive directors
Board Size: This is defined as the number of directors
both executive and non-executive directors on the board of the bank.
Code of ethics: Defines acceptable behaviors, promote
high standards of practice and provides a benchmark for members to use for
self-evaluation and establish a framework for professional behavior and
responsibilities.
Consolidation: The combining of separate companies,
functional areas or product lined into a single one, it differs from mergers in
that a new entity is created in consolidation.
Corporate Governance: The methods by which suppliers
of finance control managers in order to ensure that their capital be
expropriate and they earn a return to their investment.
Corporate Performance: This is an important concept
that relates to the way and manner in which financial, material and human
resource available to an organization are judiciously used to achieve the
overall corporative of an organization. It keeps the organization in business
and creates a greater future opportunity.
Executive Directors: Directors that are currently
employed by the firm, retired employees of the firm and related company officers.
Financial Performance: This is a measure of how well a
firm can use assets from its primary mode of business and generate revenue.
Governance Structure: This specifies the distribution
of rights and responsibilities among different participation such as; the
board, managers and stakeholders.
Independent Director: A person whose directorship
constitutes his or her only connection to the corporation.
Merger: The combining of two or more companies,
generally by offering the stakeholders of one company securities in the
acquiring company exchange for the surrender of their stock.
Non-Executive Directors: They are members of the board
who are not top executives, relative of CEO or chairperson of the board or
outside corporate lawyers employed by the firm.
O.E.C.D: Organization for economic corporation and
development.
Poison Pills: A strategy used by corporation to
discourage a hostile takeover by another company. The target company attempt to
make its stock less attractive to the acquirer.
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