CHAPTER ONEINTRODUCTION1.1 Background to the studyIt has become a worldwide dictum that the quality of corporate governance makes animportant difference to the soundness or unsoundness of banks. Thus, effective corporategovernance practice incorporates transparency, openness, accurate reporting andcompliance with statutory regulations among others. Historically, antecedents indicatethat financial crisis is a direct consequence of lack of good corporate governance inbanks; invariably one of the sources of instability in the banking sector is lack orinadequate of corporate governance.Wherever a power is exercised to direct, control and regulates activities that affectpeople, there is need for good exercise of such power. For corporate entities, particularlypublic liability companies, the exercise of power over the enterprise’s direction, thesupervision and control of executive actions, concern for the effect of the enterprise onother parties and especially the environment, the acceptance of a fiduciary duty to beaccountable, constitute the quintessential of corporate governance.The banking distress of last decades has posed many challenges to corporate governancein banking industry. Bank distress can be associated to lack or avoidance of code ofethics and professionalism. Odozi (2007) expound this posting that “ethics, like,corporate governance, transparency, and accountability etc., is a cliché that has been
abused and misused”. The failure of banks in Nigeria, as elsewhere, has been largely due,not merely to inadequate corporate governance or leadership, but to a failure ofprofessional ethics as manifested in numerous instances of creative accounting practices,professionals insensitive internal control and risk management position being seriouslycompromised or even colluding with fraudster. Financial scandals around the world and the recent collapse of major corporate institutionin the USA has brought to fore, once again the need for the practice of good corporategovernance, which is a system of managing the affairs of corporations with a view toincreasing shareholders’ value and meeting the expectations of other stake-holders.For the financial institutions, the retention of public confidence through the enthronementof good corporate governance remains of almost importance given the role of theindustry in the mobilization of fund, the allocation of credit to the deficit sectors of theeconomy, the payment and settlement system and the implementation of monetarypolicy.Universally, there is a grounds well of interest in corporate governance. Particularly, theneed to implement good corporate governance in the banking sector becomes moreapparent after the Asian financial crisis. This has been largely event-driven in the sensein that it is in response to scandals and unexpected crisis, which in some cases abruptlyterminated the existence of large corporate entities. The failure of Johnson Matheys bank,Bank of credit and commerce international, Polly peck, world com and Enron
incorporation are cases in point. The failure of these institutions has been traced toseveral lapses associated with poor corporate governance including conflicts of interestof corporate governors. Corporate governance has in recent time’s assumed heightened importance requiring thatboards and management of companies’ exhibit greater transparency and accountability intheir business conduct. The just concluded consolidation of the Nigeria banking industrymakes the institution of corporate governance a sine qua non in the industry. With thenumerous number of banks that emerged from the ashes of the erstwhile eighty-ninebanks being publicly quoted, corporate governance should in fact take the Centre stage inthe in the management of these banks. Hence, effective corporate governance requires aclear understanding of the respective role of the board and of senior management andtheir relationships with others in the corporate structure. The relationships of the board ofmanagement with stockholder should be characterized by “integrity” their relationshipswith employees should be characterized by “fairness” their relationships with thecommunities in which they operate should be characterized by commitment tocompliance and good corporate citizenship. Anya (2003).On the other hand, bank like many other economic organizations are expected to generateprofit through effective and efficient utilization of resources (inputs) to create sound assetportfolio (output) and ensure continuity. The position of bank therefore in the nation isseen as the oil of the engine of economic development through financial intermediation
and advisory services. Banks makes profit from the spread between interest charged ondeposit and loan interest rate. These differentials ought to compensate adequately for theinvestors contribution and the service provider as well, if corporate governance has to beused as yardstick in determining bank performance.Bank performance therefore, could be seen in term of how the management operates orthe result of their actions. In view of the later, performance could be seen in terms of theabsolute profits, rate of return, earnings per share, the quality of asset portfolio, level ofliquidity and net contribution to the economic development of the nation, performancehowever is not determined by inputs alone but is also dependent on the environmentwithin which the bank operates. This environment is referred to as “PESTLM” comprising of Political, Economic, SocialCultural, Technology, Legal and Marketing. The level of bank’s performance isdetermined on how the institution can positively influence these environmental factorsand effectively survive in a driven competitive environment.In the last two decades, development in Nigeria financial sector have reinforced the needfor greater concern for corporate governance in financial institutions in the country. Therole of corporate governance on banking performance relating to economic growthcannot be over-emphasized. Banks are the pivot of modern economy, the repository ofpeople’s wealth and suppliers of credit which lubricates the engine of growth of theentries economy Ebnodagne (1997).
The upsurge in the number of financial intermediaries following deregulation and thenumber of a significant number of the institutions with attendant agony suffered by manydepositors/ customers and the systematic stress to the economy, all underscore theimperative for greater concern for corporate governance in financial intermediariesespecially mainstream banks. For instance, between 1994 and 1995 five banks failed andhave their licenses revoked by the central bank of Nigeria (CBN) due to distress. Hence the kernel of this study is to examine The impact of corporate governance onperformance of deposit money banks in Nigeria.1.2 Statement of the problemBanks and other financial intermediaries are at the heart of the world’s recent financialcrisis. The deterioration of their asset portfolios, largely due to distorted creditmanagement, was one of the main structural sources of the crisis (Fries, Neven and Seabright, 2002; Kashif, 2008 and Sanusi, 2010). To a large extent, this problem was theresult of poor corporate governance in countries’ banking institutions. Schjoedt (2000)observed that this poor corporate governance, in turn, was very much attributable to therelationships among the government, banks and big businesses as well as organizationalstructure of businesses1. In Nigeria, before the consolidation exercise, the banking industry had abouteighty-nine active players whose overall performance led to sagging of
customers’ confidence. There was ungearing distress in the industry, thesupervisory structure was inadequate and there were cases of official recklessnessamongst the officials and directors, while the industry was notorious for ethicalabuses (Akpan, 2007). Poor corporate governance was identified as one of themajor factors in virtually all known instances of bank distress in the country.Weak corporate governance was seen manifesting in form of weak internalcontrol systems, excessive risk taking, override of internal control measures,absence to non- adherence to limits of authority, absence of risk managementprocesses, insider abuses and fraudulent practices remain a worrisome feature ofthe banking system (Soludo, 2004).This view is supported by the Nigerian Security and Exchange commission (SEC) surveyin April 2004, which shows that corporate governance was at a rudimentary stage, asonly about 40% of the quoted companies including banks had recognized codes ofcorporate governance in place. This, as suggested by the may hinder the public trustparticularly in the Nigerian banks if proper measures are not put in place by regulatorybodies.The Central Bank of Nigeria (CBN) in July 2004 unveiled new banking guidelinesdesigned to consolidate and restructure the industry through mergers and acquisitions.Despite this measure, the problem of corporate governance still remains unresolvedamong consolidated Nigerian banks, thereby increasing the level of fraud. (Akpan, 2007)
further disclosed that data from the National Deposit Insurance Corporation report (2006)shows 741 cases of attempted fraud and forgery involving #5.4 billion. Soludo (2004)also opined that a good corporate governance practice in the banking industry isimperative, if the industry is to effectively play a key role in the overall development ofNigeria.Various corporate governance reform has been specifically emphasized on appropriatechanges to be made to the board of directors in terms of its composition, size andstructure. The study seeks to examine the impact of corporate governance mechanisms onthe financial performance of deposit banks in Nigeria.1.3 Research QuestionsThis study addressed issues relating to the following pertinent questions emerging withinthe domain of study problems.(i) What is the relationship between the board size and the financialperformance of deposit money banks in Nigeria?(ii) Is there a significant relationship between board composition and thefinancial performance of deposit money banks in Nigeria?(iii) Is there any significant relationship between directors’ equity interest andthe financial performance of deposit money banks in Nigeria?1.4 Objectives of the Study
This study aims to examine the relationship between internal corporate governancestructures and firm financial performance and firm financial performance of depositmoney banks in Nigeria. However, it is set to achieve the following objectives:(i) To examine the relationship between board size and the financial performanceof deposit money banks in Nigeria(ii) To investigate if there is a significant relationship between board compositionand financial performance of deposit money banks in Nigeria(iii) To determine if there is any significant relationship between directors’ equityinterest and the financial performance of deposit money banks in NigeriaImpact of corporate governance on the financial performance of deposit money banks