Corporate Governance And Ethics On The Nigeria Banking Industry: Challenges And Opportunity

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Corporate Governance And Ethics On The Nigeria Banking Industry: Challenges And Opportunity


Abstract


This research work is set out to investigate issues challenges and opportunities in the Niger a Banking industry. Also to see if a significant relationship exist between corporate governance, ethics and bank failure. Relevant data were collected using well structured questionnaire. The statistical technique for data analysis and test of hypothetical proposition is chi-square (X2) The result of the findings revealed that the new code of Corporate Governance and Ethics for Bank is adequate of the Curtail Bank distress and that improper risk management, corruption of Bank official and over expansion of Bank are the key Issue why Bank fails. It is concluded that corporate Governance and ethics is necessary to the proper functioning of banks and can only prevent banks distress only f it is well implemented.

Recommendation about corporate Governance and Ethics should be use as tool to help stem the tide of distress, as it entails conformity with prudential guidelines of the government. The Central Bank and NDIC should enforce the need for all banks to have approved policies in all their operation.


Chapter One


Introduction

1.1 Background to the Study

Financial scandals and misappropriation around the world and the recent collapse of large corporate organization in the USA and Europe have brought to the fore, again, the need for the practice of sound corporate governance, which is the system by which the affairs of companies are directed and controlled with the aim of increasing shareholders value and meeting the expectation of other stakeholders. The case of Enron in the U.S and many cases in U.K such as Polly Peck, Maxwell Communication and British Ceylon Corporate Ltd (BCL) are all becomes stressing the need for the adoption of good corporate governance in our various organizations.

In Nigeria, most especially the financial industry the retention of public confidence through the enthronement of good corporate governance and ethics remain an uncompromised duty given the role of the industry in the credit to the needy sector of the economy, the payment and settlement system and the implementation of monetary policy. It is a veritable tool for ensuring corporate survival since business confidence usually suffers each time a corporate entity collapses. Most of the business failures in the recent past are attributed to failure in corporate governance and ethical practices. For instance the collapse of bank in Nigeria in the early 1990s to date was as a result of inadequate corporate governance and ethics practices such as insider related to credit abuses and poor risk appreciation and internal control failures.

To stern the tide, this ugly trend scholars and practitioners have advocated consistently different approach and theories to corporate governance and industrial ethics. A critical tool in corporate governance be adequate disclosure on the risk profile of banks in the overall interest of the stakeholder (ICAN 2006, P. 345) defined “corporate governance as the system by which the affairs of companies are directed and controlled by those charged with the responsibility” Magdi and Nadereh (2007) view corporate governance as ensuring that the business is run well and investors receive a fair return. Oyejide and Siyibo (2001) defined corporate governance as the relationship of the enterprise to shareholders or in the wider sense as the relationship of the enterprise to society as a whole.


1.2 Statement of the Problem

Corporate failures in the world, in recent time have kindled interest in corporate governance and ethics. Nigeria as a nation has suffered a lot of decadeness both in the public and private sector. The political and business climates had become so worse off that by 1999 when the nation returned to democratic rule, under the leadership of Obasanjo, it was rated as one of the most corrupt nations in the world.

Most public corporation, such as PHCN, NITEL, NNSL, water board etc were either dead or simply drain pipe of public resources, while the few factories that were merely available were working below capacity. The banks with their numbers leaving a trail of woes. For investor, shareholder, suppliers, depositors employees, and other stakeholders. The falsification of financial statement of Cadbury Nigeria PLC in 2006, the liquidation of bank in 1980’s and 26 Bank in 1997 and the recent sack of CEO’s of nine banks in Nigeria after CBN’s audit and investigation are all evidence showing the sorry state of the country.

What measures should be put in place to prevent the occurrence of corporate failure in the banking industry? How can organization best practice corporate governance? How can banking industry? How can we guarantee public confident?

The need to proffer solution to the questions greatly informed this research work.


1.3 Objectives of the Study

This study seeks to examine how corporate governance and ethic have been embraced in the Nigeria banking industry. To attain this, we intend to:

  1. Find out how corporate governance is being practiced in the Nigeria
    banking industry.
  2. Ascertain the extent of professional ethic adoption in our banking industry.
  3. Examine the role of shareholder and board of director, who manage the affairs of the companies.
  4. Examine the corporate governance demand and requirement in the banking industry in ensuring accountability and transparency.
  5. Ascertaining what were responsible for the poor performance of banks in the CBN’s audit of 2009/2010.

1.4 Research Questions

  1. Why is corporate governance and ethics so important to the Nigeria banking industry?
  2. How does corporate governance and ethics effect membership to
    change in an organization?
  3. What is the relationship between corporate governance and ethic to
    members in the banking industry?
  4. To what extent may the codes of corporate governance and ethics applied to the Nigeria banking industry?
  5. What area can corporate governance and ethics be address in the Nigeria banking industry?

1.5 Statement of Hypothesis

Hypothesis One
  • Ho: Corporate governance and ethics have no significant relationship with banks performance.
  • Hi: Corporate governance and ethics have significant relationship with banks performance.
Hypothesis Two
  • Ho: Effective Corporate Governance and ethics in the Nigeria Banking Industry does not raise a high standard of accountability and transparency.
  • Hi: Effective corporate governance and ethics in the Nigeria banking industry raise a high standard of accountability and transparency.
Hypothesis Three
  • Ho: Corporate governance and ethics does not help to avoid corporate failures and scandals.
  • Hi: Corporate governance and ethics help to avoid corporate failures and scandals.

1.6 Significance of the Study

The importance of corporate governance cannot be over emphasized. It is ii important tool in regulating corporations. Corporate governance and ethics help to avoid corporate failures and scandals. Corporate governance is seen as the structure of relationship within an entity for making decision and its implementation. It is particularly important because it ensure accountability and transparency in the manner an organization is run. Stakeholder interest is best protected, there would be public confident financial scandals and fraud would eliminate if sound corporate governance and ethics are practiced.


1.7 Scope of the Study

This research work seeks to study the emerging concept of corporate governance. Its role in financial accountability and transparency, financial statements could represent a true and fair view position of them.

It also intends to study the place of ethics in our financial industry and the roles in governing corporate decision.
However, work is limited in scope to corporate governance and ethics in our banking industry.


1.8 Limitation of the Study

The ideal cannot be attained in this research work because of some obstacles that have been encountered. Amongst these are:

  1. The time duration for this research is not enough to carry out the research. The scope has been limited in respect to population as well as the findings thereof.
  2. Financial difficulties have made it not possible for the researchers to meet all designated population. Therefore, various sampling techniques will be employed.
  3. Difficulty in getting information from the company’s staff under study. This is so because most of the documents the researchers asked for where not made available. Also most interviews were not granted and some of the questionnaires sent out were either destroyed, returned or not answered.

1.9 Definition of Terms

Corporate Governance:

This is defined as the system by which companies are directed and controlled.

Ethics:

This is defines as the philosophical analysis of human morality and conduct.

Financial Statement:

This are the means of communicating to interested parties information on the resources, obligations and performances of the reporting entity or enterprise.

Fraud:

Can be defined as a deliberate or intentional act by a privilege individual or group of individual s within or outside the organization, which results in a misrepresentation of financial statement.

Central Bank of Nigeria:

Is defined as a banking system in which a single bank has a complete monopoly in the note issue.

Corporation:

This is defined as an organization or a group of organization that is recognized by law as a single unit.

Morality:

Are principle concerning right and wrong or good and bad behavior.


Chapter Five


Summary, Conclusion and Recommendations

5.1 Summary

Corporate performance is an important concept that relates to the way and manner in which financial, material and human resources available to an organization are judiciously used to achieve the overall corporate objective of an organization. Unfortunately, corporate governance has become a major concern to both the public and the private sector of the Nigerian economy as the financial services industry has experienced fluctuating fortunes leading to high profile cases of corporate failure and consequent near loss of public confidence for the past two decades. The lack of effective corporate governance in Nigeria has worked to the decrement of shareholders and created a class of stakeholder who has lost interest in the banking system. Furthermore, poor corporate governance was identified as one of the major factors in virtually all known instances of financial institutions distress in the country, and hence the CBN enactment of a code first in 2006.

The study set out to appraise Nigerian banks compliance to the CBN code of Corporate Governance as well as its effect on banks performance. The study specifically considered Nigerian commercial banks’ compliance to CBN code for board size, board composition, audit committee, power separation and board diversity. The study then examined the effect of commercial banks’ compliance level on their performance (profit). The study employed a panel data ordinary least square and analysis of variance to appraise commercial banks’ compliance to CBN best practice code and the extent to which it affected their profit performance.

Nigerian commercial banks’ compliance to CBN best practice for board size was statistically insignificant. Therefore, commercial banks in Nigeria were up till the date of this study non-compliant with the CBN best practice for board size. The same was discovered for board diversity, audit committee, and power separation as the f-statistics evidenced in analysis of Variance showed a significant variance between the Nigerian commercial banks’ observed practices and the best practice code as dictated by the Central Bank of Nigeria (CBN). Nonetheless, Nigerian commercial banks significantly complied with the CBN best practice code for commercial banks’ board composition. This was evidenced in the analysis of variance as the f- calculated was less than the f- critical, signifying very little variance between commercial banks’ observed practices and the CBN best practice code for corporate board composition.

It was discovered that some Nigerian commercial banks had lesser board size than the best practice of a minimum of 20 persons in the board (Noncompliance with best practice code for board size). However, most banks followed the best practice of having 2 non-executive independent directors and more non-executive directors than the executive directors (compliance with best practice code for board composition). Considering the audit committee, a few commercial banks had exclusive board audit committee and separate statutory audit committee, which indicate a stronger audit team, while the other majority has just the statutory audit committee, comprised of three board directors and three shareholders. It was further discovered that members of the audit committees did not take seriously attendance to audit committee meetings. Most times, the statutory audit committee meeting held once a year just to read and approve the annual financial statement and accounts. Attendance to board committee meetings were considered significant compliance to best practice code on a premise that more good heads are better than fewer one. Fraud cases and errors may easily be detected by more than fewer directors or shareholders and there may be more than fewer meetings necessary for the early detection of fraud and errors.

All banks failed in compliance to best practice for board diversity, as they always had more males on the board than females. Sometimes, there were only males on the board and no female. There was never a case where there equal representative of males and females or where there were more females than males. Looking at the power separation, while different directors headed various committees, the representing membership was highly limited considering the size of the board.

Quantitatively, the Cronbach’s alpha test for reliability of transcribed data of commercial banks’ observed practices showed to be 67.8% (0.678). Although the commercial banks’ compliance to best practice regarding most of the code of corporate governance were insignificant. When tested on the banks’ profit after tax, it had significant effect. The group unit root test (best unit root test for panel data) showed that the aggregated variables of commercial banks’ observed practices and the banks’ profit after tax was stationary, qualifying the use of the variables for ordinary least square (OLS) analysis. Furthermore, the correlation test showed that both variables had 77.68% relationship with each other. This proved a strong and direct relationship with each other. The correlation test between commercial banks’ observed practices and best practice code showed that board composition (76.55%), board size (69.5%), and power separation (56%) was positive and strong. The rest were below 40% (weak) but positively related to best practice code.

The residual of the variables used for OLS analysis was not normally distributed. Nevertheless, the coefficient of determination (R2) was 60.35% (0.60348), indicating that 60.35% of the variation in the commercial banks’ profit after tax can be attributed to the variation in aggregated commercial banks’ observed practices (LNCOMP). The variables were logged o make the residual of the data used for OLS analysis homoscedastic. Panel data variables are normally heteroscedastic and therefore must be logged in order to make the residual have a constant variance. Furthermore, serial correlation was not identified in the model. Therefore, the result of this ols analysis can be used for forecasting and recommendation based on the result can be relied upon for policy formulation.


5.2 Conclusion

Therefore compliance to CBN code of corporate governance has direct and strong relationship with commercial banks’ profit after tax and observed commercial banks’ practices has direct relationship with the best practice, it is important for commercial banks in Nigeria to significantly comply with CBN best practice code of corporate governance in order to further strengthen their determination of the profit after tax of Nigerian commercial banks.

The researchers strongly believe that compliance to CBN code of corporate governance by Nigerian commercial banks will save the financial sector from distress in Nigeria.

In conclusion, the direct relationship between general compliance to CBN code of corporate governance and profit of commercial banks will boost the profitability of the commercial banks, and early detection of fraud cases and errors in the financial statements.


5.3. Recommendations

The following recommendations were drawn from the study;

  1. The Central Bank of Nigeria should strictly monitor on an annual bases, commercial banks’ compliance to the code of corporate governance, especially board size, audit committee, board diversity, power separation.
  2. Therefore, a percentage (1%) increase in commercial banks’ general compliance with the CBN code of corporate governance causes profit after tax to increase by 3.53%, commercial banks’ general compliance to the best practice CBN code of corporate should be raised by 24.54% in order to reach the desired level of commercial banks’ profit after tax in Nigeria.

5.4 Contribution to Knowledge

This study contributed to our knowledge on commercial banks compliance with Central Bank of Nigeria code of corporate governance and its effect on Bank performance.

The result of the study contributed the body of empirical literatures in that the success achieved in this subsector will be applied on the other sectors.

This study will help to spur Central Bank of Nigeria into monitoring the commercial bank compliance with Central Bank of Nigeria code of corporate governance in order to achieve the desired levels of profitability for the commercial banks in Nigeria


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