Corporate Governance And Performance Of Banks In Nigeria
An international wave of mergers and acquisitions has swept the banking industry as boundaries between financial sectors and products have blurred dramatically. There is therefore the need for countries to have sound resilient banking systems with good corporate governance, which will strengthen and upgrade the institution to survive in an increasingly open environment. In Nigeria, the Central Bank unveiled new banking guidelines designed to consolidate and restructure the industry through mergers and acquisition. This was to make Nigerian banks more competitive and be able to operate in the global market. Despite all its attempts, the Central Bank of Nigeria disclosed that after the consolidation in 2006, 741 cases of attempted fraud and forgery involving N5.4 billion were reported. In the light of the above, this research examined the relationships that exist between governance mechanisms and financial performance in the Nigerian consolidated banks. And also to find out if there is any significant relationship between the level of corporate governance disclosure index among Nigerian banks and their performance. The Pearson Correlation and the regression analysis were used to find out whether there is a relationship between the corporate governance variables and firm’s performance. In examining the level of corporate governance disclosures of the sampled banks, a disclosure index was developed guided by the CBN code of governance and also on the basis of the papers prepared by the UN secretariat for the nineteenth session of ISAR (International Standards of Accounting and Reporting). The study therefore observed that a negative but significant relationship exists between board size, board composition and the financial performance of these banks, while a positive and significant relationship was also noticed between directors’ equity interest, level of governance disclosure and performance. Furthermore, the t- test result indicated that while a significant difference was observed in the profitability of the healthy banks and the rescued banks, no difference was seen in the profitability of banks with foreign directors and that of banks without foreign directors. The study therefore concludes that there is no uniformity in the disclosure of corporate governance practices by the banks. Likewise, the banks do not disclose in general how their debts are performing, by providing a statement that expresses outstanding debts in terms of their ages and due dates. The study suggests that efforts to improve corporate governance should focus on the value of the stock ownership of board members. Also, steps should be taken for mandatory compliance with the code of corporate governance while an effective legal framework should be developed that specifies the rights and obligations of a bank, its directors, shareholders, specific disclosure requirements and provide for effective enforcement of the law.
1.1 Background of the Study
Globalization and technology have continuing speed which makes the financial arena to become more open to new products and services invented. However, financial regulators everywhere are scrambling to assess the changes and master the turbulence (Sandeep, Patel and Lilicare, 2002:9). An international wave of mergers and acquisitions has also swept the banking industry. In line with these changes, the fact remains unchanged that there is the need for countries to have sound resilient banking systems with good corporate governance. This will strengthen and upgrade the institution to survive in an increasingly open environment (Qi, Wu and Zhang, 2000; Köke and Renneboog, 2002 and Kashif, 2008).
Given the fury of activities that have affected the efforts of banks to comply with the various consolidation policies and the antecedents of some operators in the system, there are concerns on the need to strengthen corporate governance in banks. This will boost public confidence and ensure efficient and effective functioning of the banking system (Soludo, 2004a). According to Heidi and Marleen (2003:4), banking supervision cannot function well if sound corporate governance is not in place. Consequently, banking supervisors have strong interest in ensuring that there is effective corporate governance at every banking organization. As opined by Mayes, Halme and Aarno (2001), changes in bank ownership during the 1990s and early 2000s substantially altered governance of the world’s banking organization. These changes in the corporate governance of banks raised very important policy research questions. The fundamental question is how these changes affects bank performance. It is therefore necessary to point out that the concept of corporate governance of banks and very large firms have been a priority on the policy agenda in developed market economies for over a decade. Further to that, the concept is gradually warming itself as a priority in the African continent. Indeed, it is believed that the Asian crisis and the relative poor performance of the corporate sector in Africa have made the issue of corporate governance a catchphrase in the development debate (Berglof and Von -Thadden, 1999).
Several events are therefore responsible for the heightened interest in corporate governance especially in both developed and developing countries. The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based energy giant and WorldCom the telecom behemoth, shocked the business world with both the scale and age of their unethical and illegal operations. These organizations seemed to indicate only the tip of a dangerous iceberg. While corporate practices in the US companies came under attack, it appeared that the problem was far more widespread. Large and trusted companies from Parmalat in Italy to the multinational newspaper group Hollinger Inc., Adephia Communications Company, Global Crossing Limited and Tyco International Limited, revealed significant and deep-rooted problems in their corporate governance. Even the prestigious New York Stock Exchange had to remove its director (Dick Grasso) amidst public outcry over excessive compensation (La Porta, Lopez and Shleifer 1999).
In developing economies, the banking sector among other sectors has also witnessed several cases of collapses, some of which include the Alpha Merchant Bank Ltd, Savannah Bank Plc, Societe Generale Bank Ltd (all in Nigeria), The Continental Bank of Kenya Ltd, Capital Finance Ltd, Consolidated Bank of Kenya Ltd and Trust Bank of Kenya among others (Akpan, 2007).
In Nigeria, the issue of corporate governance has been given the front burner status by all sectors of the economy. For instance, the Securities and Exchange Commission (SEC) set up the Peterside Committee on corporate governance in public companies. The Bankers’ Committee also set up a sub-committee on corporate governance for banks and other financial institutions in Nigeria. This is in recognition of the critical role of corporate governance in the success or failure of companies (Ogbechie, 2006:6). Corporate governance therefore refers to the processes and structures by which the business and affairs of institutions are directed and managed, in order to improve long term share holders’ value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders (Jenkinson and Mayer, 1992). Corporate governance is therefore, about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that will foster good corporate performance.
Jensen and Meckling (1976) 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. A number of corporate governance mechanisms have been proposed to ameliorate the principal-agent problem between managers and their shareholders. These governance mechanisms as identified in agency theory include board size, board composition, CEO pay performance sensitivity, directors’ ownership and share holder right (Gomper, Ishii and Metrick, 2003). They further suggest that changing these governance mechanisms would cause managers to better align their interests with that of the shareholders thereby resulting in higher firm value.
Although corporate governance in developing economies has recently received a lot of attention in the literature (Lin (2000); Goswami (2001); Oman (2001); Malherbe and Segal (2001); Carter, Colin and Lorsch (2004); Staikouras, Maria-Eleni, Agoraki, Manthos and Panagiotis (2007); McConnell, Servaes and Lins (2008) and Bebchuk, Cohen and Ferrell (2009), yet corporate governance of banks in developing economies as it relates to their financial performance has almost been ignored by researchers (Caprio and Levine (2002); Ntim (2009). Even in developed economies, the corporate governance of banks and their financial performance has only been discussed recently in the literature (Macey and O’Hara, 2001).
The few studies on bank corporate governance narrowly focused on a single aspect of governance, such as the role of directors or that of stock holders, while omitting other factors and interactions that may be important within the governance framework. Feasible among these few studies is the one by Adams and Mehran (2002) for a sample of US companies, where they examined the effects of board size and composition on value. Another weakness is that such research is often limited to the largest, actively traded organizations- many of which show little variation in their ownership, management and board structure and also measure performance as market value.
In Nigeria, among the few empirically feasible studies on corporate governance are the studies by Sanda and Mukailu and Garba (2005) and Ogbechie (2006) 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 Cooperation and Development principles, which is based primarily on shareholder sovereignty. It analysed the level of compliance of code of corporate governance in Nigerian banks with the Central Bank’s post consolidated code of corporate governance. Finally, while other studies on corporate governance neglected the operating performance variable as proxies for performance, this study employed the accounting operating performance variables to investigate the relationship if any, that exists between corporate governance and performance of banks in Nigeria.
1.2 Statement of the Problem
Banks and other financial intermediaries are at the heart of the world’s recent financial crisis. The deterioration of their asset portfolios, largely due to distorted credit management, 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 the result of poor corporate governance in countries’ banking institutions and industrial groups. Schjoedt (2000) observed that this poor corporate governance, in turn, was very much attributable to the relationships among the government, banks and big businesses as well as the organizational structure of businesses.
In some countries (for example Iran and Kuwait), banks were part of larger family-controlled business groups and are abused as a tool of maximizing the family interests rather than the interests of all shareholders and other stakeholders. In other cases where private ownership concentration was not allowed, the banks were heavily interfered with and controlled by the government even without any ownership share (Williamson, 1970; Zahra, 1996 and Yeung, 2000). Understandably in either case, corporate governance was very poor. The symbiotic relationships between the government or political circle, banks and big businesses also contributed to the maintenance of lax prudential regulation, weak bankruptcy codes and poor corporate governance rules and regulations (Das and Ghosh, 2004; Bai, Liu, Lu, Song and Zhang, 2003).
In Nigeria, before the consolidation exercise, the banking industry had about 89 active players whose overall performance led to sagging of customers’ confidence. 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 notorious for ethical abuses (Akpan, 2007). Poor corporate governance was identified as one of the major factors in virtually all known instances of bank distress in the country. Weak corporate governance was seen manifesting in form of weak internal control systems, excessive risk taking, override of internal control measures, absence of or non-adherence to limits of authority, disregard for cannons of prudent lending, absence of risk management processes, insider abuses and fraudulent practices remain a worrisome feature of the banking system (Soludo, 2004b). This view is supported by the Nigeria Security 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 recognised codes of corporate governance in place. This, as suggested by the study may hinder the 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 2004 unveiled new banking guidelines designed to consolidate and restructure the industry through mergers and acquisition. This was to make Nigerian banks more competitive and be able to play in the global market. However, the successful operation in the global market requires accountability, transparency and respect for the rule of law. In section one of the Code of Corporate Governance for banks in Nigerian post consolidation (2006), it was stated that the industry consolidation poses additional corporate governance challenges arising from integration processes, Information Technology and culture. The code further indicate that two-thirds of mergers world-wide failed due to inability to integrate personnel and systems and also as a result of the irreconcilable differences in corporate culture and management, resulting in Board of Management squabbles.
Despite all these measures, the problem of corporate governance still remains un-resolved among consolidated Nigerian banks, thereby increasing the level of fraud (Akpan, 2007) see Appendix 2. Akpan (2007) further disclosed that data from the National Deposit Insurance Commission report (2006) shows 741 cases of attempted fraud and forgery involving N5.4 billion. Soludo (2004b) 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 of Nigeria.
The causes of the recent global financial crises have been traced to global imbalances in trade and financial sector as well as wealth and income inequalities (Goddard, 2008). More importantly, Caprio, Laeven & Levine (2008) opined that there should be a revision of bank supervision and corporate governance reforms to ensure that deliberate transparency reductions and risk mispricing are acted upon.
Furthermore, according to Sanusi (2010), the current banking crises in Nigeria, has been linked with governance malpractice within the consolidated banks which has therefore become a way of life in large parts of the sector. He further opined that corporate governance in many banks failed because boards ignored these practices for reasons including being misled by executive management, participating themselves in obtaining un-secured loans at the expense of depositors and not having the qualifications to enforce good governance on bank management.
The boards of directors were further criticized for the decline in shareholders’ wealth and corporate failure. They were said to have been in the spotlight for the fraud cases that had resulted in the failure of major corporations, such as Enron, WorldCom and Global Crossing.
The series of widely publicized cases of accounting improprieties recorded in the Nigerian banking industry in 2009 (for example, Oceanic Bank, Intercontinental Bank, Union Bank, Afri Bank, Fin Bank and Spring Bank) were related to the lack of vigilant oversight functions by the boards of directors, the board relinquishing control to corporate managers who pursue their own self-interests and the board being remiss in its accountability to stakeholders (Uadiale, 2010). Inan(2009) also confirmed that in some cases, these bank directors’ equity ownership is low in other to avoid signing blank share transfer forms to transfer share ownership to the bank for debts owed banks. He further opined that the relevance of non- executive directors may be watered down if they are bought over, since, in any case, they are been paid by the banks they are expected to oversee.
As a result, various corporate governance reforms have been specifically emphasized on appropriate changes to be made to the board of directors in terms of its composition, size and structure (Abidin, Kamal and Jusoff, 2009).
It is in the light of the above problems, that this research work studied the effects of corporate governance mechanisms on the financial performance of banks in Nigeria and also reviewed the annual reports of the listed banks in Nigeria to find out their level of compliance with the CBN (2006) post consolidation code of corporate governance. The study also finds out if there is any statistically significant difference between the profitability of the healthy and the rescued banks in Nigeria as listed by CBN in 2009. Finally, it went further to investigate if the banks with foreign directors perform better than those without foreign directors.
1.3 Objectives of the Study
Generally, this study seeks to explore the relationship between internal corporate governance structures and firm financial performance in the Nigerian banking industry. However, it is set to achieve the following specific objectives:
- To examine the relationship between board size and financial performance of banks in Nigeria.
- 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.
- To empirically determine if there is any significant relationship between the level of corporate governance disclosure and the financial performance of banks in Nigerian.
- 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:
- To what extent (if any) does board size affect and the financial performance of banks in Nigeria?
- Is the relationship between the proportion of non-executive directors and the financial performance of listed banks in Nigeria statistically significant?
- Is there a significant relationship between directors’ equity holdings and the financial performance of banks in Nigeria?
- To what extent does the level of corporate governance disclosure affect the performance of banks in Nigeria?
- 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;
H0: There is no significant relationship between board size and financial performance of banks in Nigeria
H0: The relationship between the proportion of non-executive directors and the financial performance of Nigerian banks is statistically not significant
H0: There is no significant relationship between directors’ equity holding and the financial performance of banks in Nigeria
H0: There is no significant relationship between the governance disclosures of banks in Nigeria and their performance.
H0: There is no significant difference between the profitability of the healthy and the rescued banks in Nigeria.
1.6 Significance of the Study
This study is of immense value to bank regulators, investors, academics and other relevant stakeholders. By introducing a summary index that is better linked to firm performance than the widely used G-index, the study provides future researchers with an alternative summary measure. This study provides a picture of where banks stand in relation to the codes and principles on corporate governance introduced by the Central Bank 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 practice and where they are experiencing difficulties. Boards of directors will find the information of value in benchmarking the performance of their banks, against that of their peers. The result of this study will also serve as a data base for further researchers in this field of research.
1.7 Scope and Limitation of Study
Considering the year 2006 as the year of initiation of post consolidation governance codes for the Nigerian banking sector, this study investigates the relationship between corporate governance and performance of banks. The choice of this sector is based on the fact that the banking sector’s stability has a large positive externality and banks are the key institutions maintaining the payment system of an economy that is essential for the stability of the financial sector. Financial sector stability, in turn has a profound externality on the economy as a whole. To this end, the study basically covers the 21 listed banks out of the 24 universal banks, operating in Nigeria till date that met the N25 billion capitalization dead-line of 2005.The study covers these banks’ activities during the post consolidation period i.e. 2006-2008. The choice of this period allows for a significant lag period for banks to have reviewed and implemented the recommendations by the CBN post consolidation code. However it was not possible to obtain the annual reports of 2009/2010 since they are yet to be published by many of the banks as at the time of this research.
Furthermore, we focused only on banking industry because corporate governance problems and transparency issues are important in the banking sector due to the crucial role in providing loans to non-financial firms, in transmitting the effects of monetary policy and in providing stability to the economy as a whole. The study therefore covers four key governance variables which are board size, board composition, directors’ equity interest and governance disclosure level.
Summary of Findings, Conclusion and Recommendations
The objective of this chapter is to discuss the findings, reach conclusion and make necessary recommendations from all the qualitative and quantitative analysis presented in chapter four.
The chapter is structured into five sections as follows: section 5.1 summarizes the research objectives and the analysis, section 5.2 presents the theoretical and empirical findings, section 5.3 covers the conclusion while section 5.4 and 5.5 covers the sections for recommendations and suggestions for further study.
5.1 Summary of Work Done
This study made use of secondary data in analyzing the relationship between corporate governance and financial performance of the 21 banks listed in the Nigerian Stock Exchange. The secondary data was obtained basically from published annual reports of the selected banks. Relevant data for the study were retrieved from the Nigerian Stock Exchange Fact Book for 2008 and corporate websites of the reviewed banks.
The Pearson Correlation and regression analysis were used to find out whether there is a relationship between the variables to be measured (i.e. corporate governance and banks’ financial performance) and also to find out if the relationship is significant or not. However, the t-test statistics was used to establish if there is any significant difference between the profitability of healthy and rescued banks and also if a difference exist in the profit of banks with foreign directors and those without. The proxies that were used for corporate governance are; board size, proportion of non-executive directors on board and directors’ equity holdings. Accounting measure of performance (return on equity and return on asset) as identified by First Rand Banking Group (2006) were used as the dependent variable. Decisions were later taken based on return on equity.
However, in examining the level of corporate governance disclosures of the sampled banks, a disclosure index was developed using the CBN post consolidation code of best practices and guided by the papers prepared by the UN secretariat for the nineteenth session of ISAR (International Standards of Accounting and Reporting, 2001), entitled “Transparency and disclosure requirements for corporate governance” and the twentieth session of ISAR (2002), entitled “Guidance on Good Practices in Corporate Governance Disclosure”) for the banks under study. Using this post consolidation code of best practices, issues in corporate governance disclosure are classified into 5 broad categories: Financial disclosures, non-financial disclosures, annual general meetings, timing and means of disclosure, and best practices for compliance with corporate disclosure. Under all these broad and subcategories, a total of 45 issues were considered (See Appendix 4).
With the help of the list of disclosure issues, the annual reports of the banks were examined and a dichotomous procedure of content analysis was followed to score each of the disclosure issue. Each bank was awarded a score of ‘1’ if it appears to have disclosed the concerned issue and ‘0’ otherwise. The score of each bank was totaled to find out the net score of the bank. A corporate governance disclosure index (CGDI) was then computed. Furthermore, the t- test was used to establish if there is any significant difference in the profitability as recorded by the cleared banks as identified by CBN
5.2 Summary of Findings
The summary of findings is in two sections. The first section discusses the theoretical findings under prior related studies while the second section discusses the empirical findings from the study we carried out on the relationship that exists between corporate governance and the financial performance of banks in Nigeria.
5.2.1 Theoretical Findings
This study reveals that both board size and the proportion of outside directors are significantly but negatively related to financial performance in banks. While the directors’ equity interest and the level of corporate governance items disclosed are significantly positive in relation with performance.
However, there is no doubt that several studies have been conducted so far and are still on –going on the examination of the relationship between firm performance and corporate governance. Our findings are therefore in line with the work of Staikouras et al. (2007) where they examined a sample of 58 out of the 100 largest, in terms of total assets, credit institutions operating in Europe for the period between 2002 and 2004. Their analysis inferred that bank profitability – measured in terms of ROE and Tobin’s Q is negatively and significantly related to the size of the Board of Directors. Pathan et al. (2007) using a dataset of the Thai commercial banks over the period 1999-2003, also obtained a negative relation between board size and ROE. This is also seen in Eisenberg, Sundgren, and Wells (1998), where a similar pattern for a sample of small and midsize Finnish firms. Their study also revealed that board size and firm value are negatively correlated. Finally, our findings also agrees with Zulkafli and Samad (2007) in their study in which they analyzed a sample of 107 listed banks in the nine countries of Asian emerging markets (Malaysia, Thailand, Philippines, Indonesia, Korea, Singapore, Hong Kong, Taiwan, India). They deduced that board size is not significantly correlated with performance measures, such as the Tobin’s Q and ROE. Our findings on board size, differs from Kyereboah-Coleman and Biekpe (2005) who conclude a positive relationship between a firms’ value and board size. The findings, also differs from Zahra and Pearce (1989) who argued that a large board size brings more management skills and makes it difficult for the CEO to manipulate the board. The result of Andres and Vallelado (2008) is also different from ours on board size and performance. After examining information on the characteristics of the boards of directors for 69 commercial banks operating in Canada, US, UK, Spain, France and Italy over the period 2000-2005, they found that the inclusion of more directors is positively associated with performance, which is measured by Tobin’s Q, ROA.
However, for the proportion of non executives, our findings is in line with Yermack (1996) who reported a significant negative correlation between proportion of independent directors and contemporaneous Tobin’s q and ROE, but no significant correlation for several other performance variables (sales/assets; operating income/assets; operating income/sales); Agrawal and Knoeber (2001) report a negative correlation between proportion of outside directors and Tobin’s q. Klein (1998) also reports a significant negative correlation between a measure of change in market value of equity and proportion of independent directors, but insignificant results for return on assets and raw stock market returns. Furthermore, Andres and Vallelado (2008) found an inverted U-shaped relation between the proportion of outsiders, defined as the number of non-executive directors, and bank performance, suggesting that an optimum combination of executive and non-executive directors would be more effective in securing value for banks than excessively independent boards.
Our findings on the proportion on non-executives, further disagree with the positive finding as noticed in Pathan et al. (2007) and Bebchuk, Cohen and Ferrell (2009). Our findings as it relate to directors’ equity holding is also in line with the findings of Saunders, Strock and Travlos (1990) and also Yu (2003). They found a significant positive relationship between the stock held by directors and the performance level of firms.
In other to find out how the level of corporate governance disclosure affects performance for US firms, a broad measure of corporate governance (Gov-Score) was prepared by Brown and Caylor (2004) with 31 factors, 8 sub categories for firms based on dataset of Institutional Shareholder Service (ISS). Their findings indicate that better governed firms are relatively more profitable, more valuable and pay more cash to their shareholders. Gompers, Ishii, and Metrick (2003) used Investor Responsibility Research Centre (IRRC) data, and concluded that firms with fewer shareholder rights have lower firm valuations and lower stock returns. Our study on governance disclosure (hypothesis 4) therefore took the same trend as in the prior studies discussed above.
Chibber and Majumdar, (1999) find out that the availability of foreign directors in a firm is positively associated with the degree of resource commitment to technology transfer. Djankov and Hoekman (2000) also find that firms with foreign directors to be associated with the provision of generic knowledge (management skills and quality systems) and specific knowledge.
5.2.2 Empirical Findings
From the descriptive analysis, it was revealed that on the average the board size of listed banks in Nigerian is 13. This result implies that on the average, a relatively moderate board size of 13 is noticed among the listed consolidated banks in Nigeria. This is in line with the suggestion of Kyereboah-Coleman and Biekpe (2006) that a board size of between 12 and 16 is appropriate. Also, board composition which is the proportion of outside directors in a board has a mean of 63%. This also reveals that on the average, about 63% of the board members are non-executive directors. This is in line with the section 4.10 of the CBN post consolidation code where it was stated that “the number of non-executive directors should exceed that of executive directors”. Although from the descriptive result, a minimum of 45% was notice in GTB in 2006. A critical review indicates that this was so because there was no immediate replacement of some directors who retired.
Although, the mean disclosure level of 66% indicates that all the banks present a statement of their corporate governance practices, however, the extensiveness of the statement varies between banks. Banks were noticed to disclose more on disclosure items1, 13-17, 22, 32, 40, 41, 44 and 45. Directors’ equity interest therefore recorded a mean of 11%. Furthermore, the findings revealed that on average, the banks included in our sample generate Return on Equity (ROE) of about 5% and a standard deviation of 4.7%. This means that the value of the ROE can deviate from mean to both sides by 4.7%.
From the regression result for the relationship between board size and performance, the coefficient of the model is found out to be negative (-1.977), with a p- value of .053 significant at only 10%. This result shows that board size and performance in terms of ROE move in opposite directions. The negative relationship is also seen to be considerably important to the performance of bank. This indicates a significant negative effect of board size on the financial performance of the listed banks.
The significant negative relationship found between a bigger board size and ROE is consistent with the findings of Yermack (1996), Eisenberg, Sundgren and Wells (1998), Conyon and Peck (1998) and Loderer and Peyer (2002). Our findings, therefore shows that a large board size can leads to the free rider problem where most of the board members play a passive role in monitoring the firm.
Furthermore, the board members will tend to be involved in dysfunctional conflicts where the board is not cohesive (board members are not working optimally to achieve a single goal) deteriorating the value of a firm.
Finally, the result implies that large boards in Nigerian banks are likely to be less effective and easier for a CEO to control. Also, when a board gets too big, it becomes difficult to co-ordinate and process. Whereas, smaller boards will tend to reduce the possibility of free riding by individual directors and increase their decision taking processes. The regression result also shows that a significant negative association exists between the proportion of outside directors and performance.
Our findings on the relationship between proportion of outside directors and financial performance indicates that significant negative relationship exist between the two variables. One of the reasons why increasing board independence apparently doesn’t pay off in improved performance is that having a reasonable number of inside directors could add value. A support for our view is the suggestion by Baysinger and Butler (1985) that an optimal board contains a mix of inside, independent, and perhaps also affiliated directors, who bring different skills and knowledge to the board.
Executive directors may also be better at strategic planning decision. This view is also consistent with Klein’s (1998) evidence that inside director representation on investment committees of the board correlates with improved firm performance.
The negative effect can also be because non-executive directors are likely to be too busy with other commitments and are only involved with the company business on a ‘part-time’ basis.
In addition, as mentioned earlier, non-executive directors are likely not to have a hands-on approach or are not necessarily well versed in the business, hence do not necessarily make the best decisions. Our findings are in tune with the study by Pi and Timme (1993); Belkhir (2006); Staikouras et al. (2007) and Adams and Mehran (2005 and 2008) who found a negative but significant relationship between the tested variables. However, our findings disagree with Bebchuk, Cohen and Ferrell (2009) and Pathan et al. (2007) who found a positive relationship between the variables.
Furthermore, our findings revealed that a strong positive relationship exist between the governance disclosure of banks and the performance of banks in Nigeria. This entails that banks that made more disclosures did better during the period under review. On the other hand, while most of the banks made disclosure on the performance of insider-related credit, Zenith Bank and Intercontinental bank do not make detailed disclosure. This disclosure will help to evaluate the objectivity in insider-related dealings and thus an evaluation of the riskiness of the banks. Also, all the banks disclosed directors’ remuneration by amount only without an effort to disclose who receives what and for what purpose are such emoluments received. They only disclose the gross amount paid to directors. This blurs the possibility of any meaningful analysis of the directors’ remuneration. These findings are therefore in line with Brown and Caylor (2004), Al-Amin, and Tareq (2006) and Ogidefa (2008).
Also, our study on directors’ equity interest reported a significant positive relationship between directors’ equity interest and performance. It was also noted that an average of 10% of the directors in the Nigerian banks holds equity in the banks. One explanation for this phenomenon is that the equity ownership creates better management monitoring on the part of the board and hence improved results. The study further revealed that in a bank where directors held stock, the ratio of directors’ stock holding is positively related to performance. This is seen to be in congruence with the findings in Bhagat, Carey and Elson (1999) and Yu (2003).
From our t- test results, it was revealed that the healthy banks differ significantly in terms of profit from the rescued. This also compliments the result as in Rashid (2008). Finally it was also observed that the profitability of banks with foreign directors do not differ from those without foreign directors.
From the analysis above, the study therefore conclude that there is no uniformity in the disclosure of corporate governance practices made by banks in Nigeria. Though they all disclose their corporate governance practices, but what is disclosed does not conform to any particular standard. The banks do not disclose in general how their debts are performing, by providing a statement that expresses outstanding debts in terms of their ages and due dates. This is however done for insider-related debts in some banks. The insider-related debts are expected to form an insignificant part of the debts of the banks and so may provide an adequate picture of the risk profile of the banks.
Disclosures on directors’ remuneration do not provide sufficient details that would enhance any meaningful analysis. This makes it difficult for anyone to judge the adequacy or otherwise of directors’ remuneration. Similarly, disclosures about employees are scanty. They do not provide sufficient details that would enable anyone to do any meaningful analysis for the assessment of the adequacy or otherwise of their remuneration, vis-à-vis the number in each category of staff.
Despite the requirements of stock exchange and government regulators, certain bank managers still disclose selectively, especially when the monitoring and enforcement of disclosure requirements are not strict in Nigeria.
Furthermore, the study conclude that a negative relationship exist between bank performance, board size and proportion of non-executive directors. That is, a reasonably strong correlation exists between poor performance and subsequent increase in board size and independence. While a percentage increase in return on equity can be explained by directors’ equity interest and the governance disclosure level.
5.4 Recommendations and Implication of Study
Based on the findings of this research, we therefore present the following recommendations which will be useful to stakeholders.
- 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. Hence, if the purpose of board independence is to improve performance, then such efforts might be misguided. However, if the purpose of board independence is to discipline management of poorly performing firms or otherwise monitor, then board independence has merit. In other to have proper monitoring by independent directors, bank regulatory bodies should require additional disclosure of financial or personal ties between directors (or the organizations they work for) and the company or its CEO. By so doing, they will be more completely independent. 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.
- Steps should also be taken for mandatory compliance with the code of corporate governance. Also, an effective legal framework should be developed that specifies the rights and obligations of a bank, its directors, shareholders, specific disclosure requirements and provide for effective enforcement of the law.
- In this study, all the disclosure items were given same weight which helps to reduce subjectivity; however, authority may place higher emphasis on certain elements of governance. Some aspect of governance may be considered to be a basic component or prerequisite to implementing others and thus should be given more weight.
- Finally, there is the need to set up a unified corporate body saddled with the responsibility of collecting and collating corporate governance related data and constructing the relevant indices to facilitate corporate governance research in Nigeria.
5.5 Contribution to Knowledge
This study has however contributed the following to the study of corporate governance;
- This study used the CBN code of best practice and some specific governance index as provided by the Institutional Shareholder Services (2001; 2002) to create a summary index of bank’s specific governance i.e. “Gov- Score”. This will be an improvement over the index as used in Gomper, Ishii and Metrick (2003) (i.e. the GIM index), which focused only on anti- takeover measures.
- Instead of considering just a single measure of governance (as prior studies in the literature have done), this study considered four different governance measures. This will help researchers in this area of interest to draw inference.
- Since to the best of the researcher’s knowledge, no study in Nigeria has extensively covered corporate governance of banks as it relates to performance, this study will serve as a data base for future research.
5.6 Suggestions for Further Study
The limitations of the study have prompted suggestions for further research as listed below;
- This research has gone some way to exploring corporate governance and corporate performance of banks in a broader context. Further research could explore the relationship in more in specific categories for example, in not-for-profit organizations, in government organizations, and in family companies. Since this study focused on the Nigeria banking sector it would be beneficial to have a clearer understanding of corporate governance roles in other types of organizations. Such research could address the similarities and differences of the roles in different organizations and consider also the legal requirements for different organizations.
- The period of study for this research is three years i.e. (2006-2008), which the post consolidation period. This limitation was imposed by the non availability of data pertaining to the reviewed banks. However, further research can consider more time frame based on the availability of the annual reports.
- Further research is also required on the behavioral aspects of boards. Researchers in developed countries have recently started examining board processes by attending actual board meetings however this also needs to be expanded by researchers in developing economies. There is therefore the need to go beyond the quantitative research, which is yielding a mixture of results, to perhaps a more qualitative approach as to how boards work. Expanding this current research into a wider study of board dynamics and decision making would be a start in developing a better understanding of corporate governance.
- The data used for the current study was derived from 24 banks and their return on equity. A larger data set comparing financial and non financial firms may result in a different model of the relationship between corporate governance and the value of a firm. The inclusion of new corporate governance instruments could also result in additional edge-worth combinations of the internal corporate governance mechanism while other performance measures can also be introduced.
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