Corporate Governance Practices And Bank Performance In Nigeria
In the immediate past two decades the financial services industry has experienced fluctuating fortunes leading to high profile cases of corporate failure and consequent near loss of public confidence and hence, the banking reform kick starts in 2004. The industry’s problems in Nigeria are consequences (directly or indirectly) of bad corporate governance. 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. The study therefore appraised Nigerian banks’ compliance to the CBN code of Corporate Governance as well as its effect on bank performance. Analysis of variance (ANOVA) was used to measure Nigerian bank’s compliance to the CBN code of corporate governance, while the panel data ordinary least square regression to measure the compliance effect on bank’s profitability. Among other codes of corporate governance for board size, audit committee, board diversity, and power separation. 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 recommended that Central Bank of Nigeria should strictly monitor Nigerian banks’ compliance to the code of corporate governance, especially board size, audit committee, board diversity, power separation, as a percentage increase in general compliance to the best practice. In conclusion, Compliance to Central Bank of Nigeria code of corporate governance significantly impacted on banks’ profitability in Nigeria. CBN code of corporate governance raises profitability of Nigerian banks by 3.53 percent. 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.
1.1 Background to the Study
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 to be over-emphasized. Worthy is of the fact that the level of functioning of the financial sector depends on the perception and patronage of the citizens towards its services (Al-Faki, 2006). The situation where the public losses 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 and deleterious effect on its performance. The measure of performance in this case is not limited to the financials (turnover and profit) but also customer satisfaction, employee welfare, social corporate responsibility, indeed the whole gamut of balanced score card.
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 do these changes affect 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).
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 shareholders’ 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.
In 1929, Means found that in only 11% of the 200 largest non-financial corporations the largest owner hold a majority of the firm’s shares. Further, establishing ownership of 20% of the stock as a threshold minimum for control, 44% of those firms had no individual who owned that much of the stock. These 88 firms which were classified as management-controlled also managed to account for 58% of the total assets held among the top 200 corporations. Two trends were indicated: the growing concentration of power and the increasing dispersal of stock ownership resulting in a widening gulf between share ownership and executive control within large corporations.
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 analyzed the level of compliance of code of corporate governance in Nigerian banks with the Central Bank’s post consolidated code of corporate governance.
1.2 Statement of the Research 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 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).
1.3 Objectives of the Study
The general objective of this study is to appraise Nigerian banks compliance to the CBN code of Corporate Governance as well as its effect on banks performance.
The specific objectives of the study are to:
- Determine the extent to which commercial banks in Nigeria complied with the Central bank of Nigeria code of corporate governance.
- Evaluate the effect of banks’ compliance to CBN code of corporate governance on the performance of banks in Nigeria.
1.4 Research Hypotheses
Specifically, the following alternate hypothetical statements were tested.
- Nigerian commercial banks significantly complied with the central bank of Nigeria code of corporate governance
- Banks’ compliance to the CBN code of corporate governance has significant effect on the performance of banks in Nigeria.
1.5. Scope of the Study
This study was limited in scope to deposit money banks in Nigeria. Reforms in the Nigerian banking sector have been an age long activity. Specifically, this study focused on the immediate past and ongoing bank reform that commenced in 2004 and with corporate governance issue as one of the core agenda of the reform of which a code of corporate governance was enacted for banks in Nigeria by CBN in 2006.
It ascertained the corporate governance practices of the Nigerian deposit money banks and their performance, and the codes of corporate governance used in the study was limited to board size, board composition, board diversity, power separation and audit committee. This work in terms of time covered a period of five years (2010 – 2014).
1.6. Significance of the Study
The relevance of any study stems from its importance to respective users or beneficiaries of such researches. Hence, this study will be of immense significance to the following categories such as Policy Makers in the Banking Industry, Government, Shareholders, Scholars and so many others. Policy makers in the Banking Industry will benefit immensely from the study as it is expected to redirect and refocus their attention to the significance of corporate governance in the financial service industry.
The Government at all levels (federal, state and local government) will find this work very interesting as it will reveal the extent of corporate governance code in Nigeria in relation to banking business. Corporate governance code was designed to ensure that banks operating within the shores of Nigeria have at the back of their mind the interest of fund providers as well as militating against agency problem. Shareholders and all other stakeholders in the industry will be willing to commit their hard earnings into an environment where it is safe and promises a desirable return. Hence, this study will reposition the confidence of all the parties in the banking industry against their investment. By extension, the potential investors will in no small way benefit as well.
Finally, scholars, researchers and students will find the work useful as it adds to existing literature and provides reference for future studies.
1.7 Organization of the Study
The study comprises of five chapters. Chapter one consists of the background to the study, statement of the problem, purpose of the study, objectives, research questions, significance, limitation of the study, delimitation of the study, basic assumptions, definitions of key terms and organization of the study. Chapter two comprises of literature review theoretical and conceptual frameworks. Chapter three deals with research methodology, covering research sampling, procedures, research instruments and their validity and reliability, procedures for data collection and data analysis. Chapter four comprises of findings and discussions which were generated by the study. Chapter five presents summary, conclusions and recommendations.
Summary, Conclusion and Recommendations
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.
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.
The following recommendations were drawn from the study;
- 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.
- 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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