Impact Of Corporate Governance On Deposit Money Banks Financial Performance In Nigeria

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Impact Of Corporate Governance On Deposit Money Banks Financial Performance In Nigeria


This study is aimed at examining the impact of Corporate Governance on the performance of banks in Nigeria, attention was given to Zenith Bank as case study. The board composition and CEO duality has been identified as one of the problems that have significant effect on the bankโ€™s performance. Corporate governance mechanisms used to achieve the objectives, formulate the hypothesis and the research questions include Board Size, Chief Executive Officer Duality and Excess remuneration of top management. Performance indicators analyzed are Return on Equity (ROE) and Return on Capital Employed (ROCE). In achieving the objective of the study, the researcher adopted both primary and secondary sources of data to present and analyze the information for the study. The primary sources of data used were questionnaires while the secondary data were obtained from the annual report of the case study. Seventy -five (75) questionnaires were administered to the respondents, out of which sixty (60) copies were filled and retrieved for the analysis. The primary data was analyzed using correlation. The secondary data was analyzed using ordinary least square method and the result shows that corporate governance has a positive impact on the performance of banks in Nigeria.

Chapter One


1.1 Background of the Study

Corporate governance is a system in which a corporation is directed and controlled, which has been of public interest after the recent financial scandals around the world. According to Adegbemi, Donald and Ismail (2010), stated that the major crises and scandals that occurred during the past decade and in recent times such as Enron and WorldCom in the US, the large retail agglomerate Ahold in the Netherland, XL Holidays and Adelphia. Also the sacking of Managers of some banks in Nigeria and Cadbury Nigeria Plc., to mention a few, highlights the importance of good corporate governance practices system. As an effect of this, government and investors required for an operative corporate governance practices in businesses, which will aid in preventing further corporate scandals. In USA, the federal government introduced the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. According to ICAN Study Pack (2010) explained that defined corporate governance as the set of mechanisms through which outside investors are protected from expropriation by insiders (including management, family interests and/or governments).

In Nigeria Banking Industry, banks like the Intercontinental Bank, Oceanic Bank, Bank PHB, Spring Bank, AfriBank, and others crumbled due to poor corporate governance put in place. The top management and the board of these companies were alleged to be reckless with investors fund, neglected due processes and took biased decisions.

According to Adegbemi et al (2010) explained that corporate governance should be characterized by transparency to shareholders and fairness to other stakeholders. Soludo (2004) explained that as a result of the nature of banking business and the manner of the operators such as unrecoverable loans, illiquidity, unethical bank practices, and so on, of Nigeria banks, there is a need to reinforce the corporate governance in banks; this will enhance public confidence and guarantee efficient and effective banking system.

Corporate governance as an overall concept covers the areas of compliance with the corporate and company law, code of best practices and ethical norms, risk management, so as to safeguard assets from expropriation, the installation and nourishment of internal audit functions which will enhance overall performance of the organization, (ICAN Study Pack: 2010). The clamour, therefore, for the institution of corporate governance has been motivated by the expectation that it will result in companies being diligently managed by the boards and management teams who are stewards for the resources placed in their care without necessarily creating agency conflicts.

The banking sector of the economy is one of the dynamic sectors of Nigeria economy. There is a need for proper governance to be insured as stipulated by regulatory bodies to make sure the goals and objectives are achieved. The Central Bank of Nigeria, (2006) in its code of corporate governance for banks recognized, due process, industrial transparency, data integrity and disclosure requirement as the essential attribute of good governance practices in banks. Despite the existence of CBN code of corporate governance for banks, code of professional practices, acts of mismanagement and decisions inimical to the interests of the stakeholders and survival of the corporate body are continuously perpetrated.

The Board size, CEO duality, and Board composition has been identify as problems, which may have significant effects on the performances of banks. Several studies have examined the separation of CEO and chairman of the board, posting that agency problems are higher when a single person occupies two positions, which is referred to as CEO duality. According to Abidin, Kamal and Jusuff (2009),stated that the Board of Directors were criticized for the decline in shareholders wealth maximization. They were said to have the spotlight for the fraud cases that has caused the failure of Major Corporation such as Enron and WorldCom, in Nigeria the failure of corporations such as Cadbury and some banks.

1.2 Statement of the Problem

The public and investors have been agitating against excessive remuneration and perquisites which directors and board members were paying themselves, out of tune with the operating and financial fortune of the companies, and failure to make adequate disclosure about the former. They are also agitating the failure to make adequate disclosure in the financial statement, leading to lack of public confidence in the financial reporting. Based on the above problems, therefore, there is need to reconnect two critical areas of the corporate governance equation: these are the shareholders and board members. There is a great need to reconnect them to the decision making process so as to maximize the value of the corporation and its reputation, which prompted the researcher to carried out this study.

In relation to the above problems, this research work is to study the impact of corporate governance mechanism (Board size, CEO duality, and excess remuneration) on the financial performance (such as returns on capital employed and returns on equity) of banks in Nigeria.

1.3 Objective of the Study

The main objective of the study is to ascertain the impact of corporate governance on deposit money banks financial performance in Nigeria, but to aid the successful completion of the study, the researcher intends to achieve the following sub-objective;

  1. To ascertain the effect of board size on Return on capital employ of the banks
  2. To examine the effect of duality of function of the chief executive officer on ROCE of the banks
  3. To examine the impact of excessive remuneration of top executive officers on ROCE of the banks
  4. To proffer suggested solutions to the identified problems

1.4 Research Question

This research study sets out to address the following questions:

  1. How does board size affect the Returns on Capital Employed (ROCE) of Bank?
  2. What are the effects of Chief Executive Officer Duality on the Returns on Capital Employed of Banks?
  3. What are the effects of Excess remuneration of top management on Returns on Equity?

1.5 Research Hypotheses

The following null hypotheses were formulated and tested:

  • H0: There is no significance relationship between Chief Executive Officer Duality and firm performance.
  • H1: There is a significance relationship between Chief Executive Officer Duality and firm performance
  • H02: There is no significant effect between the high remuneration of top managements and returns on equity.
  • H2: There is a significant effect between the high remuneration of top managements and returns on equity.

1.6 Scope and Limitation of the Study

The scope of the study was limited to impact of corporate governance on Zenith bank performance in Nigeria, since it is not possible for the researcher to cover all the banks in Nigeria as the population of the study. Zenith bank was chosen because it was listed on the Nigeria Stock Exchange and for its high market capitalization. The geographical area that was covered include; western region of Nigeria, specifically Lagos State. The annual report of the bank covering the period 2004 โ€“ 2013 was obtained to evaluate the impact of corporate governance on the performance of the bank.

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

1.7 Significance of the Study

The study will be of immense benefits for future users as well as other researchers, scholars and students. The study will also provide shareholders, stakeholders and members of the public knowledge on the importance of corporate governance in Nigeria and on internal audit monitoring and evaluation of the internal controls which are designed to mitigate all kinds of risks.

1.8 Definition of Term

Corporate Governance

Corporate governance is the mechanisms, processes and relations by which corporations are controlled and directed.

Deposit Money Banks

Deposit money banks are resident depository corporations and quasi-corporations which have any liabilities in the form of deposits payable on demand, transferable by cheque or otherwise usable for making payments

Financial Performance

Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues.

1.9 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  • Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain the impact of corporate governance on deposit money banks financial performance in Nigeria.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the impact of corporate governance on deposit money banks.

5.2 Summary

This study focused on finding out the triggers of performance of the banking sector of which Corporate Governance proved to be an important issue for many commercial banks. It has been established in selected literatures that corporate governance affects stakeholders and the banks as a whole, corporate governance affects the potential or ability of a bank to reach its market share both domestically and globally, corporate governance also determines the banksโ€™ ability to fulfill its social objectives with its clientele and society at large. This study has also established that that corporate governance practices have measurable effects on banks operational performances. The study therefore concludes that weak corporate governance structure in Nigeria contributed immensely to the recent crisis experienced in Nigerian banking sector.

5.3 Conclusion

The relationship between corporate governance and the financial performance of listed deposit money banks in Nigeria has been explored using data collected from the questionnaire and it was discovered that bigger board size contributes more to performance than smaller board size. Also, when a board size is large, it will be difficult for a person (may be CEO) to dominate the board and decisions reached by the board are seen to have emanated from sound and constructive arguments. The result of the summary statistics revealed that the proportion of nonexecutive director serving in the boards of banks are high and this is in compliance with the specification of corporate governance code which specifies that the number of non-executive directors should be higher than the executive directors. Of to continue to enjoy the advantage of larger board size, efforts should be directed at bringing on board those with relevant credentials, competence and wide range of experience.

5.4 Recommendations

Based on the discussion and conclusion above, the researchers recommend the following: Banks should engage in the development and implementation of strategic training for board members and senior bank managers. This should be carried out with special emphasis on corporate governance, corporate governance disclosure and banking ethics. They should regulate the size of the board which should not be too large and must consist of highly skilled and competent professional who are conversant with oversight function. There should also be in existence, a proper internal control structure and self-government regulation so as to detect early rule violations and also monitor systemic problems for early remediation and solutions. An effective legal framework should be developed by the legislature to regulate and specify the rights and obligations of a bank, its directors, and shareholders. Also such laws and regulations should specify disclosure requirements and enhance transparency and accountability. Also, Extra care and precautions.

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