CORPORATE GOVERNANCE STRUCTURE AND FINANCIAL

PERFORMANCE IN NIGERIA: 2012-2016

BY
PETER, ODIZIGHA . BUBARAFIAI
U2011/0606289

DEPARTMENT OF ACCOUNTING, FACULTY OF MANAGEMENT

SCIENCES, UNIVERSITY OF PORT HARCOURT, PORT HARCOURT
NIGERIA

OCTOBER, 2017

i
 CORPORATE GOVERNANCE STRUCTURE AND FINANCIAL
PERFORMANCE IN NIGERIA: 2012-2016

BY
PETER, ODIZIGHA . BUBARAFIAI
U2011/0606289

DEPARTMENT OF ACCOUNTING, FACULTY OF MANAGEMENT

SCIENCES, UNIVERSITY OF PORT HARCOURT, PORT HARCOURT,
RIVERS STATE.

Supervisor:
DR. E.A.L. IBANICHUKA
DR. NWAIWU JOHNSON

NOVEMBER 2017

ii
 CORPORATE GOVERNANCE STRUCTURE AND FINANCIAL
PERFORMANCE IN NIGERIA: 2012-2016

BY
PETER, ODIZIGHA . BUBARAFIAI
U2011/0606289

A Project submitted to the Faculty of Management Sciences in Partial Fulfillment

of the requirements for the award of degree of Bachelor of Science (BSc.) in the
Department of Accounting, University of Port Harcourt .

Supervisors: DR. E.A.L. IBANICHUKA

OR NWAIWU JOHNSON

NOVEMBER, 2017

iii
 DECLARATION

I, PETER, ODIZIGHA BUBARAFIAI declare that this Project on

Corporate Governance Structure and Financial Performance in

Nigeria was carried out by me: That it is my original work and that

it has not been submitted wholly or in part for the award of a degree

in any institution.

Name PETER, ODIZIGIIA . BUBARAFIAI

Signature: ………………………. Date: ………………….

iv
 CERTIF1CATION

UNIVERSITY OF PORT I-IARCOURT

FACULTY OF MANAGEMENT SCIENCES

CORPORATE GOVERNANCE: STRUCTURE AND FINANCIAL

PERFORMANCE IN NIGERIA: 201 2-2016

BY

PETER, ODIZIGHA. BUBARAFIAI

U2011/0606289

The Board of Examiners certifies that this Project is accepted in

partial fulfillment of the requirements for the award of the degree of
Bachelor of Science ([Link].) in the Department of Accounting.

NAME SIGNATURE DATE

Dr. E.A.L. IBANICHKA
(Supervisor) …………… …………

Dr. J.N. NWAIWU

(Supervisor) ………………….. ………….

Dr. U.I IRONKWE

Head of Department …………………. ………….

Prof. B.F. NWINNE

Dean of Faculty ………………….. …………..

External Examiner ……………….. …………..

v
 DEDICATION

This work is dedicated to God Almighty, the giver of life,

knowledge and wisdom.

vi
 ACKNOWLEDGEMENTS

I acknowledge God Almighty for endowing me with strength,

preservation, wisdom and the though process in understanding this
research project.

I hereby express m sincere appreciation to Dr. E.A.L. Ihanichuka

and Dr. J. N. Nwaiwu who devoted time to read and modify.
willfully sharing his experience and gave the necessary direction for
the successful completion of this work, Thanks also to all my
lecturers, particularly Prof. C.O. Ofurum, Dr. C. Ebere, Dr. S. Egbe,
Dr. G. N. Ogbonna and Dr. U. Ironkwe for their encouragement and
for their very useful advice during the course of the study.

I also express my gratitude to Prof. B.F. Nwinne and other members

of the faculty of management sciences, university of Port 1-larcourt,
Port Harcourt, Nigeria.

I deeply appreciate my boss and his amiable wife for their most
sincere positive disposition as expressed in their advice, love and
encourage which became a source of motivation.

I also appreciate my course mates particularly Okororna

Chukwuemeka, Amajuoyi, C.G and Damgho, N. Bariledum,
Bruce, A. V. whom we had several mutual interactive sessions
during the study. I acknowledge the branch controller C.B.N, NSE
and stock broker, Port Harcourt for swiftly granting me access to
their library and librarian for providing various necessary materials.

I would not conclude until I express my profound appreciation to

my sweet love for her patience to tolerate me all through the period I
directed my attention to this study.

vii
 ABSTRACT

The hallmark of banking is the observance of high degree of professionalism,

transparency and accountability, which are essential for building strong public
confidence. This research examined if there is significance relationship between
corporate governance structure and financial performance of quoted banks in
Nigeria. Time series data was collected from annual financial reporting from NSE
facts book and CBN statistical bulletin. The data collected was analyzed using
multiple regression analysis with the aid of e-view 7.0. The study therefore
observed that there is a positive effect of board size, director’s equity holdings and
independence directors on return on equity of banks in Nigeria. The t-test results
indicated that no significant difference was seen in the profitability of banks with
foreign directors and that of banks without foreign directors. The study concludes
that a positive relationship exist between corporate governance structure and
financial performance. The study recommend that a larger board size should be
encouraged as a larger board of directors has a range of expertise to make better
decision for the firm and also monitor the performance of an independent auditor
to improve the value of a firm.

viii
 CHAPTER 1

INTRODUCTION

1.1 Background to the Study

The International financial landscape is changing rapidly economies and financial

stems are experiencing distress and unpleasant year: globalization and technology

have continuing speed financial arenas are becoming more open new products and

services are flooding the market and regulators everywhere are scrambling to

assess the changes and master the turbulence (Mátama, 2008) Merger & and

acquisitions are now trends to make financial operators remain in business. One

fact remains that cannot be changed is the need for countries to have sound

resilient banking systems and strong banks with good corporate Governance that

will use competition to strengthen and upgrade their institutions for survival in am

increasingly open environment (Kaheeru 2001).

The concept of Corporate Governance has in recent years become a leading topical

issue n our business world. The Cadbury committee of the United Kingdom

defined corporate governance “as a set of rules that defined the relationship

between shareholders in respect creditors. The government employee and other

internal and external stakeholder is in respect to their rights and responsibilities- or

the system by which companies are directed and controlled. The corporate

governance structure specifies the is contributions of right and responsibilities

1
among different stakeholders in a corporation and spell out the rules and

procedures for making decision on corporate affairs. This is in agreement with the

opinion of Uche (2004) and Akinsulire (2006). Oladimeji (2007). posits that

corporate governance could be conceptualized as the manner in which power

exercised in the management of economic and social resources for sustainable

development ibis incluk4 financial development through efficient and effective

financial intermediation which the banks stand for Magdi and Nadereh (2002)

opined that corporate governance is- about ensuring that business is organized sell,

and investors receive a fair return. It emphasizes the invaluable concepts that relate

to the ways and manner in which financial resources available to a company are

efficiently utilized to achieve the overall corporate objective of the company. It

guarantees the stability and the going concern status of a bank and create greater

prospect for the literature of the bank. The effectiveness of corporate governance

has a profound effect-on how well a bank performs Corporate governance is about

promoting, corporate fairness transparency and accountability (Financial Timesi

999). Hence the factors responsible for poor corporate’ performance especially in

banks emanate from lack of transparency, accountability and poor ethical conduct

(ICibirango, 2002). Governance is a requisite for survival and a gauge of how

predictable the system for doing business in any country is in developing countries,

the importance of governance is the strengthen the foundation of society and chip

2
into the & Obal economy (Matama. 2008). Corporate governance is about putting

in place the structure processes and’ mechanisms that ensure that the firm is being

directed and managed in a way that enhances long term shareholder value through

accountability of managers and enhancing firm performance In other words

through such structure processes and mechanisms. The well-known agency

problem (which results when those who own the business are separated front those

who manage it thus leading to conflict within the firm may be addressed such that

the interest of managers: can be aligned with those of the shareholders. The crisis

of confidence that had rocked nations’ banking .tor alerts go’ eminent to the

importance of maintaining efficient corporate governance mechanism to ensure

stability of the economy. Hence, regulators and researchers attention have turned

towards investigating the effect of the equilibrate governance mechanism on firm

performance.

1.2 Statement of the Problem

In Nigeria. before the consolidation exercise, the banking industry had about 8.9

active players whose overall performance led to sagging of customers’ confidence.

there were lingering distress iii the industry the supervisor\ structures were

inadequate and there were cases of’ financial recklessness among, the- managers

and directors, while the industry was notorious for ethical abuses.

3
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 system, excessive risk

taking, overriding 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 this vie is

supported by the Nigeria. Security and Exchange Commission (SEC) survey in

April 2004 which shows that corporate governance what at a rudimentary stage as

only about 40% of quoted companies including banks had’ recognized code of

corporate governance in place. This as suggested by this study may hinder the

public trust particularly in Nigerian banks if proper measures are not put in place

by regulatory bodies.

The series of widely publicized cases of accounting recorded in the Nigerian

banking industry iii 2009 ( for instance.. Oceanic hank intercontinental bank.

Union Afri Bank Fin bank and Sring bank) were related to the lack of vigilant

oversight functions by the Boards- of Directors; the board- members relinquishing

control to corporate managers who pursued their own self-interests and the board

members being remiss iii its accountability to stakeholders. Corporate governance

in recent ears assumed considerable- significance as: a veritable toot for- ensuring

4
corporate survival since business confidence usually suffers each time a corporate

entity collapses.

The problem in the Nigerian banking industry prior to the post consolidation has

been that of risk management arising from accumulation of huge non-performing

accounts. This is as a result of non-application of five C’ of lending Character.

Capacity. Capital, Condition and Collateral The banking industry experienced

misuse of shareholders funds and governance, malpractice.

As banks grew in size and complexity bank board members often did not fulfill

their function and were lulled into sense of well-being by the apparent’ year-over-

year growth in assets; and profits. Board members; and executive management in

some major bank were not equipped to run their institutions. The bank

chairman/CEO- often had an overhearing, influence on the board members and

some board: members lacked independence: directors often fail to make

meaningful contributions to- safe-guard the growth and development of c-hank

and had weak ethical standards the board committees were also: often ineffective

or dormant. (Thief Executive Officers (CEO’. board members and managers lend

money to themselves at the expense of many depositors. and: Investors. For stock

pride manipulation and other activities in variance with corporate governance. The

executives: of banks had abandoned the key elements of good corporate principles

of honesty trust, and integrity openness, performance orientation. Responsibility

5
and accountability, mutual respect and commitment to the organization for selfish

reasons.

In some cases, these- hank 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. The relevance of independent directors may be watered down-

if they are bought over, since; in any case, they are being, paid by the banks they

are expected to- oversee. As a result, various corporate governance reforms have

been specifically emphasized on appropriate changes to he made to the Board of

Directors in terms of its composition, size and structure.

Finally ii is in the light of the above problems that this research- work studied the

relationship- between corporate governance mechanisms on the financial

performance of banks in Nigeria looking at the effects of Board’ size, Directors

equity interest and Board’ independence on Return’ on Assets and Return’ on

Equity.

1.3 Aim and Objectives of the Study

Generally this study seeks to explore the relationship between corporate

governance structure and. firms- financial performance in the banking industry.

However, it is set to achieve the following specific objectives:

1. To examine the effect of hoard size, hoard independence and directors’

6
 equity interest on Return on equity of banks in Nigeria.

2. To investigate the effect of board size board independence and directors

equity interest in Return on equity of banks in Nigeria.

3. To determine the difference in the financial performance of banks with

foreign directors and banks without foreign directors in Nigeria.

1.4 Research Question

The following are pertinent questions emerging within the domain: of study

problems:

1. How does board size, board independent and directors’ equity holding affect

return of equity of banks in Nigeria?

2. To what extent does board size board independent and directors’ equity

holding affect Return on Equity of banks in Nigeria?

3. How does the financial performance of banks with foreign directors differ

from those banks without foreign directors in Nigeria?

1.5 Research Hypotheses

Following hypotheses stated in their null forms were tested:

Ho1: Board size, hoard independence’ and directors’ equity holding do not

significantly affect Return on Equity of banks in Nigeria.

7
Ho2 Board size, board independence and directors’ equity holding do not

significantly affect Return on Assets of banks in Nigeria.

H03: There is no significant difference in the financial performance of banks with

foreign directors and banks without foreign directors in Nigeria.

I .6 Significance of the Study:

This study is of immense value to die following:

Bank regulators: This study provides, a picture of where bank stand in relation to

the codes and principles of corporate governance introduced by the central bank of

Nigeria. The study will help bank regulators to choose policy initiatives that will

enhance harmony in banking system.

Investors- this study will provide an insight for investors 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-.

Relevant stakeholders- shareholders and Board of Directors will find the

information of value in benchmarking the’ performance” of their banks against that

of their peers.. If banks actually maintain good quality corporate governance

through the’ findings of the study, it will help to sustain the wealth able of the

shareholder as this will enhance the stability of the banking industry.

8
Academics/students: further researchers will benefit from the study because the,

policies that will he formulated from the findings will facilitate increase and

strong compliance to good governance in all ramifications. The result of this study

will also serve as a data base the further researchers in this field of research.

General public: The findings of this study will he beneficially to the general

public, because irrespective of the sector any person finds himself/herself

adherence to corporate: governance, practice is very important as: this will ensure

adequate transparency accountability and fairness in all ramification of life.

1.7 Scope and Limitations of the Study

Considering the year 2006 as the year of initiation of post consolidation

governance codes far the Nigeria banking sector’, this study investigates the

relationship between corporate governance, and financial performance of banks.

The study, basically the covered fifteen (1:5) quoted banks listed in Nigeria Stock

Exchange as at 2013.

The study covered these banks activities before the post consolidation- period and

beyond i.e. 2004-201:3.

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 The study therefore covers three key governance variables which are board

9
size, board composition and directors equity ownership.

The researcher was constraint most on down-loading of information from the

quoted banks website because of epiIeptic power supply and network

inconsistency. Another limitation that constraint the researcher was to gather

enough information, journals and materials to’ build up the literature review in

remedying the situation, the researcher employed the ser ices of NRCRF computer

staff to enable him have access to constant supply of power and to down load the

necessary information from the quoted hank website.

Board size (BOS): This is defined as the number of directors both executive and

non-executive directors on the board of the bank.

Corporate governance: The methods by which suppliers of finance control

managers in order to ensure that their capital cannot he expropriated and that they

earn a return on their investment.

Executive directors: Directors that are currently employed by the firm, retired

employees of the firm, related company officers or immediate family members of

firm employees.

Financial performance: This is a measure of how well a firm can use assets from

its primary mode of business and generate revenues. This term is also used as a

general measure of a firm overall financial health over a given period of time

Governance structure: Governance structure specifies the distribution of rights and

10
responsibilities among different participants in the corporation such as, the board

managers, shareholders and other stakeholders, and spells out the rules and

procedures for-making decisions on corporate affair.

Independent director: A person whose directorship constitutes his or her only

connection to the corporation.

Merger: The combining, of two- or more companies, generally by offering the

stockholders of one company securities in the acquiring company in exchange for

the surrender of their stock.

Non-executive directors: They are-members of the Board who a not top

executives. Retired executives former executives, relatives of the CEO or the

chairperson of the Hoard, or outside corporate lawyers employed b the firm.

OECD: The Organization for Economic Cooperation and Development Foreign

Directors: Directors that are currently employed 5y the firm to direct and manage

the affairs of the firm who are non-indigenes of’ Nigeria.

11
 CHAPTER 2

REVIEW OF RELATED LITERATURE

2.1 Conceptual Framework

2.1.1 Concept of Corporate Governance

Corporate governance has been looked at and defined variedly by different

scholars and practitioners. However they all have pointed to the same end hence

giving more of a consensus in the definition. Corporate governance refers to the

processes and structures 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. (Jirnkinson & Mayer 2012).

Coleinan and Nicholas-Biekpe (200) defined corporate governance as the

relationship of e enterprise to shareholders or in the wider sense as the relationship

of the enterprise to society as a whole. However, Mayer (2009) offers a definition

with a wider outlook and contend that it means the sum of the processes, structures

and information used for 3irecting and overseeing the management of an

organization. The organization for Economic Corporation and Development (1999)

has also defined corporate governance a system on the basis of which companies

are directed and managed.

Lemo (2010) states that corporate governance is the body of rules of the game by

12
which companies are managed and supervised h the hoard of directors hr order to

protect the interest and financial stakes of shareholders o1 the firm It is a s stem

which corporations are governed are controlled with a view to increasing

shareholders value and meeting expectation of other stakeholders. Okene

(2010) citing Farar (2008).

Maintain that corporate governance was used as a term Forty years ago.

The root of the term “governance was ‘ruin the latin words.

‘Guharnare’?’ and Guhcrnator” which refer to “steerine a ship and to

the “steerer or captain of the ship respectively. Mensah (20.13) states

that corporate governance is am institutional arrangement which provide

the discipline and cheeks over excesses of controlling managers.

Corporate governance enforcement mechanisms through proxy contest,

takeover and buy out permit control of the company to be sold and

bought facilitating the replacement of non-performing managers.

Corporate governance refers to the organizational framework for

decision making and action taking within a corporate entity. In this

regard, it can also be defined as the structure of relationships within an

entity for making decisions and implementation & Simply putt it refers

13
to how an organization is run, that is, how the resources of an

organization. Hussy (2009) as cited in Ivior (2008.) defines corporate

governance more formally as “the manner in which organizations,

particularly limited companies are managed and the nature of

accountability of the managers to the owners”. In other words. corporate

go governance is not just a set of rules but also a structure of relationship

geared towards establishing goo4 corporate practice and culture. The

Ultimate Business Dictionary (2003) as cited in Saihi (2010) defines

corporate governance functionally as the managerial or directional

control of an incorporated organization, which. When well practiced can

reduce the risk of fraud, improve company performance and leadership

and demonstrate social responsibility essentially corporate governance

is focused on controlling the activities of those in whose custody the resources

of an organization are entrusted with a view to protecting the interest of the

resources owners.

Wise and Mahhoob (2()U)) opined that “corporate governance indicates the

policies and procedures applied by firms to attain certain sets of objectives,

corporate missions and visions with regard to stakeholders’, employees, customers,

14
suppliers and different regulatory agencies and the community at larger Effective

corporate governance practices are essential to achieving and maintaining public

trust and confidence in the banking sector and economy as a whole. Poor corporate

governance may contribute to bank failures, which can pose significant public

costs and consequences due to inability of a hank to manage its assets and

liabilities, including deposits. lost of confidence and in turn trigger a bank run or

liquidity Crisi & Oyediran (20.03;) as cited in Babalola’(2010) posits that

corporate governance is the way and mariner in which the affairs of companies are

conducted’ by those charged with the ditty. In Nigeria, the governance of a limited

liability company is the responsibility of its Board of Directors Corporate

governance is characterized by transparency, accountability, profitability and the

protection of stakeholders” rights. Corporate governance refers to the manner in

which the power of a corporation is exercised in the management of its total

portfolio of economic and socio resources with the aim of increasing shareholders’

value and safeguarding the interest of other stakeholders in the content of its

corporate mission.

The above definitions are summarized into one by the report of the committee on

Corporate Governance of Public Companies in Nigeria (2003) as cited in Sani

(2010) which sees corporate governance as the system by which companies in

Nigeria are directed and. managers are held accountable for the performance of the

15
organization”.

This further emphasizes the fact that the concept of corporate governance is

principally on the structure of relationship within the organization which is

directed at best practice in the overall interest of the Organization and its

owners/stakeholders with the sole aim of curbing distress in the Nigeria banking s

stem.

2.1 .2 Elements of Corporate Governance in Banks

Different authors and management specialists have argued that corporate

governance requires laid down procedures, processes, systems and codes of

regulation and ethics that ensures its implementation in organization Altunbas.

Evans and Molyneux, 2001). Some suggestions that have been underscored in this

respect include the Need for banks to set strategies which have been commonly

referred to as corporate strategies for their operations and establish corporate

governance and the future of the Arab banking industry, pointed out that corporate

strategy is- a deliberate search for a plan of action that will develop the corporate

competitive advantage and compounds it.

In addition to this, the BCBS (1999) contends that transparency of information

related to existing conditions, decisions and actions, is integrally related to

accountability in that it gives market participants sufficient information with which

16
to judge the management of a bank: The Committee advanced further that various,

corporate governance structures exist in different countries hence, there is no

universally correct answer to structural issues- and that has do not need to be

consistent from one country to another sound governance therefore can be

practiced regardless of the form used by a banking organization. The Committee

therefore suggests four important forms of oversight that should be included in the

organizational structure of any bank in order to ensure the appropriate checks, and

balances. They include

I) Oversight by the Board of Directors or Supervisor hoard members

2) Oversight by individuals not involved in the day—to-day running of the

various business areas;

3) Direct line’ supervision of different business, areas, and;

4) Dependent risk management and audit actions.

In summary, they demonstrate the importance of key personnel being fit and

proper for their jobs and the potentiality of government ownership of a hank to

alter the strategies and objectives of the bank as well as the internal structure of’

governance hence, the general principles of sound corporate governance are also

beneficial to government owned banks. ‘The concept of good governance in

banking industry empirically implies total quality’ management. which includes

six performance areas Klapper and Love; 2002) These performance areas include

17
capital adequacy, assets quality, management; earnings. liquidity, and sensitivity

risk. Krapper and Love argued that the degree of adherence to these parameters

determines the- quality rating, of an organization.

2.1.3 Regulation and Supervision as Elements of Corporate Governance in Banks.

In most instances it has been argued that given the special nature of banks and

financial institutions. Some form of economic regulations are necessary. However,

there is a notable shift from such regulations which have always been offered by

governments over time in different economies over the world. As observed by

Arun and Turner (2002) over the last two decades many governments around the

world have moved away from using economic regulations towards using

prudential regulations as part of their reform process in the financial sector. They

noted that prudential regulation involves banks having to hold capital proportional

to their risk-taking early warning systems bank resolution schemers and banks

being examined on an on- site and off – site basis by banking supervisors. They

asserted that the main objective of prudential regulation is to safeguard the

stability of the financial system and to protect deposits. .

However, Brown (2004) observed that the prudential reforms ahead implemented

in developing countries have not been effective in preventing banking crises, and a

question remains as to how prudential systems can be strengthened to make them

18
more effective. Barth. (aprio and Levin (2O0 ) argued that there have been gray

areas in the ability of developing economies to strengthen their prudential

supervisor and questions have-been raised on this issue for several reasons:

It is- expected that banks in developing economies should have substantially higher

capital requirements than banks in developed economies. However, many banks in

developing economies find it very costly to raise even small amounts of capital due

to the fear of fund mismanagement by shareholders.

There are not enough well trained supervisors in developing economies to examine

banks.

Supervisor\ bodies in devei4ping economies typically lack political independence,

which may undermine their ability to coerce banks to comply with prudential

requirements and impose suitable penalties.

Prudential supervision completely relies on accurate and timely accounting

information However in many developing economies, accounting rules, if they

exist at all are flexible and typically, there is a paucity of information disclosure

requirements. Barth et. al (2001) argued that if a developing economy liberalizes,

without sufficiently strengthening it prudential supervisory system hank manager

would find it easier to expropriate depositors and deposit insurance providers. A

prudential approach to regulation will typically result in banks In developing

economies having to raise equity in order to comply with capital adequacy norms.

19
They maintained the argument that prior to developing economies deregulating

their banking systems much attention will need to be paid to the speedy

implementation of robust corporate governance mechanisms in- order to protect

shareholders.

In an earlier discourse, Arun and Turner (2002) argued that in developing

economies the introduction of sound corporate governance principles into banking

has been partially hampered by poor legal protection, weak information disclosure

requirements and dominant owners. They observed further that in many developing

countries, the private banking sector is not enthusiastic to introduce corporate

governance principles due to the ownership control.

Besides control mechanisms in banks supervision of banks is- another concept (hat

can have both positive and negative impact on the performance of banks. The

Basel Committee on Banking Supervision (1999) upheld that banking supervision

cannot function as well if sound corporate governance is not in place and

consequently banking supervisors have strong interests in ensuring that there is

effective corporate governance at every banking organization. They added that

supervisory experience underscores the necessity having the appropriate levels of

accountability and checks and balances within each hank and that sound corporate

governance makes the work of supervisors infinitely easier. Sound corporate

governance therefore can contribute to collaborative working- relationship between

20
management and hank supervision.

It is clear that the development of corporate governance- in banking requires that

one understand how regulation affects the principals delegation of decision making

authority and what effect this has on the behaviour of their delegate agents

(Coleman. and Niekolas-[3iekpe 2006) They further suggest that regulation hasp at

least four effects on the principle regulation of decision-making:

a. the existence of regulation implies the existence of an external force,

independent of the market, which affects both the owner and the manager.

b. if the market, in which banking firms act is regulated one can argue that the

regulations aimed at the market implicitly create an external governance

force on the firm.

e. the existence of both the regulator and regulations implies that the market

forces will discipline both managers and owners in a different way than that

in unregulated firm

d. in order prevent systemic risk, such as lender of last resort, the current

banking regulation means that a second and external party i sharing the

bank’s risk.

From the above, the external forces affecting corporate governance in banks

include not only distinctive market forces but also regulation. The truth about bank

regulation is that governance in banks must be concerned with not only the

21
interests of owners and shareholders hut with tile public interest as well.

Additionally, regulation and its agent (the regulator) have a different relationship

to the firm than the market, bank management or hank owners.

However, as observed: in the banking firm. there exists another interest that of the

regulator acting as an agent for the public interest, Ibis interest exists outside of the

organization and is not necessarily associated in an. immediate and direct way. to

maximization of bank profits The mere existence of this outside interest will have a

profound effect on the construction of interest internal to the firm (Freixas and

Rochet 2003) Thus, because the public interest plays a crucial role in banking

pursuit of interests internal to the firm requires individual] banks to attend to

interests external to the firm. [his implies, a wider range of potential conflict of

interests than is found in a non- bank corporation in bank corporations. the agent

respond not only to the owners’ interest. but also to the public interest expressed by

regulation through administrative rules, codes. ordinances, and even financial

prescriptions.

In summary, the theory of corporate governance hr banking requires consideration

of the following; issues:

i. Regulation as an external governance- force separate and distinct from- the

market

ii. Regulation of the market itself as a distinct and separate dimension of:

22
 decision making within banks.

iii Regulation as constituting. the presence of an additional interest eternal to

and separate from the firms’ interest.

iv Regulation as constituting an external party that is in a risk sharing

relationship with the individual bank firm.

Therefore theories of corporate governance in banking. which ignores regulation

an supervision, will misunderstand the agency problems specific to banks. This

may read to prescriptions that amplits’ rather than reduce risk. In Nigeria, the

regulatory functions. which is directed at the objective of promoting and

maintaining the monetary and price, stability in the economy is controlled by the.

Central Bank of Nigeria while the supervisory bodies are Nigeria Deposit

insurance Corporation and the Central Bank of Nigeria (CBN. 2006). In other

words, if one accepts. that regulation affects the banking sector in an important

way: one must also accept the fact that this has important implications for the

structure and dynamics of the principal agent relationship in banks.

2.1.4 Corporate Governance Mechanism

Especially, one consequences of separation of ownership from management is that

the day-to -day decision making power (that is the power to make decision or the

use of capital supplied by the shareholders) rest and with persons other than the

23
shareholders themselves. The separation of ownership and control has given rise to

an agency problem whereby there is the tendency for management to operate the

firm in their own interest, rather than those of shareholders (Jensen & Meckling

1976: Paine & Jenson 1983) these create opportunities for managers to build

illegitimate empires and in the extreme outright expropriation various suggestions

have been made in the literature as to how the problem can be ameliorated

(Hermolin & Weisbach. 2001: Jensen & Meckling 1916: Shleifêr & Vishny. l97).

Some of the mechanisms and the impediments to monitor and shape banks

behaviors are examined below:

[Link] Shareholders:

Shareholders 1liav a key role hi the provision of corporate governance. Small or

diffuse shareholders exert corporate governance by directly voting n critical issues

such as mergers liquidation, and fundamental changes in business strategy and

indirectly by electing the Boards of Directors to represent their interest and verse

the myriad of managerial decisions to be taken by the management of the

organization. Incentives contracts are a common mechanism for aligning the

interests of managers with those of shareholders. The Board of Directors may

negotiate managerial compensation with a view to achieving particular results.

Thu, small shareholders may exert corporate governance directly through their

24
voting right and indirectly through the Board of Directors elected by them.

How-ever, a variety of factors could prevent small shareholders from effectively

exerting corporate control. There are large information asymmetries between

managers and small shareholders as managers have enormous discretion over the

flow of information Also, small: shareholders often -lack the expertise to monitor

managers accompanied by each investor’s small stake which could induce free-

rider problem. That is each investor relies on others to undertake the costly process

of monitoring managers. so there is too little monitoring. Large (concentrated)

ownership is another corporate governance mechanism for preventing managers

from deviating too far from the interest of the owners. Large investors have the

incentives to acquire information and monitor managers. The can also elect their

representative to the Board of Directors and thwart managerial control of the

board. Large and well-informed shareholders could he more effective at exercising

their voting rights than an ownership structure dominated by small, comparatively

uninformed investors. Also they could more attentively negotiate managerial

incentive contracts that align owner and manager interests than poorly informed

small shareholders whose representatives the Board of Directors can he

manipulated by the management.

However, concentrated ownership raises some corporate governance problems.

Large investors could exploit business, relationships with other firms they own

25
which could profit them at the expense of the hank.- In general large shareholders

could maximize the private benefits of control at the expense of small investors

(Dc Angelu & Dc Angelo 1985) Thus, while concentrated ownership is a common

mechanisms for confronting the corporate governance issue. it has its own

drawbacks.

[Link]. Debt Holders:

Debt holders provide return for a premised stream of payments and a variety of

other covenants relating to corporate behaviour; such as the value and risk of

corporate assets. If the corporation violates these covenants; or default on the

payments debts holders typical could obtain, the rights to repossess collateral

through the corporation into bankruptcy proceedings. vote in the decision to

reorganize and remove managers. However, there could be barriers- to diffuse debt

holders to effectively exert corporate governance as envisaged. Small debt holders

may he unable to monitor complex-organization and could face the free rider

incentives.-as small equity holders. Also effective exertion of corporate control

with diffuse debts depends largely on the efficiency of the legal and bankruptcy

systems. Large debts holders like large equity I-holds could ameliorate some of the

information and contract enforcement problems - associated with diffuse debt. Due

to their large investment, they are more likely to have the ability and the incentive

26
exert control over the firm by monitoring managers. Large creditors obtain various

control rights, in the case of default or violation of covenants. In arms of cash they

can renegotiate the terms of loans, which may avoid inefficient bankruptcies. The

effectiveness of large creditors. however, relies importantly on effective and

efficient legal and bankruptcy systems. If the legal system does not efficiently

identify the violation of contracts and reorganize firms, then creditors may rose a

crucial mechanism for exerting corporate governance.

Also, large creditors. like shareholders may attempt to shift activities of the hank to

reflect their own preferences. Large creditors for example as noted by Myers

(1997), may induce the company to forego good investment and take on too little

risk because the creditor hears some of the cost but will- not share the benefits.

[Link]. Competitions Product Market and Take Over

Some economists have argued that competition in the product or service market

may act as a substitute for corporate governance mechanism (Ahiem &. Gale

2000). The basic argument is that firms with inferior and expropriating

management could he force out of the market by firms possessing nun

expropriating manager due to sheer competitive pressure. That is rather than

focusing on the mechanisms via which equity and debt holders seek to exert

corporate control. Market competition can discipline a poorly managed firm-Also,

27
a fluid takeover market was noted by Jensen (1993). Could create incentives for

managers to act in the best interest of he shareholders to avoid being fired in a

takeover. Evidence however, suggests that given the power of managers and the

scarcity of liquid capital markets, takeover are essentially nonexistent as a

corporate governance mechanism outside the LSA and 13K (Shleifer &. Vishny,

L997.

2.1.5 Corporate Governance in Banks

Corporate governance is a crucial issue for the management of banks, which can he

viewed from two dimensions. One is the transparency in- the- corporate- function,

thus protecting the investors’ interest (reference to agency problem, while the other

is concerned with having a sound risk management system in place.(Jensen &

Meckling 2007). The Basel committee on banking supervision (1999) states that

from a banking industry perspective, corporate governance involves the manner in

which the business and affairs- of individual institutions are governed by their

Board of Directors and senior management.

On a theoretical perspective, corporate governance has been seen as an economic

discipline, which examines how to achieve an increase in the effectiveness, of

certain corporations with the help of organizational arrangements contracts,

regulations and business legislation it is not disputed fact that banks are crucial

28
element to any economy:

This therefore demands that they have strong and good corporate governance if

their positive effects were to be achieved (Base Committee on Banking

Supervisions, 2003). King and Levine (1993) and Levine 1997. Emphasized the

importance of corporate governance of banks in developing economies and are

extremely important engines for economic growth second, as financial markets are

usually underdeveloped, bank in developing economies are typically the most

important source of finance for majority of firms. Third as well as providing a

general accepted means of payment. banks in developing countries are usually the

main depository fur the economy’s savings. Banking supervision cannot function.

if what Hettes (2002) calls “Correct Corporate Governance’ does not exist, since

experience emphasizes the need the an appropriate level of responsibility control

and balance of competences in each hank. Hëttes explained further on this by

observing that correct corporate governance simplifies the work of banking.

supervision and contributes towards corporation between the management of a

bank and the banking supervision authority (Grespi Cestona & Salas, 2002).

Contend that corporate governance of banks refers to the various methods- by

which hank owners attempt to induce managers to implement value maximizing

policies They observed that these method may be external to the firm, as the

market for corporate control or the level of competition. in the product and labour

29
markets and that there are also internal mechanisms such as a disciplinary

intervention by shareholders (what they refer to a proxy fights) or intervention

from the’ Board of Directors.

The rapid changes brought about by globalization, deregulation and technological

advances are increasing the risks in banking system. Moreover, unlike other

companies, most of the [Link] used by banks to conduct their business belongs to

their creditors, in particular to their depositors. Linked to this is the fact that the

failure of a bank affects not only its own stakeholders, hut may have a systematic

impact on the stability of other banks. All the more reason therefore is to try to

ensure that banks are properly managed.

215.1 Structure of Corporate Governance in Nigerian Commercial Banks

Owing to the unique nature of banking, there are adequate corporate governance

laws and regulations in place to promote good corporate governance in Nigeria.

Some of the most important ones include: The Nigeria Deposit Insurance

Corporation ([Link]} Act of 1988. The Company and Allied Matters Act

(CAMA) of 1990 the Prudential Guidelines,. the Statement of Accounting

Standard (SAS 10). The Banks and Other Financial Institutions (BOFI) Act of

1991, the Central Bank of Nigeria (CBN) Act of 1991. The CBN Circular and

Guidelines; etc. Also, there are some government agencies and non governmental

30
 associations that are in the vanguard of promoting good- corporate governance

practices in the Nigerian banking sector. These organizations, apart from the 13W

and ND]EC. include the Securities and Exchange Commission (SEC), the Nigerian

stock Exchange (NSE); Corporate Affairs Commission (CAC). Institute of

Chartered accountants of Nigeria. ( ICAN ). financial Institution Training Centre (

FITC L Institute f Directors (101)) Chartered Institute of Bankers of Nigeria

(CIBN), etc. Basically, corporate governance in the nations banking system

provides the, structure and processes within which the business of bank is

conducted with the ultimate objective of realizing, term shareholders value while

taking, into account the interests of all other legitimate stakeholders. In meeting its

overall commitment to all stakeholders, the various statutory and other regulations

in the system impose the responsibilities with sanctions- for breaches on hank

director to;

a. Effectively supervise bank affairs by exercising reasonable business judgment and

competence.

b. Critically examine the policies and objectives of a bank concerning investment,

loan asset and liability management etcetera.

c. Monitor bank’s observance of all applicable Laws.

d. Avoid self-serving dealings, and any other malpractices

e. Ensure strict accountability: etc.,

31
 A critical review of the nation’s banking system over the years, have shown one of

the problems confronting the sector had been that of poor corporate governance.

From the sing reports of banks liquidated between 1994 and 2002, there were

evidences that clearly established that poor corporate governance led to their

failures. As revealed in sonic closing reports. Many owners and directors abused or

misused their privileged positions or breached their judicious duties by engaging in

self serving activities. The abuses included granting of unsecured loans/credit

facilities, to owners, directors and related companies, which in some cases were in

excess of their hanker statutory lending limits in violation of the provisions of the

law., The various corporate misconducts in the affected bank caused pain and

suffering to some stakeholders particularly depositors and some shareholders for

no fault of theirs. A review of on-site examination report of some banks in

operation in recent times continues to reveal that some banks had continued to

engage in unethical and unprofessional conduct such as:

1. Non-non-implementation of examiners’ recommendation as contained in

successive examination reports.

2. Continual and willful violation of banking laws, rules and. regulations.

3. Rendition of inaccurate returns and failure to disclose all transactions thereby

preventing timely detection of emerging problem by the regulatory authorities etc.

4. Furthermore some bank’s examination reports revealed that many banks were yet

32
to imbibe the ethics of good corporate governance. One of such issues bordering

on weak corporate governance had been the prevalence of poor. Quality of risk

assets. Apart from those of other debtors, large non-performing insider related-

loans and advances in some banks had persisted due to the inability of the

respective board. And management to take appropriate action against suck insider

debtors. From the various reports reviewed internal audit functions were, in some

banks, not give appropriate backing of the board and senior management. Lack of

transparency in financial reporting had equally been noted in some banks

examination report. Abe hoards of some banks were also to be intellective in their

oversight junctions as they readily ratified management actions even when such

actions could be seen to violate the culture of good corporate governance. Many

hoard committees were equally noted to have failed to hold regular meetings to

perform their duties.

From the forgoing it is obvious that corporate governance in the system faces

enormous challenges which if not addressed could have serious implications over

the overall success of the hank exercise. If operators in the banking sector wilt

keep to the rules as specified by the regulatory agencies and in individual banks’

policies and transactions procedures all things being equal. Financial sector

stability could be guaranteed. in some failed banks closing, report and on-site

examination reports of some banks in. operation the prospect of restoring public

33
confidence in the Nigeria banking sector may be difficult to position.

[Link] The Banks’ Responsibilities in Ensuring Corporate Governance.

Emphatically, corporate governance system should ensure that corporate managers

and their supervisors are accountable to the shareholders and a host of other &

constituencies. It is seen as the management of corporate business and affairs of a

company effectively in order to add value to the company Anaroke. (2004) in his

paper addressing the challenges of corporate governance and the role of relevant

institutions’ posited the responsibility in ensuring corporate governance as follows:

Banks should engage qualified- experts to conduct an internal review of its

corporate governance practices. Identify areas of lapses and make

recommendations which the hoard should commit to enforcing Such review should

formulate in details the role and responsibilities of the hoard and recommend

further steps a hoard should take to be on top of its responsihi1itis. Such should

include Development of clear position description fin the chairman of the board

and. the chairman of committee, develop clear position: description for the

Managing Director, which should include delineating management’s

responsibilities designed to enable the Managing Director meet pre-agreed

corporate goals and objectives, ensuring that new directors receive comprehensive

orientation, which should focus on the roles of the board and its committees and

the contributions expected of directors. Emphasis here should be on commitment

34
of time and other resources of board experts; provision of continuing education for

all directors, so that they can remain current. on their expected roles in light of the

changing business environment and challenges of the company they serve;

adoption of written of business conduct and ethics, applicable to directors, officers

and employees.

The cod should address the following issues Conflict of interest including

transactions and agreement in which a director or executive officer has a material

interest; Protection and proper use of corporate assets and opportunities;

Confidentiality of corporate information Fair dealing with the company securities.

holders, customer, suppliers. competitors and employees: Compliance with laws

and regulations; Prohibition of insider dealing and Reporting of any ill-legal or

unethical behaviour: Another responsibility is ensuing that it monitors compliance

with the code and that if alone can approve any waiver from the code granted to

directors or executives and ensuring that a procedure is in place for the affected

officer to seek waivers from the board (Nzotta, 2004). One other key aspect of

hanks responsibilities as noted by (Tony. 2007) who addresses how hoard

members can properly respond to the post consolidated corporate governance

challenges is internal control - The report’s comment that “risk management

capabilities in the majority of banks are yet to go beyond credit risk arrangements

may be attributed to inadequate understanding of the concept of internal control.

35
This process of’ internal control is affected by an entity’s Board of Directors,

management and other personnel and its designed to provide reasonable assurance

regarding the achievement of objectives in the following ways:

a) Effectiveness and efficiency of operations-.

b) Compliance with applicable laws and regulation and

c) Reliability of financial reporting.

[Link] Corporate Governance and the Current Crisis in the Nigerian Banking

Sector

Although the consolidation process in the Nigerian banking sector created bigger

banks, it however failed to overcome the fundamental weakness in corporate

governance in many of these banks. The huge surge in capital available occurred

during the time when corporate- governance at banks was indeed a principal’

factor contributing to the financial crisis. According to Sanusi. (2010) it was well

known in the industry that since consolidation, some banks were engaging. in

unethical and potential fraudulent business practices and the scope and depth of

these activities were documented in recent CBN examinations Governance

malpractice within the consolidated banks has therefore become a way of life in

large parts of the sector, enriching a few at the expense of many depositors’ and

investors. Sanusi further opined that corporate governance in many banks failed

because board ignored these practices for reasons including being misled by

36
executive management. Participating themselves iii obtaining unsecured loans at

the expense of depositors and not having the qualifications to enforce good

governance on banking management. in addition, the audit process at all banks

appeared not to have taken fully into account the rapid deterioration of the

economy and hence of the need for aggressive provisioning against risk assets. As

banks grow in size and complexity, bank board members often did not fulfill

functions and were lulled into a sense of well-being by the apparent year over

growth in assets and profit fn hindsight, board members and executive

management in some major banks were not equipped to run their institutions Some

banks’ chairman/CEOs were seen to often have an overbearing influence on the

board members and: some boards lacked: independence: directors often failed to

make meaningful contributions to safeguard the growth and development of the

bank and had weak ethical standards; the board committees were also often

ineffective or dormant.

The Central Bank of Nigeria published details of the extent of insider abuse in

several of the banks and it was revealed that CEO’s set up Special Purpose

Vehicles to lend money to themselves for stock price manipulation or the purchase

of estates all over the world For instance one bank boomed money and purchased

private jets which the apex bank later discovered were registered in the name of the

CEO’s son. In another hank. the management set up 100 fake companies for the

37
purpose of perpetrating fraud.

Sanusi also disclosed that 30% of the share capital of Intercontinental bank was

purchased with customer deposits Formal Afri bank used depositors’ funds to

purchase 80% of its Internal Purchase Order. It paid 25 per share when the shares

were- trading at Mi on the Nigerian Stock Exchange and these shares later-

collapsed to under N3. The C LA) of then Oceanic Rank control led over ]S% of

the hank through lending and borrowing customer deposits. The collapse of the

capital market wiped out these customer deposits amounting, to hundreds of

billions of naira. Therefore, a lot of the capital supposedly raised by these so called

mega banks” was fake capital’ financed from depositors fund. Based on this. we

can conclude that the consolidation process was a sham and the banks never raised

the capital they claimed they did.

21.5.4 Imperatives of Good Corporate Governance in A Consolidated Nigeria

Banking System

The hallmark of banking is the observance of high degree of professionalism,

transparency and accountability, which are essential for building strong public

confidence. Due to the systemic distress witnessed in the nation’s banking system

and its unpleasant consequences on all stakeholders as a result of inadequacies, in

corporate governance, of banks in recent tithes, series of initiatives had been taken

38
by the nation’s regulatory/supervisory authorities to encourage sound corporate

governance in the system. Some of the initiatives included enhancing the legal

frame work; enhancing the surveillance activities of the financial system;

strengthening the roles of internal and external auditors: developing of a code of

best practices of corporate governance in the system issuance of guidelines, and

circulars on matters such as pre-qualification for appointment to board and mp

management positions in ban insider related credit tee. While all the

abovementioned efforts are in the right direction, it is equally important to indicate

some imperatives of emerging confidence in the nation’s banking system. Some of

the imperatives s identified’ by Oluyemi. (2006) include:

i. Raising awareness and commercial to the value of good corporate

governance practice among shareholders
Awareness and commitment among banker directors, shareholders, depositors and

other stakeholders including’ regulators of the value of good corporate governance

are very critical for ensuring the quality of corporate governance practices. Raising

awareness means conk including people that good corporate governance is in their

self-interest. Investors and all members of the public that have stake in the proper

functioning of the banking system should be aware of their responsibility towards

ensuring, good corporate governance practices. On the legislative side, the

situation is promising as almost alt the important laws for fostering good corporate

39
governance practices in Nigeria are in place or being reviewed. A major

breakthrough in these series of efforts has been the publication of a code of best

practice for corporate governance in Nigeria based on the work of the Atedo

Petersidè Committee. According to Heidi & Marleen (2012). regulatory

authorities’ roadmap for the development of the banking system firmly. puts

corporate governance at the forefront. That had over the years been demonstrated

through regular issuance of guideline/circulars on critical issues bordering on

corporate governance in banks. While refinement of exiting laws and elimination

of discrepancies with internal best practices may certainly add further value, it is

important that the- discussion on awareness and commitment to corporate

governance should not be limited to mere compliance with regulatory authorities

rules, guidelines, or circulars. Tb improve the quality of corporate governance in a

consolidated Nigerian banking system. There is need for strict adherence to

internationally recognized corporate governance code such as those of the

Organization or Economic Cooperation and Development (OLCU) and the [asel

Committee report on banking supervision. Apart from observing these universally

acceptable standard banks must develop their own codes, particularly with respect

to corporate directors and board members. Efforts must also he made by bank

management to draw up a binding code of ethical and professional practice for all

members of staff. The development and maintenance of a robust corporate

40
governance framework in a consolidated banking system calls for the commitment

of all stakeholders regulator bodies courts and professional bodies like the

Chartered Institute of Banking of Nigeria (CIBN) Institute of Chartered

Accountants of Nigeria (LCAN). Nigeria Institute of Management (NIM) etc. must

establish monitor and enforce legal norms actively and strictly.

ii. The responsibilities of the board

The ultimate responsibility for effective monitoring of the management and

providing strategic guidance to the bank is placed with the board. The OCEL

principles provide that board members should act on a filly informed basis: in good

faith; with due diligence and; care, and in the best interest of the company and

shareholders”. The formulation lays out the basic elements of a director’s fiduciary

duty. The need to act on a “fully informed” basis demands a base level of

experience and competence on a directors’ part. The OECD principles, require the

directors to act “with due diligent and care”. This standard. like others is contextual

it arises from a blend of laws regulation and appropriate private sector practices.

This will require developing and disseminating voluntary codes of conduct 11w

directors. Governance is a professional activity. As opined by Mayer. lalme &

Aarno (2011). Under the new consolidated banking environment.

Banks should make provision for an explicit code in their governing documents in

order to ensure good corporate governance, practices Code of conduct will no

41
doubt, assist the Board of Directors in its performance by providing detailing the

minimum procedures and effort that make up “due diligence arid care”. At the,

minimum, all banks should: issue annual corporate governance, report detailing

establishment and actions of key committees’ involvement of’ independent

directors and related party transaction considered by the hoard. In a consolidated,

banking system the importance of independence both in and- appearance is

essential for the board to be able to fulfill its responsibilities. Having the right

people on the board is just important as having the right rules under which the

board operates.

Efforts should also made-by shareholders to identify competent individuals who

possess an independent spirit, which allows board members to raise difficult

questions and probe issues relating to managements decisions to ensure that the

bank operate honestly and in the interest of all stakeholders. According to

Jirnkinson & Mayer (2012). There is the need to prevent low level, inexperienced

relative of controlling shareholders from finding their way onto boards as “straw

men” which are there to cover for “shadow” directors that do not occupy board

seats themselves but are real decision makers. Under the new dispensation, bank

directors must commit adequate time to be informed participants in their banks

affairs and must devote sufficient time and energy to their duties. Board members

have a responsibility to educate themselves about their bank’s operations and seek

42
advise of external experts as and when appropriate. Even if board members are

independent, they can be ineffective as directors if they lack expertise or

knowledge relevant to banking and its business. Therefore board members must

also be willing to educate themselves about their bank and the risk it face.

Although effective risk management has always been central to safe and sound

banking practices. It has became even more important now than hitherto as a result

of the ongoing consolidation which is hound to alter the size, complexity and speed

of financial transactions in the merging banking system. It is therefore important to

indicate that the ability of a hank to identify. Measure, monitor and control risks

under the merging banking environment can make the crucial difference between

its survival and collapse (Gomper & Metrick 2010). For a bank to effectively play

its role under the emerging dispensation therefore, the deployment of an effective

risk management system- with air active board and senior management oversight is

imperative. Another major issue that has generated interest and which should be of

interest to all stakeholders in post consolidation banking system is the

appropriateness of the chairman of the Board of Directors serving as Chief

Executive Officer (CEO) This no doubt, could present potential conflict resulting

from a single individual functioning in these dual roles. To ensure the protection of

shareholder’s interest, a suitable governance structure that has being advocated is

the one where the Chairman of the Board’ is not the same thing as the CEO A

43
situation where a person takes on the role of the executive chairman thereby sitting

in judgment over its activities, could lead to gross abuse of power. The separation

of the CEO: and the chairman of the hoard could amount to recognizing the

differences in their roles and. would eliminate conflict of interest. Chairing the

board and management team are also different roles, usually calling for quite

different capacities. Apart from the traditional role of attending hoard meetings. a

Chairman could restrict himself to overseeing top executive and management:

stimulate strategy ensuring that transparency and accountability are maintained.

iii. Internal control the role of internal and external auditors.

The need for banks to continue to recognize internal and external auditors as an

important part of the corporate governance process cannot he overemphasized.

Adequate internal control system will help to discipline banks in their daily

business by ensuring compliance with internal and external regulations as well as

help the board to effectively evaluate the banks’ and ultimately its future strategy.

The Board II Accord on Capital Adequacy reinforces the need for a strong and

independent internal control system that provides the bank’s governing, bodies

with timely and accurate data to enable them perform their necessary work to

rebuild its greatest assets i.e. public trusty in order to restore faith in the integrity

and objectivity of the of profession..

According to 0gbehie (2009), the current control/audit system. which is

44
administratively or functionally dependent on the CE and not the board as noted in

some banks’ examination reports. Could limit their effectiveness. The professional

development and growth in experience of internal auditors and internal control

officers will be critical to the further development of the banking sector. There is

need for the effective functioning of the Board of Director’s audit committee. The

Job of the audit committee is critical because the directors cannot oversee the bank

effectively without reliable audit under the new dispensation. The committee

members should consist of independent directors who are adequately informed and

knowledgeable about the activities of the hank. Still in the search for strategies to

ensure good corporate governance is an examination of the role of external

auditors A major challenge in’ the emerging consolidated banking system would

be the need to continue to ensure their independence. Such that no matter the

position their clients take on accounting. Reporting and regulatory compliance the

auditor’s duty will always he towards public good. More than ever before the

external auditors of banks should be obliged commit themselves to clarity with

regard to their independence: professionalism and integrity. They must continue to

adhere to all applicable standards code of ethics and legislation. As the conscience

of the nation, external auditors must strive to rebuild confidence in the profession

through the preparation and presentation of credible and reliable financial reports.

iv Information disclosure and transparency

45
The quality of information provided by banks is fundamental to corporate variance

in a consolidated banking system-. Transparency would enable the financial

markets depositors and other stakeholders to form a fair view of a bank’s value and

to develop sufficient trust in the quality of the hank and its management. The

current information disclosure requirements in the industry are grossly inadequate

to effectively the information asymmetry between banks and investing public in a

consolidated banking system. With consolidation, it is impotent that the accounting

as well as disclosure requirements of emerging banks be reviewed. Part from its

effect on individual banks performance and market valuation, disclosure id

transparency will also affect the country’s ability to attract domestic and foreign

investment. Banks should he encouraged to disclosed information that goes beyond

be requirement of law or regulation As opined by Jensen & Meckling (2006) the

new consolidated banking environment will call for timely and accurate

information to be governance: they will face lower costs of capital which is

another source of better firm performance. Other stakeholders. including

employees and suppliers will also want to be associated with and enter into

business relationships with such firms, as the relationships are likely to be more

prosperous, fairer, and long lasting than those with firms with less effective

governance.

The factors underpinning corporate governance- main-y include shareholding

46
structure. Hoard composition and senior management. Moreover, it can be argued

that firm performance can he improved with better corporate governance controls

in a company.

Famiba and Jenson (2009) argued that corporate governance does affect firm

performance. It was discovered that the majority of larger firms with stronger

governance controls are rewarded over the long.-term. Klein, Shapiro, and Young

(2004) examined the relationship between corporate governance and firm value by

using the Corporate Governance Index. (CUI) and Tobin’s. Q, which measures the

firm’s value. The results concluded that corporate governance dues matter in a firm

value. In addition Carse (2000) argued that a strong corporate governance standard

is particularly and less vulnerable to- belong to creditors and depositors. The

failure of a bank will affect not only its own shareholdings hut have a systematic

affect on other banks Therefore, it is important to ensure that banks are operating

properly.

On the other hand, a large number of studies have investigated the relationship

between ownerships structure, and firm performance. Morek. Sheifer. &. Vishmy

(f998) argued that higher ownership concentration has a positive impact on firm

performance because it increases the ability of shareholders to properly monitor

managers. Nothrook (2009) on corporate governance mechanisms and firm

performance revealed that separation of the: posts: of chief executive officer

47
(CEO’s) is vital be strong and viable corporate governance sustainability. The

result added that a hoard size of ten is more concentrated as opposed to diffused

equity ownership.

Implications for the economy as a whole are also obvious. Economic growth will

he more sustainable, because the economy is less vulnerable to a systematic risk.

With better protection of investors at the firm level the. capital market will be

boosted and become more developed, which is essential that sustained economic

growth. At the same time, good corporate governance is critical for building. a just

and corruption-free society. Poor corporate governance in big businesses is fertile

soil for corruption and corruptive symbiosis between business: and political

circles.. Less- expropriation of minority shareholders and fewer corruptive links

between big businesses and political power may result in a more favorable

business environment for smaller enterprises and more equitable income

distribution (Iskander &.Chamlou 2010).

2.1.7 The Role of Corporate Mechanism in Organizational Performance

According to the Asian Development Bank (199-7). Dallas (2004); and Nani &

Nani (2004) cited in Kasbif (2008) various mechanisms are used in financial

markets to improve corporate governance and the value of firm Economic and

financial theory suggests that the mechanisms mentioned below affect the value of

a firm in developing and developed financial markets. These mechanisms and their

48
role are as follows:

2.1. 7.1 Role of Board Of Director’s Composition

The Board of play an important role in improving corporate governance and the

value of firm (Hanraham Ranisay & Stapledon 200!). The value of a firm also

improved when the board performs its fiduciary duties such as monitoring the

activities of management and selecting the staff for a firm. The boosted can also

appoint and monitor the performance of an independent auditor to improve the

value of a firm. The board of directors can resolve internal conflicts and decrease

the agency cost in a firm. The members of a hoard should also be accountable t the

shareholders for their suggests that the mechanism is mentioned: below affect the

value of a firm in developing and developed financial markets. These mechanisms

and their role are as follows:

[Link] Role of Statutory Audit Committee

The rote of auditors is important hr implementing corporate governance principles

arid improving the value of a time. The principles, of corporate governance

suggest that auditors should work independently and perform their duties with

professional care. In case of any financial manipulation the auditors are held

accountable for their actions as the availability of transparent financial information

reduces the information asymmetry and improves the value of the firm. (Bhagat &

49
Jefferis 2002) However, in developing markets auditors do not improve the value

of a firm. They manipulate the financial reports of the firms and serve the interests

of the majority shareholders further disadvantaging the minority shareholders. The

weak corporate law and different accounting, standards also deteriorate the

performance of the auditors and create financial instability in: the developing

market decisions as argued by Vãnce. (2008). Anderson & Anthony (1986). k;

(2001) and Tomasic, Pentony & l3ottomley (20Q3) The board members two types

of directors outsider (independent) and insider directors. The majority of Directors

in a board member should he independent to make rational decisions and create

value for the shareholders. The role of independent directors is important to

improve the value of a firm as they cart monitor the firm and cart farce the

managers to take unbiased decisions. The independent directors can also play a

role of a referee and implement the principle of corporate governance that protect

the rights of shareholders (Bhagat & Jeffenis, 2002 Tomasic, Pentony &.

Bottomley. 2003). Similarly, internal directors are also important in safeguarding

the interests of shareholders. They provide the shareholders with important

financial information, which will decrease the information asymmetry between

managers and shareholders as argued by Bhagat & Black. (1999) and Bhagat &

Jefferis,(2002). The board size should be chosen with the optimal combination of

inside- and outside directors for the- value creation of the investors. The Board of

50
Directors in the developing market are unlikely to improve the value of the firms-

as the weak judiciary and regulatory authority in this market enables the directors

to be involved in biased decision-making that serve the interest of the majority

shareholders. (Asian-Development Bank. 1997).

[Link] Role of Chief Executive Officer

The Chic! Executive Officer (CEO) of an organization can play an important role

in creating the value of shareholders. The CEO can follow and incorporate

governance provisions in a firm to improve its value (Brian. I997 Defond & Hung.

2004). In addition, the shareholders invest heavily in the firm. having high

corporate governance provisions as these firms create value for them. (Morin &

Farrell. 2001). The decisions of the hoard about hiring and tiring a (‘EQ and their

proper remuneration have an important hearing on the value of a firm as argued by

an underperforming CEO who tail to create value firm shareholders. The turnover

of CEO is negatively associated with firm performance especially in developed,

markets because the shareholders lost confidence in these firms and stop making

more investments. It is the responsibility of the hoard to determine the salary of the

CEO and give him proper remuneration for his efforts (Moks & Minow 2001). The

board can also align the interest of the CEO and the firm by linking the salary sf a

CEO with the performance of a firm. This action will motivate the CEO to perform

51
well because his own financial interest is attached to the performance of the firm as

suggested by Yermack. (2006). The tenure of a CEO is also an important

determination of the firms’ performance. CEO’s are hired on short-term contracts

and are more concerned about the performance of the firm during their own tenure

causing them to lay emphasis on short and medium-term goals. This action of the

CEO limits the usefulness of stock price as a proxy for corporate performance

(Bhagat & Jefferis, 2002). The management of a firm can overcome this problem

by linking some incentives for the CEO with the long-term performance of the firm

Heinch2002).

[Link] Role of Board Size

Board size pl-y important role in affecting the value of firm. The role of a board of

directors is to discipline the CEO and the management of a firm so that the value

of a firm can be improved. A larger board member has a range of expertise to make

better decisions for a firm as the CEO cannot dominate a bigger board because the

collective strength of its members is higher and can resist the irrational decisions of

a CEO as argued by (Pfeffer, 1992) and Zahra & Pearce (1996). On the other

handy large hoard fleet the value of a (inn in a negative way as there is an agency

cost among the members of a bigger board. Similarly small boards are more

efficient in decision making because there is less agency cost among the hoard

52
members (Yèrmack. 2(30 I)

2.l.7.5 Role of CEO Duality

Similar to other corporate governance instruments CEO duality plays an important

role in affecting the value of a firm. A single person holding both the chairman and

CEO role improves the value of a firm as the agency cost between the two

eliminated (Alexander, Fennel & Halpern. 199.8). On the negative side. CEO

duality leads to worse performance as the board: cannot remove an

underperforming. CEO and can create agency cost if the CEO pursues his own

interest at the cost of the shareholders (White & Ingrassia, 1997).

[Link] Role of Manager

Managers can play an important role in improving the value of a firm. They can

reduce the agency cost in a firm by decreasing the formation asymmetry, which

results in improving the value of a firm (Monks & Minow, 2001). Managers in the

developed market create agency cost by under and over investment of the free

cash-flow. Shareholders are disadvantaged in this case as they pay more residual.

bonding and monitoring costs in these firms Managers in developing financial

markets generally play a negative role in the value creation of investors. The rights

of the minority shareholders are suppressed and the firms in these markets cannot

53
produce real value for shareholders as actions of the managers mostly favour the

majority shareholders. The management and the shareholders in a developing

market do not use the tools of hostile takeover and incentives to s of managers in

the case of a hostile take over, the managers are forced to perform well to be able

to hold their jobs. Similarly, appreciation and bonuses can motivate managers to

produce value for shareholders (Bhagat & Jefferis 2002). the ownership of the

management in a firm has an important hearing on its value (Morek. Shici Ibr &

Vishny. 1998.

Also, firms can improve their value in- developing markets by streamlining the

interest of managers with those of the shareholders. This means that at most one

executive and at least three independent Directors Members of that committee

must be able to read and understand financial reports. There is a recommendation

that the post of CEO should be separated from that of the chairman unless, it is

absolutely necessary for the two to be combined,, in which case the code

recommends that a strong non executive ‘director should serve as Vice chairman of

the hoard. Other provisions of the code related to strengthening board

independence including the recommendation that Non-Executive Director (NED)

should chair the audit committee, In addition to the requirement’ that nonexecutive

director should have no business relationship with the firm. They also include a

recommendation that provides that the non-executive directors should be in the

54
majority, and that a non-executive director should chair the remuneration

committee the membership of’ which should comprise wholly or mainly of outside

directors.

However, it is observed that the code is silent about other equally important

committees like the appointment committee which is for regulating hoard

independence.. Moreover the code lacks legal authority, as there is no enforcement

mechanism and its observance is entirely voluntary (Nmehielle & Nwauche, 2004)

Recognizing the potential problem to effective governance that family affiliation of

board members could cause, the committee recommended that in order to be board

to be truly independence. (outside directors should not be connected with the

immediate family of the members of the management.

As mentioned above, by excluding certain vital means of strengthening ‘hoard

independence it would appear that Nigeria’s code of corporate governance does not

take full account of such provisions, in codes of corporate governance developed

much earlier on in other countries such as the United Kingdom and USA. In the

United States, the Sarbanes-Oxley Act 2002 has come into being heralding the start

of new tar reaching measures aimed at strengthening corporate governance and

restoring investor confidence Liensen & Fuiler 2002), Building on the progress

made in the reports by Cadbury U 996); and Hempel. (1995); Geenhury (1998), the

United Kingdom in 2003 stalied to implement the New Combined Code, an

55
outcome of the Company Law review and a report by the Riggs Committee. In

both countries the new set of regulations have recognized the importance of non-

executive directors and made special provisions aimed at promoting their

independence and corporate governance.

2.1.8 Corporate Governance Challenges/Determinants

A number of challenges of corporate governance entities in Nigeria have been

identified mid highlighted by CBN (Z00&) These challenges relate to technical

incompetence, of Board of Directors and management: relationship among

directors the “key man” factor:

Relationship between management and staff: inadequate management capacity:

high level malpractice and insider abuses; ineffective board/statutory audit

committee inadequate operational and financial controls; Absence of a robust risk

management system: Government involvement in. enterprise ownership and

operation; Compliance with professional and ethical standards: Effectiveness of

Supervisor’ regulatory and enforcement machinery: and Shareholders/stakeholders

awareness and participation. Ihendinibu (2009), added that disclosure and

transparency is yet another challenging facing corporate governance. In modern

business practice: disclosure- and transparency is at the heart of corporate

governance. In Nigerian banks despite conceited efforts at their regulation and

supervision by the CBN and NDLC. one could imagine the probably unspeakable

56
abuses in the less supervised business enterprises, in other sectors of the Nigerian

economy and the impact this could have on trust and confidence of both the

internal and external stakeholders. Ihendinihu. further added that the existing level

of corruption in Nigeria presents yet another challenge to good corporate

governance.

According to the Centre for International private Enterprise (2002) Corruption is a

phenomenon comprising of sundry forms of abuse of power economic, political

and administrative which all result in obtaining personal or collective benefits to

the detriment of the rights and lawful interests of an individual. groups or the

whole society. It induces poor governance-both in public administration and

business. Existing corruption in business to business relationships is a system of

poor corporate governance. It has also been stated that corporate governance codes

depend on the business ownership structures (Gathinji, 2003). The concentration of

ownership in the hand of government or a few individuals lead to serious abuses by

government, and the dominant shareholders and their families particularly as it

relates to the composition of members of board and management. Restrictions, on

the equity interests of government and of a single individual investor provide good

governance system for achieving corporate survival and growth.

Another factor that influences the level of corporate governance and by extension

the ability of an enterprise to continue as a going concern as noted by Asein

57
(2001). is separation of the function of the chief executive officer and the chairman

of the boards of directors. Where the responsibilities of the two positions are

vested in one individual, such a person acquires unfettered power to dominate the

affairs of the company and to maximize his self-interest at the expense of the

stakeholders of the company. The CBN (2006) and SEC and CAC (2003) require

that chairman and chief executive officer positions should he separated and hold by

different persons to avoid the effect of such undue concentration of power. Even in

exceptional. The SEC and CAC (2003) require that a strong non-executive

independent director he appointed as vice chairman of the board.

2.1.9 Some Corporate Governance Models

The models of corporate governance vary across countries depending on the type

of political governance in- the country as follows:

[Link] Embraer’s Model

Embraer’s model of corporate governance (2004) embodies a clear distinction of

responsibilities among the executive officers, l3oard of Directors and the audit

committee. The Board of Directors are responsible for approving and keeping

track of company strategy,, annual budget and investment programs, established in

the action plan. Functionally the audit committee supervises administers and

58
examines financial statement, compliance with transparency and good corporate

governance policies.

[Link] Walking Model

Watkins (2uu corporate governance models with a view to addressing corporate

continuity, facilitating the raising of capital, etc. The two models depict the of

corporate governance in practice as follows:

I. Anglo-American “shareholder wealth maximization model (SWM) The

benchmark of the SWM is that the suppliers of equity (shareholder) heal the

entire risk of the enterprise and are the residual claimants of income. The

shareholders elect a Board of Directors the corporation on a share equals one vote

basis The operation of SWM embodies the Board of Directors choosing the

management team, who are supposed to make decisions, the shares owned by the

shareholders the share values are based upon the- present value of expected future

dividends and the dividends are based on after tax profit.

2. Corporate Wealth Maximization Model (CWM)

The model otherwise known as the shareholders model recognize the shareholders

and other stakeholders. These various group are known as stakeholders. The

operation of corporate wealth maximization embodies the wider definition of

stakeholders to include the suppliers government and general public etc. the voting

59
power and pattern in the governance- process of the corporation is generally not

one-share-equals one vote pattern.

The objective of management decision-making is to enhance the wealth and power

of the corporation as an entity.

2.2 Theoretical Framework

In view of significant role played by Board of Directors in corporate existence. Kid

and Cholson 2013) and Lawal (20.12) stated that several theoretical approaches

emerged in order to explain the complex nature of corporate governance. The most

widely used theories are agency – stewardship resources dependency and

stakeholders theory.

2.2.1 Agency Theory

In its simplest form agency theory explains the agency problem arising from the

separation of ownership and control. The agency theory has its roots in economic

theory and it dominates the corporate governance literature as observed by Nyberg

et. al (2010), Daily et al (2003) and Kid & Nicholson (2013). They pointed dut that

the theory emerged as a result of separation of ownership and control in business

between shareholder-s and directors. I he main concern of the theory is to align the

interest of the shareholders with that of the management. H was built on the

60
assumption that there is mis-alignment of interest between shareholders

(principals) and the directors. (agents); the theory argued that directors’ interest

will be aligned with that of owners through some sort of compensation while

interest of the owners is protected through effective monitoring and control

mechanism. The theory recommends board with greater proportion of independent

non-executive directors, duality in leadership and larger board size for effective

performance. Agency theory - supports the delegation and the concentration of

control in the hoard of director: The board of directors monitors agents through

communication and reporting review and audit and the implementation of codes

and policies.

2.2.2 Stewardship Theory

Contrary to agency theory which described directors as self-centred and

opportunistic proponents of stewardship theory as pointed by Lawal (20] I),

viewed directors as trustworthy individuals capable of managing the resources of

the owners in the most appropriate way. The directors consider serving the interest

of stockholders as serving their interest. The main role of the board under this

theory is more of strategic policy formulation. Stewardship theory recommends

board composition with higher proportion of independent directors while the

position of chairman and the CEO is to be held by one person in order to maximize

corporate performance. The theory as identified by Sundaraa Murth and Lewis

61
(2003) gives room for misappropriation of owners’ fund because of its board

structure i.e. insiders and the chairman (EQ duality role

2.2.3 Resources Dependency Theory Hillman Et Al (2009) Described

Resources Dependency Theory as A Theory That Views

Organizations as open system which relied on eventualities in the outside

environment. The theory acknowledged the impact of external environmental

issues on organizational performance therefore managers can act in a manner that

will curtail the effects of environmental uncertainties. In addition to Board of

Directors. Proponents of resources dependency theory acknowledge the popularity

of agency theory. But argued that resources dependency theory was more

successful in understanding board.

The theory is mainly concerned with board size and composition wiich are

considered as basis for evaluating board performance in terms of providing

essential resources required by the organization. The theory concluded “that board

size and composition are not random or independent factors, but are, rather,

rational organizational resources to the conditions of the external environment .

Finally the theory suggests that resource rich directors should be the focus of

board composition not just the number. But the type of directors on the board that

matters.

Pfeffer and Salancik (2006) in Hilirnan et. al (2009) suggest that directors bring

62
benefits 10 organizations via

a. Information in the form of advice and counsel: -

b. Access to channel of information between the firm and environmental

contingencies:

c Preferential access to resources: and

d . Legitimacy, Significant empirical evidence supports these proposed

benefits.

2.2.4 Stakeholders’ Theory

Asther et al. (2005) Letza et al (2004) & Lawal. (2Q11). pointed out that contrary

to agency theory that view organization as a system of relationship between

shareholders and management stakeholders theory view organizations as a system

that accommodates not only the interest of the owners but also the interest of other

groups within the environment which the organization operates. The theory argued

that since organizations cannot operate and exist in isolation without relating to its

immediate environment then the interest of other stakeholders like employees,

customers, suppliers and local community might be considered the process Of

strategic decision making:

Therefore the main argument of the theory, as pointed by Lawal (2011). is that

organizations should not only maximize the returns of shareholders alone. But also

the expectations of stakeholders should he considered. Finally, the theory argued

63
that for a firm to achieve effective performance in the market, cordial relationship

must exist between the firm and the stakeholders and the firm board should be

large and diversified enough to accommodate the interest of other stakeholders.

22.5 Traditional Theory.

The traditional theory of corporate governance as pointed by Emerole (2009), is

based on the property rights concept and posits that shareholders (owners) control

the organization and the major factor in the governance process. Since they provide

the organization’s capital needs there own all the organizations1 properties”. This

establishes the legal rights to ensure that the “properties’ are used to further their

interests The Board of Directors of the company is purely an intermediary between

the shareholders (owners.) and management.

2.3 Empirical Review

2.3.1 Prior studies on specific corporate governance practices and ,firms’

performance

In Nigeria and beyond among the few empirical feasible studies on corporate

governance. are the studies by Ihendinihu (2009). He studied on auditors and

corporate governance issues challenges towards the- sustainability of Nigerian

companies. His study provided evidence on the current state of corporate

64
governance practice in Nigeria- The purpose is to help re-energize movement

towards effective corporate governance in Nigeria. Survey data were obtained from

587 respondence using research-designed questionnaire validated by expert and

shown to have reliability coefficient of 0.86. Descriptive and- regression statistical

techniques were used in his analysis of data. His study revealed that the level of

compliance to existing. corporate governance rules to be low and identifies seven

critical factors that affect the level of corporate governance in Nigeria His study

investigated the impact of corporate governance on-entity growth and

sustainability and attributes about 52.3% of the changes in the going concern

ability of Nigerian companies to existing level of corporate governance practice.

The work highlighted some policy implications of the results and advocate for the

promotion of self regulation with moderate attachment to regulate enforcement and

publication of annual compliance report is as two tier policy’ options for

stimulating the application of corporate governance 6 principles by economic

entities in Nigeria.

In the work of Simon and Maurice (2013), they examined the relationship between

corporate governance and financial performance of randomly selected quoted firms

in Nigeria. They investigate on corporate governance variables and analyses

whether they impact on firm performance as measured by return on asset (ROA)

and profit margin (PM) Based on the review of existing literature, four corporate

65
governance variables were selected namely composition of board member, board

size. CEO status and ownership concentration which served as their independent

variables. They used ordinary least square regression to estimate the relationship

between corporate governance and firm performance.

Findings from their study showed that there is positive and significant relationship

between composition of board member and board size as independent variables

and firm performance. CEO status also has positive relationship with firm

performance but insignificant at P<O.05. However ownership concentration has

negative relationships, with return on asset (ROA hut positive relationship with

profit margin (PM). The relationships are not significant at 5%. Their study

recommended among other things that companies’ board should be majorly

dominated by independent directors and board size should be in line with corporate

size and activities.

En Musa and Rohinah (2011), their study examined the relationship between

political interference, corporate governance and corporate performance in four

public universities Ugapda. The study was prompted by institutional purulence’s as

a result of political’ interference in public universities. A cross-sectional and

correlation study was conducted in four public’ universities in Uganda namely

Makerere: Kyambogu. Gulu and Mbarara. Multiple regression model was fitted

using SPSS to determine the strength of the relationship and prediction of

66
corporate performance. They offer evidence that political interference in these

universities decision-making negatively affects their corporate performance.

Political interference had a significant negative effect on corporate performance.

Their findings further revealed that corporate governance variables were

significant in this study. Specifically, board size, had a negative effect on corporate

performance while policy and decision making had a significant positive

relationship with corporate performance. There is an ongoing need for public

universities to formulate policies and make decisions that can improve the overall

operations, systemically; namely, in the areas of constituting manageable council

and senate committees and minimal political appointees to realize improved

corporate performance.

In the study conducted by Nwinee and Torbira (2013) their work investigated on

the effect of corporate governance indicators on the financial performance of

public listed deposit money banks in Nigeria. Their study sampled twenty one (21)

consolidated deposit money banks listed on the Nigerian stock exchange over a

five-year period covering 2005-2009. Two (2) corporate governance bank

performance models patterned after multivariate regression and partial adjustment

models of linear formations were constructed while they tested Iwo hypotheses

using the ordinary least square method and co integration test. The short run

Ordinary Least Secure (OLS ) test result revealed that corporate governance index

67
has a positive relationship with Earnings Per Share (EPS) and a negative

relationship with Net Profit Margin (NPM) The result of the co-integration test

revealed that there exist a long n relationship between corporate governance and

bank financial performance. Their study concluded that the financial performance

behavior of deposit money banks in response to corporate governance code is

mixed and follows the precepts of economic rationality.

They also concluded that the impact of corporate governance practices in banks

could be felt more in the long run. Their work thus recommended that training and

re-training of the management team of banks for the entrenchment of good-

corporate governance practices.

According to Khaliq and Muhammad (2013), they examined on the relationship

between the corporate governance and firm financial performance in Cement

industry of Pakistan. Their study gave attention to three variables which include

board size family controlled firm and CEO duality. Firm performance is measured

through return on equity return on assets, and earnings per share. debt to equity and

current ratio. In their findings they found out that positive relationship exists

between corporate governance and performance.

3.2 Cap in literature

In Ihendinihu (2009) that studied Auditors and corporate governance: issues,

68
challenges of Nigerian companies. I-Ic investigated the impact of corporate

growth and sustainability in Nigerian companies. His findings of compliance to

existing corporate governance rules was low. In this research work studied the

effect of corporate governance on banks in Nigeria and not on companies. Banks

have more lucrative more public than companies therefore; level of compliance to

is expected to be higher that of the companies.

In Simon and Maurice (2013), they used ROA PM as their firm’s financial

performance variables while board size, board composition CEO Status and

ownership concentration were used as their corpor4te governance variable in

selected quoted companies. This study used board size board equity holdings and

board independence as proxies for corporate governance to determine their effects

on firms financial performance peroxide ROA and ROE on quoted banks, instead

of companies and also to determine if large board size and board independence will

have significant effect on firm performance.

According to Musa & Robinafi (2011), they examined the relationship between

political inference, corporate governance- and corporate performance in public

universities in Uganda as a result of political interference in public universities.

They used corporate variables proxied by board size, policy and decision making.

But this study goes beyond that, using other corporate governance variables’ such

as board sue, board independence and director’s equity holdings to examine the

69
effect of corporate governance on firm performance on banks and not in

universities.

In (be work of Nwinee and Turbira (2013). they investigated on corporate

governance and financial performance of publicly listed deposit money banks in

Nigeria from period between 2005 2009 while this study is between the period of

2014 - 2013. Also they made use of corporate governance index as their proxy for

corporate governance and earnings per share with net profit margin as the variable

for financial performance. This study made use of board size, board’s equity

holdings and board independence as the variables for financial performance to

determine the effect of corporate governance on financial performance of banks in

Nigeria.

In Khaliq and Muhammad (2013)’ they studied the relationship between- the

corporate governance and financial performance in cement industry in Pakistan.

They used board size, family controlled firm and CEO duality a variables for

corporate governance, while ROA, ROE. EPS, debt to equity and current ratio

were used as- variable-s for firm financial performance. Whilst this study examines

the effect of corporate governance on financial performance of banks in Nigeria

not cement industry in Pakistan, using corporate governance variables as board

size, boards equity holdings and board independence while ROA and ROE only as

variable for financial performance.

70
Generally, the gap in the literature is that various studies empirically reviewed

showed that inspite of the fact that they studied on corporate governance and

financial performance different variables, methodology and analysis- were used

and different findings and recommendations were made. Some of this study were

in Nigeria and others were outside Nigeria. some are in companies- others in

university, but this study seeks to investigation the effect of corporate governance

on financial performance of banks in Nigeria, using corporate governance

variables as board size, board’s equity holding and board independence while

return in Asset and Return on Equity only as variables for financial performance.

71
 CHAPTER 3

RESEARCH METHODOLOGY

3.1 Research Design

The study made use of causal comparative- research design which seeks for

establish the relationship among variables in real Ii Fe situation It is predicated an-

the assumption that some variables have effect on the others. Therefore, the study

seeks to find out which variables, are independent and those that are dependant on

it. With causal studies, this research seeks to determine the relationship between

financial performance and corporate governance of banks in Nigeria.

3.2 Area of Study

This work is carried out in Nigeria. The Federal Republic of Nigeria is in West

Africa located about 10 degrees North of the equator just at the western coast of

Africa. Nigeria is the most populated country in all Africa and the eight most

populated countries in the world today. Nigeria has a total land area of about

930.000 squared kilometer about 15 percent of which is covered by water. Nigeria

has a total population of about 180 million people with the population growth rate

around two (2) percent. Nigeria share borders with the republic of Niger in the

North, the republic of Cameron and Chad in the East, the republic of Benin in the

West and Atlantic Ocean (Gulf of Guinea) in the south.

72
Nigeria comprises of 36 different states with Abuja being the Federal capital of

Nigeria. Nigeria comprises of about 25 different ethnic groups with Igbo, Yoruba

and 1-lausa being the three most dominant ethnic groups There are more than 600

different dialects spoken in Nigeria today with English being the official language

pidgin (broken English) being the street language. It is expected that the leaders- in

all sectors of the country should embrace the ethical practice of sound and good

corporate governance ft is in the light of this that the researcher seeks to determine

the relationship that exists between corporate governance and financial

performance from quoted banks in Nigeria.

3.3 Data Collection

The data used for this study was secondary data derived from the audited financial

statements off the banks listed on the Nigerian Stock Exchange(NSE) between the

ten years; period of 2004 to 2003. This study also and use of hooks and other

related material especially, the Central banks of Nigeria bullion and the Nigerian

Stock Exchange Fact Book. Some of the annual reports that were nut available in

the NSE Fact Book were either collected front the corporate offices; of the

concerned bunks or download from the banks’ corporate websites. ‘I he data

collected was on the following variables; Return on Asset, Return on Equity, board

size, director’s equity holdings and non-executive director. The collected data were

73
 sorted, coded, entered into E-VIEW software and analyzed.

3.4.1 Population of the Study

The population for this study consists of all the twenty one registered banks

Nigeria as at 2013. The time frame considered for this study is 2004 to 2013. These

twenty one registered banks as at 2013 are as follows:

1. Access Bank Pie (Acquired intercontinental hank

. 2. Citibank Limited

. 3. Diamond Bank Plc

4. Ecohank Transnational Incorporated (Acquired Oceanic hank)

5. Enterprise hank limited (Formerly Spring hank)

6. Fidelity Bank Plc

7. First Bank Nig Plc

8. First City Monument Bank Plc (Acquired Fin bank)

9 Guaranty Trust Bank

10. Heritage Banking Company Limited

I 1. Keystone Banking Limited (Formerly Bank PHB)

12. Mainstreet Rank Limited (Formerly Afribank):

13. Skye- Bank Plc

14. Spring Bank Pie:

74
15. Stanbic IBTC plc:

16. Sterling Bank Plc.

17. Union Bank of Nigeria P

Plc

18. United Bank of Africa

Africa-Plc

19. Unity Bank of Nigeria Plc

20. Wema Bank Pie

21. Zenith Bank Pie

3.5 Sample Size and

nd Sampling
Sampling-Technique

The study made use of judgmental

udgmental and stratified sampling technique to select the

sample banks used for this study. Out of the Iwenly

y one (2!) commercial banks

registered in Nigeria as- at 2013 only fifteen (15) of the banks were quoted in

Nigeria Stock Exchange as at 2011 The researcher therefore studied the effect of

corporate governance mechanisms on financial

financial- performance on all the fifteen (IS)

quoted banks in Nigeria Stock Exchange.

3.6 Model Specification

The study made used of a modified version of the econometric model of Miyajima

(2003) as adopted by Coleman and Nicholas

Nicholas-Biekpe (2006).

The Econometric model of Miyajima eta! (2003) is therefore seen below as,

75
Where:

Ya = financial performance: variables which are respectively Return on

Asset ROA) and Return on Equity (ROE) for banking firms at time t.

CGa Corporate governance variables, which are Beard size (BDS) and

Board composition (BDC) which is defined as the ratio of outside

directors to total number of directors.

Ca control variables: size of the firm (size)

ea the error term which account for other possible factors that could

influence

Yit that are not captured in the model

Based on the fact that the study employed: different governance and performance

proxies, the above model is therefore moth lied to determine the relationship

between hank performance: and corporate governance of banks in Nigeria. In

doing this the study therefore developed two simple definitional models to guide

the analyses. These models are as follows;

Model I

ROEa JIBOSI. NED1. DEHI ---- (1)

ROEa, 1 R1 1BOS1t 32NEDtt 3DEHtet --- (2)

Model 2

76
ROAa j(BOS, NEDI. DEHI ---- (3)

R0Aa 11 °± IBOS+ 2NEDt± 3DEH±et -. - - (4)

Where

ROA and ROE represents firm financial performance variables which are

respectively Return on Assets and Return on Equity for banking firms at time t.

ROA Annual Net Income / Average Total Asset.

ROE Annual Net income / Shareholders Equity.

BOS the Board Size; (Number of directors on the board)

NED Non Executive Director; (independence directors)

DEH Directors’ Equity Hol4i-ng (percentage of major shareholding of

Directors).

eit error term which account for other possible factors that could

influence

ROEit, and ROAit that are not captured the model.

3.7 Data Analysis Techniques

In analyzing the relationship between corporate governance and financial

performance of the quoted banks in Nigeria simple regression analysts was used to

determine the effect of the individual corporate governance variables. (BOS NED

and DEH) as used in the study and the financial performance that is proxied by

77
ROA and ROE and student t4est statistics were adopted to determine the mean

differences between banks with foreign director and banks without foreign

directors. Data were collected on BOS, NED and DEH for corporate governance

variables then ROA and ROE for financial performance variables from the annual

report of the listed banks within the period 2004- 2013 and analyzed within E-

VIEW statistical package.

78
 CHAPTER 4

DATA ANALYSIS AND DISCUSSION OF’ RESULTS

4.1 Results and Discussion

In this chapter the researcher provided two types of data analysis; namely

descriptive analysis and inferential analysis. The descriptive analysis helped us to

describe the relevant aspects of the phenomena under consideration and provide

detailed information about each relevant variable. For the inferential analysis, the

researcher and multiple regression technique and the t-test statistics to analyze the

panel data collected for the study. The regression estimates the effect of the

corporate governance variables on profitability proxied by return on equity and

return on asset while the t—test determines the difference between the financial

performance of banks with foreign directors and banks with indigenous directors in

Nigeria.

4.2 Descriptive Statistics for Corporate Governance Average Measurement

Variables
TABLE 4.2.1: Descriptive Statistics

Variables N Minimum Maximum Mean Standard

deviation
ROE 150 01 1.77 1.1385 0.5324
BOS 150 6.00 17.00 13.342 5.5043
NED 150 6.00 11.00 8.2300 3.8968
DEH 150 01 9.97 2.1014 1.4173
ROA 150 01 2.77 1.8675 0.6543

79
Computed by researcher using data extracted from annual reports of the sampled

banks. The table 4.2.1 above revealed that on average, the banks included in the

sample generates Return on Equity (ROE) of about 11% and a standard deviation

of 5.3%. This means that the value of the ROE can deviate from mean to both sides

by 5.3%. The minimum and maximum values of ROE are 1% and 17%

respectively. However, a Return on Asset (ROA) of I 8% was generated on the

average, with a minimum and maximum percentage of 10o and 7° o respectively.

the model, the average hoard Si/C from the 150 observations is about 13

suggesting that banks in Nigeria have relatively moderate board sizes as suggested

by Kyereboah Coleman and Biekpe (2006) with a maximum board size of

seventeen (17) and deviation of 5.504. The implication is clear that banks in

Nigeria have relatively similar hoard sizes. In addition, the average proportion of

the outside directors sitting on the board is 82%. Also on average, about

3 1 % of the directors are equity holders.

4.3 Inferential Analyses for Testing of the Hypotheses Using Multiple

Regression Technique.

Under the inferential analysis, multiple regression analysis was used to measure

the effect of the variables under consideration on return on equity and return on

assets. Then the t-test statistics was also used to find out if a significant difference

occurred in the performance of banks with foreign directors and those without

80
foreign directors.

Test of hypotheses.

Hypothesis
pothesis I: Hoard size, hoard independence and directors’ equity holding do not

significant affects Return, on Equity of banks in Nigeria.

Table 4.3.1: Multiple-regression.

regression. for hypothesis one

Dependent Variable: ROE

Method: Least Squares

Date: 1 1/26/15 Time 1349

Sample: 1150

Included observations 150

Computed by researcher using data extracted from annual reports of the sampled

81
banks

The value for the coefficient for ROS (i.e. 13)is 1.011875. DEH (i.e 132) is

1.011766 and NEI) (i.e 3-) is 1.001161. while the constant intercept c is 0.413639.

The value of 0.413639 for c represents what ROE is \Jthout BOS, DEH and NED.

The value 1.011875 for.13. 1.011766 for 13’ and 1.001161 for 13 implies that

holding all other factors constant, a unit increase in BOS. DEH and NED will lead

to 1.011 875, 1.011766 and 1.001161 increases in ROE. R2 tells the percentage

variation in ROE explained by BOS, DEH and NEI) By implication, the value of

0.828.733 means that about 83% of total variation in ROE is as a result of changes

in BOS. DEH and NED while 17% is unexplained. This remaining percent could

be caused by other factors or variables not built in the model. Since the Durbin-

Watson statistic is near 2, there is no evidence of first-order autocorrelation. The

estimated value is significant at I ° level (because the p value is zero).

Hypothesis 2: Board size, board independence and directors’ equity holding

do not significantly affects Return on: Assets: of banks in

Nigeria

Table 4.3.2: Multiple regression for hypothesis to

Dependent Variable: ROA

Method: Least Squares

Date: 11/26115 Time: 13:37

82
Sample: 1150

Included observations: 1 50

Computed by researcher using data extracted from annual reports of the sampled

banks. The value

alue for the coefficient for ROS (i.e. 13) is 1.028988. DER
DE (i.e. 132)

is -0.000725 (i.e. is -0.032918.

0.032918. while
hile the constant intercept. c is 0.040724. The

value of (1.04074 for c represents what ROA is without BOS. 1)1-i

1)1 I and NH).

The value 10.028988 for
 -0.00.0725 for
 and -0.03291.8 for
 implies that

holding all other factors constant, a unit increase in BOS. DEH and NED will lead

to 10.028988. -0.000725 --0.032918 increases in ROA. R2 tells the percentage

variation in ROA explained by BOS. DEH and NED By implication, the value of

0.733385 means that about 73% of total variation in ROE

E is as a result of changes

83
in ROS, DEH and NED while 27% is unexplained. This remaining percent could

be caused by other Factors or variables not built in the model. Since the Durbin
Dur

Watson statistic is near 2. There is no evidence of first

first-order
order autocorrelation. The

result of the analysis in table 4.3.2 sho

showed
ed that there is no statistical significant.

Hypothesis 111: There is no significance in the financial performance of banks

with Table 4.3.3: t-test: two--sample assuming equal variances.

Computed by researcher using data extracted from annual reports of the sampled banks

The t-lest result from table 43.4 shows that banks with foreign directors recorded a

mean of 0.03736. While those without foreign directors recorded a mean of

0.07256 Furthermore the variances of 0.0014 and 0.0034 are recorded for banks

84
with foreign directors and those without foreign directors respective. At two-tailed,

the 1- calculated of -0.2010 is seen to be less than the t-calculated of 2. 1 011.

4.4 Interpretation of the Analysis of the Three Hypotheses Result

In chapter one the researcher formulated two principal testable hypotheses on the

effect on corporate governance variables and profitability of banks in Nigeria,

against which this study is anchored. In this section, the researcher subjects these

propositions to empirical testing thawing from the results of the descriptive and

inferential statistical analyses. Our decision rule is based on the significances of the

t-statistics which are represented by the p- values flagged by the statistical

packages used. This is based on the fact that the existence of a significant

relationship can be inferred from a significant t-statistic Agbonifoh & Yomere

(2009).

Hypothesis 1:

Board size, proportion of non executive directors and directors’ equity holding do

not significantly affects Return on Equity of banks in Nigeria.

In the first hypothesis the study assumed that there is no significant effect of board

size, proportion of non executive directors and directors’ equity holdings on return

on equity of banks in Nigeria. From the analysis, the regression coefficient of the

model is positive with a p- value of zero significant at only 1%. This indicates a

85
significant positive effect of’ hoard size, proportion of non executive directors and

directors’ equity holdings on the return on equity of the quoted banks. On the

premise of these results, since the positive effect is significant. We therefore reject

the null hypothesis and accept the alternate hypothesis which states that there is a

positive significant effect of BOS. DEH and NED on ROE. This invariably means

that a larger board size has a range of expertise to make better decisions 11w a firm

as the CEO cannot dominate a bigger hoard because the collective- strength of its:

members is higher and can resist the irrational decisions of a, CEO as argued by

Pfeffer.1i992 and. Zahra & Pearce (1996). The result therefore supports the agency

theory as the large board members being the agents tend to look after their own

interests.

Also on the effect of non executive directors to return on equity. The positive

effect noticed is likely to be- because majority of directors in a board member

should be independent to make rational decisions and create value for the

shareholders. The role of 4 independent directors is important to improve the value

of a firm as they can monitor the firm and can force the managers to take unbiased

decisions. The independent directors can also play a role of a referee and

implement the principle of corporate governance that protect the rights of

shareholders as argued by Bhagat & Jefferis, 2002: Tomasic, Pentony & Bottomley

(2003).

86
In addition, on the effect of directors’ equity holdings. the result depicts that the

more banks’ equity owned by the directors. The better the banks’ financial

performance proxied by return on equity. This implies that individuals who form

part of management backs in which they also have equity ownership have a

compelling business interest to run them will Further explanation for this

phenomenon is (that the equity ownership creates better management monitoring

on the part of the board and hence improved results. It is therefore argued that one

of the ways in which the Board of Directors could be motivated to take

performance-improving measures and to protect the interests of the shareholders. is

for the directors themselves to take part in the ownership of the firm. The argument

is that this will enable them have more interest in the value of shares of the firm

and that they will take measures to improve firm performance. Similar view is

shared by McConnell. Servaes and [ins. (2008): L. Oderer and Peyer (2002) that

within a certain range. a positive- relation is predicted between director equity

interest and firm performance.

Hypothesis 2:

Board size, proportion of non executive directors and directors’ equity holding do

not significantly affects Return on Assets of banks in Nigeria.

In the second hypothesis, the study assumed that there is no significant effect of

board size. Proportion of non executive directors: and directors’ equity holdings:

87
on return on assets of banks in Nigeria. From the- analysis, the regression

coefficient of the model is positive only on BOS but negative on DEH and NED.

From the analysis, it shows that the result is not statistically significant. On the

premise of these ‘results, since the result is not statistically significant, we

therefore accept the null hypothesis which states that there is no significant effect

of BOS, DEH and NED: on ROA. This was in line with the findings of Musa and

Robinah (2011), who find out the board size and independence directors have no

significant effect on return on assets.

Hypothesis 3

H There is no significant difference in the means of the financial performance of

Nigerian banks with 1weign directors and banks without foreign directors.

The 1- test result in table 4.3 10 shows that the calculated ‘value of -0.2010 is not

significant. The t-calculated value of 2.1010 is also reported. Conversely, the mean

of banks with foreign directors is 0.03736 while that of banks without foreign

directors is 0.07265. Since the t-tabulated value of 2.1010 is greater than the t-

calculated of -0.2010. The researcher therefore accepts the null hypothesis which

states that the profitability of the banks with foreign directors is not significantly

different from the profitability of banks without foreign directors. This non

significant difference could be based on the fact that the reign directors tend to

adapt to the corporate socio organizational culture of the environment in which

88
they operate. 1 his is in line with Hoschi, Kashyap and Scharfstein (2002) and Fich

(2005) but however not in agreement with Chibber and Majumdar (2000) and

Djankov and Hoekman (2000) in their studies in which they opined that firms with

foreign directors tend to perform better than those without foreign directors.

89
 CHAPTER 5

SUMMARY, 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.

5.1 Summary of Findings

This study made use of secondary data in analyzing the relationship between

corporate governance and financial performance of the fifteen sampled banks used

for this study. 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 and corporate websites of the reviewed banks.

The regression analysis were used to find out whether there is any significant effect

of the variables to be measured (i.e. corporate governance and banks’ financial

performance) and also to- find out if the effect is significant or not. However, the t-

test statistics was used to establish a difference exist in the profit of banks with

foreign directors and those without I he proxies that were used for corporate

governance are: board size, proportion of’ non executive directors on board

(independent directors) and directors’ city holdings. Accounting measure of

performance (return on equity and return on asset) were used as the dependent

variable.

90
From the descriptive analysis, it was revealed that on the average the board size of

quoted banks in Nigerian is 13. This result implies that on the average, a relatively

moderate board sue of I .3 is noticed among the quoted banks in Nigeria. This is in

line with the suggestion of Kyerehoah-Col .eman and Biekpe (2006) that a hoard

size of between 12 and 16 is appropriate. Furthermore, the findings revealed that

on average the banks included in the sample generate Return on Equity (ROE) of

about 11% and a standard deviation of 5%°/o. This means that the value of the

ROE can deviate from mean to both sides by 5%.

From the multiple regression result for the relationship between board size.

independence directors’ and directors equity holdings and return on equity the

coefficient of the model vas found out to be positive, with a p- value of zero

significant at only I %. This result shows that hoard Size, independence directors’

and director’s equity holdings and performance in terms of ROE move in the same

directions. The positive relationship is also seen to be considerably important to the

performance of bank. The positive effect of the BOS, DEH and NED to financial

performance implies increase iii the number of directors (executive and non

executive) will lead to relative increase in financial performance as the existence of

experienced directors in the firm will lead to improvement, in the financial

performance of the banks.

Finally: the result from the second hypothesis reviewed that there is no significant

91
effect of BQS. DEH and NED on ROA. The multiple regression result shows that

BOS. DEH and NED are not statistically significant to ROA. This implies that no

matter the number of hoard size, independence director’s and director’s equity

holdings. it will not have .any effect on return on assets. This premise implies that

when a board gets too big, it becomes difficult to co-ordinate. Also, board

members have the tendency and possibility of free riding by individual directors

and delay’ their decision taking processes.

The study further revealed that in a bank where directors held stock, the ratio of

directors stockholding is positively related to performance, final l it was also

observed that the profitability of banks with foreign directors do not differ from

those without foreign directors.

5.2 Conclusion

The importance of corporate governance in enhancing the banks organizational

climate for performance is positively significant. Corporate governance beings to

bear through external independent directors, new dimension for effective running

of a corporate entity hereby enhancing a bank’s corporate entrepreneurship and

competitiveness.

The study examined the relationship between some measures of corporate

governance such as hoard size board independent and director’s equity holdings

92
and their effects on financial performance such• as return on equity and return on

assets of quoted banks in Nigeria. The findings indicate the need for increase in

board size, non executive director board independent) and directors’ equity holding

as this will increase the performance of banks on return of equity in Nigeria.

Furthermore, the study conclude that a negative non significant effect exist

between hank performance proxied by return on assets and board size director’s

equity holdings and proportion of non executive directors.

5.3 Recommendations

Based on the findings, of this research, the researcher therefore present the

following recommendations:

i. Since there is a significant relationship between BOS and ROE. It is

recommended that a larger board sue is important because ii has a range

of expertise to- make better decisions for a firm as the CEO cannot

dominate bigger board members- because the collective strength of its

members is higher and can resist the irrational decisions of a CEO.

ii. The value of a firm is improved when the board performs its fiduciary duties

such as monitoring the activities of management and selecting the staff for a

firm. The board members can also appoint and monitor the performance of an

independent auditor to improve the value of a firm. The Board of Directors can

93
 resolve internal conflicts and decrease the agency cost in a firm. Therefore, the

researcher recommends that moderate boards- are more efficient in decision

making because there is less agency cost among the board members.

iii. The more banks equity owned by the directors, the better the banks’

financial performance in terms of return on equity. This implies that individuals

who form part of management of banks in which they also have equity

ownership have a compelling business interest to run them well Further

explanation for this phenomenon is that the equity ownership creates better

management monitoring on the part of the hoard members and hence improved

results.

iv. The principles, of corporate governance suggest that auditors should work

independently and perform their duties with professional care. In case of any

financial manipulation. the auditors are held accountable for their actions as the

availability of transparent financial information reduces the information

asymmetry and improves the value of the firm.

v. For better profitability performance of banks and increase financial

performance banks should dwell mostly on their indigenous directors rather

than foreign directors since there is no much significant impact noticed from

foreign directors in the profitability and financial performance of banks.

94
5.4 Contribution to Knowledge

The study has added to the existing literature on the effect of corporate governance

structure on return on equity and return on assets as variables for financial

performance h demonstrating empirically that hoard size, directors equity holdings

and independence directors have positive and significant effect on return on equity.

And that board size director’s holdings interest and independence directors do not

have any significant effect on return on assets. The study also shows that banks in

Nigeria should dwell largely on their indigenous directors rather than looking for

foreign directors that will oversee the affairs of the banks, as there is no significant

difference between financial performance of banks with foreign directors and

banks with indigenous directors.

Again, Instead of considering just a single measure of governance as prior studies

in the literature have done), this study considered three different governance

measures and two- financial performance variables: This will help researchers in

this area of interest to draw inference, Since to the best of the researchers

knowledge no study in Nigeria has extensively covered corporate governance ci

bank as it relates to performance. this studs’ will ser e as a data base for future

research.

95
5.5 Suggestions for Further Study

The limitations of the study have prompted suggestions for further research as

listed below:

i) 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 specific categories for example: in not for

profit organizations, in government organizations, and in family companies.

Since this study the Nigeria banking sector it would be beneficial to have a

clearer understate corporate governance roles in- other types of

organizations. Such research could address the similarities and differences of

the roles in different organizations and consider a so the legal requirements

for different organizations.

ii. The period of study for this research is ten years i.e. (2004-2013), which

include 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.

iii Further research is also required on the behavioural aspects of boards.

Researchers in developed countries have recently started examining, board

processes by attending actual board meetings: however this also needs to be

96
 expanded b’ researchers in developing economies. f here 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 he a start in developing a better understanding of

corporate governance.

iv) The data used for the current study was derived from only fifteen banks and

their return on equity and return on assets. A larger data set comparing

financial and non financial firm may result in a different model of the

relationship between corporate governance and the value 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.

97
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