ABSTRACT
In the immediate past two decades the financial services industry has experienced fluctuating fortunes leading to high profile cases of corporate failure and consequent near loss of public confidence and hence, the banking reform kick starts in 2004. The industry’s problems in Nigeria are consequences (directly or indirectly) of bad corporate governance. The lack of effective corporate governance in Nigeria has worked to the decrement of shareholders and created a class of stakeholder who has lost interest in the banking system. The study therefore appraised Nigerian banks’ compliance to the CBN code of Corporate Governance as well as its effect on bank performance. Analysis of variance (ANOVA) was used to measure Nigerian bank’s compliance to the CBN code of corporate governance, while the panel data ordinary least square regression to measure the compliance effect on bank’s profitability. Among other codes of corporate governance for board size, audit committee, board diversity, and power separation. Nigerian commercial banks’ compliance to CBN best practice for board size was statistically insignificant. Therefore, commercial banks in Nigeria were up till the date of this study non-compliant with the CBN best practice for board size. The same was discovered for board diversity, audit committee, and power separation as the f-statistics evidenced in analysis of Variance showed a significant variance between the Nigerian commercial banks’ observed practices and the best practice code as dictated by the Central Bank of Nigeria (CBN). Nonetheless, Nigerian commercial banks significantly complied with the CBN best practice code for commercial banks’ board composition. This was evidenced in the analysis of variance as the f- calculated was less than the f- critical, signifying very little variance between commercial banks’ observed practices and the CBN best practice code for corporate board composition. It was recommended that Central Bank of Nigeria should strictly monitor Nigerian banks’ compliance to the code of corporate governance, especially board size, audit committee, board diversity, power separation, as a percentage increase in general compliance to the best practice. In conclusion, Compliance to Central Bank of Nigeria code of corporate governance significantly impacted on banks’ profitability in Nigeria. CBN code of corporate governance raises profitability of Nigerian banks by 3.53 percent. The direct relationship between general compliance to CBN code of corporate governance and profit of commercial banks will boost the profitability of the commercial banks.
TABLE OF CONTENTS
Title page i
Declaration ii
Approval iii
Dedication iv
Acknowledge v
Abstract vi
Table of Content vii
List of Tables viii
List of Figures ix
CHAPTER ONE: INTRODUCTION
- Background of the Study 1
- Statement of the problem 4
- Research objectives 5
1.4. Research Hypotheses 5
1.5. Scope of the Study 6
1.6. Significance of the Study 6
References 8
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 CONCEPTUAL FRAMEWORK 10
2.1.1 The Concept of Corporate Governance 10
2.1.2 Corporate Governance in Banking Sector 12
2.1.3 External Corporate Governance Mechanism 13
2.1.4 Internal Corporate Governance Mechanism 14
2.1.5 Corporate Governance in Nigeria 15
2.1.6 Key Areas of Failure of Corporate Governance in Banks 17
2.1.7 Enhancing Corporate Governance in Banks in Nigeria 22
2.2. THEORETICAL FRAMEWORK 34
2.2.1 Agency theory and the study of corporate governance 36
2.2.2 Agency Costs and Corporate Governance Solutions (Origin and Development) 40
2.2.3 Agency Problems and Corporate Governance Solutions 41
2.3 REVIEW OF EMPIRICAL LITERATURE 43
2.3.1 Corporate Governance and Bank Performance. 46
2.3.2 Board Structure and Corporate Financial Performance in Nigeria. 52
2.3.3 Corporate Performance and Executive Compensation 55
2.3.4. Existence of Audit Committee and Bank Performance 55
2.3.5. Separation of Functions of the Chairman and the CEO and Bank Performance 56
2.3.6. Board Diversity and Bank Performance 57
2.3.7 Board Activity and Bank Performance 57
2.3.8 Board Size and Bank Performance 58
2.4. SUMMARY 59
References 61
CHAPTER THREE: METHODOLOGY
- Research Design 68
- Nature and sources of data 68
- Population Size 68
3.4 Sample Size 69
3.5 Data Analysis Technique 69
3.6 Operationalization of the Variables 71
3.7 Model Specification 73
References 75
CHAPTER FOUR: DATA PRESENTATION AND ANALYSES
4.1. Data Presentation 76
4.2 Commercial Bank’s Compliance to CBN Code of Corporate Governance 77
4.3 General Compliance to Code of Corporate Governance (COMP) and Profit after Tax (PAT) 84
4.4 Test of Hypotheses 90
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS
5.1 Summary 93
5.2 Conclusion 96
5.3. Recommendations 96
5.4 Contribution to Knowledge 97
5.5 Suggested Future Research Areas 97
Bibliography 98
Appendices 105
LIST OF TABLES
Table 3.1 Estimation of Corporate Governance Variables 60
Table 4.2.1 Correlation Test 77
Table 4.2.3.1 General compliance to all codes of corporate governance 78
Table 4.2.3.2 Compliance of Board Size (BS) to Best Practice code (BP*BS) 79
Table 4.2.3.3 Compliance of Audit Committee (AC) to Best Practice code (BP*AC) 80
Table 4.2.3.4 Compliance of Board Diversity (BD) to Best Practice code(BP*BD) 81
Table 4.2.3.5 Compliance of Board Composition (BC) to Best Practice code (BP*BC) 82
Table 4.2.3.6 Compliance of Power Separation (PS) to Best Practice code (BP*PS) 83
Table 4.3.1 Unit Root Test (Common Unit root Process) 84
Table 4.3.2`Normality Test on the Variables 85
Table 4.3.3 Correlation Test 86
Table 4.3.4 Regression result 86
Table 4.3.5 Serial Correlation Test 87
Table 4.3.6 Cross-Section Dependence (Serial correlation) test 88
LIST OF FIGURES
Figure 4.1 Residual Normality and Heteroscedasticity test 89
Figure 4.2 Residual Graph 89
CHAPTER ONE
INTRODUCTION
- Background of the Study
The situation where the public loses confidence in the financial institutions can result in panic and consequentially financial and economic woes. The absence of confidence in any organisation is attributable to opaque management practices with deleterious effect on its performance Adegbemi, Ofoegbu and Ismail (2012). Corporate performance is an important concept that relates to the way and manner in which financial, material and human resources available to an organization are judiciously used to achieve the overall corporate objective of an organization. Adegbemi, et al (2012). It keeps the organization in business and creates a greater prospect for future opportunities.
Zingales (1998) defined corporate governance as a group of mechanism that stakeholders use to guarantee that directors effectively manage corporate resources, a task that includes the way in which quassi-rents are developed and distributed. Shleifer and Vishny (1997) defined corporate governance as the way in which suppliers of finance to corporation ensure themselves of getting a return on their investments.
The bank corporate governance process is a complex framework. This governance framework encompasses a bank’s stockholders, its managers and other employees, and the board of directors Jegede, Akinlabi and Soyebo (2013). Separation of ownerships and controls of bank induces the problem of internal corporate governance. Managers (employees) who act as the agents have particular interests which may differ from those of consumers and owners of the bank. In order to reduce the agency conflict of interests between managers (agents) and owners (principals), a continuous improvement on compensation and incentive system should be provided by the bank owners. The owners also select and govern the board of directors who have high credibility and capability to serve them better. This mechanism refers to internal corporate governance. Through this mechanism, the owners expect managers to have the same perception and direction as well as owners about risk management (risk-taking behaviour) which is related to return or bank performance Eduardos, Hermeidito, Putu, Supriyatna (2007). Banks further operate under a unique system of public oversight in the form of bank supervisors and a comprehensive body of banking laws and regulations. The interaction between all of these elements determines how well the performance of a bank will satisfy the desires of its stockholders, while also complying with public objectives. For investors and regulators, bank corporate governance framework is thus of critical importance to a bank’s success and its daily operations. As a result, understanding the corporate governance of banks is especially important because of the systematic risk that banking activity poses for the economy at large as evidenced by the U.S. savings and loan crisis in the 1980’s, the Asian financial crisis in the 1990’s and the more recent supreme mortgage crisis Jegede et al.( 2013) citing Alexander (2006).
The Nigerian banking system has undergone remarkable changes over the years in terms of the number of institution, ownership structure and the depth and breadth of the operations. These changes have been influenced largely by the opportunities presented by the deregulation of the financial sector, globalization of operations, technological advancements, impact of global economic downturn and the adoption of regulatory guidelines that conform to international standards. The developments in the Nigerian banking industry show that absence of good corporate governance was mainly responsible for the dismal performance of the industry which should act as a catalyst for economic growth.
