EFFECT OF BOARD DIVERSITY ON FINANCIAL PERFORMANCE OF LISTED DEPOSIT MONEY BANKS IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1         Background to the study

The collapse of well known companies such as Enron and others in developed nationsled many industrialists and legal practitioners; including investors to a belief that governance crisis was eminent in America. In response to these well known events, the United States passed the Sarbanes-Oxley Act while major stock exchange markets modified their listing criteria for effectiveness and improving board monitoring (Byoun, Chang and Kim, 2011).Issues related to boards of directors have attracted the interest of researchers from various disciplines for the past decade. This represents a shiftin paradigm from top management teams (TMT) to corporate boards, coupled with the high emphasis put on the role of boards by regulators and investors in directing and controlling firms.

Recently some countries in Europe have legislated higher representation of women on boards, while others have included the concept in laws in response to the normative case calls for diversity. Those in support of gender diversity such as McKinsey and Catalyst have proved that the concept have economic importance to firms. Catalyst proved that Fortune 500 firms with more females on corporate boards tend to make more profit. Also, Mckinsey also proved that that companies with a higher number of women at board level display a higher degree of organisation, above average operating margins and higher valuations.(Credit Suisse, 2012). Although diversity is looked upon to be a goal in itself by some academia, it is also pertinent to understand its economic importance to firms.

Diversity is needed in the boardrooms today in order to reflect both the diversity of stakeholders in a firm and the diversity of its customer’s base. The concept of diversity cannot be measured by composition alone but should also be measured by organizational growth and by how it enables an organization move forward (Susan as cited in Inspire, 2012). It is a quality that drives broader thinking due to the fact that board members are given leadership roles which in turn enable them achieve success in the board in the way of increased financial performance (Susan as cited in Inspire, 2012).Despite all this, the problem now faced is not how to convince leaders and board members to treat diversity as a serious issue but how to successfully achieve a rich balance of gender, nationality, ethnicity, experience, and educational background.

In Nigeria, the Central Bank of Nigeria (CBN Bulletin, 2014) asserted that most corporate organizations in Nigeria are yet to imbibe good corporate culture. A survey carried out by the Security and Exchange Commission (SEC) showed that averagely, about 40% of registered companies, banks inclusive, had a recognized code of corporate governance issued in 2003. Non –compliance to fundamental basic governance principles led largely to the systemic problems such as gross insider abuses, huge non- performing insider related credits, false reporting, and non- compliance with regulatory requirements. Some other forms of corporate governance abuses recorded, particularly in the banking sector prior to the code of corporate governance released in 2003, include weak internal control, non- compliance with laid down rules, non-participatory shareholders, sharp practices in borrowing, and inability to plan and be proactive to dynamism in the business world.(CBN Bulletin, 2014).

To close the gap and become competitive in the business world, the CBN in collaboration with the Bankers’ Committee developed Code of Corporate governance which came into effect on March 1, 2006 (and amended in 2009). The code was compiled to ensure best practices and improve on self regulation with specific focus on important areas including equity ownership, organizational structure, and quality of board membership.

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EFFECT OF BOARD DIVERSITY ON FINANCIAL PERFORMANCE OF LISTED DEPOSIT MONEY BANKS IN NIGERIA