ABSTRACT
The study ascertained the effect of corporate governance on public confidence in financial reporting of Nigerian banks. Hence, three specific objectives were formulated as guide which are: to ascertain the effect of Board size on public confidence in financial reporting of Nigerian banks; to ascertain the effect of Non-Executive Directors on public confidence in financial reporting of Nigerian banks and investigate the effect of Directors equity holdings on public confidence in financial reporting of Nigerian banks. The study adopted the ex- post facto research and analytical design. Data were obtained through the annual reports and accounts of the selected banks. The judgmental sampling technique was used to select five (5) Deposit Money Banks out of the fifteen (15) Deposit Money banks operating in Nigeria and listed on the Nigeria Stock Exchange for periods spanning from 2010-2014. Three hypotheses were formulated and tested using the Pooled Ordinary Least Squares Regression with the aid of E-view version 6. The findings revealed that Board size has no positive nor significant effect on the confidence of the public in financial reporting of Nigerian banks (r2 = 500032; p = 0.2825). Non-Executive Directors have a positive and significant effect on public confidence in financial reporting of Nigerian banks (r2 = 0.7121; p = 0.0103) and also, Directors’ equity holdings has a positive and significant effect on the confidence of the public in financial reporting of banks in Nigeria (r2 = 0.8682; p = 0.0080). The study recommends that a small Board size is preferred than a large Board size, the Board size should be more of non-Executive Directors and Directors should subscribe more to the shares of the banks.
TABLE OF CONTENTS
Title i
Declaration                                                                                                               ii
Approval                                                                                                                    iii
Dedication                                                                                                                  iv
Acknowledgments                                                                                                    v
Abstract                                                                                                                    vi
List of Tables                                                                                                          xi
List of Figures                                                                                                          xii
CHAPTER ONE: INTRODUCTION
1.1   Background to the Study                                                                            1
1.2   Statement of the Problem                                                                          3
1.3      Objectives of the Study                                                                        4
1.4      Research Questions                                                                            4
1.5      Research Hypotheses                                                                        4
1.6      Significance of the Study                                                              5
1.7 Scope and Limitation of the Study 5
1.8      Operational Definition of Terms                                                        6
            References                                                                                                7
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1      Conceptual Framework                                                                         8
2.1.1  Historical Overview of Corporate Governance                                      9
2.1.2  Elements of Corporate Governance in Banks                                10
2.1.3 Regulation and Suspension as Elements of Corporate Governance in Banks 12
2.1.4  Corporate Governance Mechanism                                                     13
2.1.5  Linkage between Corporate Governance and Public Confidence in Financial       Reporting                                                                                  17
2.1.6  The Role of Internal Corporate Mechanisms in Financial Reporting         18
2.1.6.1 Auditor                                                                                                    18
2.1.6.1.1 Auditor’s Report                                                                                   18
2.1.6.2 Board of Director’s Composition                                                            19
2.1.6.3 Chief Executive Officer                                                                       19
2.1.6.4 Board Size                                                                                               20
2.1.6.5 Non-Executive Directors                                                                        21
2.1.6.6 Directors Equity Holdings                                                                   21
2.1.6.7 Managers                                                                                                 21
2.1.7 Regulatory Environment for Banks in Nigeria                                    22
2.1.8 Governance Standards and Principles around the World                   24
2.1.8.1 United Kingdom                                                                                        24
2.1.8.1.1 The Cadbury Report (1992)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 24
2.1.8.1.2 The Greenbury Report (1995)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 25
2.1.8.1.3 The Hampel Report (1998)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 25
2.1.8.1.4 The Higgs Report (2003)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 25
2.1.8.1.5 The Combined Code of Corporate Governance                               26
2.1.8.2 Organisation for Economic Co-operation and Development (OECD) 27
2.1.8.3 Australia                                                                                                        27
2.1.8.4 United States                                                                                          28
2.1.8.5 Standards and Principles Summary                                                    28
2.1.9 Corporate Governance and the Crisis in the Nigerian Banking Sector         29
2.1.10 The State of Corporate Governance in Nigerian Banks                        30
2.1.11 Information Disclosure and Transparency                                        32
2.2      Theoretical Framework                                                                           33
2.2.1  Stakeholder Theory                                                                                    33
2.2.2  Stewardship Theory                                                                                34
2.2.3  Agency Theory                                                                                          35
2.2.4 Information Asymmetric Theory                                                             36
2.3      Empirical Framework                                                                            36
2.4     Summary                                                                                                   42
References 44
CHAPTER THREE: METHODOLOGY
3.1      Research Design                                                                                         51
3.2      Sources of Data                                                                                           51
3.3      Population of the Study                                                                    51
3.4      Sample Size Determination                                                                    51
3.5      Instrument for Data Collection                                                             51
3.6      Data Analysis Techniques                                                                     52
3.7      Description of Research Variables                                                      52
3.8      Model Specification                                                                             52
           References                                                                                                       54
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1 Presentation of Data                                                              55
4.2 Test of Research Hypotheses                                                                        56
4.3 Discussion of Findings                                                                                   60
     References                                                                                                       62
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings                                                                       63
5.2 Conclusion                                                                                                     63
5.3 Recommendations                                                                                     64
5.4 Contributions to Knowledge                                                               64
5.5 Suggestion for Further Studies                                                                    65
     Bibliography                                                                                                     66
     Appendix 1 75
Appendix 2Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 75
Appendix 3Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 76
     Appendix 4                                                                                                76
     Appendix 5                                                                                                     77
     Appendix 6                                                                                                77
     Appendix 7                                                                                                         78
     Appendix 8                                                                                                   78
     Appendix 9                                                                                                         78
     Appendix 10                                                                                       79
     Appendix 11                                                                                     79             Â
LIST OF TABLES
Table 4.1 Summary of Aggregate Values of Variables                                      55
Table 4.2.1 Pooled Panel Data Regression Analysis for Hypothesis One     56
Table 4.2.2 Pooled Panel Data Regression Analysis for Hypothesis Two      57
Table 4.2.3 Pooled Panel Data Regression Analysis for Hypothesis Three  58
LIST OF FIGURES
Figure 2.1.4.1 Corporate Governance Mechanisms for Outsiders                16
Figure 2.1.4.2 Corporate Governance Mechanisms for Outsiders                 16
CHAPTER ONE
INTRODUCTION
- Background to the Study
Corporate governance is all abouttransparent, effective and accountable control of affairs of an organisation by its Board and Management. With the increasing globalisation, the issues of corporate governance have continued to attract significant national and international interest. Corporate governance is about a decision-making process that holds individualsaccountable for work performed, encourages stakeholder’s participation and facilitates the flow of information (Ogbechie, 2011).The governance of firms’ especially thatof financial institutions, should always aim at protecting the interests of all stakeholders such as shareholders, depositors, regulators, creditors, and the public in general.
The corporate governance of banks is important for several reasons. Firstly, banks have an overwhelmingly dominant position in the financial systems of developing economies and are extremely important engines of economic growth (Ogbechie, 2011).Secondly, banks in developing economies are vital or main sources of finance for majority of firms. Thirdly, banks are also the main depository for the economy’s savings and provide the means for payment.
In view of the above, there have been series of corporate distress and failures of which include organisations likeEnron, the Houston(Texas based energy giant)Health South, Tyco, Parmalat, Vivendi, Ahold, Adecco, Tv Azteca, Royal Dutch Shell, China Aviation, Cendant and WorldCom. Italian companies like Hollinger Inc., Adelphia Communications Company, Global crossing limited and Tyco International Limited, revealed significant and deep rooted problems in their corporate governanceframework in the past. Even Dirk Grasso, the director of the prestigious New York Stock exchange was removed as a result of public outcry over excessive compensation (La Porta, Lopez &Shileifer, 1999). In 2008, the former Board and External Auditors of Cadbury Nigeria Plc. were sanctioned due to misleading financial reporting in the company’s 2006 audited accounts. This organisations surprised the business world with their unlawful and unethical operations.
Corporate governance is also important in the Nigerian banking Industry because a number of recent financial failures, fraud and doubtful business practices had adversely affected the public confidence in the affairs of the sector most especially in the issue of the quality of the financial reports published by the management of the banks. The Nigeria banking sector has also witnessed distress and failure of which include banks like the Alpha Merchant Bank Ltd, Savannah Bank Plc., Oceanic bank Plc. and the Societe General Bank Ltd. (Akpan, 2007). In recent times, mismanagement was seen as the reason in the near collapse of banks like Oceanic bank Plc., Union bank Plc., Intercontinental bank Plc., which led to their being bailed out by the Central bank of Nigeria in 2009 as well as some banks like Enterprise Bank limited (acquired by Skye Bank PLC) and Mainstreet Bank limited (acquired by Heritage Bank limited) being restructured by the Asset Management Corporation of Nigeria (AMCON) as a result of the Central Bank of Nigeria audit in 2009 which showed their poor financial standing in 2009. In 1995, several Chief Executive Officers and Directors of banks in Nigeria were arrested for non-performing loans that were given to themselves, relations and friends (Uwuigbe, 2011). In 2006, some of the banks that could not meet the Central Bank of Nigeria (CBN) recapitalization requirements were found to be saddled with non-performing loans that were given to Directors and their friends.
In 2003, the Nigerian Securities and Exchange Commission (SEC) adopted a code of best practices on corporate governance for publicly quoted companies in Nigeria and this code was replaced in 2011 by the Securities and Exchange Commission known as the Code of Corporate Governance (2011 SEC Code).
At the end of the consolidation exercise in the banking industry, the CBN, in March 2006, released the code of corporate governance for banks in Nigeria, to complement and enhance the effectiveness of the SEC code, which was implemented at the end of 2006. This code was also reviewed to the CBN Code of Corporate Governance for Banks and Discount Houses in Nigeria (the CBN code), 1 October, 2014.The CBN code requires among others that there should be annual Board and Directors’ appraisal covering all aspects of the Board’s structure and composition, responsibilities, processes and relationship, as well as individual members competence and respective roles in the Board’s performance. It could be said that the three major governance issues that attracted the attention of the regulators are related party transactions, conflict of interest and creative accounting (Ogbechie, 2011).
In view of the above, this study considers the effect of corporate governance on public confidence in financial reporting of Nigerian banks.