CORPORATE GOVERNANCE MECHANISMS AND BANK PERFORMANCE: A STUDY OF LISTED NIGERIAN DEPOSIT MONEY BANKS

ABSTRACT

 

The banking system of Nigeria in the past had seen corporate failures which resulted principally due to the lack of a robust corporate governance structure. For the sound of working with the banking sector in an economy, it is important to have a sound corporate governance for banks. This study examined the impacts of corporate governance mechanisms, policies and practice on the performance of Nigerian banks. Specifically, the study determines if there is any difference in the diversity (executive and non-executive) of the composition in the board of directors before and after the failed banks report of 2011; evaluates if there is any difference in insider ownership before and after the failed banks report of 2011 and determines the significant difference in profitability performance before and after the failed banks report of 2011. To achieve this, quasiexperimental research design was adopted as it calculates the effect of a treatment on an outcome. Having employed annual reports of three (3) Tier 1 banks (Zenith Bank, Guaranty Trust Bank and First Bank of Nigeria plc) and three (3) Tier 2 banks (Fidelity Bank, Eco Bank and Unity Bank) between 2003-2010 and 2012-2019, this study through Paired Sample t-test found that there is no significant difference between diversity in the composition of the board of directors before and after the failed banks report of 2011. It was also found that there is no significant difference between insider ownership before and after the failed banks report of 2011. The study further revealed that there is no significant difference between the profitability performance before and after the failed banks report of 2011. This study recommends that the Nigeria Federal Government through Assets Management Corporation of Nigeria (AMCON) should be concerned about the level of both internal and external corporate governance mechanisms of banks.

KEYWORDS: Corporate, governance, performance

CHAPTER I INTRODUCTION

1.1 Background to the Study

Corporate governance has become one of the most topical issues in the modern business world today. Spectacular corporate failures, such as those of Enron, Worldcom, Barlow Clows and

Levitt, the Bank of Credit and Commerce International (BCCI), Polly Peck International and Baring Bank, have made it a central issue, with various governments and regulatory authorities making efforts to install stringent governance regimes to ensure the smooth running of corporate organizations, and prevent such failures. A corporate governance system according to Mohamed, Ehab & Ahmed (2014) is defined as a more-or-less country-specific framework of legal, institutional and cultural factors shaping the patterns of influence that shareholders (or stakeholders) exert on managerial decision-making. Corporate governance mechanisms are the methods employed, at the firm level, to solve corporate governance problems. Governance encompasses the system by which an organization is controlled and operated, and the mechanisms by which it, and its people, are held accountable (Abu-Tapanjeh, 2009). To Arouri, Hossain, & Muttakin (2011), corporate governance deals with the manner in which companies are to be run to meet the owners’ required return on invested capital and thus contribute to economic growth and efficiency and ethical behaviour in society. Put differently, it refers to the processes and structures by which the business and affairs of the company are directed and managed, in order to enhance long term shareholder value through enhancing corporate performance and accountability, whilst taking into account the interests of other stakeholders (NPC, 2008).

In the Nigerian context however, the issue of corporate governance is of very high significance.

According to Babalola (2012), corporate governance of banks in developing economies is of even greater importance given the dominant position of banks as providers of fund. In developing economies, banks are typically the most important source of finance for the majority of firms

(Ahunwan, 2002). A sound financial system is based on profitable and adequate capitalized banks. Effective corporate governance practices are essential to achieving and maintaining public trust and confidence in the banking system, which are critical to the proper functioning of 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 their potential impact on any applicable deposit insurance systems and the possibility of broader macroeconomic implications (Basel

Committee on Banking Supervision, 2006). Hassan (2018) noted that banking institutions in Nigeria perform essential intermediation functions in the economy. According to the author, they allocate financial resources from savings to investments and consumption, provide vehicles for wealth accumulation, and perform maturity transformation functions that facilitate the financing of long-term projects, provide liquidity, and facilitate a payment, clearing and settlement function in the economy, including cross-border payments. As these institutions grow in size and sophistication, they provide economies of scale, cost-effectiveness, efficiencies and riskmanagement processes that benefit their customers and the economy at large. Without a welldeveloped, safe and efficient financial system, growth in the real economy is constrained.

However, as financial institutions become larger and more sophisticated, they also become increasingly complex, interconnected and integrated into the fabric of the real economy. As a result, the failure of a single banking institution could result in a deadlock in critical financial markets and services, which could quickly spread through the financial system to other markets and institutions, and which could result in economic costs that vastly exceed the costs of the initial single failure (Ohwofasa & Mayuku, 2012). Past experience has shown that normal corporate insolvency arrangements are inadequate to deal with the potential financial system instability caused by the failure of some banking institutions. Because of the destructive impact that the failure of some banking institutions could have on the real economy, especially if such institutions are large, complex or very interconnected, they are often regarded as being ‘too big to fail’, with a general expectation among depositors and investors that they will always be rescued if they do fail, most likely with taxpayer funds (Chude & Chude, 2014). Financial institutions that have the potential to dislocate a whole financial system and cause severe real economic costs if they fail have come to be referred to as systemically important financial institutions. Because of banks’ high liquidity risk, they require a different approach to their rescue or resolution than other types of businesses (Obamuyi, 2011). Obamuyi (2011) noted that a non-bank corporate normally approaches insolvency over an extended period and the deterioration of its financials becomes apparent over time. However, even a relatively well-managed and profitable bank can experience liquidity problems, sometimes as a result of external factors.

When the public or financial markets lose confidence in a bank or the banking sector, deposits are withdrawn and sources of short-term funding dry up. Even a solvent bank can fail if it cannot access funding with which to service its expenses, repay deposits and other liabilities as they become payable, and finance its longer-term loans and other assets. Resolving a bank in these circumstances requires immediate intervention, which is not provided for in the normal insolvency Processes (Hassan, 2018).

The banking crisis reflected a failing in management and of the board in its role of overseeing the work of management. In 2011, CEOs of some banks were relieved of their duties and this was linked to the lack of good corporate governance by those officials in handling the affairs of their organizations as applied. One of these former managers, Mrs. Cecilia Ibru, the former managing director of Oceanic Bank PLC, was sentenced to eighteen (18) months in jail and forfeited over a N150 billion in assets and cash. This research thus beams the spotlight on the relationship between corporate governance and bank performance and the major challenges that affect the operating performance of the banking industry in Nigeria with an outlook to increasing shareholder value and meeting the expectations of the other stakeholders.

1.2 Statement of the Problem

Banks and other establishments have long known that good governance attracts and generates investor goodwill and confidence and there is even more reason for them to improve on governance practices. Over the years, the interest in corporate governance has continued to grow and the scope is ever increasing and different angles to the study of corporate governance continue to be developed and explored. Financial scandals around the world and the collapse of major corporate institutions in the USA, South East Asia, Europe, Africa and Nigeria have shaken investors’ faith in the capital markets and the efficacy of existing corporate governance practices in promoting transparency and accountability. All these help to further buttress the importance of good corporate governance practices. It will not be farfetched to expect that better governed firms would perform better than their counterparts with poor governance mechanisms or structures. This can be related to the fact that good corporate governance structures in place in firms could reduce the amount of related-parties’ transactions and other self-dealing practices as was evident in most of the banks in which their CEO’s where ousted by the Central Bank of Nigeria in 2009 and 2011. It could also help lower the cost of capital of firms and ensure more smooth operations.

This research will not only look at the relationship between corporate governance and bank performance but also examine the major challenges that may affect the sustainable observation and practice of good corporate governance in Nigeria. It is on record that many of the 34 Nigerian banks that had their operating licenses revoked between the late 80’s and 90’s suffered from poor corporate governance. Legislation on corporate governance in Nigeria has followed the pattern laid down several decades ago in England following the collapse of enterprises due to fraudulent manipulations by corporate managers.  Corporate governance as noted earlier is about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that would foster good corporate governance performance as stated by bankers’ committee.

There is the Company and Allied Matters Act, the CBN Code for Banks on Corporate Governance, the CBN Code of Ethics for Directors, and the Securities and Exchange Commission (SEC) code for publicly quoted companies in Nigeria. Similarly, there is the code of corporate governance for insurance companies and the subsisting investment and securities act of 1999. But analysts argue that these documents are neither here nor there in terms of instilling the desired checks and balances, as well as discipline in boards and management of banking and other business organizations. It is, therefore, imperative to empirically ascertain whether a significant difference  exists between corporate governance mechanisms put in place by shareholders and bank performance before and after the 2011 failed banks report.

1.3 Objectives of the Study

This study aims at examining the impacts of corporate governance mechanisms, policies and practice on the performance of Nigerian banks. Specifically, this study would:

2011. Determine if there is any difference in the diversity (executive and non-executive) of the composition in the board of directors before and after the failed banks report of 2011.
2012. Evaluate if there is any difference in insider ownership before and after the failed banks report of 2011.
2013. Determine the significant difference in profitability performance before and after the failed banks report of 2011.

1.4 Research Questions

Research questions are those questions that the project will be devoted to answering and proffering solutions to. In this vein, the study seeks to find solutions to the following questions:  

1. Is there any significant difference in the diversity of the composition of the board of directors before and after the failed banks report of 2011?
2. Is there any significant difference in insider ownership before and after the failed banks report of 2011?
3. Is there any significant difference in profitability performance before and after the failed banks report of 2011?

 

1.5 Research Hypothesis

In order to carry out this research, the following hypotheses have been postulated and are stated in their null forms.

H₀₁: There is no significant difference between diversity in the composition of the board of directors before and after the failed banks report of 2011.

H₀₂: There is no significant difference between insider ownership before and after the failed banks report of 2011.

H₀₃:  There is no significant difference between the profitability performance before and after the failed banks report of 2011.

1.6 Scope of the Study

To reduce the tediousness of studying the entire population 22 banks in Nigeria, the scope of this study covers relevant issues surrounding corporate governance and bank performance in Nigeria using six (6) selected banks in Nigeria listed on Nigeria Stock Exchange. This focus would be on three (3) Tier 1 banks (Zenith Bank, Guaranty Trust Bank and First Bank of Nigeria plc) and three (3) Tier 2 banks (Fidelity Bank, Eco Bank and Unity Bank).

In order to ensure a critical evaluation of the topic under study and ensure good results are documented, this study would focus on eight (8) years before the failed banks report of 2011 and eight (8) years after the incident. Thus, the empirical analysis would test the relationship using time series data from 2003-2010 and 2012-2019.

1.7 Significance of the Study

This research will hereby bring options and ways in which the term Corporate Governance will enhance the performance of banks and promote investor’s confidence thereby boosting accountability and reliability of the financial position of the sector. The following stakeholders will be the main beneficiaries to the project:

Accountants: This research will help accountants realize how important it is to familiarize themselves with the term corporate governance and remain open and receptive to its effects.

Banking Industry: This research will be important for the banking industry because it will help highlight the importance of corporate governance in relation to their performance.

Government: To show how corporate governance can help boost firm’s performance and how imperative it is for firms owned by the government to embrace corporate governance.

Investors: Investors will promote the affairs of a firm at its reception but still hope to get returns as the firm continues to grow in its sales and profit margins. This study will enlighten prospective investors on the importance of investing in establishments that have adopted the corporate governance codes as it relates to them and the effects on their performance.

Researchers: It will help serve as a source of secondary data for researchers who will like to carry out further studies on corporate governance. This study encourages researchers to find more problems and proffer solutions to them.

The General Public: It will help educate the general public on the importance of corporate governance and how it can affect the performance of Nigerian banks.

CORPORATE GOVERNANCE MECHANISMS AND BANK PERFORMANCE: A STUDY OF LISTED NIGERIAN DEPOSIT MONEY BANKS

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