EFFECT OF CORPORATE GOVERNANCE PRACTICE IN ENSURING FINANCIAL ACCOUNTABILITY IN DEPOSIT MONEY BANK IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Corporate governance has become a most topical issue in the modern business world today. Financial institutions all over the world, whether big or small, are concerned about financial performance, increasing profitability and shareholders’ return is usually a top priority.

Corporate governance refers to the ways by which an organization guarantees that its owners or stockholders receive a fair return on their investment, while the expectations of other stakeholders are also met (Jenkinson and Mayer, 1992). It is considered to be a means by which affairs of the firm are directed and controlled so as to protect the interest of all stakeholders (Sullivan, 2009). The narrow view perceives corporate governance in terms of issues relating to shareholders protection, suppliers of finance to corporation, management efficiency, agency problems of economic theory, roles of board of directors, the independence of external meetings etc. (Oyejide and Soyibo, 2001 & Asekunowo, 2001).

Given the foregoing explanations, corporate governance can be seen as the way to protect shareholders’ rights. The shareholder has zero tolerance for poor performance and therefore, it is argued that the outcome of good governance is good performance (Tandelilin, 2007; De Andres, 2008; Aebi, Sabato, and Schmid,2010; Yang, 2011). The worldwide financial crisis of 2008, which started in the United States, was attributable to United States banks’ excessive risk-taking. Consequently, in order to control such risk and draw people’s attention to the agency problem within banks, there are statements made by bankers, central bank officials, and other related authorities, emphasizing the importance of effective corporate governance in the banking industry since 2008 and until now (Beltratti and Stulz 2009; and Peni and Vahamaa 201 1). Emphasis is not just on how well the organization succeeds in its profitability goal, but how well it is managed, run and internally regulated, both formally and informally (Parker, 2006). Therefore, any similar crisis that occurred or that may occur in the future might be explained as a result of bank governance failure.

In Nigeria however, evidences emerging from some of the collapsed banks in 2008, hitherto assumed to be run professionally or on sound principles, succinctly demonstrates that there will always be discrepancies or misalignments between the various organizational stakeholders’ interests (Sanusi, 2010). Therefore, managing these conflicting interests in a way that produces mutually satisfying outcomes for all stakeholders is at the core of the good corporate governance.

The issue of corporate governance has been given the front burner status by all sectors of the economy. The government in its effort to ensure good corporate governance through Securities and Exchange Commission (SEC) set up the Peterside Committee on corporate governance in public companies. The Bankers” Committee also set up a sub-committee on corporate governance for banks and other financial institutions in Nigeria. This is in recognition of the critical role of corporate governance in the success of companies (Ogbechie, 2006).

Financial economists have long been concerned with ways to address the problems which arises from conflict of interest between equity owners and managers. They have made a number of assertions on this issue. The literature emanating from such efforts has grown and much of the econometric evidence has been built on the theoretical works of Ross (1973), and Fama (1980).

Jensen and Meckling (1976) acknowledged that the principal-agent theory which was also adopted in this study is generally considered as the starting point for any debate on the issue of corporate governance. These governance mechanisms as identified in agency theory such as board size, board composition, directors’ equity holding have been proposed to ameliorate the principal-agent problem between managers and their shareholders (Gomper, lshii and Metrick, 2003). Some studies have focused on banks’ corporate governance (see Capiro, Leaven, and Levine, 2007; Bokpin, 2013; Nyamongo and Temesgen, 2013). This study focuses on deposit money banks operating in Nigeria as a developing country in order to provide empirical evidence on the impacts of corporate governance on bank performance.

1.2 Statement of the Problem

Corporate governance is particularly important in the Nigerian banking industry because a number of past financial failures, frauds and questionable business practices had adversely affected investors’ confidence. The main structural sources of the crisis are as a result of the deterioration of the banks’ asset portfolios, largely due to distorted credit management.

There was lingering distress in the industry. The supervisory structures were inadequate and there were cases of official recklessness amongst the managers and directors, while the industry was notorious for ethical abuses. These manifested in form of weak internal control systems, excessive risk taking, override 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.

Furtherance to this view, experts opined that the failure of corporate governance within the consolidated banks was as a result of the Boards’ ignorance of these practices for reasons including being misled by executive management, obtaining un-secured loans at the expense of depositors and not having the qualifications to enforce good governance on bank management.

In 2009, the Nigerian Banking Industry recorded series of cases of accounting improprieties (for example, Oceanic Bank, Afri Bank, Union Bank, Fin Bank and Spring Bank) and this was as a result of the board of directors’ lack of vigilance in their oversight functions, the board relinquishing control to corporate managers who pursue their own self-interests and the board being remiss in its accountability to stakeholders.

Also, some studies posit that the smaller the board size the higher the performance, others show that the higher the number of directors sitting on the board the better the performance. Still, others argued to the contrary that the nature and significance of the relationship between board size and performance is sensitive to the estimation methods used.

Similarly, some researchers discovered that boards of directors dominated by outsiders (non-executive Directors) have better performance while others find no such relationship in terms of accounting profits or firm’s value. Therefore, the study seeks to ascertain the true relationship between various aspects of corporate governance and its impact on the performance of banks in Nigeria.

Finally, while other studies on corporate governance neglected the operating performance variable as proxies for performance, this study employed the accounting operating performance variables to examine the impact (if any) of corporate governance on the performance of banks in Nigeria.

1.3 Research Questions

The study would examine the following research questions:

1. What is the impact of board size on the return on equity and return on asset of deposit money banks in Nigeria?

2. What is the relationship between board composition (the proportion of non-executive directors), return on equity and return on asset of deposit money banks in Nigeria and how significant is the relationship?

3. What is the relationship between directors’ equity holding, return on equity and return on asset of deposit money banks in Nigeria?

4. What is the significance of the level of corporate governance disclosure on return on equity and return on asset of deposit money banks in Nigeria?

5. What is the impact of the Audit Committee size on return on equity and return on asset of deposit money banks in Nigeria?

1.4 Objectives of the Study

The main objective of this study is to find out the impact of corporate governance mechanisms on the financial performance of deposit money banks in Nigeria. The specific objectives are to:

1. Examine the impact of board size on return on equity and return on asset of deposit money banks in Nigeria;

2. Find out whether the impact of board composition (the proportion of non-executive directors) on return on equity and return on asset of deposit money banks in Nigeria is significant;

3. Examine if the impact of directors’ equity holding on return on equity and return on asset of deposit money banks in Nigeria is significant;

4. Ascertain whether the impact of the level of corporate governance disclosure on return on equity and return on asset of deposit money banks in Nigeria is significant; and

5. Examine the impact of audit committee size on return on equity and return on asset of deposit money banks in Nigeria.

1.5 Research Hypotheses

The following hypotheses are formulated and tested:

Ho1: Board size has no significant impact on return on equity and return on asset of deposit money banks in Nigeria.

Ho2: The proportion of non-executive directors has no significant impact on return on equity and return on asset of deposit money banks in Nigeria.

Ho3: There is no significant impact of the directors’ equity holding on return on equity and return on asset of deposit money banks in Nigeria.

Ho4: There is no significant impact of the level of corporate governance disclosure on return on equity and return on asset of deposit money banks in Nigeria.

Ho5: There is no significant impact of the Audit Committee size on return on equity and return on asset of deposit money banks in Nigeria.

1.6 Scope of the Study

The study focuses on Nigeria and investigates the impact of corporate governance on the performance of deposit money banks in Nigeria. The data used for this study were secondary data derived from the published financial statements of the ten (10) selected banks from the universal banks listed on the Nigerian Stock Exchange (NSE) between the ten (10) years period of 2006 to 2015. These banks are; Access Bank Plc, Diamond Bank Plc, Ecobank Plc, Fidelity Bank Plc, First bank Plc (FBN), First City Monument Bank Plc (FCMB), Guaranty Trust Bank Plc (GTB), Sterling Bank Plc, United Bank for Africa Plc (UBA) and Zenith Bank Plc. The data utilized for empirical estimation relates to the Nigerian economy, though have implications for world economy.

1.7 Significance of the Study

The research study is of great benefit to bank regulators, academics, business practitioners, investors, other relevant stakeholders and the general public as it explains the impact of corporate governance on the financial performance of banks. This study provides an insight 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. Boards of directors will find the information of value in benchmarking the performance of their banks, against that of their peers.

This study provides investors with knowledge on how their investments with the financial institutions are being managed and a decision whether to invest more or not. More so, the study provides future researchers with an alternative summary measure and the result of this study will also serve as a data base for further researchers in this field of research.

1.8 Limitations of the Study

1. Time: Limited time was one of the major difficulties encountered in this research study. One would have expected that a research of this nature and magnitude should take at least not less than 10-12 months. But considering the status of the researcher as a student with a job and family to be bothered with, the time frame could not have been sufficient.

2. Inadequate Library Facilities: Lack of adequate library facilities also contributed its part of the setbacks on this research study in some ways. The library is meant to provide at least sufficient if not adequate literature materials. But this was not the case, as the researcher had to contend with the problem of out sourcing the internet.

3. Finance: The hash economic condition in Nigeria has its negative toll on the researcher’s financial potency. The planned estimates of funds needed for this research were not met. As a result of the fact that the scope (in terms of volume, data sourcing, sample size and literature materials) were limited to the extent to which the available finance could effectively cover.

Despite these limitations, we equally concluded this research study through the use of secondary data which are derived from the respective audited financial reports of the available banks.

1.9 Definition of Terms

For the purpose of this research, the following terms will be defined as it is used in the study.

1. Corporate Governance: Corporate governance is the structures and processes by which the business and affairs of institutions are directed and controlled in order to improve the long-term shareholder’s value by enhancing corporate performance and accountability while taking into account the interest of stakeholders.

2. Agency Theory: Agency relationship occurs when “one or more persons (principal) engage another person (agent) to perform some service on their behalf, which involves delegating some decision- making authority to the agent”.

3. Board Composition: This refers to the distinction between inside and outside directors, and this is traditionally shown as the percentage of outside directors on the board.

1. Board Size: This refers to the total number of directors both executive and non-executive directors on the board of any corporate organization. Determining the ideal board size for an organization is very important because the number and quality of directors in a firm determines and influences the board functioning and hence corporate performance.

5. Audit Committee Size: The composition of the audit committee that is outside as a proportion of the total member for firm in a given time (t).

1. Return on Assets: This is a measure of a company’s profitability, equal to a fiscal year’s earnings divided by its total assets, expressed as a percentage.

1. Return on Equity: A measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year’s after-tax income (after preferred stock dividends but before common stock dividends) divided by shareholder’s equity, expressed as a percentage.

1.10 Organization of the Study

The study is organized into various chapters. The logical organization of the study gives it uniqueness and makes it very simple and clear for readers and researchers. The orderliness is as follows: Chapter one talks about the introduction to the investigation. Also included in this chapter is the statement of the research problems, objectives of the study, the research hypotheses, scope of the study, significance of the study and definition of terms among others.

Chapter two talks about the various literature reviews related to the study. Here, emphasis is on the conceptual, theoretical and empirical reviews of literature. Chapter three talk about the research methodology used in the study.

Chapter four covers the results and discussion of various secondary data used in the study.

Chapter five summarizes, concludes and makes recommendation.

1.11 Summary

This study is an attempt to explore the impact of corporate governance on the performance of deposit money banks with special attention being paid to Nigerian banks. The Nigerian environment is targeted also because the issue of corporate governance has been given the front burner status by all sectors of the economy. The government in its effort to ensure good corporate governance through Securities and Exchange Commission (SEC) set up the Peterside Committee on corporate governance in public companies. The Bankers” Committee also set up a sub-committee on corporate governance for banks and other financial institutions in Nigeria. This is in recognition of the critical role of corporate governance in the success of companies

In essence, the entire chapter seeks to enlighten the readers on the subject area being conducted by the researcher with a view to adding to the existing body of knowledge through a well-constructed and articulated research questions and hypotheses among other sub-headings.