1.1 BACKGROUND TO THE STUDY
Corporate Governance is the system by
which corporations are directed and controlled (Rezaee, 2009). The
corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation such
as; boards, managers, shareholders and other stakeholders and spells out
the rules and procedures and also decision making assistance on
corporate affairs (Magdi and Nadereh, 2002). By doing this, it also
provides the structure through which the company objectives are set, the
means of obtaining those objectives and examining the value and the
performance of the firms. Effective corporate governance is considered
as ensuring corporate accountability, enhancing the reliability and
quality of financial information, and therefore enhancing the integrity
and efficiency of capital markets, which in turn will improve investors’
confidence (Rezaee, 2009).
Corporate governance involves a system
by which governing institutions and all other organizations relate to
their communities and stakeholders to improve their quality of life.
(Ato, 2002). It is therefore important that good corporate governance
ensures transparency, accountability and fairness in reporting. In this
regard, corporate governance is not only concerned with corporate
efficiency, but also relates to a much wider range of company strategies
and life cycle development (Mayer, 2007). It is also concerned with the
ways parties (stake holders) interested in the wellbeing of firms
ensure that managers and other insiders adopt mechanisms to safeguard
the interest of the shareholders. (Ahmadu and Tukur, 2005). Corporate
governance is based on the level of corporate responsibility a company
exhibits with regard to accountability, transparency and ethical values.
Corporate governance has also been defined by Keasey et al (1997) to
include, “the structures, processes, cultures and systems that engender
the successful operation of organizations”. The definition could
therefore be centered on how the organization relates with other stake
holders within an environment. Therefore, corporate governance describes
how companies ought to be run, directed and controlled (Cadbury
Committee, 1992). It is about supervising and holding to account those
who direct and control the management.
Corporate governance is an important
effort to ensure accountability and responsibility and a set of
principles, which should be incorporated into every part of the
organization. Though it is viewed as a recent issue, there is, in fact,
nothing new about the concept. Corporate governance has been in
existence as long as the corporation itself – as long as there has been
large–scale trade, reflecting the need for responsibility in the
handling of money and the conduct of commercial activities (Metrick and
Ishii, 2002). Corporate governance has succeeded in attracting a great
deal of interest as it focuses not only on the long-term relationship,
which has to deal with checks and balances, incentives for managers and
communications between management and investors but also on
transactional relationship, which involves dealing with disclosure and
authority (Tandelilin et al. , 2007).
The challenge of corporate governance
could help to align the interests of individuals, corporations and
society through a fundamental ethical basis. This it will fulfill the
long-term strategic goal of the owners, which, after survival may
consist of building shareholder value, establishing a dominant market
share or maintaining a technical lead in a chosen sphere (Yetman,2004).
It will certainly not be the same for all organizations, but will take
into account the expectations of all the key stakeholders, in
particular: considering and caring for the interests of employees,
customers and suppliers, stockholders and debt holders, state and local
community, both in terms of the physical effects of the company’s
operations and the economic and cultural interaction with the
population. The outcome of a good corporate governance practice is an
accountable board of directors who ensures that the investors’ interests
are not jeopardized (Hashanah and Mazlina, 2005).
Desai and Yetman (2004), identified two
areas of agency problems that make human ability to make allocative
decision imperfect; the cognitive and behavioral limitations. The
cognitive limitation is hidden information, also known as bounded
rationality. This prevents investors from knowing a priori whether the
managers, whom they have employed as their agents, allocate resources in
the most efficient manner. The behavioral limitation, also known as
opportunism, is hidden action that reflects the productivity, inherent
in an individualistic society of managers as agents to use their
positions for resources allocation to pursue their own selfish interest
and not necessarily the interest of the firm’s principals. This makes it
very crucial and important to study the existence of the influence of
corporate governance on the performance of firms.
1.2 STATEMENT OF PROBLEM
Banks and other financial intermediaries
are at the heart of the world’s recent financial crisis. The
deterioration of their asset portfolios, largely due to distorted credit
management, was one of the main structural sources of the crisis
(Sanusi, 2010). In Nigeria, before the consolidation exercise, the
banking industry had about 89 active players whose overall performance
led to sagging of customers’ confidence. 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 (Akpan, 2007).
Poor corporate governance was identified as one of the major factors in
virtually, all known instances of bank distress in the country. Weak
corporate governance was seen manifesting 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 remained a worrisome feature of
the banking system (Soludo, 2004). The problem of corporate governance
still remains un-resolved among consolidated Nigerian banks, thereby
increasing the level of fraud (Akpan, 2007). The current banking crises
in Nigeria, has been linked with governance malpractice within the
consolidated banks which has therefore become a way of life in large
parts of the sector. He further opined that corporate governance in many
banks failed because boards ignored these practices for reasons
including being misled by executive management, participating themselves
in obtaining un-secured loans at the expense of depositors and not
having the qualifications to enforce good governance on bank management
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to
ascertain the impact of corporate governance on performance in Nigerian
commercial banks. To achieve this, the research is focused on the
following specific objectives:
- Examine the conceptual framework of corporate governance in commercial banks in Nigeria.
ii. Determine the extent of corporate governance practices in operation in the banking sector
- Ascertain the impact of Board Size on corporate performance.
iv. Determine how the level of independence of directors influences the returns of banks.
v. Ascertain the factors that affect the levels of governance adopted.
1.4 RESEARCH QUESTIONS
The study will attempt to answer the following research questions:
- i. To what extent do commercial banks in Nigeria practice and adhere to corporate governance principles?
ii. Does the size of a board have an impact on the corporate performance of banks in Nigeria?
iii. What influence does the level of independence of boards have on bank’s performance?
- iv. What are the reasons that make firms adopt different levels of governance under the same level of investor protection?
1.5 RESEARCH HYPOTHESES
H0: There is no significant relationship between the size of a board and firm performance
in the banking sector in Nigeria
H1: There is a significant relationship between the size of a board and firm performance
in the banking sector in Nigeria
H0: Level of board independence has no impact on firm performance in the banking sector
H1:. Level of board independence impacts on firm performance in the banking sector
1.6 SIGNIFICANCE OF THE STUDY
The purpose of this study would be to
critically examine, and understand while analyzing the adherence to
corporate governance in the Nigerian Commercial banking sector. The
outcome of this research is anticipated to contribute to existing body
of knowledge.In addition; the study would highlight the regulatory and
institutional factors which may affect the adoption, sustainable
observation and practices of good corporate governance by banks in
Since the corporate performance of banks
and other financial intermediaries is crucial for efficient resource
allocation, at the micro and macro levels, this study would show the
importance for banks themselves to put in place sound corporate
governance. In fact, no one single factor contributes more to
institutional problems, capable of precipitating crisis, than the lack
of effective corporate governance (Lawal, 2009).
1.7 SCOPE OF THE STUDY
This study investigated corporate
governance and its impact on performance commercial banks in Nigeria.
The choice of this sector is based on the fact that the banking sector’s
stability has a large positive externality and banks are the key
institutions maintaining the payment system of an economy that is
essential for the stability of the financial sector (Achua, K,2007).
Financial sector stability, in turn has a profound externality on the
economy as a whole. To this end, the study basically covered five of the
commercial banks operating in Nigeria till date that met the N25
billion capitalization dead-line of 2005. The study will cover these
banks’ activities during the post consolidation period i.e. 2006- 2012.
1.8 DEFINITION OF KEY TERMS
is the totality of practices and principles by which a company’s board
of directors provide a framework for achieving a company’s objectives.
It encompasses every aspect of Management from the conceptualization of
plans to the evaluation of performance and disclosure of such
PLANNING: is developing a strategy to accomplish specific objectives set to achieve organizational performance.
is the ability of an organization to fulfill its mission through sound
management, strong governance and a persistent rededication to achieving
PRODUCTIVITY: is the
effectiveness of all efforts geared towards set objectives, measured as a
relationship between the amount of output produced and the amount of
input used to produce that output.
PERFORMANCE: is the result of activities of an organization or investment over a given period of time.
SHAREHOLDER: is an individual, group, or organization that owns one or more units of shares in a company and who partakes in the financial prosperity or otherwise of the company.
STAKEHOLDERS: A person, group or organization that has an interest or concern in an organization.