Project Topic - THE IMPACT OF CORPORATE GOVERNANCE IN THE NIGERIA MONEY

Project Topic – THE IMPACT OF CORPORATE GOVERNANCE IN THE NIGERIA MONEY DEPOSIT BANKS’ PERFORMANCE

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The issue of corporate governance has recently been given a great deal of attention in various national and International forays. This is in recognition of the critical role of corporate governance in the success or failure of companies. Corporate governance refers to the processes and structures by which the business and affairs of an institution are directed and managed. In order to improve long-term shareholder value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders. Corporate governance is therefore about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that would Foster good corporate performance. The strategy for addressing the challenges of corporate governance has taken various forms at both the national and International levels and have culminated in initiatives such as: the OECD Code; the Cadbury Report; the Basel Committee Guidelines on Corporate Governance; the King‟s Report of South Africa etc. It is therefore necessary to point out that the concept of corporate governance of banks and very large firms have been a priority on the policy agenda in developed market economies for over a decade. Further to that, the concept is gradually warming itself as a priority in the African continent. Indeed, it is believed that the Asian crisis and the relative poor performance of the corporate sector in Africa have made the issue of corporate governance a catchphrase in the development debate (Berglof and Von -Thadden, 1999).

Several events are therefore responsible for the heightened interest in corporate governance especially in both developed and developing countries. The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based energy giant and WorldCom the telecom behemoth, shocked the business world with both the scale and age of their unethical and illegal operations. These organizations seemed to indicate only the tip of a dangerous iceberg. While corporate practices in the US companies came under attack, it appeared that the problem was far more widespread. Large and trusted companies from Parmalat in Italy to the multinational newspaper group Hollinger Inc., Adephia Communications Company, Global Crossing Limited and Tyco International Limited, revealed significant and deep-rooted problems in their corporate governance. Even the prestigious New York Stock Exchange had to remove its director (Dick Grasso) amidst public outcry over excessive compensation (La Porta, Lopez and Shleifer 1999).

In developing economies, the banking sector among other sectors has also witnessed several cases of collapses, some of which include the Alpha Merchant Bank Ltd, Savannah Bank Plc, Societe Generale Bank Ltd (all in Nigeria), The Continental Bank of Kenya Ltd, Capital Finance Ltd, Consolidated Bank of Kenya Ltd and Trust Bank of Kenya among others (Akpan, 2007). In Nigeria, the issue of corporate governance has been given the front burner status by all sectors of the economy. For instance, the 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 or failure of companies (Ogbechie, 2006:6). Corporate governance therefore refers to the processes and structures by which the business and affairs of institutions are directed and managed, in order to improve long term share holders‟ value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders (Jenkinson and Mayer, 1992). Corporate governance is therefore, about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that will foster good corporate performance.

Eight chief executives and executive directors of some Nigerian banks were summarily dismissed between August and October, 2009 due to issues related to poor corporate governance practices. This was sequel to the conclusion of audit investigations embarked upon by the Central Bank of Nigeria to determine the soundness of Nigerian banks. The release of these reports led CBN to conclude that the affected banks have acted in manners detrimental to the interest of depositors and creditors. This was at variance to the clean bill of good health earlier given to these banks by regulatory authorities (CBN inclusive) and their so called appointed reputable external auditors.

The term “Corporate Governance” has been identified to mean different things to different people. Magdi and Nadereh (2002) stress that corporate governance is about ensuring that the business is run well and investors receive a fair return. OECD (1999) provides a more encompassing definition of corporate governance. It defines corporate governance as the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company’s objectives are set and the means of attaining those objectives and monitoring performance. This definition is in line with the submissions of, Wolfensohn (1999) Uche (2004) and Akinsulire (2006).

Effective corporate governance reduces “control rights” shareholders and creditors confer on managers, increasing the probability that managers invest in positive net present value projects (Shleifer and Vishny, 1997). Thus, the relationships of the board and management, according to Al-Faki (2006), should be characterized by transparency to shareholders, and fairness to other stakeholders. This will in effect mitigate the agency cost as predicted by Jensen and Meckling (1976). Corporate performance is an important concept that relates to the way and manner in which financial resources available to an organization are judiciously used to achieve the overall corporate objective of an organization, it keeps the organization in business and creates a greater prospect for future opportunities.

This study is a contribution to the ongoing debate on the examination of the relationship that exists between corporate governance mechanisms and commercial banks performance. Mixed and tenuous findings have been made from previous studies especially those ones that were conducted in the developed nations, particularly USA, UK, Japan, Germany and France.

1.2 STATEMENT OF THE 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 (Fries, Neven and Seabright, 2002; Kashif, 2008 and Sanusi, 2010). To a large extent, this problem was the result of poor corporate governance in countries‟ banking institutions and industrial groups. Schjoedt (2000) observed that this poor corporate governance, in turn, was very much attributable to the relationships among the government, banks and big businesses as well as the organizational structure of businesses.

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 remain a worrisome feature of the banking system (Soludo, 2004b). This view is supported by the Nigeria Security and Exchange Commission (SEC) survey in April 2004, which shows that corporate governance was at a rudimentary stage, as only about 40% of quoted companies including banks had recognised codes of corporate governance in place. This, as suggested by the study may hinder the public trust particularly in the Nigerian banks if proper measures are not put in place by regulatory bodies.

The Central Bank of Nigeria (CBN) in July 2004 unveiled new banking guidelines designed to consolidate and restructure the industry through mergers and acquisition. This was to make Nigerian banks more competitive and be able to play in the global market. However, the successful operation in the global market requires accountability, transparency and respect for the rule of law. In section one of the Code of Corporate Governance for banks in Nigerian post consolidation (2006), it was stated that the industry consolidation poses additional corporate governance challenges arising from integration processes, Information Technology and culture. The code further indicate that two-thirds of mergers world-wide failed due to inability to integrate personnel and systems and also as a result of the irreconcilable differences in corporate culture and management, resulting in Board of Management squabbles.

Despite all these measures, the problem of corporate governance still remains un-resolved among consolidated Nigerian banks, thereby increasing the level of fraud (Akpan, 2007). The causes of the recent global financial crises have been traced to global imbalances in trade and financial sector as well as wealth and income inequalities (Goddard, 2008). More importantly, Caprio, Laeven & Levine (2008) opined that there should be a revision of bank supervision and corporate governance reforms to ensure that deliberate transparency reductions and risk mispricing are acted upon.

The series of widely publicized cases of accounting improprieties recorded in the Nigerian banking industry in 2009 (for example, Oceanic Bank, Intercontinental Bank, Union Bank, Afri Bank, Fin Bank and Spring Bank) were related to the lack of vigilant oversight functions by the boards of directors, the board relinquishing control to corporate managers who pursue their own self-interests and the board being remiss in its accountability to stakeholders (Uadiale, 2010). Inan (2009) also confirmed that in some cases, these bank directors‟ equity ownership is low in other to avoid signing blank share transfer forms to transfer share ownership to the bank for debts owed banks. He further opined that the relevance of non-executive directors may be watered down if they are bought over, since, in any case, they are been paid by the banks they are expected to oversee.

As a result, various corporate governance reforms have been specifically emphasized on appropriate changes to be made to the board of directors in terms of its composition, size and structure (Abidin, Kamal and Jusoff, 2009).

It is in the light of the above problems, that this research work studied the effects of corporate governance mechanisms on the performance of commercial banks in Nigeria and also reviewed the annual reports of the listed banks in Nigeria to find out their level of compliance with the CBN (2006) post consolidation code of corporate governance.

1.3 OBJECTIVE OF THE STUDY

This study seeks to achieve the following objectives:

To determine the extent to which noncompliance with corporate governance codes by the bank executives contributed to this present crisis and management problem
To ascertain the relationship between cooperate governance and the performance of commercial banks in Nigeria
To investigate if there is any significant change in the performance of banks in Nigeria by the proper implementation of corporate governance by the board of the directors.
To empirically determine factors that militates against successful implementation of corporate governance framework in commercial banks.

1.4 RESEARCH QUESTION

The following research questions were formulated to guide the investigation.

What is the extent to which noncompliance with corporate governance codes by the bank executives contributed to this present crisis and management problem?
What are the relationship between cooperate governance and the performance of commercial banks in Nigeria?
What is the significant change in the performance of banks in Nigeria by the proper implementation of corporate governance by the board of the directors?
What are the factors that militates against successful implementation of corporate governance framework in commercial banks?

1.5 RESEARCH HYPOTHESIS

The following hypotheses form the basis for carrying out this study.

H0: The extent to which noncompliance with corporate governance codes by the bank executives contributed to this present crisis and management problem is low

H1: The extent to which noncompliance with corporate governance codes by the bank executives contributed to this present crisis and management problem is high

H0: There is no evidence to show significant relationship between cooperate governance and the performance of commercial banks in Nigeria

H2: There is no evidence to show significant relationship between cooperate governance and the performance of commercial banks in Nigeria

H0: There is no evidence to show significant change in the performance of banks in Nigeria by the proper implementation of corporate governance by the board of the directors

H3: There is evidence to show significant change in the performance of banks in Nigeria by the proper implementation of corporate governance by the board of the directors

H0: The factors that militates against successful implementation of corporate governance framework in commercial banks are low

H4: The factors that militates against successful implementation of corporate governance framework in commercial banks are high

1.6 SIGNIFICANCE OF THE STUDY

The significance of the study is drawn from two stand points: Academic and practical view.

In the academic arena, this study will prove to be significant in the following ways;

The study will serve as a body of knowledge to be referred to by future and present researchers
It will contribute to the enrichment of the literature on impact of corporate governance in the Nigeria commercial bank performance.

Practically, the study will result in broadening understanding of the following;

This study provides a picture of where banks stand in relation to the codes and principles on corporate governance introduced by the Central Bank of Nigeria. It further 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.

1.7 SCOPE OF THE STUDY

The study covers the impact of corporate governance in the Nigeria commercial bank performance, a case study of UBA (United Banks of Africa), Enugu Branch from a period of 2011 to 2012.

1.8 LIMITATIONS OF THE STUDY

This study was exposed to the following limitations

Delay in filing ad returning questionnaire by respondents.
Small sized sample was used due partly to limited financial resources.
Limited use of varied analytical techniques due to size of the sample
Difficulty in accessing significant researchable materials.
Financial and time constraints also majored as the limitation of the work.

1.9: DEFINITION OF RELEVANT TERMS

Corporate Governance: The methods by which suppliers of finance control managers in order to ensure that their capital cannot be expropriated and that they earn a return on their investment.

Commercial banks: bank that dealing with businesses: a bank whose primary business is providing financial services to companies

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Project Topic – THE IMPACT OF CORPORATE GOVERNANCE IN THE NIGERIA MONEY DEPOSIT BANKS’ PERFORMANCE

Project Topic – THE IMPACT OF CORPORATE GOVERNANCE IN THE NIGERIA MONEY DEPOSIT BANKS’ PERFORMANCE

Project Topic – THE IMPACT OF CORPORATE GOVERNANCE IN THE NIGERIA MONEY DEPOSIT BANKS’ PERFORMANCE

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