Corporate Governance and Performance of Listed Banks in Nigeria
CHAPTER ONE
OBJECTIVES OF THE STUDY
Generally, this study looked at corporate governance and financial performance of listed deposit money banks in Nigeria. . However, the specific objectives of the study were to:
- Examine the effect of board independence on the financial performance of listed deposit money banks in Nigeria.
- Ascertain the effect of board composition on the financial performance of listed deposit money banks in Nigeria.
- Examine the influence of audit committee on the financial performance of listed deposit money banks in Nigeria.
- Examine the effect of bank size on the financial performance of listed deposit money banks in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
THEORETICAL REVIEW
The theories underlying this study are the Agency theory , Stakeholder theory, Extreme Value Theory, Credit Market Theory and Resource dependency theory.
AGENCY THEORY BY JENSEN AND MECKLING (1976)
Agency theory as propounded by Jensen and Meckling (1976), opened the important research area concerning the separation of ownership and control in the modern corporation and it defines the agency relationship as a contract in which one or more persons usually known as the ‘principal’ engages another person known as the agent to perform some service on their behalf, which involves delegating some decision-making authority to the agent. Haslinder and Benedict (2009) define the agency theory as “the relationship between the principals, such as the shareholder and agents such as the company executives and managers”. This theory seeks to explain the problem that arises from the separation of ownership and control. The conflict of interests between managers and the principals refer to the tendency that the former may become self-interested and opportunistic in the course of doing business. However, the principal can counter such problems by incurring agency costs which include monitoring expenditures such as auditing, budgeting. The share price that shareholders (principal) pay reflects such agency costs. To increase firm value, one must therefore reduce agency costs. This is one way to view the linkage between corporate governance and corporate performance. The agency theory prescribes strong director and shareholder control. It advocates that the fundamental function of the board of directors is to control managerial behavior and ensure that managers act in the interests of shareholders.
STAKEHOLDER THEORY: Heenetiga (2011) said that research into corporate governance also discusses the stakeholder theory in relation to firms’ responsibility to the wider community. A stakeholder is any group of individuals who can affect or is affected by the activities of the firm, in achieving the objectives of the firm (Freeman 1984). A similar view has been put forward by the World Business Council for Sustainable Development (1999), which also identifies stakeholders as the representatives from labor organizations, academia, church, indigenous peoples, human rights groups, government and nongovernmental organizations and shareholders, employees, customers/consumers, suppliers, communities and legislators. According to Ansoff (1965), a firm’s objective could be achieved through balancing the conflicting interests of these various stakeholders.
CHAPTER THREE
METHODOLOGY
INTRODUCTION
This section provides information on general method and procedure for data collection, research design, and instrument used population of the study, sample selection, administration and method of data analysis.
RESEARCH DESIGN
The study adopted the ex-post facto research design. The ex-post facto research design is considered in this study because the emphasis of the study is on establishing a relationship between corporate governance and financial performance. This makes it imperative that the study has to find out how the selected components of corporate governance affect financial performance. Thus, the study has a cause-effect nature. Based on this, efforts are made to establish the nexus between the dependent variable (i.e. return on assets) and the independent variables (i.e. board size, board composition and board diversity) using existing data. According to Osuala (2010), the ex-post facto research design is appropriate and preferred in a cause-effect relationship where there is already existing data which cannot be manipulated by the researcher. Given that data on return on assets of the selected bank already exists and the data on the independent variables: board size, board composition and board diversity of selected bank in Nigeria also exists, all that the researcher did was to use the existing data (devoid of manipulation) to investigate the effect of the independent variables on the dependent variable within the chosen time frame.
CHAPTER FOUR
RESULTS AND DISCUSSIONS
This section presents, analyses and interprets the results obtained from the secondary data generated from the annual reports and accounts of the sampled deposit money banks listed on the Nigerian Stock exchange for the period of the study.
Table 1 shows 9 observations. The mean board independence is 14.5, which suggests that banks in Nigeria have relatively moderate board independence as the mean value 14 is greater than the average of the maximum value of board independence of 21. Also, with a maximum board independence of 21 and standard deviation of 3.404277 it implies that banks in Nigeria have relatively similar board independence level. The mean description for board composition is high compared to the maximum board composition which suggests that the ratio of outside directors to the total number of directors in Nigerian banks is very high.
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
Summary of Findings
The summary of findings is in two sections. The first section discusses the theoretical findings under prior related studies while the second section discusses the empirical findings from the study we carried out on the relationship that exists between corporate governance and the financial performance of banks in Nigeria.
Theoretical Findings
This study reveals that both board independence and the composition of outside directors are significantly but negatively related to financial performance in banks. While the Board Gender Diversity and the firm size items disclosed are significantly positive in relation with performance.
However, there is no doubt that several studies have been conducted so far and are still on –going on the examination of the relationship between firm performance and corporate governance. Our findings are therefore in line with the work of Staikouras et al. (2007) where they examined a sample of 58 out of the 100 largest, in terms of total assets, credit institutions operating in Europe for the period between 2002 and 2004. Their analysis inferred that bank profitability – measured in terms of ROE and Tobin’s Q is negatively and significantly related to the size of the Board of Directors. Pathan et al. (2007) using a dataset of the Thai commercial banks over the period 1999-2003, also obtained a negative relation between board independence and ROE. This is also seen in Eisenberg, Sundgren, and Wells (1998), where a similar pattern for a sample of small and midsize Finnish firms. Their study also revealed that board size and firm value are negatively correlated. Finally, our findings also agrees with Zulkafli and Samad (2007) in their study in which they analyzed a sample of 107 listed banks in the nine countries of Asian emerging markets (Malaysia, Thailand, Philippines, Indonesia, Korea, Singapore, Hong Kong, Taiwan, India). They deduced that board size is not significantly correlated with performance measures, such as the Tobin’s Q and ROE. Our findings on board independence, differs from Kyereboah-Coleman and Biekpe (2005) who conclude a positive relationship between a firms’ value and board independence. The findings, also differs from Zahra and Pearce (1989) who argued that a large board independence brings more management skills and makes it difficult for the CEO to manipulate the board. The result of Andres and Vallelado (2008) is also different from ours on board independence and performance. After examining information on the characteristics of the boards of directors for 69 commercial banks operating in Canada, US, UK, Spain, France and Italy over the period 2000-2005, they found that the inclusion of more directors is positively associated with performance, which is measured by Tobin’s Q, ROA.
Empirical Findings
From the descriptive analysis, it was revealed that on the average the board independence of listed banks in Nigerian is rated 14. This result implies that on the average, a relatively moderate board independence of 13 is noticed among the listed consolidated banks in Nigeria. This is in line with the suggestion of Kyereboah-Coleman and Biekpe (2006) that a board independence of between 12 and 16 is appropriate. Also, board composition which is the proportion of outside directors in a board has a mean of 63%. This also reveals that on the average, about 63% of the board members are non executive directors. This is in line with the section 4.10 of the CBN post consolidation code where it was stated that “the number of non-executive directors should exceed that of executive directors”. Although from the descriptive result, a minimum of 45% was notice in GTB in 2006. A critical review indicates that this was so because there was no immediate replacement of some directors who retired.
Although, the mean disclosure level of 66% indicates that all the banks present a statement of their corporate governance practices, however, the extensiveness of the statement varies between banks. Banks were noticed to disclose more on disclosure items1, 13-17, 22, 32, 40, 41, 44 and 45. Directors’ equity interest therefore recorded a mean of 11%. Furthermore, the findings revealed that on average, the banks included in our sample generate Return on Equity (ROE) of about 5% and a standard deviation of 4.7%. This means that the value of the ROE can deviate from mean to both sides by 4.7%.
From the regression result for the relationship between board independence and performance, the coefficient of the model is found out to be negative (-1.977), with a p- value of .053 significant at only 10%. This result shows that board independence and performance in terms of ROE move in opposite directions. The negative relationship is also seen to be considerably important to the performance of bank. This indicates a significant negative effect of board independence on the financial performance of the listed banks.
The significant negative relationship found between a bigger board independence and ROE is consistent with the findings of Yermack (1996), Eisenberg, Sundgren and Wells (1998), Conyon and Peck (1998) and Loderer and Peyer (2002). Our findings, therefore shows that a large board independence can leads to the free rider problem where most of the board members play a passive role in monitoring the firm.
Furthermore, the board members will tend to be involved in dysfunctional conflicts where the board is not cohesive (board members are not working optimally to achieve a single goal) deteriorating the value of a firm.
Finally, the result implies that large boards in Nigerian banks are likely to be less effective and easier for a CEO to control. Also, when a board gets too big, it becomes difficult to co-ordinate and process. Whereas, smaller boards will tend to reduce the possibility of free riding by individual directors and increase their decision taking processes. The regression result also shows that a significant negative association exists between the proportion of outside directors and performance.
Conclusions
In this study, the relationship between corporate governance and the financial performance of listed deposit money banks in Nigeria from 2011 to 2015 has been explored using data collected from the financial statements of 8 listed deposit money banks on the Nigerian Stock Exchange. It was found that average board independence contributes more to performance than large board independence. The results of the descriptive statistics also showed that money deposit banks in Nigeria have relatively moderate board independence, and that the ratio of outside directors to the total number of directors in the banks is very high in compliance with the requirement of corporate governance code, which specifies that the number of non-executive directors shall be higher than the executive directors. Consequently, it is recommended that deposit money banks should maintain relatively small board independence dominated by outside directors within the provision of the code of corporate governance for banks. Also, the board should comprise of competent members, who are conversant with oversight function and with capacity to add significant value in decision making toward achieving greater performance.
Recommendation
Based on the findings of this research, we therefore present the following recommendations which will be useful to stakeholders.
1) Efforts to improve corporate governance should focus on the value of the stock ownership of board members, since it is positively related to both future operating performance and to the probability of disciplinary management turnover in poorly performing banks.
2) Proponents of board independence should note with caution the negative relationship between board independence and future operating performance. Hence, if the purpose of board independence is to improve performance, then such efforts might be misguided. However, if the purpose of board independence is to discipline management of poorly performing firms or otherwise monitor, then board independence has merit. In other to have proper monitoring by independent directors, bank regulatory bodies should require additional disclosure of financial or personal ties between directors (or the organizations they work for) and the company or its CEO. By so doing, they will be more completely independent. Also, banks should be allowed to experiment with modest departures from the current norm of a “supermajority independent” board with only one or two inside directors.
3) Steps should also be taken for mandatory compliance with the code of corporate governance. Also, an effective legal framework should be developed that specifies the rights and obligations of a bank, its directors, shareholders, specific disclosure requirements and provide for effective enforcement of the law.
4) In this study, all the disclosure items were given same weight which helps to reduce subjectivity; however, authority may place higher emphasis on certain elements of governance. Some aspect of governance may be considered to be a basic component or prerequisite to implementing others and thus should be given more weight.
5) Finally, there is the need to set up a unified corporate body saddled with the responsibility of collecting and collating corporate governance related data and constructing the relevant indices to facilitate corporate governance research in Nigeria.
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