CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Corporate governance has been of concern since the foundation of the joint-stock company. Much of this concern focused on the separation of ownership from control. Adam Smith (1776) expresses unease over separation of ownership and control; and subsequently explored by Ross (1973) and Davis et al. (1997). However, recent discussion and interest in corporate governance stems from issues relating to financial crises and high profile corporate scandals. The most recent of such scandals are the Enron and the WorldCom saga in the United States, the Vivendi and the Parmalat scandals in Europe.

Globalization and technological advancement also provide challenges for corporate governance structure. Good corporate governance is necessary to facilitate effective firms‟ management in the current global and dynamic environment. Moreover, good corporate governance is necessitated by the need for accountability due to deregulation and lesser governmental control. Good corporate governance promotes economic growth and development. The benefits of good corporate governance practices to a firm, among others, include: facilitating greater access to finance, lower cost of capital, better performance and favourable treatment of stakeholders (Claessens et al., 2002); promoting better disclosure in business reporting, thereby facilitating greater market liquidity and capital formation (Frost et al., 2002); and increasing firm valuations and boast profitability (Gompers et al., 2003). Nigeria had its share of inelegant business practices that have resulted in failed corporate firms. Hence, several insurance companies in Nigeria have gone out of business; while some have been acquired or merged due to poor performance, following poor corporate governance practices. For a developing country, like Nigeria, corporate governance is of critical importance.

Recently, Nigeria has initiated pillars of corporate governance by sponsoring a series of legislative, economic and financial reforms which seek to promote transparency, accountability and the rule of law in the nation‟s economy. Consequently, corporate governance is relevant in insurance companies, as it promotes accountability, enhances transparency of operations,

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improves firm‟s profitability, protects stakeholders‟ interest by aligning their interest with that of the managers, and facilitates growth of the insurance industry.

Corporate governance could be defined as “ways of bringing the interests of investors and managers into line and ensuring that firms are run for the benefit of investors (Mayer, 1997). Corporate governance is concerned with the relationship between the internal governance mechanisms of corporations and society‟s conception of the scope of corporate accountability (Deakin and Hughes, 1997). It has also been defined by Keasey et al. (1997) to include „the structures, processes, cultures and systems that engender the successful operation of organizations‟. From the foregoing analysis, we argue that corporate governance is represented by the structures and processes laid down by a corporate entity to minimize the extent of agency problems as a result of separation between ownership and control. It must also be indicated that different systems of corporate governance will embody what are considered to be legitimate lines of accountability by defining the nature of the relationship between the company and key corporate constituencies.

The cost inherent in the agency problem can be reduced by investments in monitoring and the structuring of relationships such that agents are induced to act in the interest of the principals without a need for further monitoring such as offering bonuses and inducing them to monitor each other. Another way is the payment of stock options as this aligns more closely with the interest of the agents (Jensen & Meckling, 1976).

The Nigerian financial sector has experienced many changes over the last two decades which included bank distress and reforms of major financial institutions. The radical changes in financial developments in 1987 brought about by the structural adjustment programme of 1986 did not prevent bank crisis. The said innovations of the CBN in 1986 has not been able to provide enough backbone for the financial industry as reflected by the down turn in the events of late 1980s which were characterized by the unprecedented level of distress as depicted by large volume of non-performing loans, insolvency, liquidity problem and default in meeting depositors and inter-bank obligations. This poor state of the banking sector was exposed in 1989 with the government directive to withdraw the deposits of governments and other public sector institutions from banks to CBN. Thus, bank distress became obvious and increased from 7 in 1989 to a peak of 60 in 1995 while the amount required for recapitalization of distressed banks

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increased from N1.1 billion in 1989 to N30.5 billion in 1995, N43.9 billion in 1996 while peaking at N98.1 billion in 2004. Non-performing loans for the distress banks increased from N2.9 billion to N29.5 billion in 1994 and 1995, and increased further to N40.7 billion in 1997 while peaking at N149.6 billion in 2004 (Okpara, 2012)

1.2     STATEMENT OF THE PROBLEM

The issue of corporate governance in Nigeria was as a result of the financial crisis that happen and the collapse of firms across the globe including Nigeria. As a result the federal government issues a code of corporate governance in 2006, 2007, 2008 since that time banks are still collapsing. Against this background this study wants to review the challenges and issues surrounding practicing of effective corporate governance by banks in Nigeria. The study will find out the reasons for these challenges facing the banks which are resulting to lack of corporate governance in Nigeria. Thus, there are multiple code of corporate governance in Nigeria such as 2006, 2007, 2008 issued by CBN and SEC, still most of our banks are still collapsing so what are the challenges facing corporate governance in order to practice effective corporate governance.

1.3 OBJECTIVE OF THE STUDY

The primary aim of this research work is to ascertain the issues and challenges of corporate governance of banks in Nigera. Thus, the study aims at the following objectives:

i. To encourage the issues of corporate governance in Nigeria.

ii.  To ascertain the challenges of corporate governance of banks in Nigeria.

iii.  To encourage the adoption of corporate governance in Nigeria.

1.4 RESEARCH QUESTIONS

1.  What are the challenges and changes of corporate governance in the Nigerian banks?

2.   Has Nigerian firms adopt the code of corporate governance issued by the security exchange commission SEC.

1.5        STATEMENT OF HYPOTHESIS

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Ho There is a relationship between effective corporate governance and regulatory framework, enforcement, transparency and disclosure of corporate governance practices.

HI There is a relationship between effective corporate governance and the role and responsibility of the board of directors

1.6          SIGNIFICANCE OF THE STUDY

This study analyzes the issues and challenges of corporate governance of banks in Nigeria. This research will help to understand the general practices of corporate governance in Nigeria including the challenges and issues on Nigerian banks. This will also act as a guide for the financial managers to design their optimum policy to maximize the market value of the bank and minimize the agency cost.

1.7 SCOPE OF STUDY

The scope of this study research will however be limited to only some banks in the public and private sector of our country. The study was set to determine the issues and challenges of corporate governance of bamks in Nigeria.

1.8 Organization of the Study

Chapter One

Chapter One highlight the background information, statement of the research problem, research questions, Ob