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CHAPTER ONE
1.0 INTRODUCTION
Given the fury of activities that have affected the effects of
banks to comply the various consolidation policies and the antecedents
of some operators in the system, there are concerns on the need to
strength corporate governance in banks. This will boost public
confidence and ensure efficient and effective functioning of the
banking system (Soludo, 2004). Banking supervision cannot function well
if sound corporate governance is not in place (Heidi and Marleen,
2003). As a result, banking supervisors have strong interest in
ensuring that there is effective corporate governance at every banking
organization in an increasingly open environment (Kashif, 2008).
Several events are therefore responsible for the heightened interest in
corporate governance especially in both developed and developing
countries. This concept of corporate governance of banks and every
large firm have been a priority on the policy agenda in developed market
economics for over a decade.
Further to that, the concept is gradually warming itself as a
priority in the African continent (Uwuigbe, 2011). Indeed in developing
economics, the banking sector among other sectors has also witnessed
several cases of collapses, some of which include Savannah Bank Plc and
Society Generale Bank Ltd among others (Akpan, 2007). Although
corporate governance in developing economies has recently received a
lot of attention, yet corporate governance of banks in developing
economies as it relates to financial performance has almost been
ignored by researchers (Ntim, 2009). Even in developed economies the
corporate governance of banks and their financial performances has only
been discussed recently in literature (Macey and O’ Hara, 2011).
In Nigeria, the issue of corporate governance has been given
the front burner status by all sectors of the economy. This is in
recognition of the failure of the critical role of corporate governance
in the success or failure of companies (Ogbechie, 2006). Corporate
governance is about building credibility, ensuring transparency and
accountability as well as maintaining an effective channel of
information disclosure that will foster good corporate performance.
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 shareholders’ value by enhancing
corporate performance and accountability while taking into account the
interest of other stakeholders.
1.1 BACKGROUND OF THE STUDY
The background of corporate governance dates back to the 19th
Century when state corporation laws enhanced the rights of corporate
boards without unanimous consent of shareholders. They did it in
exchange for statutory benefits such as appraisal rights in order to
make corporate governance more efficient. The early debates came up
after the increase of agency problem, which emanated from separation of
ownership and control created in the case of Salomon v Salomon,
(1897). Recently corporate governance becomes a hot topic among a wide
spectrum of people, government, industry operations, directors,
investors, shareholders, academics and international organisations to
least but a few. Today’s world has seen that organisation transparency,
financial disclosure, independency, board size, board composition,
board committees, board diversity and among other is the cornerstone of
good governance practices. These variables are in the main agenda of
most meetings and conferences worldwide including the World Bank,
International Monetary Fund (IMF) and Organisation of Economic
Co-operation and Development (OECD) (Inyanga, 2009).
Recently researchers have managed to come up with many
definitions of corporate governance. Strine (2010) pointed out that
corporate governance is about putting in place the structure, processes
and mechanisms that insure that the firm is directed and managed in a
way that enhances long-term shareholder value through accountability of
manager, which will then enhancing firm performance. OECD (1999)
defined it as the system by which business corporations are directed
and controlled in favour all the stakeholders. Currently financial
sectors have seen the importance of having good corporate governance
practices (Kolk&Pinkse, 2010). IFC (2004) examined the benefits of
having good Corporate Governance at different levels. At the company
level, well-governed companies tend to have better and cheaper access
to capital, and tend to outperform their poorly governed peers over the
long-term, on the other hand corporate governance reduce financial
crisis (IFC, 2004).
Currently many country leaders all over the world has increased
concern over corporate governance due to the increase of reported
cases of frauds, inside trading, agency conflicts among other
corporations saga (Enobakhare, 2010). Corporate failure has recently
witnessed in both developed and developing countries with the reported
cases of the East Asia crises of 1997/98, the collapse of Enron in 2001
and WorldCom in 2002, (Inyang, 2009) and the just ended global
financial crisis of 2007/8. The crises emanated from the poor
governance practices from the financial sector (the mortgage market).
Since mortgage market was the mother of the crisis, this has triggered
the world leaders to enact some laws, which increase banks governance.
This is supported by Ahmad (2006) who argued that a sound banking
system requires appropriate infrastructure to support efficient conduct
of banking business operating environment, governance and regulatory
framework at domestic as well as international levels in order to
reduce bank crisis. The World Bank is helping currently many economies
to undertaking the banking sector reformation and restructuring. This
exercise will easy, reduce or eliminate some fatal global macroeconomic
troubles which have emanated from poor governance of large financial
and non-financial institutions (Zaharia, Tudorescu&Aharia, 2010).
In most recently, researchers worldwide have grown interest on
corporate governance and corporate performance of commercial banks as
witnessed by an explosion research on corporate governance (Adams,
2012; Adams, Hermalin&Weisbach, 2008). Commercial banks should show
good corporate governance since they play a critical role in the
corporate governance of other firms (Franks & Mayer, 2001; Santos
& Rumble, 2006), as creditors or equity holders of firms. In this
regard, commercial banks must be transparent, accountable, trustworthy
and responsible to the public. Nigeria commercial banks like any other
banks in the world are facing corporate governance challenges. The
commercial banks have previously witnessed a phenomenal growth after
the economic deregulation in 2005. The economic turbulences and
political meltdown that have cornered the country in year 2000, 2004
and 2008 has created a new challenging environment. By the mid of 2012,
the country has experienced intermittent corporate governance turmoil
which has caused the closure of Royal bank, Genesis bank, and placement
of Interfin bank under recuperative curatorship by the central bank
(RBZ, 2012).
The study investigates the impact of corporate governance on
commercial banks, in order to assess the significance of corporate
governance in the commercial banks of Nigeria. This would be done in
line with the empirical studies carried out by Bhagat and Bolton (2008)
in the US, who found that corporate governance, has an impact on firm
performance during the 1990s. On the policy domain, corporate
governance proponents have prominently cited this study as evidence
that good governance has a positive impact on corporate performance.
However, (Laeven, and Levine, 2009) argued that corporate governance
might not capture the true relationship with corporate performance
unless other specific aspects of governance are controlled. However,
relatively limited attention has been done on corporate governance of
commercial banks in Nigeria of which commercial banks are the
cornerstone of financial system in any economy as advocated by (Adams
&Mehran, 2005; Caprio et al., 2007). The researchers increased an
eager over this gray area of finding out if corporate governance has an
impact on commercial banks performance in Nigeria after the
introduction of multi-currency in 2009. The research is in line with
other studies done in countries like USA, Italy among others.
1.2 STATEMENT OF THE PROBLEM
The few studies on bank corporate governance normally focused
on a single aspect of governance, such as the role of directors or that
of shareholders while omitting other factors and interactions that may
be important within the governance framework. Feasible among these few
studies is the one by Adams and Mehran (2000) for a sample of US
companies, where they examined the effects of board size and
composition on value. Another weakness is that such research is often
limited to the largest, actively traded organizations, many of which
show little variation in their ownership, management and board
structure and also measure performance as market value. In Nigeria,
among the few empirically feasible studies on corporate governance are
the studies by Sanda et al (2005) and Ogbechie (2006) that studied the
corporate governance mechanisms and firms’ performance. In order to
address these deficiencies, this study is not restricted to the
framework of the organization for Economic Co-operation and Development
principle, which is based primarily on shareholder sovereignty. It
analyzed the level of compliance of code of corporate governance in
Nigerian banks with the Central Bank of Nigeria code of corporate
governance.
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
investigate the existence if any relationship between corporate
governance and performance of banks in Nigeria.
1.3. OBJECTIVES OF THE STUDY
Generally this study seeks to explore the relationship between
internal corporate governance and financial performance of banking
sector in Nigeria as its main objective. However the specific objectives
are:
- To examine the relationship between board size and banks performance in Nigeria.
- To investigate if there is any significant relationship between directors’ equity interest and the financial performance of banks in Nigeria.
- To determine empirically if there is any significant relationship between the level of corporate governance disclosure and the financial performance of banks in Nigeria.
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