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EFFECT OF CORPORATE GOVERNANCE ON THE PERFORMANCE OF COMMERCIAL BANKS IN TERMS OF PROFITABILITY

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

From time immemorial, there wasn’t any need for corporate governance due to the fact that business institutions were owned and managed by their sole owners. In recent times, the owners have employed professionals to manage and direct the affairs of their institutions in anticipation of giving account of their stewardship. The issue of corporate governance has recently been given a great deal of attention in the global financial sector ensuring credibility, fairness and transparency in financial statement and protecting the interest of the owners. Corporate governance is one of the most critical issues in the financial industry across the globe. Failure of the industry in the past have made it important to promote good corporate. 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 the shareholders.

The recent collapse of the stock market and uncovering of flagrant abuse of loans and perquisites in the banking sector and the Nigerian economy generally are enough to pose the question indeed of not corporate governance but actually its absence in this country. The massive fraud and cooking of the books in companies, a notable example of which is Cadbury, not to mention insider dealings and compromised boards in many companies as well as spineless shareholders’ associations, audit committees and rubber stamp Annual General Meetings suggest the collapse of corporate governance in Nigeria (Oyebode,2009).

The main reason for better practices in corporate governance can be traced to the UK when in the 1980s and 1990s, a number of companies unexpectedly collapsed (Bank of Credit, Commerce and Industry, the Mirror Group, Polly Peck Int’l and Barings Bank). In each case there appeared to be serious accounting and financial reporting irregularities and inadequate internal controls and risk management. In Nigeria, the mechanism of corporate governance are the Companies and Allied Matters Act 2004, Investment & Securities Act 2007, Securities and Exchange Commission 2011, Corporate Governance codes and various industry specific governance codes. (Osajie, 2014).

From a banking industry perspective, good corporate governance demands that banks will operate in a safe and sound manner, and will comply with applicable laws and regulations and will protect the interests of depositors. Interestingly, not many Nigerian banks are noted for their strict observance of corporate governance, best practices and high ethical standards in their operations. (Wilson, 2006). Given the various activities that have affected the efforts of banks to comply with various consolidation policies and the antecedents of some operators in the system, there are concerns on the need to strengthen corporate governance in banks. This will boost public confidence and ensure efficient and effective functioning of the banking system (Soludo, 2004). In line with these changes, the fact remains unchanged that there is need for countries to have sound resilient banking systems with good corporate governance (Uwuigbe, 2011).

In developing economies, the banking sector and other sectors have also witnessed several cases of collapses, some of which include the Alpha Merchant Bank Ltd, Savannah Bank, 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). Poor corporate governance was identified as one of the major factors in virtually all known instances of financial distress in Nigeria. It was because of this that 13-point agenda was introduced during the banking sector consolidation in 2004 thereby enforcing a new code of corporate governance for banks. The emergence of mega banks in the post consolidation era task the skills and competencies of boards and management in improving shareholder values against other stakeholder interests in a competitive environment. The aim of this study is to critically examine what corporate governance is, its mechanisms, measures of corporate performance in banks as well as the relationship between corporate performance and corporate governance.

1.2 Statement of the Problem

The global events concerning the high profile corporate failures have necessitated a policy agenda and intensified debate on the efficiency of corporate governance mechanisms as a means of enhancing firm’s financial performance. The incidence of corporate collapses regarding financial scandals and related frauds, which have dominated scholarly debates around the world, have raised doubts about financial reporting credibility (Adeyemi,and Fagbemi, 2012). In Nigeria, before the consolidation exercise, the banking industry had about 89 active players whose overall performance led to loss 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, 2004).

1.3 Research Questions

In this study, the following research questions are asked with the hope of providing answers to them;

i. What is the impact of ethical practices on performance of commercial banks?

ii. What is the impact of corporate governance on the performance of commercial banks?

1.4 Objectives of the Study

The main objective of this study is to examine the effect of corporate governance on the performance of commercial banks in terms of profitability. The specific objectives of this study are to;

i. Examine the impact of ethical practices on performance of commercial banks; and 

ii. determine the impact of corporate governance mechanisms on the performance of commercial banks.

1.5 Justification of the Study

This study aims at contributing to the existing literature on the topic. Generally, banks play important role in the economy of a country such that its performance affects the country positively or negatively. This study will assist the management on issues dealing with the fundamentals of accountability, transparency, probity, financial and other control structures. Poor corporate governance contributes to bank failures which will lead to loss of confidence by investors and little or no deposit by the customers. Good corporate governance ensures transparency, protection of interest of stakeholders. Hence, the study of corporate governance is intended to increase transparency and accountability of corporate firms to avoid massive disasters before they occur. The result of this study is expected to benefit shareholders and stake holders and promote shareholders trust and provide further insight to both academicians and practitioners concerning the need for corporate governance and the inadequacies that exist therein. 

1.6 Hypothesis of the Study

For the purpose of this study, the following hypotheses stated in null form are tested;

H01:  There is no relationship between ethical practices and performance of commercial banks.

H02: Corporate governance mechanisms do not have effect on commercial banks performance.

1.7  Scope of the Study

This study focused on the effects of corporate governance on performance of some selected commercial banks in Nigeria. The selected commercial banks’ financial statement for the years 2000 to 2014 covering the pre-consolidation and the post-consolidation periods of the Nigerian banking system was studied.

1.8 Plan of the Study

This study is organized into five chapters. Chapter one is the Introduction to the study. Chapter two is the review of relevant literature that are related to the study. Chapter three is the research methodology. Chapter four contained the presentation of data, analysis and discussion of results. Lastly, chapter five is the summary, the findings, conclusions and recommendations.

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