EFFECT OF CORPORATE GOVERNANCE ON INVESTMENT IN NIGERIA BANKING INDUSTRY

ABSTRACT

This work tried to find out the impact of corporate governance on investment in Nigerian economy with particular interest in the banking industry. The need for this work is based on the fact that the quality of investments brought into Nigeria by foreign investors is below expectation.   To arrive at  its conclusion, the work was carried out based on systematic  application of survey research procedures. The  survey  method was used because of the population involved, hence the need to stratify them in order to discover the relative distributions and correlations. On identification of the problem, research questions were formed followed by matching hypothetical statements as a guide towards the achievement of the objectives of the study.  Related literature were reviewed to form a direction for the research.  In the course of this work, data were gathered both from the primary and secondary sources. Being a survey research, a sample size of population was determined  for  the  purpose  of  administering  questionnaire  in  order  to  collect  the necessary information relevant to this work.   The data were analyzed using different statistical tools such as Regression Analysis,  ANOVA and chi-square to arrive at  a conclusion.    Finally, the results obtained from the analysis of the instrument, questionnaire, administered on the population were used as a basis to determine the findings of the work.  Based on these findings, some recommendations were made and conclusion drawn with a suggestion for further areas of research on this topic. In the course of this work, it was found out that corporate governance has a serious impact on investment in Nigeria.  Also, people are getting more aware of their corporate rights, such as, rights to transparency of information, participation in corporate management, determination of appointments to boards of corporate organizations, etc.  Hence, the work recommended that there is need to strengthen the anti-corruption war in the banking industry by the appropriate authorities to beef up the quality of corporate governance as practiced in Nigeria so that investors will find our economy attractive enough to do quality investment in it, thereby growing our economy.

CHAPTER ONE

1.1      BACKGROUND OF THE STUDY

The  recent  spate  of  corporate  failures  in  Nigeria,  especially  in  the  banking industry, has brought once again to the fore the need to re-examine the issues of

corporate governance practices in Nigeria. On August 14, 2009, the Central Bank of Nigeria (CBN) forcefully removed the Chief Executive Officers (CEOs) and the Executive Directors of five commercial banks in Nigeria on the ground of poor corporate governance in their various banks.   Some of the affected banks were regarded as big banks while some of their lesser peers were not affected. While reiterating the need for good corporate governance in Nigeria, the CBN (2006:2) says that the retention of public confidence through the enthronement of good corporate governance remains of utmost importance, given the role of the banking industry to the economy. In the United States of America, Weihrich and Koontz (2006:425) assert that since 2001, there has been renewed interest in corporate governance in modern corporations  due to the high-profile collapses of a number of US firms such as Enron Corporations, MCI Inc (formerly known as WorldCom), Tyco (a conglomerate) and others.  All these have rekindled the need to ascertain what makes up corporate governance and the attendant reasons for its failures.  Weihrich  and  Koontz  (op.cit)  aver  that  corporate  governance  is concerned  with  truth  and  justice  as  the  expectation  of  the  society,  fair competition,   advertising,   public   relation,   social   responsibility,   consumer autonomy  and  corporate  bahaviour.  The  key  points  are  truth,  justice,  and corporate bahaviour. Most authors and reports like Claessens (2001:6), Okereke (2004:4), Dike (2004:7B), IFC (2004:3), Anyaoku (1991:1) and CACG (1991:1) cited in Okorie (2005:31) summarize the benefits derivable from good corporate governance as follows:

      It  improves  corporate  performance  through  the  sanitization  of  the corporate  management  practices  and  environment  by  enhancing  the quality and integrity of management and governance structures and processed for better decision making. It increases the corporate capacity for succession planning for top management, consolidation of the opportunities for corporate growth and survival.

      Good Corporate Governance assists the corporate environment and the economy to track, anticipate and flow with the changes and the challenges of technological progress and globalization.

      It  improves  access  to  international  finance,  trade  and  investments by providing  comfort  to  lengthen  equity  investment  and  creditors,  and enhance stock market valuations.

      Cross border issues especially investments and trans-cultural management issues in corporate governance results from the interaction and free flow of corporate governance principles amongst the international economic community

      It improves economic performance in the stimulation, mobilization and allocation of resources within sectors.

      Good corporate governance enhances the development of a private sector or market driven economy. Core development projects, strategic projects, and  infrastructures  receive  greater  attention  with  the  development  of strong and resilient financial sector.

      Good corporate governance and reliable corporate environment improve the access to  international capital markets and  attracts quality foreign investments.

      It  is  the  powerful  micro-economic  policy  instruments  which  when combined well with macro-economic policies provide the effective leverage for change at the business enterprise and sectoral levels.

      In  view  of  the  above,  corporate  governance  has  been  given  several definitions by different authors. Kachru (2005:479), defines corporate governance as a system by which companies are directed and controlled. He  posits  that   corporate  governance  leads  the   leaders  because   it determines  the  strategy  of  the  organization  and  how  it   is  to  be implemented.   It also determines who the organization is there to serve and  how the priorities of the organization are  determined.   Molokwu (2004:2) states that corporate governance facilitates the achievement of economic  development,  provides  the   tools  for  plugging  loopholes, checking of pilfering and leakages and encourages rationality and virtues which  are  highly needed  in  the  Nigerian economy.  It  empowers and strengthens the enterprise culture, which is needed to motivate entrepreneurs.

Anyaoku (1999:1) could not agree more by saying that there are strong and positive economic linkages and multiplier effects arising from the relationship between good corporate governance and enterprise culture.

Accordingly, Al Faki (2005:29) believes that good corporate governance practice is a catalyst for performance excellence because it adds value to the assets  of  companies.  Perhaps,  that  was  why  the  Federal  Government  of Nigeria, in pursuit of good corporate governance established the Economic and Financial Crime Commission (EFCC) in 2003 saddled with, among other responsibilities,  prosecuting people who have in one way or the other looted the treasury of corporate organizations – be it public or private.   The Commission is fallout of massive corruption in the private and public sectors of the economy – which by extension is due to non adherence to the ethics of good corporate governance.

Sulaimain (2004:3) cited in Okorie (2005:1) exposes the reasons behind most corporate failures to include undisclosed huge debts, insider dealings, accounting fraud, manipulating of Initial Public Offers (IPO), undeserved and inflated welfare package for CEOs and management, manipulation of control system, illegal business practices and tax evasion.  The above findings have gone further to show why some less valued organizations in the same industry thrive while their giant counterparts go under.

To further underscore the importance of corporate governance, Image (2001:67) states that industries (organizations) requiring large capital investment appear to require a correspondingly heavy investment in high- talent managerial resources.  He goes further to say that if large expenditures

are made for the acquisition of equipment and machinery without a corresponding  investment  in  the  technical,  professional  and  managerial aspects to make such expenditure effective, then the investment will remain unproductive, hence losing the essence of such investment. The import of this assertion is to highlight the importance of managerial acumen to manage a given resources with the ultimate goal of delivering the required result.   As such, there is need for us to examine what impact corporate governance has on investment.

1.2      STATEMENT OF THE PROBLEM

In Nigeria, the economy has been threatened by corporate crisis thus impairing the quality of investment attracted into the country.  Every year, the government will propose budgets hoping to realize part of it through local and foreign investments but these dreams are, in most cases, not fulfilled. Yauri (2006:32) cited in CBN Economic and Financial Review states that recognition of Nigeria (ns) as top-ranking in corruption, fraud, and other financial improprieties such as “419” has resulted to loss of investors’ confidence to invest in Nigeria generally and to partner with Nigerians. Also, investors are wary of investing in Nigeria due to poor practices of corporate governance, especially in the banking industry.  The bottom-line of this failure is drifting economy, retrenchment in banks, loss of public  confidence  in  the  system,  underdevelopment, poor  rate  of returns  on investment, corruption, criminality, and pariah status in the comity of nations.

The major problems of corporate governance in Nigeria banking industry include the overbearing dominance of the Chief Executive Officer, non-adherence to internal control measures, manipulation of employment procedures (a situation whereby appointment goes to the highest bidder), family-affair ownership structure, doctored annual financial reports, ineptitude of the regulatory authorities, insider dealings, undeserved welfare packages for CEO and management, use of ad hoc (contract) staff, among others. Hence, on August 14,

2009, the Central Bank of Nigeria (CBN) forcefully removed the Chief Executive Officers (CEOs) and Executive Directors of five commercial banks in Nigeria on the ground of poor corporate governance of their various banks.  These scenarios have given rise to the need for this research to look into Corporate Governance (CG) as an issue with a view to finding out its effect on investment in Nigeria economy.

Based on the above identified problems, the study aimed at determining their effects on investment in Nigeria economy.

1.3      OBJECTIVES OF THE STUDY

Given the identified problems of this work, the following are the objectives of this study:

1.                     To  find  out  if  and  to  what  extent  adherence  to  corporate governance attracts investors in the banking industry.

2.                     To examine the degree of accountability to investors by corporate managers in the banking industry.

3.                     To assess if and how the quality of corporate managers attract investors in the banking industry.

4.                     To  determine  the  extent  to  which  transparency  in  information disclosure attracts investments in the banking industry.

1.4      RESEARCH QUESTIONS

This work intends to find answers to the following questions:

1.  To what extent does corporate governance affect investment in the banking industry?

2.         How accountable are corporate managers to their investors in the banking industry?

3.         What are the determinants of recruiting corporate managers in the banking industry?

4.         To  what  extent  are  corporate  managers  transparent  in  disclosure  of information to investors in the banking industry?.

1.5      RESEARCH HYPOTHESES

Based on the objectives of this study and the research questions above, the following hypotheses are formulated:

1.        Corporate governance has no effect on investment.

2.         Investors do not get proper accounts of their investments from corporate managers.

3.         Corporate  managers  are  not  recruited  based  on  skills,  knowledge, experience and qualification.

4.         Investors do  not  get  adequate and  transparent  information about their investments.

1.6      SCOPE OF THE STUDY

This  work  used  two  banks,  namely,  United  Bank  for  Africa  PLC  (a  first generation bank) and Oceanic Bank International PLC (a second generation bank) as study organizations. These banks were chosen due to their branch network and years of existence.   Also, Enugu and Ebonyi States were selected as areas of coverage because Enugu is the capital of old Eastern region of Nigeria; thus it is the domain of very influential investors in the South Eastern Nigeria.. On the other hand, Ebonyi State was chosen being a relatively new State that has a lot of investment potentials and it has closer link to the South-South zone of Nigeria. The banks have a total of nineteen (28) branches in the two States.

1.7      LIMITATIONS OF THE STUDY

The major constraints of this study are:

1)        Time.  Being  a  time-bound  work,  there  was  not  enough  time  owing combination of my official job with the academic research.

2)         Also, the issue of classified document syndrome in the society is another constraint as some relevant documents are not handy for the sole excuse of being “classified”.

3)         Some management/senior staff of the study organizations are reluctant with detailed information, hiding under the excuse of “oath of secrecy” in the banking industry.

4)         The  economic  crunch  is  another  limitation.     The  cost  of  obtaining information from the internet is enormous coupled with the issue of crises- crossing from Enugu to Abakaliki to obtain information. As such, it was not an easy task.

1.8      SIGNIFICANCE OF THE STUDY

On  completion,  this  work  will  be  useful  to  prospective  investors,  corporate organizations, government, researchers and students.

1.9      BRIEF HISTORY OF STUDY ORGANISATIONS

1.9.1       Oceanic Bank International PLC

Oceanic  Bank  International  PLC  was  incorporated  on  March  26,  1990  and licensed on April 10, 1990. The bank commenced full banking business on June

12, 1990 at its corporate office, Waterfront Plaza, Plot 270 Ozumba Mbadiwe venue, Victoria Island, Lagos. It commenced universal banking in January 2001

and has a branch network of over 360 business offices spread across the States of the Federation.  It has staff strength of about 3500 workers. Its mission statement is “To provide excellent and comprehensive services to all our customers in a friendly environment using qualified and experienced personnel with appropriate technology”

1.9.2   United Bank for Africa Plc

The  history of United Bank for Africa Plc dates back to  1961 when it  was established by a consortium of five international banks to take over the banking business  carried  on  in  Nigeria  since  1949  by  the  British  and  French  Bank Limited.  However, today’s UBA Plc is the product of the merger of Nigeria’s erstwhile Standard Trust Bank (STB) Plc, the old United Bank for Africa Plc, and the  subsequent  acquisition  of  the  erstwhile  Continental  Trust  Bank  (CTB) Limited.

Currently, the consolidated UBA Plc is one of the largest financial service institutions in West Africa with a balance sheet size in excess of one trillion Naira and more than six million customers’ accounts, operating out of the two most vibrant economies in the sub-region – Nigeria and Ghana.  It has over six hundred and thirty (630) retail distribution centers across Nigeria, its main operating base, and eight (8) branches in Ghana. Outside Africa, it also has presence in New York and Cayman Island.
The Mission statement of the Bank is  “To  provide first  class  service to our customers delivered by well trained and highly motivated people aided by the best technology, generating superior returns to shareholders while positively impacting the country served

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