THE ROLES OF CORPORATE GOVERNANCE IN THE NIGERIA COMMERCIAL BANKS’ PERFORMANCE A CASE STUDY OF UBA (UNITED BANKS OF AFRICA)

ABSTRACT

The  research  focuses  on  the  roles  of  corporate  governance  in  the  Nigeria commercial bank performance, a case study of UBA (United Banks of Africa). The major objective of the study is, to determine the extent to which noncompliance with corporate governance codes by the bank executives contributed to this present crisis and management problem, to ascertain the relationship between cooperate governance and the performance of commercial banks in Nigeria, to investigate if there is any significant change in the performance of banks in Nigeria by the proper implementation of corporate  governance  by  the  board  of the  directors  and  to empirically determine factors that militates against successful implementation of corporate governance framework in commercial banks. Data were collected through primary and secondary sources. The descriptive survey method was used and the research tool was questionnaire. Total of 129 respondents were obtained using a strained random sampling techniques by balloting and they answered the questionnaire. Data analysis using Chi-square formula and presentation was done by the use of tables. The major findings from the study are: the factors that militate against successful implementation of corporate governance framework in commercial banks are high. On the basis of the above findings; the study concludes that competitive advantage is an important factor in the strategic management of companies. On the basis of the above findings it was recommended that: Corporate Governance is necessary to the proper functioning of banks and that Corporate Governance can only prevent bank distress only if it is well implemented. 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. For the purposes of further studies, further research could explore the relationship in more in specific categories  for  example,  in  not-for-profit  organizations,  in  government organizations, and in family companies. Since this study focused on the Nigeria banking sector it would be beneficial to have a clearer understanding of corporate governance roles in other types of organizations. Such research could address the similarities and differences of the roles in different organizations and consider also the legal requirements for different organizations.

CHAPTER ONE INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The issue of corporate governance has recently been given a great deal of attention in various national  and  International  forays.  This  is  in  recognition  of  the  critical  role  of  corporate governance in the success or failure of companies. 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 other stakeholders. Corporate governance

is  therefore about  building credibility,  ensuring  transparency and  accountability  as well  as maintaining an effective channel of information disclosure that would Foster good corporate performance. The strategy for addressing the challenges of corporate governance has taken various forms at both the national and International levels and have culminated in initiatives such as: the OECD Code; the Cadbury Report; the Basel Committee Guidelines on Corporate Governance; the King’s Report of South Africa etc. It is therefore necessary to point out that the concept of corporate governance of banks and very large firms have been a priority on the policy agenda  in  developed  market  economies  for  over  a  decade.  Further to  that,  the  concept  is gradually warming itself as a priority in the African continent. Indeed, it is believed that the Asian crisis and the relative poor performance of the corporate sector in Africa have made the issue of corporate governance a catchphrase in the development debate (Berglof and Von – Thadden, 1999).

Several events are therefore responsible for the heightened interest in corporate governance especially in both developed and developing countries. The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based energy giant and WorldCom the telecom behemoth, shocked the business world with both the scale and age of their unethical and illegal operations. These organizations seemed to indicate only the tip of a dangerous iceberg. While corporate practices in the US companies came under attack, it appeared that the problem was far more widespread. Large and trusted companies from Parmalat in Italy to the multinational newspaper group Hollinger Inc., Adephia Communications Company, Global Crossing Limited and Tyco International  Limited,  revealed  significant  and  deep-rooted  problems  in  their  corporate

governance. Even the prestigious New York Stock Exchange had to remove its director (Dick

Grasso) amidst public outcry over excessive compensation (La Porta, Lopez and Shleifer 1999).

In developing economies, the banking sector among other sectors has also witnessed several cases of collapses, some of which include the Alpha Merchant Bank Ltd, Savannah Bank Plc, 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). In Nigeria, the issue of corporate governance has been given the front burner status by all sectors of the economy. For instance, the Securities and Exchange Commission (SEC) set up the Peterside Committee on corporate governance in public companies. The Bankers’ Committee also set up a sub-committee on corporate governance for banks and other financial institutions in Nigeria. This is in recognition of the critical role of corporate governance in the success or failure of companies (Ogbechie, 2006:6). 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 share holders’ value by enhancing corporate performance and accountability, while taking  into  account  the  interest  of other  stakeholders (Jenkinson and  Mayer,  1992). Corporate governance is therefore, about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that will foster good corporate performance.

In the  corporate governance of banks,  bank  boards of directors play a  significant  role  by monitoring and advising management in the formulation and implementation of strategies. Our hypothesis is that certain characteristics of bank boards (size, composition and proactiveness) determine the effectiveness of the boards in carrying out its monitoring and advisory roles. After controlling for heterogeneity and endogeneity using the two-step system estimator, we find that

admitting new members into the board improves bank performance up to a certain point ‘efficient limit’ where continuous increase of the board size begins to destroy value. We observe an inverse relation between board meetings and bank performance which suggest to us that bank boards that meet more often are only reacting to bank’s poor performance. This challenges the widespread belief that frequent board meetings play a role that is more proactive than reactive. We agree that bank boards strategically alleviate the problems of governance in banks and reduce the weakness of other corporate governance mechanisms, especially the regulatory and external governance mechanism. Hence empowering boards through incentive packages and enlarged responsibilities with authority to monitor, sanction, reprimand and advise management will be the way forward for the Nigerian banking sector.

The anxiety over the current banking sector crisis in Nigeria is understandable given the vital role played by the banking sector in the economic development of any nation. The banking industry plays a major intermediation role in an economy by mobilizing savings from surplus units and channeling these funds to the deficit units particularly the private enterprises for the purpose of expanding their production capacities. The concern over corporate governance stems from the fact that sound governance practices by organizations, banks inclusive results in higher firm’s market value, lower cost of funds and higher profitability (Block, Jang & Kim, 2006 & Claessen, 2006).

Eight  chief  executives  and  executive  directors  of  some  Nigerian  banks  were  summarily dismissed between August and October, 2009 due to issues related to poor corporate governance practices. This was sequel to the conclusion of audit  investigations embarked upon by the Central Bank of Nigeria to determine the soundness of Nigerian banks. The release of these reports led CBN to conclude that the affected banks have acted in manners detrimental to the

interest of depositors and creditors. This was at variance to the clean bill of good health earlier given to these banks by regulatory authorities (CBN inclusive) and their so called appointed reputable external auditors.

The term “Corporate Governance” has been identified to mean different things to different people. Magdi and Nadereh (2002) stress that corporate governance is about ensuring that the business is run well and investors receive a fair return. OECD (1999) provides a more encompassing definition of corporate governance. It defines corporate governance as the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company’s objectives are set and the means of attaining those objectives and  monitoring performance. This definition is  in  line  with the  submissions of, Wolfensohn (1999) Uche (2004) and Akinsulire (2006).

Effective corporate governance reduces “control rights” shareholders and creditors confer on managers, increasing the probability that managers invest in positive net present value projects (Shleifer and Vishny, 1997). Thus, the relationships of the board and management, according to Al-Faki (2006), should be characterized by transparency to shareholders, and fairness to other stakeholders. This will in effect mitigate the agency cost as predicted by Jensen and Meckling (1976). Corporate performance is an important concept that relates to the way and manner in which financial resources available to an organization are judiciously used to achieve the overall corporate objective of an organization, it keeps the organization in business and creates a greater prospect for future opportunities.

This study is a contribution to the ongoing debate on the examination of the relationship that exists between corporate governance mechanisms and commercial banks performance. Mixed and tenuous findings have been made from previous studies especially those ones that were conducted in the developed nations, particularly USA, UK, Japan, Germany and France.

1.2 STATEMENT OF THE PROBLEM

Banks and other financial intermediaries are at the heart of the world’s recent financial crisis. The deterioration of their asset portfolios, largely due to distorted credit management, was one of the main structural sources of the crisis (Fries, Neven and Seabright, 2002; Kashif, 2008 and Sanusi, 2010). To a large extent, this problem was the result of poor corporate governance in countries’ banking institutions and industrial groups. Schjoedt (2000) observed that this poor corporate  governance,  in  turn,  was  very  much  attributable  to  the  relationships among  the government, banks and big businesses as well as the organizational structure of businesses.

In Nigeria, before the consolidation exercise, the banking industry had about 89 active players whose overall performance led to sagging 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, 2004b). This

view is supported by the Nigeria Security and Exchange Commission (SEC) survey in April

2004, which shows that corporate governance was at a rudimentary stage, as only about 40% of quoted companies including banks had recognised codes of corporate governance in place. This, as suggested by the study may hinder the public trust particularly in the Nigerian banks if proper measures are not put in place by regulatory bodies.

The Central Bank of Nigeria (CBN) in July 2004 unveiled new banking guidelines designed to consolidate and restructure the industry through mergers and acquisition. This was to make Nigerian banks  more  competitive and  be  able  to  play in  the  global market. However, the successful operation in the global market requires accountability, transparency and respect for the rule of law. In section one of the Code of Corporate Governance for banks in Nigerian post consolidation (2006), it was stated that the industry consolidation poses additional corporate governance challenges arising from integration processes, Information Technology and culture. The  code  further  indicate  that  two-thirds of mergers world-wide failed  due  to  inability to integrate personnel and systems and also as a result of the irreconcilable differences in corporate culture and management, resulting in Board of Management squabbles.

Despite all these measures, the problem of corporate governance still remains un-resolved among consolidated Nigerian banks, thereby increasing the level of fraud (Akpan, 2007). The causes of the recent global financial crises have been traced to global imbalances in trade and financial sector as well as wealth and income inequalities (Goddard, 2008). More importantly, Caprio, Laeven  &  Levine  (2008)  opined  that  there  should  be  a  revision of  bank  supervision and corporate governance reforms to ensure that deliberate transparency reductions and risk mispricing are acted upon.

The series of widely publicized cases of accounting improprieties recorded in the Nigerian banking industry in 2009 (for example, Oceanic Bank, Intercontinental Bank, Union Bank, Afri Bank, Fin Bank and Spring Bank) were related to the lack of vigilant oversight functions by the boards of directors, the board relinquishing control to corporate managers who pursue their own self-interests and the board being remiss in its accountability to stakeholders (Uadiale, 2010). Inan (2009) also confirmed that in some cases, these bank directors’ equity ownership is low in other to avoid signing blank share transfer forms to transfer share ownership to the bank for debts owed banks. He further opined that the relevance of non- executive directors may be watered down if they are bought over, since, in any case, they are been paid by the banks they are expected to oversee.

As a result, various corporate governance reforms have been specifically emphasized on appropriate changes to be made to the board of directors in terms of its composition, size and structure (Abidin, Kamal and Jusoff, 2009).

It is in the light of the above problems, that this research work studied the effects of corporate governance mechanisms on the performance of commercial banks in Nigeria and also reviewed the annual reports of the listed banks in Nigeria to find out their level of compliance with the CBN (2006) post consolidation code of corporate governance.

1.3 OBJECTIVE OF THE STUDY

This study seeks to achieve the following objectives:

      To determine the extent to which noncompliance with corporate governance codes by the bank executives contributed to this present crisis and management problem

      To  ascertain the relationship  between cooperate governance and the performance of commercial banks in Nigeria

      To investigate if there is any significant change in the performance of banks in Nigeria by the proper implementation of corporate governance by the board of the directors.

      To  empirically determine  factors that  militates against  successful implementation of corporate governance framework in commercial banks.

1.4 RESEARCH QUESTION

The following research questions were formulated to guide the investigation.

             What is the extent to which noncompliance with corporate governance codes by the bank executives contributed to this present crisis and management problem?

             What are the relationship between cooperate governance and the performance of commercial banks in Nigeria?

             What is the significant change in the performance of banks in Nigeria by the proper implementation of corporate governance by the board of the directors?

             What are the factors that militates against successful implementation of corporate governance framework in commercial banks?

1.5 RESEARCH HYPOTHESIS

The following hypotheses form the basis for carrying out this study.

        H0:      The extent to which noncompliance with corporate governance codes by the bank executives contributed to this present crisis and management problem is low

H1:      The extent to which noncompliance with corporate governance codes by the bank executives contributed to this present crisis and management problem is high

      H0:      There  is  no  evidence  to  show  significant  relationship  between  cooperate governance and the performance of commercial banks in Nigeria

H2:      There  is  no  evidence  to  show  significant  relationship  between  cooperate governance and the performance of commercial banks in Nigeria

      H0:      There is no evidence to show significant change in the performance of banks in Nigeria  by the  proper implementation of corporate governance  by the  board of the directors

H3:      There is evidence to show significant change in the performance of banks in Nigeria  by the  proper implementation of corporate governance  by the  board of the directors

      H0:      The  factors  that   militates  against  successful  implementation  of  corporate governance framework in commercial banks are low

H4:      The  factors  that   militates  against  successful  implementation  of  corporate governance framework in commercial banks are high

1.6      SIGNIFICANCE OF THE STUDY

The significance of the study is drawn from two stand points: Academic and practical view. In the academic arena, this study will prove to be significant in the following ways;

             The study will serve as a body of knowledge to be referred to by future and present researchers

             It  will  contribute  to  the  enrichment  of  the  literature  on  roles  of  corporate governance in the Nigeria commercial bank performance.

Practically, the study will result in broadening understanding of the following;

             This study provides a picture of where banks stand in relation to the codes and principles on corporate governance introduced by the Central Bank of Nigeria. It further provides an insight into understanding the degree to which the banks that are reporting on their corporate governance have been compliant with different sections of the codes of best practice and where they are experiencing difficulties. Boards of directors will find the information of value in benchmarking the performance of their banks, against that of their peers.

1.7      SCOPE OF THE STUDY

The study covers the roles of corporate governance in the Nigeria commercial bank performance, a case study of UBA (United Banks of Africa), Enugu Branch from a period of 2011 to 2012.

1.8      LIMITATIONS OF THE STUDY

This study was exposed to the following limitations

          Delay in filing ad returning questionnaire by respondents.

          Small sized sample was used due partly to limited financial resources.

          Limited use of varied analytical techniques due to size of the sample

          Difficulty in accessing significant researchable materials.

          Financial and time constraints also majored as the limitation of the work.

1.9: DEFINITION OF RELEVANT TERMS

Corporate Governance: The methods by which suppliers of finance control managers in order to ensure that their capital cannot be expropriated and that they earn a return on their investment.

Commercial banks: bank that  dealing with businesses: a  bank whose primary business is providing financial services to companies

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