COPORATE GOVERNANCE IN NIGERIA BANKING SECTOR.

INTRODUCTION

It has become a worldwide dictum that the quality of

corporate governance makes an important difference to the

soundness and unsoundness of banks. Broadly speaking,

corporate governance refers to the extent to which companies

are run in an open and honest manner. Sanusi (2003). Thus,

effective corporate governance practice incorporates

transparency, openness, accurate reporting and compliance

with statutory regulations among others. Historically,

antecedents indicate that financial crisis is a direct

consequence of lack of good corporate governance in banks;

invariably one of the sources of instability in the banking

sector is lack or inadequate practice of corporate

governance. Wherever a power is exercised to direct, control

and regulates activities that affect people, there is need

for good exercise of such power. For corporate entities,

particularly public liability companies, the exercise of

power over the enterprise’s direction, the supervision and

control of executive actions, concern for the effects of the

enterprise on other parties and especially the environment,

the acceptance of a fiduciary duty to be accountable,

constitute the quintessential of corporate governance. The

banking distress of the last decades has posed many

challenges to corporate governance in banking industry. Bank

distress can be associated to lack or avoidance of code of

ethics and professionalism. Odozi (2007) expound this

posting that, “Ethics, like, corporate governance,

transparency and accountability, etc, is a cliché that has

been abused and misused”. The failure of banks in Nigeria,

as elsewhere, has been largely due, not merely to inadequate

corporate governance or leadership, but to a failure of

professional ethics as manifested in numerous instances of

creative accounting practices, professionals insensitive

internal control and risk management position being

seriously compromised or even colluding with fraudster.

Financial scandals around the world and the recent collapse

of major corporate institution in the USA has brought to the

fore, once again the need for the practice of good corporate

governance, which is a system of managing the affairs of

corporations with a view to increasing shareholders’ value

and meeting the expectations of other stake - holders. For

the financial institutions, the retention of public

confidence through the enthronement of good corporate

governance remains of almost importance given the role of

the industry in the mobilization of fund, the allocation of

credit to the deficit sectors of the economy, the payment

and settlement system and the implementation of monetary

policy.

Universally, there is a grounds well of interest in

corporate governance. Particularly, the need to implement

good corporate governance in the banking sector becomes more

apparent after the Asian financial crisis. This has been

largely event- driven in the sense that it is in response to

scandals and unexpected crisis, which in some cases abruptly

terminated the existence of large corporate entities. The

failure of Johnson Matheys Bank, Bank of Credit and Commerce

International, Polly Peck, world com and Enron Incorporation

are cases in point. The failure of these institutions has

been traced to several lapses associated with poor corporate

governance including conflicts of interest of corporate

governors. Corporate governance has in recent time’s assumed

heightened importance requiring that boards and management

of companies’ exhibit greater transparency and

accountability in their business conduct. The just concluded

consolidation of the Nigeria banking industry makes the

institution of corporate governance a sine qua non in the

industry. With twenty- five, now twenty- four as at today

banks that emerged from the ashes of the erstwhile eighty-

nine banks being publicly quoted, corporate governance

should in fact take the centre stage in the management of

these banks. Hence, effective corporate governance requires

a clear understanding of the respective role of the board

and of senior management and their relationships with others

in the corporate structure. The relationships of the board

of management with stockholder should be characterized by

candour; their relationships with employees should be

characterized by fairness; their relationships with the

communities in which they operate should be characterized by

good citizenship, and their relationships with government

should be characterized by commitment to compliance and good

corporate citizenship. Anya (2003).

On the other hand, bank like many other economic

organizations are expected to generate profit through

effective and efficient utilization of resources (inputs) to

create sound asset portfolio (output) and ensure continuity.

The position of bank therefore in the nation is seen as the

oil of the engine of economic development through financial

intermediation and advisory services. Bank makes profit from

the spread between interest charged on deposit and loan

interest rate. These differentials ought to compensate

adequately for the investors contribution and the service

provider as well, if corporate governance has to be used a

yard stick in determining bank performance.

Bank performance therefore, could be seen in term of how the

management operates or the result of their actions. In view

of the later, performance could be seen in terms of the

absolute profits, rate of return, earnings per share, the

quality of asset portfolio, level of liquidity and net

contribution to the economic development of the nation.

Performance however is not determined by inputs alone but is

also dependent on the environment within which the bank

operates. This environment is refers to as “PESTLM”

comprising of Political, Economic, Social Cultural,

Technology, Legal and Marketing. The level of bank’s

performance is determined also on how the institution can

positively influence these environmental factors and

effective survive in a driven competitive environment.

In the last two decades, developments in Nigeria

financial sector have reinforced the need for greater

concern for corporate governance in financial institutions

in the country. The role of governance on banking

performance relating to economic growth cannot be over-

emphasized. Banks are the pivot of modern economy, the

repository of people’s wealth, and supplier of credit which

lubricates the engine of growth of the entries economy

Ebhodaghe (1997). The upsurge in the number of financial

intermediaries following deregulation and the failure of a

significant number of the institutions with attendant agony

suffered by many Depositors/Customers and the systemic

threat to the economy, all underscore the imperative for

greater concern for corporate governance in financial

intermediaries especially mainstream banks. For instance,

between 1994 and 1995, five banks failed and had their

licenses revoked by the Central Bank of Nigeria (CBN) due to

distress. This was to be a tip of the iceberg as the

distress situation worsened and later resulted in the

closure of thirty other licensed banks between 1998 and

2002. With the catalogue of these failed banks even up to

the period of consolidation in 2004 from the Nigeria banking

landscape, the ‘multi- million naira’ question now being

asked by financial expects is how many more banks would

follow suit? It is against this back drop that this study

attempts to examine corporate governance and bank

performance in Nigeria most especially the post-

consolidation era. What has been the impact of corporate

governance to bank performance? Since the advent of newly

adopted “code of corporate governance in Nigeria launched by

the past President Obasanjo on November 4, 2003, as there

being any change in corporate organization.

DEFINITION OF 'CORPORATE GOVERNANCE'

The system of rules, practices and processes by which a

company is directed and controlled. Corporate governance

essentially involves balancing the interests of the many

stakeholders in a company - these include its shareholders,

management, customers, suppliers, financiers, government and

the community. Since corporate governance also provides the

framework for attaining a company's objectives, it

encompasses practically every sphere of management, from

action plans and internal controls to performance

measurement and corporate disclosure.

Corporate governance broadly refers to the mechanisms,

processes and relations by which corporations are controlled

and directed. Governance structures identify the

distribution of rights and responsibilities among different

participants in the corporation (such as the board of

directors, managers, shareholders, creditors, auditors,

regulators, and other stakeholders) and includes the rules

and procedures for making decisions in corporate affairs.

Corporate governance includes the processes through which

corporations' objectives are set and pursued in the context

of the social, regulatory and market environment. Governance

mechanisms include monitoring the actions, policies and

decisions of corporations and their agents. Corporate

governance practices are affected by attempts to align the

interests of stakeholders.

RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND BANK’S

PERFORMANCE

The factors underpinning corporate governance mainly

include shareholding structure, board composition, and

senior management. The relationship between these factors

and firm performance is the focal point for many scholarly

studies. Moreover, it can be argued that firm performance

can be improved with better corporate governance controls in

a company. Famma and Jenson (1983:39) argued that corporate

governance does affect firm performance. It was discovered

that the majority of larger firms with stronger governance

controls are rewarded over the long- term. Klein, Shapiro,

and Young (2004:32) examined the relationship between

corporate governance and firm value by using the corporate

governance index (CGI) and Tobin’s, which measures the

firm’s value. The results concluded that corporate

governance does matter in a firm value. In addition Carse

(2000:25) argued that a strong corporate governance standard

is particularly important for banks. This is because most of

funds that the banks use for business belong to creditors

and depositors. The failure of a bank will affect not only

its own shareholdings, but have a systematic affect on other

banks. Therefore, it is important to ensure that banks are

operating properly.

On the other hand, a large number of studies have

investigated the relationship between ownership structure,

and firm performance. Morck, Sheifer, and Vishny (1998:45)

argued that higher ownership concentration has a positive

impact on firm performance, because it increases the ability

of shareholders to properly monitor managers. Notbrook

(2009:65) on corporate governance mechanisms and firm

performance revealed that separation of the posts of chief

executive officer (CEOs) is vital for strong and viable

corporate governance sustainability. The result added that a

board size of ten is more concentrated as opposed to

diffused equity ownership. The relationship between

corporate governance and foreign investment can be discussed

through the direct effects of governance on the firm’s

investment level, and the firm’s behaviour towards

investment opportunities. Empirical studies according to

(Notbrook, 2009:45) shows that well governed firms invest

more than badly governed ones .Within a broad sample of

United States manufacturing firms, the study finds that

increased governance quality leads to higher levels of

investment and greater responsiveness of investment to

growth opportunities. Higher quality governance mitigates

the under investment problem that arises from incentive

problems between managers and shareholders.

CORPORATE GOVERNANCE MECHANISMS

Basically, one consequence of separation of ownership

from management is that the day-today decision making power

(that is the power to make decision over the use of capital

supplied by the shareholders) rest and with persons other

than the shareholders themselves. The separation of

ownership and control has given rise to an agency problem

whereby there is the tendency for management to operate the

firm in their own interest, rather than those of

shareholders (Jensen and Meckling 1976: 236, Fame and Jenson

1983: 73). These create opportunities for managers to build

illegitimate empires and in the extreme, outright

expropriation. Various suggestions have been made in the

literature as to how the problemcan be ameliorated (Hermolin

and Weiisbach 2001: 697; Jensen and Meckling 1976:240;

Shleifer and Vishny, 1997: 89). Some of the mechanisms and

their impediments to monitor and shape banks behaviours are

examined below:

a). Shareholders: Shareholders play a key role in the

provision of corporate governance. Small or diffuse

shareholders exert corporate governance by directly voting

on critical issues, such as mergers, liquidation, and

fundamental changes in business strategy and indirectly by

electing the boards of directors to represent their interest

and oversee the myriad of managerial decisions to be taken

by the management of the organistaion. Incentives contracts

are a common mechanism for aligning the interests of

managers with those of shareholders. The board of directors

may negotiate managerial compensation with a view of

achieving particular results. Thus, small shareholders may

exert corporate governance directly through their voting

right and indirectly through the board of directors elected

by them.

However, a variety of factors could prevent small

shareholders from effectively exerting corporate control.

There are large information asymmetries between managers and

small shareholders as managers have enormous discretion over

the flow of information. Also, small shareholders often lack

the expertise to monitor managers accompanied by each

investor’s small stake which could induce free-rider

problem. That is each investor relies on others to undertake

the costly process of monitoring managers, so there is too

little monitoring. Large (concentrated) ownership is another

corporate governance mechanism for preventing managers from

deviating too far from the interest of the owners. Large

investors have the incentives to acquire information and

monitor managers. They can also elect their representative

to the board of directors and thwart managerial control of

the board. Large and well-informed shareholders could be

more effective at exercising their voting rights than an

ownership structure dominated by small, comparatively

uninformed investors. Also, they could more effectively

negotiate managerial incentive contracts that align owner

and manager interests than poorly informed small

shareholders whose representatives, the board of directors

can be manipulated by the management. However, concentrated

ownership raises some corporate governance problems. Large

investors could exploit business relationships with other

firms they own which could profit them at the expense of the

bank. In general large shareholders could maximize the

private benefits of control at the expense of small

investors. Thus, while concentrated ownership is a common

mechanism for confronting the corporate governance issue, it

has its own drawbacks.

b). Debt holders: Debt holders provide return for a promised

stream of payments and a variety of other covenants relating

to corporate behaviour, such as the value and risk of

corporate assets. If the corporation violates these

covenants or default on the payments, debts holders

typically could obtain the rights to repossess collateral

throw the corporation into bankruptcy proceedings, vote in

the decision to reorganize and remove managers. However,

there could be barriers to diffuse debt holders to

effectively exert corporate governance as envisaged. Small

debt holders may be unable to monitor complex organization

and could face the free rider incentives, as small equity

holders. Also the effective exertion of corporate control

with diffuse debts depends largely on the efficiency of the

legal and bankruptcy systems. Large debts holders like large

equity holders, could ameliorate some of the information and

contract enforcement problems associated with diffuse debt.

Due to their large investment, they are more likely to have

the ability and the incentive to exert control over the firm

by monitoring managers. Large creditors obtain various

control rights in the case of default or violation of

covenants. In terms of cash they can renegotiate the terms

of loans, which may avoid inefficient bankruptcies. The

effectiveness of large creditors however, relies importantly

on effective and efficient legal and bankruptcy systems. If

the legal system does not efficiently identify the violation

of contracts and reorganize firms, then creditors may lose a

crucial mechanism for exerting corporate governance. Also,

large creditors, like shareholders may attempt to shift

activities of the bank to reflect their own preferences.

Large creditors for example as noted by Myers (1997: 147),

may induce the company to forego good investment and take on

too little risk because the creditor bears some of the cost

but will not share the benefits.

c). competitions in product market and take over: Some

economists have argued that competition in the product or

service market may act as a substitute for corporate

governance mechanism (Allen and Gale 2000: 96). The basic

argument is that firms with inferior and expropriating

management could be forced out of the market by firms

possessing nonexpropriating managers due to sheer

competitive pressure. That is rather than focusing on the

mechanisms via which equity and debt holders seek to exert

corporate control, market competition can discipline a

poorly managed firm. Also a fluid takeover market is noted

by Jensen (1993: 325), could create incentives for managers

to act in the best interest of the shareholders to avoid

being fired in a takeover. Evidence however suggests that

given the power of managers and the scarcity of liquid

capital markets, takeover are essentially nonexistent as a

corporate governance mechanism outside the U S A and U K

(Shleifer and Vishny, 1997: 90).

PRINCIPLES OF CORPORATE GOVERNANCE

Given the globalization of business and the need to ensure

uniformity in the practice of corporate governance the world

over, the Hampel Committee (1998) developed some basic

principles of good corporate and sets out a code of best

practices called the “combined code”. The combined code

includes the following;

1. Every listed company should be headed by an effective

board which should lead and control the company. The board

should meet regularly and should have a formal schedule of

matters reserved to it for decisions; directors should bring

an independent judgment to bear on issues of strategy,

performance, resources and standards of conduct, directors

should receive appropriate training on first appointment and

as necessary thereafter.

2. There are two key tasks at the top of every public

company- running of the board (the chairman’s role and the

executive responsibility for the operation of the company’s

business (Chief executive’s role). There should be a clear

division of responsibilities between the two roles, so as to

ensure a balance of power and authority and thus avoid a

situation where one person has unfettered powers of

decision.

3. The board should have a balance between executive and

non- executive directors with at least 1/3rd from the

latter. The majority of non-executive should be independent

of the management and free of business relationships that

could interfere with their independence.

4. There should be a formal and transparent procedure for

the appointment of directors and all directors should offer

themselves for re-election every three years.

5. Levels of remunerations should be sufficient to attract

and retain the directors to run the company successfully,

but should not be excessive. Part of the payment of

directors should be in the form of performance related

element.

6. The board should use the annual general meeting to

communicate with the individual investors and encourage

their participation.

EFFECTS OF CORPORATE GOVERNANCE ON PERFORMANCE OF BANKS IN

NIGERIA

The hallmark of banking is the observance of high

degree of professionalism, transparency and accountability

which fundamental components for building strong public

confidence. It is equally important to indicate some effects

of good corporate governance on banks performance so as to

maintain the safety and soundness of emerging bigger banks

in the post consolidation era with a view to enhance public

confidence in the nation’s banking system. Myers (1997:147-

150) investigated the determinants of corporate borrowing

and highlighted the following effects on corporate

governance: Raising awareness and commitment to the value of

good corporate governance performance among all

stakeholders: An essential part of corporate governance

concerns persons as well as groups which are considered as

stakeholders. Awareness and commitment among banks,

directors, shareholders and stakeholders as well as

regulators are very critical for ensuring quality

performance practices. Raising awareness means convincing

people that good corporate governance is in their own

interest. To improve the quality of corporate governance

performance in a consolidated Nigerian banking system, there

is the need for strict adherence to internationally

recognized corporate governance codes/principles such as

those of Central bank of Nigeria codes on corporate

governance, the organization for economic corporation and

development (OECD) and the Basel committee on banking

supervision. To ensure good performance, banks should draw

up a binding code of ethical and professional practice for

all members.

Effect on the board responsibilities: The ultimate

responsibility for effective monitoring to the management

and of providing strategic guidance to the bank is placed

with the board. The OECD principles provide that “board

members should act on fully-informed basis, in good faith

with due diligence and care, and in the best interest of the

company and shareholders”. For board to effectively perform

its responsibilities, it must have the “right people” on the

board who are independent, knowledgeable and ethical and

whose integrity is unquestionable. Enhancement of internal

control measures: The need for banks to continue to

recognize internal and external auditors as important part

of the corporate governance process cannot be over-

emphasized. Adequate internal control measures will help to

discipline banks and enhance their daily business

performance by ensuring compliance with internal and

external rules as well as help the board to effectively

evaluate the bank’s risks and ultimately its future

strategy. The external auditors of the banks should be

oblique to commit themselves to clarify with regard to their

independence, professionalism and integrity. They should

strive and rebuilt confidence in the profession through the

preparation and presentation of credible and reliable

financial statements reports.

Effect on information disclosure and transparency: This

has been discussed in corporate governance legislature.

Transparency will enable the financial markets, depositors

and other stakeholders to form a fair view of the bank’s

value and develop sufficient trust in the quality and

performance of the bank and management. The quality of

information disclosure depends on the standard and practices

under which it is prepared and presented. Comprehension

disclosure should also include non-financial information.

Effect on implementation and enforcement of corporate

governance laws and regulations: to improve the quality of

corporate governance on performance of banks in a

consolidated Nigeria banking sector, sanction for violation

of judiciary duty should be sufficiently severe to deter

wrong doing. The good faith requirement imposed on bank

directors, oblique them to honour the substance as well as

the form of their duties. Enhancement of training of

directors and shareholders to actualize performance: A well

planned and properly executed continuous training programme

will help directors and shareholders achieve their goals in

the performance of judiciary obligation. This will

contribute to the overall success of the banking sector.

Protection of shareholders rights and equity treatment of

all stakeholders: The protection of the rights is a pillar

of an effective corporate governance system. Measures for

protection include: strengthening disclosure requirements,

clarifying and strengthening the judiciary duty of directors

to act in the interest of the bank and all its shareholders.

CONCLUSION

To minimized financial and economic crime in the

system, banks must embrace fiduciary duty which include

transparency, honesty and fairness in dealing with all it

stakeholders. It is concluded that, though factor such as

accountability, transparency, independence, reliance and

fairness, help in the effective performance of banks but the

major significant was in this period of consolidation are

accountability and transparency.

Corporate governance affects stakeholders. It also affects a

corporate potential or ability to access its market share

both locally and globally. It also determines the ability of

the organization to fulfill its social contracts with the

clientele and society at large. These lofty ideals will not

come if the enterprise could not improve on its economic

fortunes at an increasing rate. An organization will not

promote its economic fortunes at an increasing rate without

instituting measures to fight corruption transparently and

ensuring that the major stakeholders, shareholders,

directors and management are conscripted into the vanguard

for the institution of corporate governance.

It is cleared that corporate governance is a catalyst

that speed up the performance of banks in Nigeria base on

this study. It is therefore worthy to note that, although

Nigerian banks cannot be fully supported to be practicing

what we regards to as corporate governance but in a

nutshell, corporate governance practice at the long run will

completely encourage bank client’s patronage and total

reliance on the services provided by the banks in Nigeria.

Hence, for banks to have a brighter tomorrow there is need

for effective corporate governance. Ebhodaghe (1997),

asserted that in the country, the role of governance on

banking performance relating to economic growth cannot be

over-emphasized. Banks are the pivot of modern economy, the

repository of people’s wealth, and supplier of credit which

lubricates the engine of growth of the entries economy. The

upsurge in the number of financial intermediaries following

deregulation and the failure of a significant number of the

institutions with attendant agony suffered by many

Depositors/Customers call for improve service delivery of

bank staff in other to maintain their fiduciary duty.

RECOMMENDATION

There is no doubt that good corporate governance is a

major factor in financial sector stability. Both at the micro

(individual) and macro (sector-wide) levels, if the

institutions comply with regulations and ensure that all

organizational activities are carried properly, the system

will remain solid. Since the salience of corporate governance

in the fight against financial and economic crimes cannot be

overemphasized, the following recommendations are hereby

suggested:

1. The challenge banks therefore are to ensure that corporate

governance become their watchword. This will enhance the

efficiency and profitability and encourage an environment for

the cultivation of the other attributes of corporate

transparency.

2. The operation scope of corporate governance includes

accountability, transparency and operationalised anti-

corruption anchored on stakeholder participation. In any

banking environment therefore, corporate governance should

promote accountability, transparency, healthy ethics and

general participation of stockholders, which is central to

creating and sustaining the enabling environment of wealth

creation, equitable welfare distribution, economic growth and

development.

3. Internal discipline and a strong operational agenda rooted

in corporate governance, strong leadership, strengthened by

moral questions bordering on integrity to carry out functions

as appropriate should be put in place in banking sector.

4. In all this capacity building is important. Complementary

to the need for professional grounding of management and staff

of bank is institutional capacity building. The competence of

individuals in a corporate entity dovetails into the capacity

of the organization for analyzing, assessing and addressing

governance issues with quick responsiveness. Institutional

capacity requires the strengthening of in-house expertise in

the various areas of activities and of governance. An

organization in quest of thorough governance will therefore

incorporate local knowledge and experience, insights and

institutional context in governance initiatives. As the

leadership of such enterprise rise to demands of effective

working environment with requisite infrastructure and

knowledge bases, the ability of stakeholder to access

information will enhance and vindicate the expectations of

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COPORATE GOVERNANCE IN NIGERIA BANKINGSECTOR.

WRITTEN BY

Davies, Kelvin udim

UNIVERSITY OF UYO, UYO.

November, 2014.