CHAPTER ONEINTRODUCTION1.1Background to the StudyThe issues of
corporate governance have continued to attract considerable
national and international attention over the years. The shocking
accounting scandals of the 2001 perpetuated by Enron, Xerox, and
WorldCom have placed the credibility of corporate financial reports
under suspicion, and furthermore, eroding investors confidence.
Thus, the issue of corporate governance has become paramount and
centre of the agenda for both business leaders and regulators all
over the world following the global financial crisis which has
provided many illustrations of the collapse of corporate
governance, consequently, the international regulators are hard at
work to influence appropriate regulatory controls (Jegede, Akinlabi
and Soyebo, 2013).As a follow up to this, the Sarbanes-Oxley Act
was enacted in 2002 to enhance corporate government mechanism which
is viewed as the priority of financial revolution, in the
expectation that governance mechanism may be reinforced, public
confidence retrieved, accuracy and reliability of financial
information assured (Ming-Cheng, Hsin-chaing, I-cheng &
Chun-feng, 2008).Corporate governance is about putting in place the
structure, processes and mechanisms that insure that the firm is
being directed and managed in a way that enhances long term
shareholder value through accountability of managers and enhancing
firm performance (Jegede, Akinlabi and Soyebo, 2013). In other
words, through such structure, processes and mechanisms, the well-
known agency problem (which results from the separation of
ownership from management and leads to conflict of interests within
the firm) may be addressed such that the interest of managers can
be aligned with those of the shareholders. In Nigeria, It was
discovered by the Securities and Exchange Commission (SEC) (a
regulatory organ responsible for the supervision of corporations in
Nigeria) in 2003 states that, poor corporate governance was one of
the major factors in virtually all known instances of financial
institutions distress in the Nigerian financial sector. It was also
found that only about 40% of quoted companies, including banks, had
recognized codes of corporate governance in place (Ahmad &
Kwanbo, 2012).Consequently, in 2003, SEC in collaboration with the
Corporate Affairs Commission released a code of corporate
governance. Banks were expected to comply with the provisions of
the code. In addition to that, banks were further directed to
comply with the Code of Corporate Governance for Banks and Other
Financial Institutions approved earlier in the same year by the
Bankers Committee. However, in 2006, the consolidation of the
banking industry necessitated a review of the existing code for the
Nigerian Banks. A new code was therefore, developed to compliment
the earlier ones and enhance their effectiveness for the Nigerian
banking industry. Compliance with the provisions of the Code was
mandatory. The reforms carried out by the CBN in the banking sector
as well as the code issued by the SEC were to bring about optimized
corporate governance practices in the industry (Ahmad & Kwanbo,
2012). However, in 2008, the CBN and the Nigerian Deposit Insurance
Company (NDIC) carried out a stress test in the banking industry.
The stress test revealed some unwholesome developments in the
banking industry which were as a result of noncompliance with the
corporate governance code by some banks (Ahmad & Kwanbo, 2012).
This study therefore seeks to investigate the impact of corporate
governance mechanism on the performance of banks. 1.2Statement of
the problemThe integrity of financial reporting has been a
consistent concern among regulators and practitioners, especially
after high-profile accounting scandals involving once
well-respected companies such as Enron, WorldCom and Xerox (Zhou
& Chen, 2004) and the Nigerian recapitalization exercise of the
CBN in 2005. This has thus; rekindle the interest of researchers in
recent years to examine the impact of corporate governance on the
performance of firms (e.g. Macey and OHara, 2003; Levine, 2004;
Adams and Mehran, 2008; Larcker, 2007; Caprio et al., 2007, Taiwo
& Okorie, 2013; Mohammed, 2012; Akpan & Riman, 2012, Ajala,
Amuda and Arulogun, 2012 and Obeten, Ocheni, & Sani,
2014).Concerned about the dwindling loss of confidence by investors
in commercial banks due to absence of good corporate governance,
the CBN in 2004 made it compulsory for all commercial banks to have
sound corporate governance in their respective banks. However,
there are absence of consensus amongst empirical studies that seek
to examine the relationship between corporate governance and firms
performance especially as regards the Nigerian banking sector. This
could be explained by the use of different corporate governance
measures by different researchers in different economic
environment. There is therefore need to examine relationship
between corporate governance and performance of firms in a typical
economic environment in Nigeria. In the light of the forgoing, this
present seeks to empirically examine the impact of corporate
governance on the performance of commercial banks in
Nigeria.1.3Objectives of the Study The main objective of this study
is to empirically examine the extent to which corporate governance
mechanism affects the performance of commercial banks in Nigeria.
This study specifically seeks to accomplish the following specific
objectives.1. To examine the relationship between board size and
the return on equity (ROE) of commercial banks in Nigeria.2. To
examine the relationship between audit committee independence and
the return on equity (ROE) of commercial banks in Nigeria.3. To
examine the relationship between size of audit committee and the
return on equity (ROE) of commercial banks in Nigeria.1.4Research
QuestionsThe study specifically seeks for answers to the following
questions via findings.1. To what extent is the relationship
between board size and the return on equity (ROE) of commercial
banks in Nigeria?2. To what extent is the relationship between
audit committee independence and the return on equity (ROE) of
commercial banks in Nigeria?3. To what extent is the relationship
between size of audit committee and the return on equity (ROE) of
commercial banks in Nigeria?1.5Research HypothesesThe following
null hypotheses have been formulated for this study.Ho1: There is
no significant relationship between Board size the return on equity
(ROE) of commercial banks in Nigeria.Ho2: There is no significant
relationship between audit committee and the return on equity (ROE)
of commercial banks in Nigeria.Ho3: There is no significant
relationship between audit committee and the return on equity (ROE)
of commercial banks in Nigeria.1.6Significance of the StudyThe
research provides management/owners of banks, shareholders and
other stake holders with valuable information to reach a better
understanding on the extent to which corporate governance impact on
banks performance.This study will also be of benefit to the
regulatory bodies like the Security and exchange commission (SEC)
and the central bank of Nigeria (CBN) in a way that it will avail
them with valuable insight on how sound corporate governance
mechanism could turn to impact performance of firms in Nigeria thus
re-engineering the need to strengthen corporate governance in
banks. In addition, the government will also be made to understand
the need to strengthen regulatory agencies saddled with the
responsibility of issuing sound corporate governance in Nigeria.
More so, the study will also be of immense important in the sense
that it will add more statistical data to prior studies; this will
help to serve as a reference point to students, researchers and the
academia who desired to carry out further research on related
topics.1.7Scope of the StudyThe scope of this study covers all the
21 commercial banks quoted on the Nigerian stock exchange as at
2005. The scope in relation to time covers a period of 8 years
(i.e. from 2005-2013). The choice of this period is due to the
researchers belief that the period will provide findings that
reflect current realities in the banking sector.
CHAPTER TWO LITERATURE REVIEW2.1IntroductionThis chapter looks
at review of related literature on the impact of corporate
governance mechanism on banks performance. The chapter will focus
on conceptual frame work, theoretical framework, an over view of
corporate governance, importance of corporate governance in the
Nigerian baking industry review of empirical works and summary of
review.2.2 Theoretical Frame WorkAn understanding of corporate
governance proceeds from an examination of a number of theories
that attempt to explain the basis and rationale behind this
management imperative. According to Anthony, (2007) these theories
include the following: Agency theory, Stakeholders theory,
Stewardship theory and Resource dependency theory. These theories
are succinctly examined below:
2.2.1 Agency TheoryIt is an acknowledged fact that the
principal-agent theory is generally considered the starting point
for any debate on the issue of corporate governance emanating from
the classical thesis on the modern and private property by Berle
and Means, (1932). According to this thesis, the fundamental agency
problem in modern firms is primarily due to the separation between
finance and management. Modern firms are seen to suffer from
separation of ownership and control and therefore are run by
professional managers (agents) who cannot be held accountable by
dispersed shareholders. In this regard, the fundamental question is
how to ensure that managers follow the interest of shareholders in
order to reduce cost associated with principal agent theory? The
principals are confronted with two main problems. Apart from facing
an adverse selection problem in that they are faced with selecting
the most capable managers, they are also confronted with a moral
hazard problem; they must give agents (managers) the right
incentive to make decisions aligned with shareholders interest. In
further explanation of the agency relationships and cost, Jensen
& Meckling, (1976) describe agency relationship as a contract
under which one or more persons (agent) to perform some service on
their behalf, which involves delegating some decision making
authority to the agent. In this scenario there exist a conflicting
of interests between managers or controlling shareholders, and
outside or minority shareholders leading to the tendency that the
former may extract perquisites or (perks) out of a firms resources
and be less interested to pursue new profitable ventures. Agency
costs include monitoring expenditures by the principal such as
auditing, budgeting, control and compensation systems, bonding
expenditures by the agent and residual loss due to divergence of
interests between the principal and the agent. The share price that
(principal) pay reflects such agency costs. To increase firms
value, one must therefore reduce agency costs. The following
represent the key issues towards addressing opportunistic behaviour
from managers within the agency theory:2.2.2 Stakeholder TheoryOne
argument against the strict agency theory is its narrowness by
identifying shareholders as the only interested parties, the
stakeholder theory stipulate that a corporate entity invariably
seeks to provide a balance between the interest of its diverse
stakeholder in order to ensure that each constituency receives some
degree of satisfaction (Abrams, 1951). The stakeholder theory
therefore appears better in explaining the role of corporate
governance than the agency theory by highlighting various
constituents of a firm. Thus creditors, customers, employees,
banks, governments and society are regarded as relevant
stakeholders.Related to the above discussion, John and Senbet
(1998), provide a comprehensive review of the stakeholders theory
of corporate governance which points out the presence of many
parties with competing interest in the operations of the firm. They
also emphasis the role of non-market mechanism such as size of the
board, committee structure as important to firm
performanceStakeholder theory has become more prominent because
many researchers have recognize that the activities of a corporate
entity impact on the external environment requiring accountability
of the organization to a wider audience than simply its
shareholders alone but exist within the society and therefore, has
responsibilities to that society. One must however point out that
large recognition of this fact has rather been a recent phenomenon.
Indeed it has realized that economic value is created by people who
voluntarily come together and corporate to improve every ones
position (Freeman et al, 2004 & Jensen, 2001). Critique of the
stakeholders theory criticize it for assuring a single-valued
objective (gains that accrue to the firms constitutions). The
argument of Jensen (2001) suggests that the performance of a firm
is not and other issues such as flow of information from senior
management to lower ranks, inter-personal relations, working
environment etc. are all critical issues that should be considered.
An extension of the theory called an enlightened stakeholder theory
was proposed. However, problems relating to empirical testing of
the extension have limited its relevance (Sanda et al, 2005).2.2.3
Stewardship TheoryThis theory, arguing against the agency theory
posits that managerial opportunism is not relevant (Donaldson and
Donaldson, 1991; Daris, Choorman and Donaldson, 1997;Muth and
Donaldson, 1998). According to the steward theory, a managers
objective is primarily to maximize the firms performance because a
managers need of achievement and success are satisfied when the
firm is performing well. One key distinguishing feature of the
theory of stewardship is that it replace theory refers with respect
for authority and inclination to ethical behaviour. The theory
considers the following summary as essential for ensuring effective
corporate governance in entity. Board of Directors: the involvement
of non-executive directors (NEDS) is viewed as critical to enhance
the effectiveness of the boards activities because executive
directors fully enhance decision making and ensure the
sustainability of the business. Leadership: Contrary to agency
theory, the stewardship theory stipulates that the positions of CEO
and boards chair should be concentrated in the same individual. The
reason being that it affords the CEO the opportunity to carry
through decision quickly without the hindrance of undue
bureaucracy. We must rather point out that this position has been
found to create higher agency costs. The argument is that when
governance structures are effectively working, there should not be
undue bureaucratic delays in any decision-making. Board Sizes:
Finally, it is argued that small board size should be encouraged to
promote effective communication and decision-making. However, the
theory does not stipulate a rule for determining the optimal board
size and for that matter what constitute small.Resource Dependency
Theory: This theory introduces accessibility to resources, in
addition to the separation of ownership and control, as a critical
dimension to the debate on corporate governance.Again the theory
points out that organization usually tend to reduce the uncertainty
of external influence by ensuring that resources are available for
their survival and development. By implication, this theory seems
to suggest that the issue of dichotomy between executive and
non-executive directors is actually irrelevant. How then does a
firm operate efficiently? To resolve this problem, the theory
indicates that what is relevant is the firms presence on the boards
of directors of the organizations to establish relationships in
order to have access to resources in the form of information which
could then be utilized to the firms advantage. Hence, this theory
shows that the strength of a corporate organization lies in the
amount of relevant information it has at its disposal.In the height
of the foregoing analysis, it is clear that governance mechanism
seeks to protect the interest of all stakeholders of a firm. In
recent times, the structures of laws and accountability issues
regarding corporate governance is changing world wide and directors
are being held responsible every day for the success and failures
of the companies the governance.Corporate boards are responsible
for major decisions like changing corporation by laws, issues of
shares, declaiming dividends etc. this explains to some extent, the
reason why discussions of corporate governance usually focus on
boards. The board of directors is the apex of the controlling
system in an organization and is there to ensure that the interests
of shareholders are protected (Jensen 1993 and Short et al, 1998).
It acts as the fulcrum between the owners and controllers of the
corporation (Monks and Minow, 2001) and regarded as the single most
important corporate governance mechanism (Blair, 1995). The boards
of directors are the institution to which managers of a company are
accountable before the law for the companys activities Oxford
Analytical Ltd 1992: 7).2.3Conceptual Frame work2.3.1 Concept of
Corporate GovernanceCorporate governance relates to relationship
between firms various legitimate stakeholders. Corporate governance
is about making certain that the company is directed appropriately
for reasonable return on investments (Magdi and Nadereh, 2002). It
is considered to be a process in which affairs of the firm are
directed and controlled so as to protect the interest of all
stakeholders (Sullivan, 2009). 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
(Uche, 2004 and Akinsulire, 2006).Corporate governance is concerned
with the processes, systems, practices and procedures that govern
institutions. It is also concerned with the resolution of
collective action problems among dispersed investors and the
reconciliation of conflicts of interest between various corporate
claim holders, corporate governance rules can be seen as the
outcome of the contracting process between the various principals
or constituencies and the CEO (Becht et al, 2005). There are other
perspectives on corporate governance, the corporations perspective
and the public policy perspectives. The corporations perspective is
about maximizing value subject to meeting the corporations
financial, legal, contractual, and other obligations. This
perspective stresses the need for boards of directors to balance
the interests of shareholders with those of other stakeholders:
employees, customers, suppliers, investors, etc. In order to
achieve long term sustained value for the corporation. From a
public policy perspective, corporate governance is about nurturing
enterprises while ensuring accountability in the exercise of power
and patronage by firms. The role of public policy is to provide
firms with the incentives and discipline to minimize the divergence
between private and social returns and to protect the interests of
stakeholders. These two perspectives provide a framework for
corporate governance that reflects the interplay between internal
incentives and external forces that govern the behavior and
performance of the firm (Iskander, Magdi and Chamlou, 2000).2.3.2
Overview of Bank Corporate Governance in Nigeria Effective
corporate governance practices are essential to achieving and
maintaining public trust and confidence in the banking system,
which are critical to proper functioning of the banking sector and
economy as a whole. Poor corporate governance may contribute to
bank failures, which could lead to a run on the bank, unemployment
and negative impact on the economy. Effective corporate governance
is likely to give a bank access to cheaper sources of funding
through improving their reputation with rating agencies, customers
and investors. The corporate governance landscape in Nigeria has
been dynamic and generating interest from within and outside the
country. In 2003, the Securities and Exchange Commission (SEC)
adopted a Code of Best Practices on Corporate Governance for
publicly quoted companies in Nigeria. At the end of the
consolidation exercise in the banking industry, the CBN in March
2006 released the Code of Corporate Governance for Banks in
Nigeria, to complement and enhance the effectiveness of the SEC
code. The three major governance issues that attracted the
attention of the regulators are related party transactions,
conflict of interest and creative accounting. Globally, corporate
governance practices in the banking industry have attracted special
attention because of the importance of the industry to most
economies. This led to the Organization for Economic Co-operation
and Development (OECD) playing active role in defining guidelines
for corporate governance in the banking industry through its Basel
Committee on Banking Supervision.According to the Basel Committee
on Banking Supervision (2006), corporate governance from a banking
industry perspective involves the manner in which the business and
affairs of banks are governed by their boards of directors and
senior management, which affects how they: Set corporate
objectives; Operate the banks business on a day-to-day basis; Meet
the obligation of accountability to their shareholders and take
into account the interests of other recognized stakeholders; Align
corporate activities and behaviour with the expectation that banks
will operate in a safe and sound manner, and in compliance with
applicable laws and regulations; and Protect the interests of
depositors. The Basel Committee on Banking Supervision came up with
the following principles, which are viewed as important elements of
an effective corporate governance process. Principle 1 Board
members should be qualified for their positions, have a clear
understanding of their role in corporate governance and be able to
exercise sound judgment about the affairs of the bank. This is
because the board of directors is ultimately responsible for the
operations and financial soundness of the bank. In addition the
board and individual directors can strengthen the corporate
governance of a ban when they do the following: Understand and
execute their oversight role; Approve the overall business strategy
of the bank; Avoid conflict of interest in their activities; Commit
sufficient time and energy to fulfilling their responsibilities;
Periodically assess the effectiveness of their own governance
practices; Avoid participation as the board of directors in
day-to-day management of the bank. For effective corporate
governance boards are expected to function with specialized
committees which include Audit committee, Risk management
committee, Compensation committee, and Nomination/corporate
governance committee. Principle 2 The board of directors should
approve and oversee the banks strategic objectives and corporate
values that are communicated throughout the banking organization.
This implies that the board must set the tone at the top and build
a corporate culture that will drive good corporate governance. The
board of directors should ensure that senior management implements
the agreed strategy of the bank and strategic policies and
procedures designed to promote professional behavior and integrity
in the bank. Principle 3 The board of directors should set and
enforce clear lines of responsibility and accountability throughout
the bank. This means that the authorities and key responsibilities
of the board and senior management are very clear to avoid
confusion. Principle 4 The board should ensure that there is
appropriate oversight by senior management consistent with board
policy. Principle 5 The board should ensure that compensation
policies and practices are consistent with the banks corporate
culture, long-term objectives and strategy, and control
environment. Principle 6 The bank should be governed in a
transparent manner since transparency is essential for sound and
effective corporate governance. The Basel Committee recognizes that
primary responsibility for good corporate governance rests with the
board of directors and senior management of banks. 2.3.3 Corporate
Governance Mechanism and Bank Performance Measures Prior studies on
the relationship between corporate governance mechanisms and
corporate performance are seen to include various internal and
external mechanisms, among which board size, board composition,
board committees, CEOs position-duality, CEOs incentives and
ownership interest, ownership concentration of insiders and
outsiders, multiple directorships, debt financing, market for
corporate control etc. are mentionable. However, this section of
the chapter reviews only mechanism relevant to the scope of this
study. These include: Board size, CEO duality, Audit committee
independent, size of the audit committee, company size and debt
financing1. Board Size Board size refers to the total number of
directors on the board of any corporate organization. While a
number of authors have recommended large board size, there are
others who believe that a small board size is the ideal thing for
any firm that wants to sustain improved performance. Determining
the ideal board size for organizations is very important because
the number and quality of directors in a firm determines and
influences the board functioning and hence corporate
performance.There is a convergence of agreement on the argument
that board size is associated with firm performance. However,
conflicting results emerge on whether it is a large, rather than a
small board, that is more effective. For instance, while Yermack
(1996) had found that Tobins Q declines with board size, and this
finding was corroborated by those of Mak and Kusnadi (2005) and
Sanda, Mikailu and Garba (2005) which showed that small boards were
more positively associated with high firm performance. However,
results of the study of Kyereboah-Coleman (2007) rather indicated
that large boards enhanced shareholders wealth more positively than
smaller ones.Ogbechie, (2011) reveal that the average size of the
boards of Nigerian banks is 14 directors, with the smallest having
8 directors and the largest 20 directors. A board size of 16
directors is the most popular. The Central bank of Nigeria (CBN)
corporate governance code for banks operating in Nigeria recommend
a maximum board size of 20 directors. All the banks are compliant.
However, United Bank for Africa Plc has applied to the CBN for
approval to increase their board size to 24.2. CEO Duality
Separation of office of board chair and CEO Separation of office of
board chair from that of CEO generally seeks to reduce agency costs
for a firm. Kajola (2008) found a positive and statistically
significant relationship between performance and separation of the
office of board chair and CEO. Yermack (1996) equally found that
firms are more valuable when different persons occupy the offices
of board chair and CEO. Kyereboah-Coleman (2007) proved that large
and independent boards enhance firm value, and the fusion of the
two offices negatively affects a firms performance, as the firm has
less access to debt finance. The results of the study of Klein
(2002) suggest that boards that are structured to be more
independent of the CEO are more effective in monitoring the
corporate financial accounting process and therefore more valuable.
Fosberg (2004) found that firms that separated the functions of
board chair and CEO had smaller debt ratios (financial debt/equity
capital). The amount of debt in a firms capital structure had an
inverse relationship with the percentage of the firms common stock
held by the CEO and other officers and directors. This finding was
corroborated by Abor and Biekpe (2005), who demonstrated that
duality of the both functions constitute a factor that influences
the financing decisions of the firm. They found that firms with a
structure separating these two functions are more able to maintain
the optimal amount of debt in their capital structure than firms
with duality. Accordingly, they argued that a positive relationship
exists between the duality of these two functions and financial
leverage.2. Audit CommitteeConsistent with the agency theory, audit
committee works as an additional control mechanism that ensures
that the shareholders interests are being safeguarded. In
consistent with the Cadbury proposal as to formation of audit
committee, Central Bank of Nigeria and SEC have made it compulsory
for all banks to constitute a board audit committee consisting of a
minimum of seven (7) members and it will hold at least three
meetings in a year.The committee will review the financial
reporting process, the internal control system and management of
financial risks, the audit process, conflicts of interest,
infringement of laws etc. Thus, audit committee works as another
internal control mechanism in the board structure, the impact of
which should be to improve the quality of the financial management
of the company and hence its performance (Weir et al,
2002).Although results of Klein (2002) and Anderson, Mansi and Reeb
(2004) showed a strong association between audit committee and firm
performance, Kajola (2008) found no significant relationship
between both variables. This lack of consensus presents scope for
deeper research on the impact of this corporate governance
variable.
3. Size of the Audit CommitteeThis means the total number of
directors on the audit committee board. Bedard et al (2004) argue
that it is important to increase the number of members of the audit
committee to ensure more effective control of accounting and
financial processes. Similarly Pincus et al (1989) show that firms
with larger audit committees are expected to devote greater
resources to monitor the process of reporting accounting and
finance. In the same furrow, Anderson et al (2004) found that large
size audit committees can protect and control the process of
accounting and finance with respect to small committees by
introducing greater transparency with respect shareholders and
creditors which has a positive impact on the financial performance
of the company.4. The Independence of Audit Committee Members The
report of the Blue Ribbon Committee (BRC) considers independence as
an essential quality of the audit committee in order to fulfill its
oversight role. Indeed, this report argues that several recent
studies have identified a correlation between the independence of
the audit committee, the level of supervision and the level of
fraud in the financial statements Several previous studies use the
percentage of outside directors to measure independence like
Marrakchi et al (2001) and Bradbury et al (2006). In effect, these
studies note that audit committees composed mostly or exclusively
by outside directors are more independent than other committees.
Similarly, Klein (2002) shows that following the publication of the
BRC, the NYSE and NASDAQ have changed their requirements concerning
the audit committee. Indeed these amendments concern the obligation
to establish at least three independent directors on the audit
committee for listed companies. Bryan et al (2004) find that the
independence of the audit committee has a positive influence on the
quality of earnings. In addition, in a study on the main
characteristics of audit committees, Keasey et al (1993) show that
the independence of the members of the audit committee is the most
important criterion with effect on the reliability of financial
statements. 4. Company SizeThe size of company (proxied by total
assets) is considered in this study as control variable to have a
relationship with other factors, for example, there is a strong
relationship between firm size and CEO compensation (e.g., Murphy,
1985). The literature is in harmony with this tendency. On average,
larger companies are better performers as they are able to
diversify their risk (Ghosh, 1998).Furthermore, larger company has
larger market share and market power in respect of customers and
volume of investment. Larger firms have larger investors bases than
smaller ones. Again, company size may be measured in different ways
such as sales turnover, total assets, capital employed, etc. In
this study, total assets have been used as the measure of company
size. Actually, to measure the magnitude of a company, total assets
is such a determinant that may preferably be used than other
measures as the accounting measure because sometimes a medium firm
may have larger sales volume, for example, due to increase in
assets turnover.5. Debt FinancingDebt financing or leverage may
play a significant role in governance mechanisms especially in the
banking sector for two unique characteristics of banks: Opacity and
strong regulations. Due to opacity, depositors do not know the true
value of a banks loan portfolio as such information is
incommunicable and very costly to reveal, implying that a banks
loan portfolio is highly fungible (Bhattacharya et al., 1998). As a
consequence of this asymmetric information problem, bank managers
have an incentive each period to invest in riskier assets than they
promised they would ex ante (Arun and Turner, 2003). The opaqueness
of banks also makes it very costly for depositors to constrain
managerial discretion through debt covenants (Capiro and Levine,
2002). Referring different studies Haniffa and Hudaib (2006) assert
that debt forces managers to consume fewer perks and become more
efficient to avoid bankruptcy, the loss of control as well as loss
of reputation (Grossman and Hart, 1982). Debt contracting may also
result in improved managerial performance and reduced cost of
external capital (John and Senbet, 1998). In short, debt may help
yield a positive disciplinary effect on performance. On the other
hand, debt can increase conflicts of interest over risk and return
between creditors and equity holders. Like other variables,
relationship of gearing ratio with performance shows conflicting
results in different studies. Dowen (1995), McConnell and Servaes
(1995), Short and Keasey (1999) and Weir et al. (2002) found a
significant negative relationship between gearing and corporate
performance. However, Hurdle (1974) found gearing to affect
profitability positively.2.3.4.2 Bank Performance MeasuresA
companys operations and successfulness are integrally connected.
Studies show that then concept of companys performance is
multidimensional. But the fact is that the companys investors,
shareholders and other stakeholders find its successfulness in the
financial performance. The financial performance measures can be
divided into two major types: 1. Accounting- based measures (e.g.,
Return on Assets, Return on Equity, or Return on Sales), and 2.
Market- based measures (e.g. Tobins Q ratio). There has been
extensive empirical research using different performance measures
for examining the relationship between corporate governance and
firms performance. There are some researches where either
accounting-based measure or market-based measure has been used but
some researchers have used both the measures. When both the
measures have been used, almost all the researchers have found
significant relationship with one measure but no relationship with
other measures. This may be attributed for using different type of
numerators and denominators used for calculating financial
performance. Different researchers argue differently in favour of
their using measurement base. Some argue that if the capital market
is unstructured and much volatile, Tobins Q ratios of different
companies give misleading results. Accounting measures have been
criticized on the grounds that they are subject to manipulation,
that they may systematically undervalue assets as a consequence of
accounting conservatism and that they may create other distortions
as well (Sanchez-Ballesta and Garcia-Meca, 2007). Joh (2003) argues
that accounting profitability is a better performance measure than
stock market measures for at least three reasons. First, market
anomalies may act as an impediment to all available information
being reflected in the stock price. Second, a firms accounting
profitability is more directly related to its financial
survivability than is its stock market value. Finally, accounting
measures allow users to evaluate the performance of privately held
firms as well as that of publicly traded firms. 2.4Review of
Empirical StudiesThere exist a plethora of studies that seek to
examine the influence of corporate governance on firms performance.
This section of the chapter examines some of these studies.Yinusa
and Babalola (2012) investigated the interaction between corporate
governance mechanisms and capital structure decisions of Nigerian
firms. Panel data methodology was employed to analyse the data for
the selected foods and beverages companies and the results show
that corporate governance has important implications on the
financing decisions. They concluded that corporate governance can
greatly assist the food and beverages sector by infusing better
management practices, effective control and accounting systems,
stringent monitoring, effective regulatory mechanism and efficient
utilization of firms resources resulting to improved performance if
it is properly and efficiently practice.Abdul-Qadir and Kwanbo,
(2012) studied corporate Governance and Financial Performance of
Banks in the post-consolidation era in Nigeria using data from the
period 2006-2010. The study employed the use of t-test and ANOVA to
test the three hypotheses formulated for the study. Findings
revealed a significant impact of dispersed equity on the
profitability of banks and an insignificant impact of board size on
profitability. Mohammad, Islam and Ahmed, (2011) empirically
investigated the influence of corporate governance mechanisms on
financial performance of 25 listed banking companies in Bangladesh
over the period 2003- 2011. Estimated results demonstrate that the
general public ownership and the frequencies of audit committee
meetings are positively and significantly associated with return on
assets (ROA), return on equity (ROE) and Tobins Q while Directors
ownership and independent directors have significant positive
effects on bank performance measured by Tobins Q.Mohammed, (2012)
in a related study investigated the Impact of Corporate Governance
on Banks Performance in Nigeria. The study made use of secondary
data obtained from the financial reports of nine (9) banks selected
for a period of ten (10) years (2001- 2010). Data were analyzed
using multiple regression analysis. Finding revealed that corporate
governance positively affects performance of banks. The findings of
the study further show that poor asset quality (defined as the
ratio of non-performing loans to credit) and loan deposit ratios
negatively affect financial performance and vice visa.Ogbechie,
(2011) studied corporate governance practices in Nigerian banks
with regards to board characteristics, performance, culture and
processes, and board effectiveness. The study also attempted to
identify the level of compliance of Nigerian banks to the Central
Bank of Nigeria (CBN) code of corporate governance for banks
operating in Nigeria. Empirical findings indicate that boards of
Nigerian banks frequently undertake evaluation of their activities
as a means of improving performance. It was also revealed that
almost all the banks have been compliant with nearly all the
Central Bank of Nigeria (CBN) corporate governance guidelines.
Cheng Wu, Chiang Lin, Cheng Lin and Chun-Feng, (2008) examined the
impact of the corporate governance mechanism on firm performance.
Return on assets, stock return and Tobins Q were the variables used
in the regression model to measure firms performance. The empirical
results indicate that firm performance has negative and significant
relation to board size, CEO duality, stock pledge ratio and
deviation between voting right and cash flow right. On the other
hand, firm performance has a positive and significant relation to
board independence and insider ownership.Ahmad, (2003) investigated
the impact of corporate governance on banking performance in
Pakistan. The study measured efficiency of banks using Cobb-Douglas
cost function for the year 2000-2002. It is evident from the
results that on average, overall efficiency remains about 82
percent throughout the period of analysis. However, it is observed
that public ownership show lowest efficiency among all the groups
i.e., 74 percent on average, which emphasizes on a competitive
environment in the banking sector that may improve the efficiency
of these institutions. Similarly, market share also affects the
performance of banks negatively, suggesting that banks in a less
competitive environment might feel less pressure to control their
costs. Moreover, introduction of governance variables such as sound
management and concentration have significant impact on banking
efficiency. Omankhanlen et al (2013) investigated the role of
corporate governance in the growth of Nigerian Banks. A multiple
linear regression analysis involving ordinary least square was
employed to test the hypotheses. The statistical significance of
the variables was first determined using ANOVA statistics. The
findings reveal that the problems of corporate governance in the
Nigerian banking sector include: instability of board tenures,
board squabbles, ownership crises, high level of insider dealings
While the weaknesses of corporate governance have been identified
to include ineffective board oversight functions, disagreement
between boards and management giving rise to board squabbles, lack
of experience on the part of the Board of directors members and
weak internal control. Adeyemi and Ajewole (2004) examine corporate
governance issues and challenges in the Nigerian banking sector.
Both primary and secondary sources of data were made use of. The
primary data collected through the use of questionnaire were
analyzed using simple descriptive statistics. Findings from the
study showed that the Nigerian banking sector is yet to learn from
the sad consequences of poor corporate governance of the period
between 1994-2003 in particular. Akpan and Riman (2012) examined
the relationship between corporate governance and banks
profitability in Nigeria. The study discovered that good corporate
governance and not assets value determine the profitability of
banks in Nigeria. Ayorinde et al (2012) examined the effects of
corporate governance on the performance of Nigerian banking sector.
The secondary source of data was sought from published annual
reports of the quoted banks. The Person Correlation and the
regression analysis were used to find out whether there is a
relationship between the corporate governance variables and firms
performance. The study revealed that a negative but significant
relationship exists between board size and the financial
performance of these banks while a positive and significant
relationship was also observed between directors equity interest,
level of corporate governance disclosure index and performance of
the sampled banks. Onakoya (2011) examines the impact of corporate
governance on bank performance in Nigeria during the period 2005 to
2009 based on a sample of six selected banks listed on Nigerian
Stock Exchange market making use of pooled time series data.
Findings from the study revealed that corporate governance have
been on the low side and have impacted negatively on bank
performance. The study therefore contends that strategic training
for board members and senior bank managers should be embarked or
improved upon, especially on courses that promote corporate
governance and banking ethics.Ganiyu and Abiodun (2012) examined
the interaction between corporate governance mechanisms and capital
structure decisions of Nigerian firms by testing the corporate
governance and capital structure theories using sample of ten
selected firms in the food and beverage sector listed on the
Nigeria Stock Exchange during the periods of 2000 2009. Panel data
methodology was employed to analyse the data for the selected foods
and beverages companies and the results show that corporate
governance has important implications on the financing decisions.
Corporate governance can greatly assist the food and beverages
sector by infusing better management practices, effective control
and accounting systems, stringent monitoring, effective regulatory
mechanism and efficient utilization of firms resources resulting in
improved performance if it is properly and efficiently
practiced.Hoque et al (2012) empirically investigated the influence
of corporate governance mechanisms on financial performance of 25
listed banking companies in Bangladesh over the period 2003-2011.
Estimated results demonstrate that the general public ownership and
the frequencies of audit committee meetings are positively and
significantly associated with return on assets (ROA), return on
equity (ROE) and Tobins Q. Directors ownership and independent
directors have significant positive effects on bank performance
measured by Tobins Q.Chiang (2005) argues that as the independent
directors are more specialized to monitor the board than the inside
directors to run the business successfully by reducing the
concentrated power of the CEO, it helps the company to prevent
misuse of resources and enhance performance.Krivogorsky (2006) also
observes significant positive relationship between independent
directors and performance of 81 European companies. In contrast,
directors who are unrelated to the firm may lack the knowledge or
information to be effective monitors. Yermack (1996), Agrawal and
Knoeber (1996) and Bhagat and Black (1998) find a negative
relationship between the proportion of independent directors and
performance.2.5Conclusions In conclusion, the review of prior
studies has identified ten corporate governance characteristics
that impact on firms performance, albeit with mixed evidence as to
the direction of the relation. Nevertheless, almost all this body
of literature examined the relationship between corporate
governance and firms performance during economically healthy
periods without any financial distress.As expected, the researchers
differ on the extent to which corporate governance influences the
performance of firms. Furthermore, each research study considered
different set of factors and used variety of measurements to assess
the performance of firms under investigation. Also most of these
study focus on advance countries of Asia, Europe and America with
Africa and Nigeria in particular receiving less research attention.
This study therefore seeks to fill this gap that has hitherto
existed in literature by empirically examining the impact of
corporate governance mechanism on performance of commercial banks
in Nigeria.
CHAPTER THREERESEARCH METHODOLOGY3.1IntroductionThis chapter
examines the methodology that will be utilized to reveal some
statistical details about impact of corporate governance on banks
performance in Nigeria. This chapter will mainly focus on the
research design, the population and sample of the study, Sources of
data collection, Techniques of data analysis, definition of
variable/model specification and weaknesses of the
methodology.3.2Research DesignThis study adopts the ex-post facto
research design. This research design is adopted for this study
because of its strengths as the most appropriate design to use when
it is impossible to select, control and manipulate all or any of
the independent variables or when laboratory control will be
impracticable, costly or ethically questionable (Akpa and Angahar,
1999).
3.3Population of the StudyA population is an aggregation of
survey elements with common features or characteristics that are of
interest to the researcher. The population of this study in view of
the above definition covers all the 21 banks quoted on the Nigerian
stock exchange as at 19th August 2014.3.4Sample Size of the
StudyThe sample is a subset of the population selected for the
study or investigation. This study purposively selects six (6)
commercial banks namely Zenith Bank Plc, Guarantee Trust Bank (GTB)
Plc, First Bank Plc, Fidelity Bank Plc, Union Bank Plc, United Bank
for Africa (UBA) Plc from the existing 21 banks to constitute the
sample size of the study. The following criteria were taken into
cognizance in the selection process. The commercial banks selected
were only those that survived the 2005 recapitalization exercise of
the CBN without changing their identity. The commercial banks
selected for the study must be from the list of commercial banks
that the CBNs and World Banks ranking were adjudged to be the best
performing banks in terms of strong and vibrant banks (Vanguard 3,
July 2011). 3.5Sources of Data CollectionThis study adopts majorly
the secondary kind of data in obtaining all the information there
in. The financial statement of the six (6) sampled commercial banks
from the period 2005-2012 forms the major sources of data for this
study (e.g. see appendix I).3.6Techniques of Data AnalysisThe
following statistical tools will be employed in the analysis of
data generated from the annual financial statement of the six (6)
sampled commercial banks listed above: Descriptive statistics and
multiple regression statistics. The multiple regression using the
ordinary least squares (OLS) method was adopted for the analysis.
The OLS method was preferred because it minimizes the errors
between the points on the line and the actual observed points of
the regression line by giving the best fit. 3.7Definition of
VariablesThis study employed the following variables which are
briefly explained below. Return on equity (ROE): This is an
accounting based performance indicator of companies. It measures
the returns accruable to shareholders from their equity holdings.
It is given by net profit /Shareholders equity. Board size (BS):
Board size refers to the total number of directors on the board of
a bank. Independence of the Audit Committee (IAC): This refers to
the proportion of independent directors on the audit committee.
Size of Audit Committee: This is the total number of auditors that
constitute the audit committee of a bank. CEO Duality: This is a
situation where one individual occupies the positions of CEO and at
the same time the board chairperson of a company, thus increasing
the concentration of power in one individual and undue influence of
particular management and board members. CEO duality exists in a
situation where the owner of the company in question still doubles
as the chief executive officer (CEO) of the company.
3.8Model SpecificationThe following model has been formulated to
guide the researcher in the investigation.ROE = + 1 BS + 2IDA+ 3
SAC +uWhere,ROE = Return on EquityBS = Board SizeIDA = independence
of the Audit Committee MembersSAC = Size of the audit committee =
alpha, which represents the model constant1 4 =Beta, representing
the coefficients of variables used in the model.u = is the
stochastic variable representing the error term in the model. It is
usually estimated at 5% (0.05) level of significance.
Decision RuleThis study shall accept and reject the null and
alternative hypotheses using the following set criteria. Accept the
null hypothesis if the critical value of t at 0.05 level of
significance in the t-table is greater than the calculated value.
Reject the null hypothesis if the critical value of t at 0.05 level
of significance is less than the calculated value3.9 Weaknesses in
the MethodologyThere is no methodology that has no inherent
weakness. It is only left for the researcher to minimize them. The
weakness of this studys methodology is briefly discussed in
subsequent paragraphs.Over reliance on secondary data is another
weakness of the methodology. Financial statements published do not
have 100 %accuracy, so its reliability is not assured. The
occurrence of inflation as well affects the secondary data.Also as
a weakness of the methodology is the erroneous assumption of the
ability of linear and multiple regressions to validly project into
the future past relationship whereas the relationship between the
dependent and independent variables established is only valid
across the relevant range. Furthermore the model equations are only
estimations of the independent value, the researcher cannot
possibly account for every factor that goes into each independent
value, and there will always be some error (either pure error or
lack of fit error) in a regression model.The above weaknesses
notwithstanding, the intent of the research may not be deterred as
the error term included in the models specified above takes care of
any information asymmetry either caused by inflation or reporting
misfeasance. The researcher also made use of SPSS version 20 for
windows application software to run the regression model for a more
reliable result that reflect current realities in the banking
sector and findings to meet all academic standards. Also the
secondary data used in this study will be sourced from reliable
source and human subjectivity will be suppressed to the barest
minimum so as to enable the researcher have a result devoid of
manipulation.
CHAPTER FOURDATA PRESENTATION, ANALYSIS AND
FINDINGS4.1IntroductionThis chapter focuses on the presentation and
analysis of data. In this regard, this chapter therefore presents
findings from data analysis using the research method earlier
explained in chapter three. This chapter will first present and
analyse the data, test the hypotheses and interpret and discuss the
findings of the study.4.2Data Presentation and AnalysisThis section
of the chapter presents and analyse the data extracted from the
annual financial statement of the commercial banks sampled for the
study (see appendix I for the raw data). Data analysis here was
done with the aid of the statistical package for social science
(SPSS version 20). As a reminder, this study has only one dependent
variable: Return on equity (ROE), three independent variables:
board size (BS), independence of audit committee (IDA), and size of
the audit committee (SAC). The analysis of data is presented in the
subsequent sections.
4.2.1 Data Validity TestThe researcher computed several
diagnostic tests such as Durbin Watson test, variance inflation
factor (VIF) and Tolerance statistics in order to ensure that the
results of this study are robust. This is shown in table 4.1, 4.3
& 4.4. The Durbin Watson statistics is estimated at 2.0 (see
table 4.3) which is equal to the standard internationally
recognized 2 (Gujarati, 2007). This thus indicates the absence of
auto-correlation. The Durbin Watson statistics ensures that the
residuals of the proceeding and succeeding sets of data do not
affect each other to cause the problem of auto-correlation.The
Variance Inflation Factor (VIF) statistics for all the independent
variables consistently fall below 2 (see table 4.4). This indicates
the absence of multicollinearity problems among the variables under
investigation (see Berenson and Levine, 1999). This statistics
ensures that the independent variables are not so correlated to the
point of distorting the results and assists in filtering out those
ones which are likely to impede the robustness of the model. There
is no formal VIF value for determining presence of
multicollinearity. Values of VIF that exceed 10 are often regarded
as indicating multicollinearity, but in weaker models values above
2.5 may be a cause for concern (Kouisoyiannis, 1977: Gujarati and
Sangeetha, 2007). Thus, this model exhibit low risk of potential
multicollinearity problems as all the independent variables have a
variance inflation factor (VIF) below 10 (Myers, 1990). This shows
the appropriateness of fitting of the model of the study with the
three (3) independent variables.In addition, the tolerance values
consistently lies between 0.945 and 0.996 (see table 4.4). Menard
(1995) suggested that a tolerance value of less than 0.1 almost
certainly indicates a serious collinearity problem. In this study,
the tolerance values are more than 0.1; this further substantiates
the absence of multicollinearity problems among the explanatory
variables.4.2.1.1 Correlation ResultsThis section of the chapter
presents in the table below the results of the correlation results
between the dependent and explanatory variables.
Table 4.1: Correlations Result for All Variables
ROEBSIDASAC
ROEPearson Correlation1.310*.119.300*
Sig. (2-tailed).030.414.036
N49494949
BSPearson Correlation.310*1-.050.228
Sig. (2-tailed).030.732.115
N49494949
IDAPearson Correlation.119-.0501.026
Sig. (2-tailed).414.732.861
N49494949
SACPearson Correlation.300*.228.0261
Sig. (2-tailed).036.115.861
N49494949
*. Correlation is significant at the 0.05 level (2-tailed).
Source: SPSS Version 20 outputTable 4.1 shows the Pearson
product movement correlation for all the variables. Correlations
result here is used as further check for data validity. These types
of checks are necessary because high correlation cause problems
about the relative contribution of each predictor to the success of
the model (Guajariti, 2007). The correlation matrix above shows the
absence of multicollinearity among the explanatory variables as all
the variables are very low with the highest correlation estimated
at 0.310. This is less than 0.75 which is considered harmful for
the purpose of analysis (see Gujarati and Sangeeta, 2007, Berenson
and Levine, 1999).
4.2.3 Descriptive StatisticsThis subsection of the chapter
presents and analyses the descriptive statistics for both the
dependent and independent variables. The results are presented in
table 4.2 and explained subsequently. Table 4.2: Descriptive
Statistics for all Variables
NMinimumMaximumMeanStd. Deviation
ROE4911.6239.4522.69456.63261
BS4911.0020.0015.00002.09165
IDA493.005.003.2449.59619
SAC495.006.005.8980.30584
Valid N (listwise)49
Source: SPSS Version 20 outputTable 4.2 presents the descriptive
statistics for all the variables. N represents the number of paired
observations and therefore the number of paired observation for
this study is 49. The performance of the selected commercial banks
proxied by Return on equity (ROE) reflects a low mean of 22.7% with
fluctuations of just 6.6. The maximum value during the period of
observation is at 39.45, and the minimum value during the period of
observation is at 11.62 while the maximum value of 39.45 indicates
the highest ROE value from the sampled banks. This result implies
that on average, shareholders of Nigerian commercial banks gets
returns of 22.7% on their equity investment during the period under
investigation. This reveals poor performance of the sampled
commercial banks in terms of returns to the shareholders. The
reason for this may be that, most firms make minimal profits and
still pay taxes and other deductibles before declaring dividend to
their owners.The result of the descriptive analysis further
reflects a mean of 15 in respect to the Board Size (BS) with a
fluctuation of 2. This implies that on average, the number of
persons who constitute the Board Size of commercial bank during the
period under investigation is 15. The minimum and maximum mean
stood at 11 and 20 respectively indicating that on average, the
minimum number of persons that constitute the board size of
commercial banks is 11 and the maximum is 20 in the period under
investigation.The independence of audit committee of commercial
banks in Nigeria reflects a mean of 3 persons with a standard
deviation of 1. This implies that on average, the sampled
commercial banks have at least three independent directors on the
audit committee during the period under investigation. This is also
in line with statutory requirements of the CBN. The minimum and
maximum mean stood at 3 and 5 respectively. This indicates that on
average, the minimum number of persons that constitute the
independent members of the audit committee is 3 and the maximum is
5 in the period under investigation Finally, the mean size of the
audit committee (SAC) is estimated at 6 with a fluctuation of 0.
This also implies that on average, the number of persons that
constitute size of the audit committees of the sampled commercial
banks is six (6) which is in line with statutory requirements of
the CBN. The minimum and maximum mean stood at 5 and 6
respectively. This indicates that on average, the minimum number of
persons that constitute the size of the audit committee is 5 and
the maximum is 6 in the period under investigation.4.2.4 Regression
Results of the Estimated Model SummaryThis section of the chapter
presents the results produced by the model summaries for further
analysis.Table 4.3: Model Summaryb
ModelRR SquareAdjusted R SquareStd. Error of the EstimateChange
StatisticsDurbin-Watson
R Square ChangeF Changedf1df2Sig. F Change
1.409a.167.1126.25047.1673.016345.0402.034
a. Predictors: (Constant), SAC, IDA, BS
b. Dependent Variable: ROE
Source: SPSS Version 20 outputTable 4.3 presents the summary of
results for all the variables. From the model summary table above,
the R value of 0.409 shows that there is a weak relationship
between the dependent and independent variables. The R2 stood at
0.167. The R2 otherwise known as the coefficient of determination
shows the percentage of the total variation in the dependent
variable (ROE) that can be explained by the independent or
explanatory variables (BS, IDA and SAC). Thus the R2 value of 0.167
indicates that 16.7% of the variation in the Return on equity (ROE)
of commercial banks can be explained by the variation in the
independent variables: (BS, IDA and SAC) while the remaining 83.3%
(i.e. 100-R2) could be explained by other variables not included in
this model. The adjusted R2 of 0.112% indicates that if the entire
population is considered for this study, this result will deviate
from it by 5.5% (i.e. 16.7 11.2). This result implies that the
performance of commercial banks in Nigeria herein measured by
return on equity (ROE) is not very responsive to corporate
governance mechanism herein measured by BS, IDA and SAC. This is
why other factors account for most of the variation in performance
of Nigerian commercial banks.The results further reveals an
F-statistics of 3.016 which indicate that the set of independent
variables were as a whole contributing to the variance in the
dependent variable and that there exist a statistically significant
relationship at 0.040 (4.8%) between ROE and the set of predictor
variables (BS, IDA, SAC) indicating that the overall equation is
significant at 4.0% which is below 5% level of significance.In
conclusion, the results of the model summary in table 4.3 revealed
that, other factors other than corporate governance measures (BS,
IDA, and SAC) contribute mostly to the variation in performance
(ROE) of commercial banks in Nigeria. 4.2.5 Regression Coefficients
ResultsRegression analysis is the main tool used for data analysis
in this study. Regression analysis shows how one variable relates
with another. The result of the regression is here by presented in
this section.
Table 4.4: Coefficients Result for all the Independent
Variables
ModelUnstandardized CoefficientsStandardized
CoefficientstSig.95.0% Confidence Interval for
BCorrelationsCollinearity Statistics
BStd. ErrorBetaLower BoundUpper
BoundZero-orderPartialPartToleranceVIF
1(Constant)-24.67418.206-1.355.182-61.34211.995
BS.831.444.2621.872.068-.0631.724.310.269.255.9451.058
IDA1.4061.516.126.927.359-1.6484.460.119.137.126.9961.004
SAC5.1463.032.2371.697.097-.96111.252.300.245.231.9471.056
a. Dependent Variable: ROE
Source: SPSS Version 20 output.The regression result as
presented in table 4.4 above to determine the influence of
corporate governance on the performance of commercial banks
revealed that when all the explanatory variables are held
stationary; the performance variable (ROE) is estimated at -24.674.
This simply implies that when all variables are held constant,
there will be an insignificant negative return on equity (ROE) up
to the tune of -24.674 units occasioned by factors not incorporated
in this study. Thus, a unit change in the board size (BS) will lead
to an insignificant increase in the return on equity (ROE) by 26.2%
units. Similarly a unit change in the number of the independent
audit committee will lead to an insignificant increase in ROE by
12.6% units. Finally, a unit change in size of the audit committee
(SAC) will lead to an insignificant increase in ROE by 23.7% units.
4.3Test of Research HypothesesTable 4.4 displays t-values for the
independent variable regressed with ROA and ROE. These t-values
will be used for testing the studys formulated hypotheses in
consonance with the decision rule earlier stated in chapter three
(section 3.8). These tests are performed in the following
subsections.4.3.1 Test of Hypothesis OneHo1: There is no
significant relationship between Board size the return on equity
(ROE) of commercial banks in Nigeria.
Given that the critical value of t is 2.021 and the calculated
values of t is 1.872 which less than the critical value. The
researcher therefore accepts the null hypothesis and rejects the
alternative hypothesis and thus concludes that there is no
significant relationship between Board size the return on equity
(ROE) of commercial banks in Nigeria.4.3.2 Test of Hypothesis
TwoHo2: There is no significant relationship between audit
committee independence and the return on equity (ROE) of commercial
banks in Nigeria.Given that the critical value of t is 2.021 and
the calculated values of t is 0.927 which less than the critical
value. The researcher therefore accepts the null hypothesis and
rejects the alternative hypothesis and thus concludes that there is
no significant relationship between audit committee independence
and the return on equity (ROE) of commercial banks in Nigeria.4.3.3
Test of Hypothesis ThreeHo3: There is no significant relationship
between size of the audit committee and the return on equity (ROE)
of commercial banks in Nigeria.
Given that the critical value of t is 2.021 and the calculated
values of t is 1.697 which less than the critical value. The
researcher therefore accepts the null hypothesis and rejects the
alternative hypothesis and thus concludes that there is no
significant relationship between audit committee independence and
the return on equity (ROE) of commercial banks in
Nigeria.4.4Discussion and Interpretation of ResultsThis studys
first objective was concerned with examining the extent to which
board size (BS) influences the performance of commercial banks in
Nigeria. Consequently, the null hypothesis was formulated in line
with this objective and was tested using the t-test statistics at
5% level of significance. Findings from this test reveal that board
size (BS) does not significantly influence the performance (i.e.
ROE) of Nigerian commercial banks. This finding corroborates the
findings of Holthausen and Larcker (1993) who found no significant
association between board size and performance of companies. The
second objective of this studys was concerned with investigating
the extent to which independent of audit committee significantly
influences the performance of commercial banks in Nigeria.
Consequently, the null hypothesis was also formulated in line with
this objective and was tested using the t-test statistics at 5%
level of significance. Findings from this study reveal that the
independence of the audit committee does not significantly
influence the performance of commercial banks in Nigeria. This
finding is inconsistent with the recent study of Bouaziz, (2012)
who found that the independence of audit committee members
positively and significantly influences the financial performance
of Tunisian companies. This finding also is contrary to the study
of Klein (1998) which shows that the allocation of external
directors (independent) within the audit committee is likely to
improve the financial performance of the company. Also the third
objective of this study which was interested in examining the
extent to which size of the audit committee of Nigerian commercial
banks significantly influences performance. Consequently, the null
hypothesis was also formulated in line with this objective and was
tested using the t-test statistics at 5% level of significance.
Findings from this study reveal an insignificant influence of the
size of the audit committee (SAC) on the performance of commercial
banks in Nigeria. This finding is inconsistent with findings of
Bouaziz (2012) who found a significant relationship between size of
audit committee and financial performance of Tunisian
companies.
CHAPTER FIVESUMMARY, CONCLUSION AND RECOMMENDATION5.1Summary of
FindingsThe study arrives at the following major findings through
the test of the research hypotheses earlier formulated in this
study. These findings are summarily presented as follow:1. Board
size of commercial banks does not significantly influence the
performance (ROE) of commercial banks in Nigeria.2. Independence of
the audit committee of commercial banks does not significantly
influence the performance (ROE) of commercial banks in Nigeria.3.
The size of the audit committee of commercial banks does not
significantly influence the performance (ROE) of commercial banks
in Nigeria.5.2ConclusionsThis study was carried out with the broad
objective of examining the extent to which corporate governance
influences the performance of commercial banks in Nigeria. The
study has one proxy for performance and three proxies for corporate
governance and each was used to form a research hypothesis aimed at
empirically answering the research questions the study was set to
solve. Based on the findings of this study from the test of the
three research hypotheses earlier formulated in the study, the
researcher has therefore come to the following conclusions outlined
in respect to each hypothesis.1. The performance of commercial
banks in Nigeria herein measured by return on equity (ROE) is not
significantly impacted by the number of persons who sits on the
board (board size) of commercial banks in Nigeria. Thus an increase
in the Board size of commercial banks will result to an
insignificant increase in the performance of commercial banks in
Nigeria.2. The performance of commercial banks in Nigeria herein
measured by return on equity (ROE) is not significantly impacted by
the number independent audit committee members on the board. Thus a
change in the number of independent audit committee members will
result to an insignificant increase in the performance of
commercial banks in Nigeria.3. The performance of commercial banks
in Nigeria herein measured by return on equity (ROE) is not
significantly impacted by the number of person who constitutes the
audit committee (size of the audit committee) of commercial banks
in Nigeria. Thus a variation in the size of the audit committee
will result to an insignificant increase in the performance of
commercial banks in Nigeria.The results in the context of
developing countries is consistent with the findings of Fahy (2005)
and PAIB Committee (2004) that corporate governance of an
organization ensure conformance but does not directly ensure
performance, rather helps to achieve performance. 5.3
RecommendationsThe following recommendations are made in line with
the study findings.1. Commercial banks in Nigeria should adhere to
the CBN stipulated board size so as to help achieve performance.
Such board size should be made up of more independent directors
than non-independent directors. More so, the compliance status
needs to be identified in banks that are yet to comply with this
provision, so that efficiency and effectiveness in management is
complimented with other internal controls.2. Regulatory authorities
should impose the notion of independence of audit committee members
in the boards of directors of commercial banks to provide more
security for investors and comparing financial information from two
different sources namely the auditors report and / report of the
Audit Committee. In addition, individual audit committees should
consider adopting all of the audit committee best practices that
apply to their situations, even those that are not required, such
as oversight of internal audit, oversight of company compliance
with the code of ethics, and increased monitoring over financial
reporting. The results imply that audit committees are very good at
taking on responsibilities when required. On the other hand, their
record for assuming non-required best practices is mixed, at best.
If audit committees do not voluntarily assume best practices,
regulators may find it necessary to intervene. The effectiveness of
the audit committee should be evaluated at least annually in order
to ensure continued compliance with best practices requirements and
recommendations.3. Due to the increasing complexity and large
nature of organizations, the apex regulatory bodies of commercial
banks should carry out an upward review in the size of the audit
committee so as to enhance their positive influence on the overall
performance of commercial banks in Nigeria. 5.4 Limitations of the
StudyThere is no research without its inherent limitations no
matter the methodology adopted by the researcher. Thus this study
is not an exception. The following are the inherent limitations of
this study that should be taken into consideration.1. The current
research is limited to only commercial banks in Nigeria due to time
and the cost involved, thus, making it impossible for corporate
governance practices of other firms in different sectors of the
economy to be considered for examination. That notwithstanding,
corporate governance codes are issued by CBN therefore its practice
and application is uniform in any sector of the economy. Thus these
findings are valid across different companies in different sectors
of the economy.2. Furthermore, this research was mainly conducted
based on the secondary data collection. The other data collection
methods had not been considered. As a result they may not be 100%
accurate. However, to avoid the adverse incidence of these
limitations on the findings of the study, the research first and
foremost carried out an intensive data validity test before using
the secondary data generated for further analysis.3. Also,
appearing to be a limitation of this study is the inability of this
study to capture many other variables that could impact on the
performance of commercial banks in Nigeria. The study only adopted
the return on equity (ROE) as a measure of performance. However,
the use of the return on equity was carefully selected as a measure
of performance base on the focus of this study which is highly
hinged on the agency theory.5.5Suggestions for Further
ResearchThere is clearly enormous scope for more research that can
inform an understanding on the workings of corporate governance
mechanism, how it impacts on performance of firms. To develop
specific policies and recommendations, this study suggests the
following for further research.1. There are many companies listed
on the NSE under different sectors of the Nigerian economy. This
study succeeded in examining the corporate governance of on the
banking sector. Therefore, additional investigation is required to
examine the corporate governance and its influence on performance
of firms in other sectors of the economy like the manufacturing
sector.2. Another research area that could be extended by further
studies is on the impact of corporate governance on the
profitability of non-listed firms.3. There are some other factors
that are also found to affect the performance of commercial banks
in Nigeria which are not considered in this study. Some of these
factors include: Audit committees, capital structure, the
regulations and restrictions from the Central Bank of Nigeria and
Nigeria stock exchange. Therefore further investigation is required
to examine other factors other than corporate governance that also
influence performance of commercial banks in Nigeria.
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APPENDIX IRAW DATA IN RESPECT TO THE SELECTED BANKSNAME OF
BANKSYear ROEBSIDASACCEO Dual