As distinctions between financial sectors and products have become more hazy, the banking industry has been hit by a worldwide wave of mergers and acquisitions. In order to improve and update the institution, nations must have solid, resilient financial institutions with excellent corporate governance in order to thrive in an increasingly open world. New banking regulations were published in Nigeria by the Central Bank with the goal of merging and restructuring the sector. This was done to increase the capacity of Nigerian banks to compete on the world market. Despite all of its efforts, the Central Bank of Nigeria revealed that 741 incidents of attempted fraud and forgery totalling N5.4 billion were detected following the consolidation in 2006. In light of the aforementioned, this study investigated the connections between the financial performance of the Nigerian consolidated banks’ governance procedures. Also, it was determined if there was any correlation between the performance of Nigerian banks and the degree of corporate governance transparency. In order to determine if there is a correlation between the corporate governance characteristics and business performance, the Pearson Correlation and regression analysis were performed. A disclosure index was created to evaluate the degree of corporate governance disclosures made by the sampled banks, and it was constructed in accordance with the CBN code of governance and the documents the UN secretariat provided for the ISAR’s nineteenth session (International Standards of Accounting and Reporting). The research found that there is a large but inverse association between board size, board composition, and these banks’ financial success, as well as a significant but opposite relationship between directors’ equity stake, amount of governance transparency, and performance. The t-test result also showed that although there was no difference in the profitability of banks with foreign directors compared to institutions without foreign directors, there was a significant difference between the profitability of healthy banks and rescued banks. The analysis comes to the conclusion that the banks’ disclosure of their corporate governance processes is not consistent. In a similar vein, banks do not provide a statement that reflects outstanding debts in terms of their ages and due dates, so failing to indicate how their loans are doing generally. According to the report, efforts to enhance corporate governance should concentrate on the value of board members’ stock holdings. A strong legislative framework that outlines the rights and duties of a bank, its directors, shareholders, and other stakeholders as well as the precise disclosure requirements and provides for efficient enforcement of the law should also be constructed.
The continued advancement of technology and globalization has increased the financial industry’s accessibility to newly developed goods and services. Yet financial officials across the world are frantically trying to analyze the developments and control the volatility (Sandeep, Patel and Lilicare, 2002:9). The banking sector has also been affected by a worldwide wave of mergers and acquisitions. According to these adjustments, the reality that nations must have strong, dependable financial institutions with effective corporate governance does not alter. As a result, the institution will be strengthened and improved in order to survive in a more open environment (Qi, Wu, and Zhang, 2000; Köke and Renneboog, 2002; Kashif, 2008).
Concerns have been raised about the need to increase corporate governance in banks given the ferocity of operations that have interfered with banks’ attempts to adhere to the different consolidation rules and the track records of certain players in the system. This will increase public trust and guarantee that the financial system operates effectively and efficiently (Soludo, 2004a). According to Heidi and Marleen (2003:4), solid corporate governance is necessary for effective banking supervision to take place. As a result, banking supervisors have a keen interest in making sure that every banking business has solid corporate governance. Changes in bank ownership throughout the 1990s and early 2000s, according to Mayes, Halme, and Aarno (2001), significantly changed the governance of the global banking organization. These modifications to bank corporate governance created crucial issues for future policy study. How do these modifications impact bank performance is the key question.
It is important to note that developed market economies have prioritized corporate governance of banks and extremely big companies on their policy agenda for more than ten years. Also, the idea is progressively becoming a priority throughout the African continent. In fact, it is thought that the Asian crisis and the relative underperformance of the corporate sector in Africa are to blame for turning the topic of corporate governance into a buzzword in the development discussion (Berglof and Von -Thadden, 1999).
So, there are a number of things to blame for the increased interest in corporate governance, particularly in developed and emerging nations. Once a number of high-profile corporations went out of business, the topic of corporate governance suddenly shot to the forefront of the world of business. The size and duration of Enron’s unethical and illegal practices as well as WorldCom’s telecom colossus, all centered in Houston, Texas, astonished the corporate community. These groups seemed to represent only the very tip of a very frightening iceberg. When business practices in American corporations were criticized, it seemed that the issue was far more pervasive. Adephia Communications Corporation, Global Crossing Limited, Tyco International Limited, Parmalat in Italy, and the global newspaper company Hollinger Inc. are just a few of the well-known and respected firms that have exposed serious and ingrained issues with their corporate governance. Due to public uproar over exorbitant remuneration, even the esteemed New York Stock Exchange was forced to fire its director (Dick Grasso) (La Porta, Lopez and Shleifer 1999).
Several bank failures have occurred in developing economies, including those of the Alpha Merchant Bank Ltd., Savannah Bank Plc., Societe Generale Bank Ltd. (all in Nigeria), The Continental Bank of Kenya Ltd., Capital Finance Ltd., Consolidated Bank of Kenya Ltd., and Trust Bank of Kenya, among other institutions (Akpan, 2007).
All areas of the economy in Nigeria have given the subject of corporate governance top priority status. For instance, the Peterside Committee on corporate governance in public firms was established by the Securities and Exchange Commission (SEC). A subcommittee on corporate governance for Nigerian banks and other financial institutions was also established by the Bankers’ Committee. This acknowledges the crucial part that corporate governance plays in determining whether a company succeeds or fails (Ogbechie, 2006:6). To promote long-term shareholder value by boosting corporate performance and accountability and taking into consideration the interests of other stakeholders, corporate governance refers to the methods and structures by which the business and affairs of institutions are directed and managed (Jenkinson and Mayer, 1992). Hence, corporate governance focuses on establishing trust, guaranteeing accountability and transparency, and maintaining a reliable route for the disclosure of information that will support strong corporate performance.
The principal-agent theory, which was also used in this research, is typically regarded as the beginning point for any discussion on the subject of corporate governance, according to Jensen and Meckling (1976). The principal-agent issue between managers and their shareholders has been addressed by a variety of corporate governance measures. These governance mechanisms include the board size, board composition, CEO pay performance sensitivity, directors’ ownership, and share holder rights as outlined by agency theory (Gomper, Ishii and Metrick, 2003). Moreover, they contend that altering these governance practices will encourage managers to better align their goals with those of shareholders, raising the firm’s value.
Despite the recent literature’s focus on corporate governance in developing nations (Lin (2000), Goswami (2001), Oman (2001), Malherbe and Segal (2001), Carter, Colin and Lorsch (2004), Staikouras, Maria-Eleni, Agoraki, Manthos and Panagiotis (2007), McConnell, Servaes and Lins (2008), and Bebchuk, Cohen and Ferrell (2009)), corporate governance of banks in developing nations as it (2009). The corporate governance of banks and their financial performance have only lately been explored in the literature, even in industrialized nations (Macey and O’Hara, 2001).
The limited research on corporate governance in banks narrowly focused on one facet of governance, such as the function of directors or stockholders, and left out other potential contributing aspects and interconnections. The study by Adams and Mehran (2002), which looked at the impact of board size and composition on value for a sample of American firms, is one of the few studies that is plausible. Another drawback of this kind of study is that it is sometimes restricted to the biggest, publicly listed companies, many of which have stable ownership, management, and board structures and gauge success by market value.
The research by Sanda and Mukailu and Garba (2005) and Ogbechie (2006) that examined corporate governance methods and business performance are among the few empirically viable studies on corporate governance in Nigeria. This research looked at how corporate governance affected the financial performance of Nigerian banks in order to rectify these flaws. This research, in contrast to previous earlier studies, is not constrained by the OEC&D’s framework of principles, which is focused largely on shareholder sovereignty. It examined the extent to which the Central Bank’s post-consolidated code of corporate governance was followed by Nigerian banks. Last but not least, this study used accounting operating performance variables to examine whether there is any relationship, if any, between corporate governance and performance of banks in Nigeria, whereas other studies on corporate governance neglected the operating performance variable as proxies for performance.
Statement of the problem
The latest financial crisis affecting the whole globe has its roots in banks and other financial intermediaries. One of the primary structural causes of the crisis was the decline in their asset portfolios, which was mostly brought on by faulty credit management (Fries, Neven and Seabright, 2002; Kashif, 2008 and Sanusi, 2010). This issue was mostly brought on by bad corporate governance in the industrial and financial sectors of several nations. According to Schjoedt (2000), the interactions between the government, banks, and large corporations as well as the organizational structure of firms were largely to blame for this bad corporate governance.
In certain nations (such as Iran and Kuwait), banks are used improperly to advance family interests above those of other shareholders and other stakeholders. These banks were formerly a component of broader family-controlled corporate organizations. The government aggressively intervened with and controlled the banks in other instances when private ownership concentration was prohibited, even when it had no ownership stake (Williamson, 1970; Zahra, 1996 and Yeung, 2000). In either scenario, it was understandable that corporate governance was quite bad. The continuation of inadequate prudential regulation, weak bankruptcy laws, and subpar corporate governance norms and regulations was further aided by the symbiotic links between the government or political establishment, banks, and large corporations (Das and Ghosh, 2004; Bai, Liu, Lu, Song and Zhang, 2003).
Prior to the consolidation process, there were roughly 89 active participants in Nigeria’s banking sector, and their combined performance was causing consumers’ trust to decline. Although the business was infamous for ethical violations, there was still persistent unrest, insufficient supervision mechanisms, and official carelessness among managers and directors (Akpan, 2007). Almost every documented case of bank crisis in the nation has poor corporate governance as one of its key contributing elements. Weak internal control systems, excessive risk-taking, circumvention of internal control procedures, the absence of or non-observance of authority limits, disregard for the rules of prudent lending, a lack of risk management procedures, insider abuses, and fraudulent practices are all signs of weak corporate governance that have been observed in the banking industry (Soludo, 2004b). This opinion is backed by a poll conducted by the Nigerian Securities and Exchange Commission (SEC) in April 2004 which revealed that corporate governance was in its infancy and that just 40% of publicly traded corporations, including banks, had established recognized rules of corporate governance. If appropriate safeguards are not put in place by regulatory organizations, this, as recommended by the research, may damage public confidence, especially in Nigerian banks.
In July 2004, the Central Bank of Nigeria (CBN) revealed new banking regulations intended to streamline and reorganize the sector via mergers and acquisitions. This was done to boost Nigerian banks’ competitiveness and enable them to compete on the international stage. Nonetheless, responsibility, openness, and respect for the law are necessary for effective operation in the global market. The sector consolidation presents new corporate governance problems due to integration procedures, Information Technology, and culture, according to section one of the Code of Corporate Governance for Banks in Nigeria Post Consolidation (2006). The law also states that two-thirds of mergers globally failed because it was difficult to integrate staff and systems and because there were irreconcilable differences in company culture and management, which led to conflicts on the Board of Management.
Notwithstanding all of these steps, corporate governance issues in consolidated Nigerian banks continue to exist, which raises the level of fraud (Akpan, 2007; see Appendix 2). Data from the National Deposit Insurance Commission report (2006), according to Akpan (2007), indicates 741 instances of attempted fraud and forgery totalling N5.4 billion. A strong corporate governance framework is required in the banking sector, according to Soludo (2004b), if the sector is to successfully contribute to Nigeria’s overall growth.
Wealth and income disparities, as well as global imbalances in trade and the banking sector, have all been identified as the root causes of the most recent global financial crises (Goddard, 2008). More crucially, according to Caprio, Laeven, and Levine (2008), bank supervision and corporate governance reforms need to be updated to make sure that purposeful transparency reductions and risk mispricing are taken seriously.
Additionally, according to Sanusi (2010), governance malpractice inside the consolidated banks has turned into a way of life in a significant portion of the industry and has been related to the present banking crisis in Nigeria. Additionally, he claimed that many banks’ attempts at corporate governance failed because boards disregarded these procedures due to a variety of factors, including being duped by executive management, taking part in the acquisition of unsecured loans at the expense of depositors, and lacking the qualifications to enforce good governance on bank management.
The reduction in shareholder wealth and the collapse of the company were further issues that the boards of directors were blamed for. According to reports, they were in the news because of the fraud charges that led to the demise of well-known companies like Enron, WorldCom, and Global Crossing.The series of widely reported instances of accounting irregularities that were discovered in the Nigerian banking sector in 2009 (such as those at Oceanic Bank, Intercontinental Bank, Union Bank, Afri Bank, Fin Bank, and Spring Bank) were caused by the boards of directors’ lax oversight procedures, their ceding of authority to corporate managers who act in their own self-interests, and their negligence in meeting their stakeholder accountability obligations (Uadiale, 2010). According to Inan (2009), these bank directors sometimes have low equity ownership levels so they won’t have to sign blank share transfer forms transferring ownership to the bank in exchange for payment of debts owing to banks. He said that non-executive directors’ importance may be diminished if they are acquired since, in any event, they are paid by the institutions they are required to monitor.As a consequence, many corporate governance reforms have placed a special emphasis on the need to modify the board of directors’ makeup, size, and organizational structure (Abidin, Kamal and Jusoff, 2009).
In light of the aforementioned issues, this research examined the effects of corporate governance mechanisms on the financial performance of Nigerian banks. It also examined the annual reports of the country’s listed banks to determine the extent to which they complied with the CBN’s 2006 post-consolidation corporate governance code. The research examines the profitability of the healthy and rescued banks in Nigeria, as stated by the CBN in 2009. It also determines if there is any statistically significant difference between the two groups of banks. Lastly, it went one step further to look at whether banks with foreign directors perform better than those without.
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