Impact of Corporate Governance on Firm Profitability

CHAPTER ONE INTRODUCTION 1.1 Background to the Study The 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, 1

public confidence retrieved, accuracy and reliability of financial information assured (Ming-Cheng, Hsin-chaing, I-cheng & Chunfeng, 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%

2

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

3

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. 1.2 Statement of the problem The 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 O’Hara, 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

4

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 firm’s 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. 1.3 Objectives 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

5

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

commercial banks in Nigeria. 3. To examine the relationship

on

equity

between

size

(ROE) of

of

audit

committee and the return on equity (ROE) of commercial banks in Nigeria. 1.4 Research Questions The 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?

6

1.5 Research Hypotheses The 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. 1.6 The

Significance of the Study 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 7

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. 1.7 Scope of the Study The 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 20052013). The choice of this period is due to the researcher’s belief that the period will provide findings that reflect current realities in the banking sector. 8

CHAPTER TWO LITERATURE REVIEW 2.1 Introduction This 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. 9

2.2 Theoretical Frame Work An 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 Theory It 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 10

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 firm’s resources and be less interested to 11

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 firm’s 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 Theory One 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, 12

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 stakeholder’s 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 performance Stakeholder 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 one’s position (Freeman et al, 2004 & Jensen, 2001). 13

Critique of the stakeholder’s theory criticize it for assuring a single-valued

objective

(gains

that

accrue

to

the

firm’s

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, interpersonal 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 Theory This 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 manager’s objective is primarily to maximize the firm’s performance because a manager’s need of achievement and success are satisfied when 14

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 effectively

is

that

working,

when there

governance should

structures not

bureaucratic delays in any decision-making.

15

be

are

undue

 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 firm’s 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 firm’s advantage. Hence, this theory shows that 16

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 17

managers of a company are accountable before the law for the company’s activities Oxford Analytical Ltd 1992: 7). 2.3 Conceptual Frame work 2.3.1 Concept of Corporate Governance Corporate governance relates to relationship between firm’s 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 18

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 corporation’s perspective and the public policy perspectives. The corporation’s perspective is about maximizing value subject to meeting the corporation’s 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

19

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

20

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 bank’s business on a day-to-day basis;

21

 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: 22

 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 bank’s 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 23

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 bank’s 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.

24

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, CEO’s positionduality, CEO’s 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 financing 1. Board Size Board size refers to the total number of directors on the board of any corporate organization. While a number of authors have

25

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 Tobin’s 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 KyereboahColeman (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 26

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. KyereboahColeman (2007) proved that large and independent boards enhance firm value, and the fusion of the two offices negatively affects a firm’s 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 27

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 firm’s 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 Committee Consistent 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 28

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 Committee 29

This 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

30

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 Size The size of company (proxied by total assets) is considered in this study as control variable to have a relationship with other 31

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 investor’s 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 Financing

32

Debt 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 bank’s loan portfolio as such information is incommunicable and very costly to reveal, implying that a bank’s 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).

33

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 Measures A company’s operations and successfulness are integrally connected. Studies show that then concept of company’s performance is multidimensional. But the fact is that the company’s investors, shareholders and other stakeholders find

34

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. Tobin’s 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 marketbased 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, Tobin’s Q ratios of different companies give misleading results. Accounting measures have been criticized on the grounds that they are subject to 35

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 firm’s 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. 2.4 Review of Empirical Studies There exist a plethora of studies that seek to examine the influence of corporate governance on firm’s performance. This section of the chapter examines some of these studies. Yinusa

and

between

Babalola

corporate

(2012)

investigated

governance

the

mechanisms

interaction and

capital

structure decisions of Nigerian firms. Panel data methodology 36

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

37

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 Tobin’s Q while Directors’ ownership and independent directors have significant positive effects on bank performance measured by Tobin’s 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 nonperforming 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

38

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 Tobin’s Q were the variables used in the regression model to measure firm’s 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

39

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

40

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 director’s 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

41

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.

42

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 43

meetings are positively and significantly associated with return on assets (ROA), return on equity (ROE) and Tobin’s Q. Directors’ ownership and independent directors have significant positive effects on bank performance measured by Tobin’s 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

performance. 2.5 Conclusions

44

independent

directors

and

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.

45

CHAPTER THREE RESEARCH METHODOLOGY 3.1 Introduction This chapter examines the methodology that will be utilized to reveal some statistical details about impact of corporate governance on bank’s 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

46

data analysis, definition of variable/model specification and weaknesses of the methodology. 3.2 Research Design This 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).

3.3 Population of the Study A 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. 3.4 Sample Size of the Study

47

The 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 CBN’s and World Bank’s ranking were adjudged to be the best performing banks in terms of strong and vibrant banks (Vanguard 3, July 2011). 3.5 Sources of Data Collection This 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-

48

2012 forms the major sources of data for this study (e.g. see appendix I). 3.6 Techniques of Data Analysis The following statistical tools will be employed in the analysis of data generated from the annual financial statement of the six (6)

sampled

statistics

and

commercial multiple

banks

listed

regression

above:

statistics.

Descriptive

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. 3.7 Definition of Variables This 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. 49

 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.

3.8 Model Specification The following model has been formulated to guide the researcher in the investigation.

50

ROE = α + β1 BS + β2IDA+ β3 SAC +u Where, ROE = Return on Equity BS = Board Size IDA = independence of the Audit Committee Members SAC = Size of the audit committee α = alpha, which represents the model constant β1 – β4 =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 Rule This study shall accept and reject the null and alternative hypotheses using the following set criteria.

51

 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 value 3.9 Weaknesses in the Methodology There is no methodology that has no inherent weakness. It is only left for the researcher to minimize them. The weakness of this study’s 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 52

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 FOUR 53

DATA PRESENTATION, ANALYSIS AND FINDINGS 4.1 Introduction This 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. 4.2 Data Presentation and Analysis This 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. 54

4.2.1 Data Validity Test The 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 autocorrelation. 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 55

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 Results

56

This 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 ROE Pearson Correlation ROE

BS 1

SAC

.310*

.119

.300*

.030

.414

.036

N Pearson Correlation

49 .310*

49 1

49 -.050

49 .228

Sig. (2-tailed) N Pearson Correlation

.030 49 .119

49 -.050

.732 49 1

.115 49 .026

Sig. (2-tailed) N Pearson Correlation

.414 49 .300*

.732 49 .228

49 .026

.861 49 1

Sig. (2-tailed)

.036

.115

.861

N 49 *. Correlation is significant at the 0.05 level (2-tailed).

49

49

BS

IDA

SAC

Sig. (2-tailed)

IDA

49

Source: SPSS Version 20 output Table 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

57

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 Statistics This 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 N

Minimum

Maximum

Mean

Std. Deviation

ROE

49

11.62

39.45

22.6945

6.63261

BS

49

11.00

20.00

15.0000

2.09165

IDA

49

3.00

5.00

3.2449

.59619

SAC

49

5.00

6.00

5.8980

.30584

Valid N (listwise)

49

Source: SPSS Version 20 output Table 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 58

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 59

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

60

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

Summary This section of the chapter presents the results produced by the model summaries for further analysis. Table 4.3: Model Summaryb Model

R

R

Adjusted R

Std. Error

Square

Square

of the Estimate

1

.409a

.167

.112

Change Statistics

DurbinWatson

R Square

F

Change

Change

6.25047

.167

3.016

df1

df2

Sig. F Change

3

45

.040

a. Predictors: (Constant), SAC, IDA, BS b. Dependent Variable: ROE

Source: SPSS Version 20 output Table 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 R 2 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 R 2 value of

61

2.034

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. 62

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 Results Regression 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 Model

Unstandardized

Standardized

Coefficients

Coefficients

B

Std.

t

Sig.

-24.674

18.206

BS

.831

.444

IDA

1.406

SAC

5.146

Correlations

Collinearity

Interval for B

Beta

Error (Constant)

95.0% Confidence

Statistics

Lower

Upper

Zero-

Bound

Bound

order

Partial

Part

Toleranc

VIF

e

-1.355

.182

-61.342

11.995

.262

1.872

.068

-.063

1.724

.310

.269

.255

.945

1.058

1.516

.126

.927

.359

-1.648

4.460

.119

.137

.126

.996

1.004

3.032

.237

1.697

.097

-.961

11.252

.300

.245

.231

.947

1.056

1

a. Dependent Variable: ROE

63

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. 4.3 Test of Research Hypotheses Table 4.4 displays t-values for the independent variable regressed with ROA and ROE. These t-values will be used for 64

testing the study’s 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 One Ho1: 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 Two Ho2: 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 65

significant relationship between audit committee independence and the return on equity (ROE) of commercial banks in Nigeria. 4.3.3 Test of Hypothesis Three Ho3: 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. 4.4 Discussion and Interpretation of Results This study’s 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

66

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 study’s was concerned with investigating committee

the

extent

significantly

to

which

influences

independent the

of

audit

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. 67

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 ttest 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

companies.

CHAPTER FIVE 68

of

Tunisian

SUMMARY, CONCLUSION AND RECOMMENDATION 5.1 Summary of Findings The 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. 5.2 Conclusions This 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 69

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 70

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 Recommendations The 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

71

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 auditor’s 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 72

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 Study

There 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.

73

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. 5.5 Suggestions for Further Research There is clearly enormous scope for more research that can inform

an

understanding

on 74

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

75

that also influence performance of commercial banks in Nigeria.

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APPENDIX I RAW DATA IN RESPECT TO THE SELECTED BANKS NAME OF BANKS UBA

Year 2005

ROE 28.83

BS 19

84

IDA

3

SAC 6

CEO Duality 0

ECO BANK

ZENITH BANK

FIRST BANK

GTB

FIDELITY BANK

2006

35.75

19

2007

20.42

19

2008

22.50

19

2009

27.12

19

2010

23.42

19

2011

29.87

19

2012

37.01

19

2005

11.62

14

2006

22.06

14

2007

39.45

14

2008

12.28

14

2009

22.12

14

2010

21.34

14

2011

22.07

14

2012

23.67

14

2005

23.65

16

2006

16.53

16

2007

17.00

12

2008

22.46

18

2009

23.45

16

2010

19.23

16

2011

17.32

16

2012

18.89

16

2005

28.73

20

2006

21.01

20

2007

28.28

16

2008

16.85

14

2009

23.65

14

2010

22.32

14

2011

20.45

20

2012

16.23

20

2005

13.06

12

2006

16.16

12

2007

20.50

13

2008

25.01

13

2009

26.34

14

2010

25.67

14

2011

28.43

14

2012

30.67

14

2005

12.62

14

2006

22.06

14

2007

39.45

14

2008

15.28

14

2009

22.12

14

2010

23.34

14

2011

11.62

14

2012

22.06

14

3 3 3 3 4 3 5 3 3 3 3 5 3 3 3 3 3 3 3 4 3 3 3 3 3 3 3 4 3 5 3 3 3 3 5 3 3 3 3 3 3 3 4 3 3 3 3

6

0

6

0

6

0

6

0

6

0

6

0

6

0

6

0

6

0

6

0

5

0

6

0

6

0

6

0

5

0

6

0

6

0

6

0

6

0

6

0

6

0

6

0

6

0

6

0

6

0

6

0

5

0

6

0

6

0

6

0

6

0

6

0

5

0

6

0

6

0

6

0

6

0

6

0

6

0

6

0

6

0

6

0

5

0

6

0

6

0

6

0

6

0

SOURCE: Annual Published Account of Selected Banks. APPENDIX II T-TEST TABLE 85

86