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The Role of Corporate Governance in the Performance of Nigeria’s Banking Sector

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Abstract

This study investigated the ways and manners in which the affairs of banking sector in Nigeria are managed by those charged with the responsibility. It showed there is a relationship between corporate governance and the performance of banks in Nigeria. The population of the study consisted of all the 24 consolidated banks in Nigeria that met the requirement of ₦25 billion capital base as at today. A sample of five of them was considered adequate for generalization. One hundred and thirty questionnaires were administered on the management staff of those selected banks out of which 120 were returned and 10 were not properly filled. Statistical Package for Social Scientist (SPSS) was used to analyse the data collected and interpretation of data was done through simple percentages. Pearson Product Moment Correlation was used to test the relationship that exists between efficient Corporate Governance in the banking sector and the roles of external auditor and the composition of the board of directors. The study revealed that, lack of proper corporate governance is the bane of so many banks in Nigeria. The collapse and failure of many banks was as a result of both poor audit control and directors’ negligence to observe due diligence and acceptable standard practices. However, banking sector has greatly contributed to the gross domestic product (GDP) of Nigeria and consequently improved the economy. Therefore, transparency, honesty and objectivity have to be encapsulated in banking operations so as to have a positive effect on the continuity of the organization.

Key-words: Governance, performance, banking, survival

Introduction

There has been a recent revival of concern about the issue of corporate governance due to the challenges, responsibilities, failures and achievements of large corporations all over the world.

Multinationals, include public and private-owned corporations, exist like they are uncontrollable—even in foreign countries, and this makes it look as if corporate organizations have no ethical responsibility to benefit the society at large. Various corporations (such as Enron Corporation in the USA, Polly Peck in US, Maxwell Communication and Bank of Credit and Commerce Industry (BCCI), National Bank of Nigeria, Societe Generale Bank etc) have performed below expectations and eventually collapsed in recent years. The event at Enron and other cases of spectacular failure have helped to shed light on the importance and how strengthening of governance mechanisms could play to improve firm performance.

Bank failures in Nigeria dated back several decades and the consequence has been terrible until lately when the Nigerian Deposit Insurance Corporation (NDIC) and Central Bank of Nigeria (CBN) stepped up vigilance and loan recovery (Sanusi, 2009). Orogun (2009) painted a very interesting picture of the principles governing banking as a developing tool. Quoting the former Executive Secretary of the Economic Commission for Africa, Adeniji (2004) said ‘our banking system must be totally committed to the creation of favourable socio-economic environment for real productive investment and not for speculation’. Therefore, there seems to be a link between the mode of governance and the performance of corporations, which means that the way a corporation is directed, controlled and structured has some effects on the result the organization achieves in terms of its performance (Denis and McConnell 2003). Corporate governance in Nigerian organizations is not only an evolving concept, but is also tied in with the notion of corporations and their practices within the wider society.

Clark and Thomas (2000) defined corporate governance as a set of processes, customs, polices, laws and institutions affecting the way in which a corporation is directed, administered or controlled. Corporate governance also includes the relationship among the many players involved (the shareholders and stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management, and the board of directors, the accountants and auditors. Other stakeholders include employees, suppliers, customers, lenders, regulators and the community at large. Kala, (2005) asserted that corporate governance could also be said to be the consistent management, cohesive policies, processes and decision-rights for a given area of responsibility in a separate legal entity that is different from its owners, invisible, artificial and existing only in the contemplation of the law. Parker (2002) considered corporate governance as the processes of activities involved in running an enterprise through the influence of the board of directors and top executive members of the enterprise. According to the researcher, there is a direct and clear causal link between the actions of the board of directors and the success of the organizations measured in terms of such factors as profitability, reputation and share price. He asserted that this link to business performance is rarely strong ranging from satisfactory to weak. Corporate governance therefore refers to the way by which the board of directors sets the framework of action.

Further, Parker (2002) noted that this involves the board of directors in eight key activities which include:

1) focusing on the core activities and being pragmatic

2) adding values and reducing cost

3) building a business culture that embraces change

4) moving with the market but not changing faster than the market

5) leading the market

6) integrating e-business activities, aligning and optimizing resources

7) managing risk and

8) Establishing and maintaining good corporate governance.

The above listed activities represent some of the issues involved in corporate governance and can be termed the ‘art of corporate governance’ which ensures organizational effectiveness, performance or success in a health and conflict free corporate environment.

Statement of the Problem

There seems to be some elements of doubt if the governance of corporate organizations is really effective considering the rate of bankruptcy and demise of large corporations all over the world, both in Nigeria and foreign countries (Inam 2006). In recent times, the world has witnessed the failure of large corporations; in particular, the Nigerian banking sector is currently experiencing insider abuses of reckless granting of credit facilities running into several billions of naira without adequate security. This is contrary to accepted practice which has been attributed to large scale fraud by directors in connivance with auditors. Also identified by (Mehra 2005) is the problem of window dressing (eye-service) by the directors who are aided by the auditors, as well as the issue of negligence and misfeasance on the part of the auditors when auditing the financial statement of organizations which can be attributed to the lack of independence of the auditors.

One will therefore wonder what was really wrong when a bank which has been declaring huge amount of profits and has been declaring dividends to shareholders is suddenly declared bankrupt (Mehra 2005). With this as the background, this study seeks to examine the nature of corporate governance in practice in the Nigerian banking system to see if those people charged with the responsibility of managing the affairs of the enterprise are religiously following the acceptable practices of corporate governance as stipulated by the regulatory authorities in Nigeria and that of other developed countries of the world.

Research Objectives

i) To assess the significance of Auditor’s independence and its role in corporate governance.

ii) To assess the relationship between corporate governance and the composition of the board of directors.

iii) To examine the organizational structure of the bank and its management.

Research Hypotheses

The following Hypotheses shall be empirically tested through the adoption of Product Moment Correlation;

Hypothesis 1: There is no significance relationship between auditor’s independence and the effective corporate governance.

Hypothesis 2: There is no significance relationship between corporate governance and the composition of the board of directors.

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