CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Corporate
governance has become a topical issue which has attracted the attention of
academic scholars and practitioners. Revelations of corporate fraud all over
the world in the past years have clearly shaken investors’ confidence and
historical antecedents in financial practices have indicated that financial
crisis is the direct consequence of poor corporate governance (Akingunola,
Olosegun & Adedipe, 2013). For instance, the Enron saga and the crash of
sub-prime mortgage institutions which led to the last global financial crisis.
These problems transferred to other parts of the world through globalization
which makes countries of the world to be interconnected as a result of trade
liberalization and advancement in technology (telecommunication and
transportation). Africa particularly Nigeria had its own share of the
contagious financial crises. In the recent past, financial institutions in
Nigeria witnessed untold financial distress in which banks that were considered
healthy by investors happened to be the most distressed. This made the Securities and Exchange Commission (SEC) in 2003 to posit that, the
financial sector attracted poor corporate governance as a result of the fact
that about 40% of companies including banks quoted in the exchange had
recognized code of corporate governance. Subsequently, in 2003, the Nigerian
Securities and Exchange Commission rolled out a code of best practices on
corporate governance for all public quoted companies.
The
banking sector crisis remained a subject of concern because of its role in
facilitating and stimulating economic development. This however made the apex
bank (Central Bank of Nigeria) to take a bold step in revitalizing the banking
sector through the stipulation of N25 billion naira capital base for all banks
in Nigeria. This led to the emergence of 25 commercial banks in Nigeria as at
31st December, 2005. In 2006, the Central bank of Nigeria issued a
code of corporate governance to complement the existing one and the provisions
of the new code were said to be indispensable in achieving viable and
successful banking practice (Demaki, 2011). Since the issuance of the code of
corporate governance by the CBN, efforts have been made to evaluate its impact
on the performance of banks. From empirical perspective, efforts aimed at
studying the impact of corporate governance among scholars have yielded varying
outcome where a consensus is yet to be reached. This led to continuous study in
the area of corporate governance and the performance of banks in the post
consolidation era. While a number of performance measures were used by previous
authors such as Net Interest Margin (NIM), financial reporting quality and
earnings management, financial performance has not been given the desired
attention in the literature particularly in Nigerian studies.
It
is based on this vacuum created by previous studies that this study intends to
fill by examining the impact of corporate governance on the performance of
listed deposit money banks in Nigeria.
1.2
Statement of Research Problem
The
experiences of advanced countries have demonstrated a positive marriage of
convenience between well coordinated wealth management and economic
development. Lack of framework to manage wealth continues to plague and plunge
less developed counties, like Nigeria into the vicious circle of poverty.
Nigeria has a lot of resources being the seventh largest oil producer in the
world but lack the ability to manage wealth by effectively developing and
encouraging indigenous and foreign investment. This inability has a direct
relationship with the need for efficient corporate governance in Nigeria for
sustainable development. The lack of effective corporate governance in Nigeria
has worked to the decrement of shareholders and created a class of stakeholder
who has lost interest in the system. The corporate governance culture in
Nigeria have persistently failed to be responsible to the stakeholders and has
no deep rooted mechanisms to a balance among the major players (board of
directors, shareholders and management) in the system or economy. The
spectacular failure and decline of companies like Enron, Worldcom, Lehman
Brothers, Northern Rock (UK) Parmalat (Italy), Fannie Mae and Freddie Mac (US)
make them ready to be cited as problem. The recent corporate collapses of these
large organizations have raised questions about the efficacy of corporate
governance.
However,
corporate governance improves management oversight and increases disclosure and
quality of reported financial information (Hermalin 2005) and reduces the information
asymmetry between managers and capital providers (Core, Holthausen, and Larcker
1999). For instance, at board level, there was lack of Corporate Governance and
serious conflict of interests, where the Chief Finance Officer was guilty of
participating in the running of Special Purpose Entities (SPESS) which was
created to siphon funds from the company. Also in Worldcom, there was lack of
Corporate Governance. The company lent the CEO money to offset the loan that he
took to buy his own shares. While Parmalat operated a financial
speculative scheme to lure investors
money and siphon it off through a network of 260 international offshore
entities where money disappeared. In all these cases cited above, poor corporate
governance remains the central problem. In Nigeria, we observed in the 1980s
and 1990s that Savannah Bank and Societe Generale Bank of Nigeria died
prematurely where the CBN listed the reasons as the ineffectiveness of the
board as well as the ineptitude and instability of the management; the false
and unreliable returns to the regulatory authorities; the insolvent and
deteriorating financial position of the banks and the urgent need to protect
the interest of depositors, both existing and prospective and the banking
system and the inability of the bank to respond to various regulatory
initiatives (CBN, 2002).
The
revocation of Peak Merchant Bank license by the Central Bank of Nigeria because
of over bearing influence of the Chairman who was also the majority shareholder
of the bank; persistent liquidity problem; poor asset quality; significant
insider abuses; poor track of profitability; unseriousness, inability and
unwillingness of shareholders to recapitalize; reckless granting of credits;
complete absence of focus and lack of corporate governance, are quite
indication that the state of corporate governance in the Nigeria Banking
industry is at low ebb. (CBN, 2004) The shakeup which affected the banking
industry, and the replacement of the CEOs of five banks (Oceanic Bank,
Intercontinental Bank, Union Bank, Afribank, Finbank, and ETB) exposed the
failure of the Regulatory authorities and lack of good corporate governance in
detecting deep rooted mismanagement and the existence of large cases of insider
lending to directors and their relations, unsecured margin loans and other
toxic debts which were already threatening the financial well being of the
banks are indication that all is not well with our banking industry (Sanusi,
2009). A massive injection of N720 billion new funds by the Central Bank, which
should have been invested in other economic activities send a signal that there
is much to be done in the area of corporate governance in the Nigeria banking
industry.
1.3
Objectives of the Study
The main objective of the study
is to ascertain the implications of corporate governance on the performance of
deposit money banks (DMBs) in Nigeria. Other specific objectives of the study
include:
i.
To
determine the effectiveness of corporate governance in improving financial
reporting quality of listed deposit money banks in Nigeria.
ii.
To
ascertain the level of compliance to corporate governance in improving
financial reporting quality of listed deposit money banks in Nigeria.
1.4 Research
Questions
This
research work seeks to investigate the following research questions:
i.
What
are the impacts of corporate governance in improving financial reporting
quality of listed deposit money banks in Nigeria?
ii.
Does
compliance with corporate governance in improving financial reporting quality
of listed deposit money banks in Nigeria?
1.5 Hypotheses of
the Study
This research work seeks to validate or invalidate the following research
hypotheses:
H01: Corporate governance does not
significantly improve financial reporting quality of listed deposit money banks
in Nigeria.
H02: Compliance with corporate governance
does not improve financial reporting quality of listed deposit money banks in
Nigeria.
1.6 Significance of
the Study
The
relevance of any study stems from its importance to respective users or
beneficiaries of such research works. Hence, this study will be of immense
significance to the following categories of people:
Policy
makers in the banking industry will benefit immensely from the study as it will
redirects and refocuses their attention to the significance of corporate
governance in the financial service industry.
Government
at all levels (federal, state and local government) will find this work very
interesting as it reveals the extent of corporate governance code in Nigeria in
relation to banking business. Corporate governance code was designed to ensure
that banks operating within the shores of Nigeria have at the back of their
mind, the interest of fund providers as well as militating against the agency
problem.
Shareholders
and all other stakeholders in the industry will be willing to commit their hard
earnings into a conducive environment where it is safe and promises a desirable
return. Hence, this study will reposition the confidence of all the parties in
the banking industry against their investment. By extension, the potential
investors will in no small way benefit as well. Finally, scholars, researchers
and students will find the work useful as it adds to existing literature.
1.7 Scope of
the Study
This study is confined
to the corporate governance on financial reporting quality of listed deposit
money banks. To be specific, the study is further reduced to some selected
Banks in Jalingo Metropolis such as zenith Bank, United Bank for Africa (UBA),
Guaranty Trust Bank (GTB), First Bank and Diamond Bank. The time frame within
which this study will cover is 2012-2017. This scope is
considered appropriate in order to help the researcher generate the relevant
materials required for effective analysis.
This study is faced with
the challenge of time constraint, distance to be covered and financial
constraint. It is worthy to note that, the topic under review requires enough
time and adequate financial resources to generate the needed materials for
effective analysis.
1.8
Organization of the Study’s Report
The
study is composed of five chapters. Chapter one comprises an introduction,
statements of the problem, hypothesis and the objectives of the study. It also
includes the significance of the study, research questions, Scope and
limitation of the Study. Chapter two focuses on a review of the relevant
literature for the study. Chapter three discusses the methods used in gathering
information as well as the analysis of the data which were generated for this
study. Chapter four focuses on the data presentation and analysis. Chapter five
deals with the summary, conclusion and recommendation derived from the findings
of the study.
1.9 Definition of Terms
i. Corporate Governance
Corporate
governance is “the organization and rules that affect expectations about the
exercise of control of resources in a firm. The World Bank report (2002).
ii. Deposit money bank
Deposit money bank is a
resident depository corporation and quasi-corporation which have any
liabilities in the form of deposits payable
on demand, transferable by cheque or otherwise usable for making payments (Wikipedia).
iii. Impact
Impact can be defined as the measure of the tangible and intangible effects or consequences of one things or entity's action or influence upon another (Wikipedia).
iv. Performance
The
accomplishment of a given task measured against preset known standards of
accuracy, completeness, cost, and speed; or a completion of a task with
application of knowledge, skills and abilities (Wikipedia).