CHAPTER ONE

INTRODUCTION

1.1          BACKGROUND TO THE STUDY

The bank is committed to the principle of best practice in corporate governance which aims at ensuring integrity, openness, credibility, transparency and accountability in all facets of its business, Annual Report (Zenith, 2009). Corporate Governance is the process by which a board of directors through its management guides an institution in the fulfillment of its corporate mission with a view to protect operational responsibilities.

Corporate Governance therefore, involves a network or relationship between corporate managers, directors and providers of capital, Central Bank of Nigeria (2008).

It is seen as a means of ensuring that business organizations are controlled and directed to align with the interest of the owners of the business or organization. It aims at ensuring that corporate managers in whom resources are entrusted do not betray this trust bestowed on them by the owners of the resources.

Consequently, resource owners vest the control of the organization on corporate managers while appointing a board of directors to oversee the activities of the corporate managers. It is on this platform that oversight function of the board of directors is being established. Corporate manager therefore work towards maximizing the wealth of their shareholders. Periodic reports are prepared and these are done through the presentation of financial statement.

However, there are other interested parties (stakeholders) who make use of these reports presented by the corporations.

This pushes the responsibilities of the corporations beyond the focus of the shareholders alone to include other interested parties.

The financial statement represents the only means by which stakeholders can evaluate the performance of the banks.

These financial statements provide the banks with the opportunities of presenting their performances usually on the basis of earnings. Managers, as a result of their day to day involvement in the control of the corporation have access to information which stakeholders (except inside directors) do not have access to as such employ the use of financial statement to communicate these information to stakeholders.

The management of earnings as done by manages connotes manipulation of income (profit) to create an impressive or favourable perception to stakeholders. Bank managers indulge in several acts of managing earnings.

1.2          STATEMENT OF RESEARCH PROBLEM

The credibility of reported financial statement by corporate entities has become a cause of concern to regulators, investors, analysts and other stakeholders. The Nigerian Stock Market Annual Report (2004: 200) points that corporate managers indulge in several unholy acts such as understating losses, overstating profit, covering bad debt and other wrongful acts. These have become regular features in the corporate world and have tarnished the corporate image of the nation.

This research is to address corporate governance issues such as board size covering, composition of board, percentage of directors’ ownership, succession plan and number of directors.

1.3          RESEARCH HYPOTHESES

1.     There is a positive relationship between a bank’s board size and bank performance.

2.     There is a positive relationship between a bank’s succession plan and bank performance.

3.     There is a positive relationship between percentage of directors’ ownership and bank performance.

4.     There is a positive relationship between number of directors in a bank and bank performance.

1.4          RESEARCH QUESTIONS

1.     Is there a positive relationship between a bank’s board size and bank performance?

2.     Is there a positive relationship between a bank’s succession plan and bank performance?

3.     Is there a positive relationship between percentage of directors’ ownership and bank performance?

4.     Is there a positive relationship between number of directors and bank performance?

1.5          SCOPE OF STUDY

This study was restricted to Public Limited Companies (banks) quoted on the Nigeria Stock Exchange (NSE) as at 2009 financial year end. This is done in order to critically examine the banks’ performances. The choice of limiting the study to the quoted banks is to permit a manageable size for the study rather than focusing on a wide scope which may prove to be taskful to effectively carry out this study with a large sample size.

1.6          RESEARCH OBJECTIVE

1.     To find out if there is a positive relationship between a bank’s board size and bank performance.

2.     To find out if there is a positive relationship between succession plan and bank performance.

3.     To find out if there is a positive relationship between percentage of directors’ ownership.

4.     To find out if there is a positive relationship between number of director and bank performance.

1.7          SIGNIFICANCE OF THE STUDY

The need for credible or quality financial statement in any economy cannot be overemphasized. Its relevance lies in the efficient and effective allocation of economic resource. More importantly, for a developing country such as Nigeria which requires the inflow of foreign direct investments into her financial system, a transparent, credible, accountable and reliable financial reporting system is a prerequisite for attracting foreign investors.

This study will also help in:

1.     Maintaining good corporate values and safe business environment which allows for healthy competition among corporate entities.

2.     Boosting the confidence of the investing public as a consequence of credible financial reports made by the banks.

3.     Enabling the regulatory authorities direct or align their efforts properly in curbing the discretionary behaviour of bank managers.

4.     Ultimately prevent the collapse of the bank in the future.

1.8          LIMITATIONS OF STUDY

It is restricted to 14 selected banks in the finance industry. It is done in other to get the effect of corporate governance on banks’ performance.

Performance can be evaluated in different ways. Return on capital employed is been used as an indicator of the banks’ performances. The limitations encountered during this study included:

1.     Difficulty in getting primary data from the banks concerning financial matters and business proceedings.

2.     The cross sectional differences in accounting methods of various companies under study.

3.     Different corporate governance exist in the banks used, thereby making comparison difficult.

4.     Another constraint was the sample size. A larger size could not be obtained due to technical inadequacies and time factor.

5.     Ultimately, non disclosure of full corporate governance practice by the banks in their annual reports, some banks did not state explicitly in their annual reports, the status of its directors (i.e. either executive or non-executive).

1.9          STATEMENT OF HYPOTHESES

From the research study, it was discovered that some banks have effective and efficient corporate governance while some have a very poor one.

Consequently, the following hypotheses as tested empirically in the course of this research work and the result is the basis of conclusion.

H0:          There is no positive relationship between corporate governance and bank performance.

H1:          There is positive relationship between corporate governance and bank performance.

H0:          Banks with board chairman position different from chief executive officer are not performance conscious (profitability).

H2:          Banks with board chairman position different from chief executive officer are performance conscious (profitability).

H0:          Banks with insider-outsider ownership are not maximizing profit.

H3:          Banks with insider-outsider ownership are interested in the maximization of profit.

1.10        OPERATIONAL DEFINITION OF TERMS

1.     Corporate Governance: This term refers to the process by which a board of directors through its management guides an organization to achieve its corporate goals.

2.     Manager Discretionary Behaviour: It refers to those actions of a corporate manager, which do not align with the expectation of the stakeholders.

3.     Corporate Managers: It refers to those charged with the responsibility of performing managerial functions such as planning, directing, organizing, controlling and coordinating.

4.     Empirical: Relying on observation and experiment, not on theory, questionnaire and regression analysis.

5.     Curbing: There are rules and regulations, checks and balances that restrain the corporate managers from placing their personal goals before the organizational goals.