ASSESSMENT OF THE LEVEL OF ADOPTION OF CORPORATE GOVERNANCE IN THE FINANCIAL SECTOR

CHAPTER ONE

INTRODUCTION

• Background to the Study

The concept of corporate governance has attracted a good deal of public interest in recent years, because of its apparent importance on the economic health of corporations and society in general. Basically, corporate governance in the banking sector requires judicious and prudent management of resources and the preservation of resources (assets) of the corporate firm; ensuring ethical and professional standards and the pursuit of corporate objectives, it seeks to ensure customer satisfaction, high employee morale and the maintenance of market discipline, which strengthens and stabilizes the bank. However, the successful banks accounted for about 93.5% and 97% of the total deposit liabilities and assets of the banking system respectively. (CBN Annual report, 2007: 26). Before the consolidation exercise, the banking industry had 82 active banks whose overall performance led to sagging of customer’s confidence, as there was lingering distress in the industry. The supervisory structures were inadequate, as they were cases of official recklessness amongst managers, and the industry was notorious for financial abuses. However, in November, 2005; the CBN blacklisted six officers of banks, including a chairman and a non-executive director, for unethical practices and professional misconduct. The same year, 110 cases of fraud and forgeries totalling N1.5 billion were reported by various Banks; and fifty six (56) of the cases amounted to N 1.38 billion, representing 91.8% of the total amount (N1.50B) {CBN annual report, 2006: 64).

Poor corporate governance was identified as one of the major factors in virtually all the cases.

Globalization and Information and Communication Technology (ICT) took the world by storm and have reduced the world to a global village. This has given rise to the continuous integration of the world economy and capital markets which has in turn given rise to increase in the interdependence of international financial markets. As a result of this, there is increased mobility of capital across boundaries of the globe. Therefore, in order to ensure and sustain investors’ confidence in the capital market, the issue of corporate governance has now been brought to the front  burner because that is the only way corporate financial reporting can be seen to be transparent (Garuba &Donwa, 2011).

Given this background, this study examines the efficacy of corporate governance with a view to determine it impact on firms’ performance and providing measures to enhance corporate financial performance and sound business practices. The experience of business failure and financial scandals around the world brought about the need for good governance practices. The United States of America, Brazil, Canada, Germany, France, England, and Nigeria and so on, all witnessed financial failures. Bell and Pain (2000) supported this view that the last 20 years have witnessed several bank failures throughout the world. Financial distress in most of these countries was attributed to high incidence of non-performing loans, capital deficiencies, weak management, and poor credit policy and governance system. In the view of Bollard (2003), the weaknesses in some of the ailing banks reflected poor management of conflicts of interest, inadequate understanding of banking risks and poor oversight by boards of the risk management system and internal audit arrangements. These problems were further compounded by poor quality of financial disclosure and ineffective external audit.

Corporate governance is the oversight mechanisms, including the processes, structures and information for directing and overseeing the management of a company. It encompasses the means by which members of the board of directors and senior managers are held accountable for their actions and the establishment and implementation of oversight functions and processes. Corporate governance is holding the balance between economic and social goals and between individuals and communal goals. It is also concerned with the appropriate structuring of corporations and enterprises, with the fundamental importance to the performance of the economies, particularly in developing and transition economies. The corporate failures in Nigeria, especially in the financial sector has once again brought to the fore the need to re -examine the issues of corporate governance practices in Nigeria. As corporate governance deals with processes, policies, laws, and regulations which ensure that the management of an organization is accountable, objective, transparent and ethical in the conduct of the business in their interaction with stakeholders and the larger society. The turmoil in the Nigerian banking industry has more than ever before, necessitated the need for the adoption of corporate governance principles by the sector. The apex financial sector regulator in Nigeria, the Central Bank of Nigeria (CBN) on August 14, 2009, removed the Chief Executive Officer (CEOs) and the Executive Directors of five commercial banks in Nigeria on the ground of poor corporate governance in their various banks. Some of the affected banks were among the big banks in the country. The apex regulator stresses that “retention of public confidence through the enthronement of corporate governance remains of utmost importance, given the critical role of the banking industry in the economy (CBN (2009:23).

1.2.     Statement of the problem

There is no gain saying that the present economy deserves a sound, stable and better banking performance following the causative factors, such as unethical and unprofessional practices, poor management quality among others which contributed to low level of bank performance and sometimes lead to failure of bank. The bitter experiences of Asian financial crisis of the 1990s underscore the importance of effective corporate governance procedures to the survival of the macro economy. This crisis demonstrated in no unmistakable terms that “even strong economies, lacking transparent control, responsible corporate boards and shareholder right can collapse quite quickly as investor’s confidence collapse”. Sullivan (2000). Banks need payments system infrastructure to exchange claims securely and markets in which to hedge the risks arising from their intermediation activities. The banking system therefore functions more efficiently and effectively when there is a robust and efficient payments systems infrastructure.

The few studies on bank corporate governance normally focused on a single aspect of governance, such as the role of directors or that of shareholders while omit ting other factors and interactions that may be important within the governance framework. Feasible among these few studies is the one by Adams and Mehran (2000) for a sample of US companies, where they examined the effects of board size and composition on value.

Another weakness is that such research is often limited to the largest, actively traded organizations, many of which show little variation in their ownership, management and board structure and also measure performance as market value. In Nigeria, among the few empirically feasible studies on corporate governance are the studies by Sanda et al (2005) and Ogbechie (2006) that studied the corporate governance mechanisms and firms’ performance.  In order to address these deficiencies, this study is not restricted to the framework of the organization for Economic Co-operation and Development principle, which is based primarily on shareholder sovereignty. It analyzed the level of compliance of code of corporate governance in Nigerian banks with the Central Bank of Nigeria code of corporate governance. Finally, while other studies on corporate governance neglected the operating performance variable as proxies for performance, this study employed the accounting operating performance variables to investigate the existence if any relationship between corporate governance and performance of banks in Nigeria.

 1.3         Objectives of the Study

The broad objective of this study is to assess the level of adoption of corporate governance in the financial sector. To achieve this, the following specific objectives will be addressed:

1. a) To examine the extent to which adherence to corporate governance attracts investors in the banking industries.
2. b) To evaluate the level of accountability to investors by corporate managers in the banking industries.
3. c) To evaluate the extent to which principles of corporate governance are practiced in the banking industries.

In order to ensure good corporate governance which is therefore embodies both enterprise (performance) and accountability (compliance concerns), (Alaribe, 2014). Sir Adrian Cadbury described Corporate Governance “As the way organizations are directed and managed. Corporate Governance therefore ensures that due process, transparency and accountability are displayed in the management of the affairs of an enterprise. Corporate governance is designed to promote a diversified strong and reliable banking sector which will ensure the safety of depositor’s money as well as play active developmental roles in Nigeria’s economy. Corporate governance is used to monitor whether outcomes are in accordance with plans and to motivate the organization to be fully informed in order to maintain organizational activity.

1.4.    Research questions

The following research questions were formulated:

1. To what extent does adherence to corporate governance attracts investors in the banking industries.
2. To what extent does the level of accountability to investors by corporate managers in the banking industries?

• Is there a significant relationship between corporate governance practiced in the banking industries?

1.5.    Research hypotheses

It is in the light of the above research questions, that this research work tested the following hypotheses;

H0: There is no significant relationship which adheres to corporate governance and investors in the banking industries.

H1: There is significant relationship which adheres to corporate governance and investors in the banking industries.

H0:  There is no significant relationship in level of accountability to investors by corporate managers in the banking industries?

H1: There is significant relationship in level of accountability to investors by corporate managers in the banking industries?

H0:  There is no significant relationship between corporate governance practiced and bank’s performance.

H1: There is significant relationship between corporate governance practiced and bank’s performance.

1.6.    Significance of the study

This entails the reasons why corporate governance should be adopted in the banking industry so as to regulate how banks will manage the investor’s funds.

The interests of investors and other stakeholders are usually protected by a three-tier security system. At the top level is the company’s governance code which is directed toward enforcing company policies, achieving company objectives, monitoring company performance, and ensuring adequate disclosure of the company’s activities. At the other end is the reporting system regulated by public and private institutions such as the Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB), and Financial Accounting Standard Board (FASB), which subject public companies to accounting and disclosure standards, and their auditors to audit, independence, ethical, and quality control standards.

1.7.     Scope of the Study

This study is focused on bank selected for the research work which is Guaranty Trust Bank (GT Bank) Agbara in other to analyze how effective corporate governance is, on the performance of the organization, how the principles of corporate governance will be adopted in other to enhance the degree of accountability and transparency by the banks to the shareholders. Also 65 questionnaires were constructed, while 54 was returned by the respondents.

1.8.    Limitation of the Study

During the research work, there is some limitation which occurs due to some certain reasons:

1. Time Frame.
2. Finance Constraints.
3. Reluctances of Staffs to give adequate information.

Historical Background to Case study, Guaranty Trust Bank (GTB)

Guaranty Trust Bank plc has overthe years, acquired an enviablereputation built on a solid foundationof integrity, professionalism, valueadding service delivery and excellentcorporate governance. As a publiclyquoted company with a highlydiversified ownership structure, theBank is committed to improvingshareholder value throughtransparent best business practices.In addition to the principles of the” Code of Corporate Governance forBanks in Nigeria Post Consolidation”issued by the Central Bank ofNigeria (CBN), and the Securitiesand Exchange Commission’s “Codeof Best Practices”, the Bankbenchmarks itself againstinternational best practices. TheCode of Corporate Governance ofGuaranty Trust Bank plc (revised inJanuary, 2011), provides the basisfor promoting the highest standardsof corporate governance in the Bank.The Bank is governed by aframework that facilitates checksand balances and ensures thatappropriate controls are put in place.

 1.9. Definition of terms

2. The stakeholders: Stakeholders play a key role in the provision of corporate governance. Small or diffuse shareholders exert corporate governance by directly voting on critical issues, such as mergers, liquidation, and fundamental changes in business strategy and indirectly by electing the boards of directors to represent their interest and oversee the myriad of are a common mechanism for aligning the interests of managers with those of shareholders. The board of directors may negotiate managerial compensation with a view to achieving particular results. Thus, small shareholders may exert corporate governance directly through their voting right and indirectly through the board of directors elected by them.
3. Corporate governance mechanism: Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. There are both internal monitoring systems and external monitoring systems. Internal monitoring can be done, for example, by one (or a few) large shareholder(s) in the case of privately held companies or a firm belonging to a business group. Furthermore, the various board mechanisms provide for internal monitoring. External monitoring of managers’ behavior occurs when an independent third party (e.g. the external auditor) attests the accuracy of information provided by management to investors. Stock analysts and debt holders may also conduct such external monitoring. An ideal monitoring and control system should regulate both motivation and ability, while providing incentive alignment toward corporate goals and objectives.

 Internal mechanism: The foremost sets of controls for a corporation come from its internal mechanisms. These controls monitor the progress and activities of the organization and take corrective actions when the business goes off track. Maintaining the corporation’s larger internal control fabric, they serve the internal objectives of the corporation and its internal stakeholders, including employees, managers and owners. These objectives include smooth operations, clearly defined reporting lines and performance measurement systems. Internal mechanisms include oversight of management, independent internal audits, structure of the board of directors into levels of responsibility, segregation of control and policy development.

4. External mechanism: External control mechanisms are controlled by those outside an organization and serve the objectives of entities such as regulators, governments, trade unions and financial institutions. These objectives include adequate debt management and legal compliance. External mechanisms are often imposed on organizations by external stakeholders in the forms of union contracts or regulatory guidelines. External organizations, such as industry associations, may suggest guidelines for best practices, and businesses can choose to follow these guidelines or ignore them. Typically, companies report the status and compliance of external corporate governance mechanisms to external stakeholders.

5. The organization of economic corporation and development (OECD): The OECD Principles of Corporate Governance were first published in 1999. These principles were intended to provide guidelines in assisting governments in improving the legal, institutional and regulatory framework that underpins corporate governance (OECD 1999). In addition they provided guidance for stock exchanges, investors, companies, and other parties. These principles were not binding, but rather provided guidelines for each country to use as required for its own particular conditions. These principles were published as the first international code of corporate governance approved by governments. Since then, they have been widely adopted.

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