Given the fury of activities that have affected the effects of banks to comply the various consolidation policies and the antecedents of some operators in the system, there are concerns on the need to strength corporate governance in banks. This will boost public confidence and ensure efficient and effective functioning of the banking system (Soludo, 2004). Banking supervision cannot function well if sound corporate governance is not in place (Heidi and Marleen, 2003). As a result, banking supervisors have strong interest in ensuring that there is effective corporate governance at every banking organization in an increasingly open environment (Kashif, 2008). Several events are therefore responsible for the heightened interest in corporate governance especially in both developed and developing countries. This concept of corporate governance of banks and every large firm have been a priority on the policy agenda in developed market economics for over a decade.
Further to that, the concept is gradually warming itself as a priority in the African continent (Uwuigbe, 2011). Indeed in developing economics, the banking sector among other sectors has also witnessed several cases of collapses, some of which include Savannah Bank Plc and Society Generale Bank Ltd among others (Akpan, 2007). Although corporate governance in developing economies has recently received a lot of attention, yet corporate governance of banks in developing economies as it relates to financial performance has almost been ignored by researchers (Ntim, 2009). Even in developed economies the corporate governance of banks and their financial performances has only been discussed recently in literature (Macey and O’ Hara, 2011).
In Nigeria, the issue of corporate governance has been given the front burner status by all sectors of the economy. This is in recognition of the failure of the critical role of corporate governance in the success or failure of companies (Ogbechie, 2006). Corporate governance is about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that will foster good corporate performance. Corporate governance therefore refers to the processes and structures by which the business and affairs of institutions are directed and managed in order to improve long term shareholders’ value by enhancing corporate performance and accountability while taking into account the interest of other stakeholders.
1.1 BACKGROUND OF THE STUDY
The background of corporate governance dates back to the 19th Century when state corporation laws enhanced the rights of corporate boards without unanimous consent of shareholders. They did it in exchange for statutory benefits such as appraisal rights in order to make corporate governance more efficient. The early debates came up after the increase of agency problem, which emanated from separation of ownership and control created in the case of Salomon v Salomon, (1897). Recently corporate governance becomes a hot topic among a wide spectrum of people, government, industry operations, directors, investors, shareholders, academics and international organisations to least but a few. Today’s world has seen that organisation transparency, financial disclosure, independency, board size, board composition, board committees, board diversity and among other is the cornerstone of good governance practices. These variables are in the main agenda of most meetings and conferences worldwide including the World Bank, International Monetary Fund (IMF) and Organisation of Economic Co-operation and Development (OECD) (Inyanga, 2009).
Recently researchers have managed to come up with many definitions of corporate governance. Strine (2010) pointed out that corporate governance is about putting in place the structure, processes and mechanisms that insure that the firm is directed and managed in a way that enhances long-term shareholder value through accountability of manager, which will then enhancing firm performance. OECD (1999) defined it as the system by which business corporations are directed and controlled in favour all the stakeholders. Currently financial sectors have seen the importance of having good corporate governance practices (Kolk&Pinkse, 2010). IFC (2004) examined the benefits of having good Corporate Governance at different levels. At the company level, well-governed companies tend to have better and cheaper access to capital, and tend to outperform their poorly governed peers over the long-term, on the other hand corporate governance reduce financial crisis (IFC, 2004).
Currently many country leaders all over the world has increased concern over corporate governance due to the increase of reported cases of frauds, inside trading, agency conflicts among other corporations saga (Enobakhare, 2010). Corporate failure has recently witnessed in both developed and developing countries with the reported cases of the East Asia crises of 1997/98, the collapse of Enron in 2001 and WorldCom in 2002, (Inyang, 2009) and the just ended global financial crisis of 2007/8. The crises emanated from the poor governance practices from the financial sector (the mortgage market). Since mortgage market was the mother of the crisis, this has triggered the world leaders to enact some laws, which increase banks governance. This is supported by Ahmad (2006) who argued that a sound banking system requires appropriate infrastructure to support efficient conduct of banking business operating environment, governance and regulatory framework at domestic as well as international levels in order to reduce bank crisis. The World Bank is helping currently many economies to undertaking the banking sector reformation and restructuring. This exercise will easy, reduce or eliminate some fatal global macroeconomic troubles which have emanated from poor governance of large financial and non-financial institutions (Zaharia, Tudorescu&Aharia, 2010).
In most recently, researchers worldwide have grown interest on corporate governance and corporate performance of commercial banks as witnessed by an explosion research on corporate governance (Adams, 2012; Adams, Hermalin&Weisbach, 2008). Commercial banks should show good corporate governance since they play a critical role in the corporate governance of other firms (Franks & Mayer, 2001; Santos & Rumble, 2006), as creditors or equity holders of firms. In this regard, commercial banks must be transparent, accountable, trustworthy and responsible to the public. Nigeria commercial banks like any other banks in the world are facing corporate governance challenges. The commercial banks have previously witnessed a phenomenal growth after the economic deregulation in 2005. The economic turbulences and political meltdown that have cornered the country in year 2000, 2004 and 2008 has created a new challenging environment. By the mid of 2012, the country has experienced intermittent corporate governance turmoil which has caused the closure of Royal bank, Genesis bank, and placement of Interfin bank under recuperative curatorship by the central bank (RBZ, 2012).
The study investigates the impact of corporate governance on commercial banks, in order to assess the significance of corporate governance in the commercial banks of Nigeria. This would be done in line with the empirical studies carried out by Bhagat and Bolton (2008) in the US, who found that corporate governance, has an impact on firm performance during the 1990s. On the policy domain, corporate governance proponents have prominently cited this study as evidence that good governance has a positive impact on corporate performance. However, (Laeven, and Levine, 2009) argued that corporate governance might not capture the true relationship with corporate performance unless other specific aspects of governance are controlled. However, relatively limited attention has been done on corporate governance of commercial banks in Nigeria of which commercial banks are the cornerstone of financial system in any economy as advocated by (Adams &Mehran, 2005; Caprio et al., 2007). The researchers increased an eager over this gray area of finding out if corporate governance has an impact on commercial banks performance in Nigeria after the introduction of multi-currency in 2009. The research is in line with other studies done in countries like USA, Italy among others.
1.2 STATEMENT OF THE PROBLEM
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 omitting 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
Generally this study seeks to explore the relationship between internal corporate governance and financial performance of banking sector in Nigeria as its main objective. However the specific objectives are:
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