CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE OF NIGERIAN BANKS: (A CASE STUDY OF FIRST BANK PLC)
ABSTRACT
The study used First Bank Plc as a case study to investigate the impact of corporate governance on the financial performance of Nigeria's banking industry. Board composition, board size, CEO duality status, and the number of shareholders were used as proxies for corporate governance, while return on asset, return on equity, and net profit margin were used to measure financial performance. The study aimed to investigate the impact of corporate governance variables on return on assets, return on equity, and net profit margin. Secondary data on the variables of interest were acquired from the sampling bank's yearly financial statements from 2011 through 2016. The acquired data were analysed using descriptive statistics, Pearson correlation analysis, and regression analysis. The findings, among others, revealed that corporate governance had a considerable impact on return on assets, return on equity, and net profit margin. Furthermore, board size has been shown to have a detrimental impact on financial performance, although board composition and the number of shareholders have a beneficial impact. The regression coefficient for the CEO's duality status was not found since the sampled bank had distinct people in the posts of CEO and board chairman over the estimated period. To that end, the study recommends, among other things, that companies ensure that the majority of their board members are independent, which means that the directors are not employees of the company and do not rely on it for their livelihood, allowing them to fearlessly and honestly monitor the activities of the CEO and other executive directors. This will also serve to limit the CEO and executive directors' ability to exploit the company to their own benefit.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Every economy's growth and development are determined by its financial system. In Nigeria, the banking industry effectively controls the financial sector. The industry has undergone a number of restructurings, all aimed at protecting deposit funds, maintaining and ensuring the soundness of banking, and increasing the welfare of employees and stakeholders. Internal (workers and investors) and external (public and depositor) unhappiness have plagued the banking industry, resulting in image issues. As a result, most banks have sought improved techniques such as information and communication technology (ICT), total quality management strategies, corporate governance strategies, repackaging, and rebranding to compete more effectively, solve these problems, and improve their financial and corporate performance (Okojie, 2021; Uche, 2020; Alabi & Oluwaseun, 2022). Corporate governance has long been a global concern. However, it rose to prominence in the 1980s as a result of the aftermath from the Cadbury report in the United Kingdom, which focused on financial aspects of corporate governance. Following then, the topic of corporate governance spread throughout both developed and developing countries (Oluwatayo and Oyewole, 2021; Ezeani and Oji, 2020). effective corporate governance is becoming as important to the global economy as effective national governance, and it will converge in related concerns of competitiveness, corporate citizenship, and social and environmental responsibility. Bank governance is especially important in developing economies due to its involvement in financial intermediation. Commercial banks are the primary sources of financing to businesses, and in the absence of a strong capital market, their collapse becomes the system's failure. According to Simpson (2009), the consequences of a financial system failure might be enormous, with losses exceeding aid received. The biggest problem facing the global economy today is not in the production of advanced equipment to aid in the fight against government rebellions or other crises. However, resolving governance issues can benefit a country's economy and raise citizens' living conditions. This is demonstrated by the fact that many organisations globally experience the consequences of poor governance, which has a negative impact on organisational performance (Alabi & Oluwaseun, 2022; Aluko, 2021). Commercial banks play critical roles in pushing any nation's economy by channelling surplus funds to deficit units, which is critical for repositioning to achieve efficient financial performance through a reform process targeted at preventing bank failure. In Nigeria, the banking sector reform process is part of the government's strategic objective, with the goal of restructuring and integrating the Nigerian banking industry into a continental and global financial system. According to Akpan and Rima (2012), the banking system has undergone significant changes over time in terms of the number of institutions, ownership structure, and breadth and depth of activities. These changes have been primarily influenced by the constraints imposed by the financial system's deregulation, globalisation of operations, technological advancement, and the implementation of supervisory and prudential requirements that comply with international regulations and standards, all of which corporate governance encompasses. Corporate governance refers to the set of rules, policies, and processes that guide and control a firm. According to Okojie (2021), corporate governance entails balancing the interests of a company's various stakeholders, which include shareholders, management, consumers, suppliers, financiers, the government, and the community. Corporate governance also serves as a platform for achieving the company's objectives, and it encompasses nearly every aspect of management, from action plans and internal controls to performance measurement and corporate disclosure. Good corporate governance increases profitability for businesses, boosts valuation and sales growth, and can minimise capital expenditure. According to Uche (2020), excellent company governance boosts stakeholder confidence and promotes organisational goodwill. company governance is a mechanism for ensuring that company reporting is fair, equitable, accountable, and transparent. According to Mayer (2011), corporate governance is more than just enhancing corporate efficiency; it also addresses two fundamental issues: the company's strategy and life cycle development. It guarantees that organisational management follows initiatives that protect shareholders' interests. Good corporate governance is defined as governance procedures based on a greater level of corporate responsibility that an organisation demonstrates in terms of transparency, accountability, and ethical issues (Alabi & Oluwaseun, 2022; Aluko, 2021). Corporate governance is typically designed to increase competition while giving customers the option of making a decision. company governance systems and institutions differ by location, but the goal is to foster company independence, responsibility, and probity (Ezeani & Oji, 2020). Thus, strong corporate governance is a critical issue for the modern banking business in the globe today since it has the potential to impact profitability, solvency, and liquidity levels.
1.2. STATEMENT OF PROBLEM
According to Aremu (2014), corporate governance is still in its early stages in Nigeria's banking industry, with only 40% of quoted commercial banks appearing to have recognised corporate governance norms. The inadequacy inherent in the implementation of corporate governance ethics is possibly the most important factor contributing to business failures and financial difficulty among banks. In recent years, the Nigerian banking system has seen a rise in corporate fraud, which often leads to failures. Poor implementation of corporate governance processes has been identified as one of the key causes contributing to practically all known bank failures in the country as a result of noncompliance with corporate governance ethics. According to Aremu (2014), the previous distresses suffered by Nigerian banks were caused by the board of directors' failure to provide effective monitoring, regulatory, supervisory, and corporate governance functions, with some running their organisations for their own personal gain.
1.3. OBJECTIVE OF THE STUDY
The main objective of the study is to examine the impact of corporate governance on the financial performance of Nigerian banks using a case study of the First Bank of Nigeria. The specific objectives of the study are:
To examine the impact of corporate governance on returns on assets of First Bank Plc. To examine the impact of corporate governance on returns on equity of First Bank Plc. To examine the impact of corporate governance on the net profit margin of the First Bank Plc.
1.4. RESEARCH QUESTIONS
The study is aimed to provide relevant answers to the following research questions and they are:
Does corporate governance impact returns on assets of First Bank Plc? Does corporate governance impact on returns on equity of First Bank Plc? Does corporate governance impact the net profit margin of First Bank Plc?
1.5. RESEARCH HYPOTHESES
Based on the objectives and questions raised in the study, three hypotheses were developed to guide the study. The three hypotheses are stated in their null form and they include:
H01: Corporate governance has no significant impact on returns on assets of First Bank Plc. H02: Corporate governance has no significant impact on returns on equity of First Bank Plc. H03: Corporate governance has no significant impact on the net profit margin of First Bank Plc.
1.6. SIGNIFICANCE OF THE STUDY
The study provides a picture of where banks stand in relation to the codes and principles on corporate governance introduced by the Central Bank of Nigeria. It will further provide insight into understanding the degree to which the banks that are reporting on corporate governance has been compliant with different sections of the codes of the best practice and where they are experiencing difficulties.
Financial institutions, non-financial institutions, private sectors, stakeholders in the financial system, and as well as other corporate titans will find this study as an invaluable asset which spelled out ways of improving an organization’s financial performance via corporate governance
The research study will also be beneficial to future researchers and undergraduate and postgraduate students wishing to carry out a similar study in their future research undertakings.
1.7. SCOPE OF THE STUDY
The study is delineated to examine the impact of corporate governance on financial performance by placing a strong emphasis on First Bank Plc between the periods 2011-2016.
1.8. METHODOLOGY
Secondary data sourced from the Nigerian Stock Exchange (NSE) and financial statements of First Bank Plc for the period considered were used in the study. Returns on asset (ROA), returns on equity (ROE) and net profit margin (NPM) were used as indices to measure financial performance while board size (BS), board composition (BC), chief executive officer’s duality status (CDS) and a number of shareholders (NS) were used as indices to measure corporate governance.
Three models are developed to estimate the impact of corporate governance on the financial performance of the sampled bank. The first model estimates the impact of corporate governance (BS, BC, CDS, NS) on returns on assets (ROA). The second model estimates the impact of corporate governance (BS, BC, CDS, NS) on returns on equity (ROE). The third model estimates the impact of corporate governance (BS, BC, CDS, NS) on net profit margin (NPM).
The regression analysis is therefore employed to estimate the coefficients of parameters estimate in each of the models.
1.9. DEFINITION OF KEY TERMS
CORPORATE GOVERNANCE: These refer to the set of rules, controls, policies, and resolutions put in place to dictate corporate behavior to the stakeholders of a firm.
FINANCIAL PERFORMANCE: This is a measure of how well a firm can use assets from its primary mode of business and generates revenue. This term is also used as a general measure of a firm’s overall financial health over a given period of time.
RETURNS ON ASSET: This measure of a company’s profitability equals a fiscal year’s earnings divided by its total asset, expressed as a percentage.
RETURNS ON EQUITY: This the measure of how well a company used reinvested earnings to generate additional earnings, equal to fiscal year after-tax income (after preferred stock dividends but before common stock dividends) divided by book value expressed as a percentage.
TOTAL ASSETS: This refers to the final amount of all gross investments, cash and equivalents, receivables, and other assets presented on a firm’s balance sheet. Total assets are the aggregation of fixed assets and current assets.
NET PROFIT MARGIN: This refers to how much of a company’s revenue is kept as net income. The net profit margin is generally expressed as a percentage.
References
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