THE IMPACT OF CORPORATE GOVERNANCE ON PERFORMANCE

IN THE NIGERIAN BANKING INDUSTRY

BY

SIAKA QUEEN RABIYAT

FPI/HND/ACC/23/086

A PROJECT SUBMITTED TO THE DEPARTMENT OF ACCOUNTANCY, SCHOOL

OF BUSINESS STUDIES, FEDERAL POLYTECHNIC IDAH, KOGI STATE

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF

HIGHER NATIONAL DIPLOMA (HND) IN ACCOUNTANCY

AUGUST, 2025

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 APPROVAL PAGE

The research work has been read and approved having met the requirements for the award of
Higher National Diploma (HND) in Accounting, Department of Accountancy, School of
Business Studies, Federal Polytechnic, Idah.

_______________________________ ___________________

SANI P. M.. Date

Project Supervisor

_____________________________ __________________

DR. ONALO UGBEDE Date

Head of Department

____________________________ __________________

External Examiner Date

ii
 DEDICATION

This project is dedicated to Almighty God, the creator, and the giver of wisdom and
knowledge for seeing me through the Higher National Diploma (HND) programme.

iii
 ACKNOWLEDGEMENTS

I am very grateful to Almighty God for his unceasing guidance and protection and
also for his enabling grace and inspirations to make this work a successful one.

My humble gratitude goes to my supervisor, SANI P. M.. whose fatherly and

constructive guidance led to the success of this research work. I also acknowledge the Head
of Department (HOD), DR. ONALO UGBEDEfor his leadership style which is the architect
of my success. and all the lecturers in the Accountancy Department.

I sincerely appreciate the efforts of my lovely and caring parents in financial support,
spiritual and moral aspect I say thank you, you are the best.

Finally, I will not forget to acknowledge my good friends, for their prayers and
support, my course mates and those who supported me in one way or the other, May God
bless you all.

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 ABSTRACT

This empirical study, seeks to determine the impact of corporate governance mechanisms on
the performance of banks in Nigeria. An intensive review of literature was conducted to
identify the various aspects of corporate governance and the roles they play in determining
corporate performance. In this study, board size and board independence represented
corporate governance while return on equity and return on assets proxied firm performance.
The Ordinary Least Squares (OLS) technique was applied on data gathered from 5
Commercial Banks firms over the period 2008 to 2012. The findings of this study indicate
that elements of corporate governance such as board size and board independence have
negative effects on the performance of firms, as measured by the return on assets and return
on equity.

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 TABLE OF CONTENTS
PAGE

i
Title Page

Approval Page ii

Dedication iii

Acknowledgement iv

Table of Contents v

Abstract vii

CHAPTER ONE-INTRODUCTION

1.1 Background to the Study 1

1.2 Statement of Problem 3

1.3 Objectives of the Study 3

1.4 Research Questions 4

1.5 Research Hypotheses 4

1.6 Significance of the Study 4

1.7 Scope of the Study 5

1.8 Operational Definition of Terms 5

CHAPTER TWO-REVIEW OF RELATED LITERATURE

2.1 Corporate Governance 7

2.2 Theoretical Framework of the Study 9

2.3 Prior Evidence on Corporate Governance and Firm Performance 13

2.4 Corporate Governance Mechanisms 15

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2.5 Internal Mechanisms of Corporate Governance 20

2.6 Standardizing Corporate Governance in Nigeria 22

2.7 Corporate Governance Frameworks in Nigeria 22

CHAPTER THREE- METHODOLOGY

3.1 Introduction to Chapter 24

3.2 Research Design 24

3.3 Data Description and Sources 24

3.4 Specification of Model 24

3.5 Procedure for Data Analysis 26

CHAPTER FOUR-PRESENTATION, ANALYSIS AND INTERPRETATION

OF DATA

4.1 Measurements of the Variables of the Study 27

4.2 Data Analysis 28

4.3 Test of Hypotheses 29

4.4 Discussion and Interpretation of Result 40

CHAPTER FIVE-SUMMARY, CONCLUSION AND

RECOMMENDATIONS

5.1 Summary of Findings 43

5.2 Conclusion 43

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5.3 Recommendations 44

5.4 Suggestions for Further Study 44

Bibliography

Appendix-Data Summary

viii
 CHAPTER ONE
INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Corporate Governance is the system by which corporations are directed and
controlled(Rezaee, 2009). The corporate governance structure specifies the distribution of
rights and responsibilities among different participants in the corporation such as; boards,
managers, shareholders and other stakeholders and spells out the rules and procedures and
also decision making assistance on corporate affairs(Magdi and Nadereh,2002).By doing this,
it also provides the structure through which the company objectives are set, the means of
obtaining those objectives and examining the value and the performance of the
firms.Effective corporate governance is considered as ensuring corporate accountability,
enhancing the reliability and quality of financial information, and therefore enhancing the
integrity and efficiency of capital markets, which in turn will improve investors’ confidence
(Rezaee, 2009).
Corporate governance involves a system by whichgoverning institutions and all other
organizations relate to their communities and stakeholders to improve their quality of life.
(Ato, 2002). It is therefore important that good corporate governance ensures transparency,
accountability and fairness in reporting. In this regard, corporate governance is not only
concerned with corporate efficiency, but also relates to a much wider range of company
strategies and life cycle development (Mayer, 2007). It is also concerned with the ways
parties (stake holders) interested in the wellbeing of firms ensure that managers and other
insiders adopt mechanisms to safeguard the interest of the shareholders. (Ahmadu and Tukur,
2005). Corporate governance is based on the level of corporate responsibility a company
exhibits with regard to accountability, transparency and ethical values. Corporate governance
has also been defined by Keasey et al (1997) to include, “the structures, processes, cultures
and systems that engender the successful operation of organizations”. The definition could
therefore be centered on how the organization relates with other stake holders within an
environment. Therefore, corporate governance describes how companies ought to be run,
directed and controlled (Cadbury Committee, 1992). It is about supervising and holding to
account those who direct and control the management.

1
Corporate governance is an important effort to ensure accountability and responsibility and a
set of principles, which should be incorporated into every part of the organization. Though it
is viewed as a recent issue, there is, in fact, nothing new about the concept.Corporate
governance has been in existence as long as the corporation itself – as long as there has been
large–scale trade, reflecting the need for responsibility in the handling of money and the
conduct of commercial activities(Metrick and Ishii, 2002). Corporate governance has
succeeded in attracting a great deal of interest as it focuses not only on the long-term
relationship, which has to deal with checks and balances, incentives for managers and
communications between management and investors but also on transactional relationship,
which involves dealing with disclosure and authority (Tandelilin et al. , 2007).

The challenge of corporate governance could help to align the interests of individuals,
corporations and society through a fundamental ethical basis. This it will fulfill the long-term
strategic goal of the owners, which, after survival may consist of building shareholder value,
establishing a dominant market share or maintaining a technical lead in a chosen
sphere(Yetman,2004). It will certainly not be the same for all organizations, but will take into
account the expectations of all the key stakeholders, in particular: considering and caring for
the interests of employees, customers and suppliers, stockholders and debt holders, state and
local community, both in terms of the physical effects of the company’s operations and the
economic and cultural interaction with the population. The outcome of a good corporate
governance practice is an accountable board of directors who ensures that the investors’
interests are not jeopardized (Hashanah and Mazlina, 2005).
Desai and Yetman (2004), identified two areas of agency problems that make human ability
to make allocative decision imperfect; the cognitive and behavioral limitations. The cognitive
limitation is hidden information, also known as bounded rationality. This prevents investors
from knowing a priori whether the managers, whom they have employed as their agents,
allocate resources in the most efficient manner. The behavioral limitation, also known as
opportunism, is hidden action that reflects the productivity, inherent in an individualistic
society of managers as agents to use their positions for resources allocation to pursue their
own selfish interest and not necessarily the interest of the firm’s principals. This makes it
very crucial and important to study the existence of the influence of corporate governance on
the performance of firms.

2
1.2STATEMENT OF PROBLEM
Banks and other financial intermediaries are at the heart of the world’s recent financial crisis.
The deterioration of their asset portfolios, largely due to distorted credit management, was
one of the main structural sources of the crisis (Sanusi, 2010).In Nigeria, before the
consolidation exercise, the banking industry had about 89 active players whose overall
performance led to sagging of customers’ confidence. There was lingering distress in the
industry, the supervisory structures were inadequate and there were cases of official
recklessness amongst the managers and directors, while the industry was notorious for ethical
abuses (Akpan, 2007). Poor corporate governance was identified as one of the major factors
in virtually, all known instances of bank distress in the country. Weak corporate governance
was seen manifesting in form of weak internal control systems, excessive risk taking,
override of internal control measures, absence of or non-adherence to limits of authority,
disregard for cannons of prudent lending, absence of risk management processes, insider
abuses and fraudulent practices remained a worrisome feature of the banking system (Soludo,
2004).The problem of corporate governance still remains un-resolved among consolidated
Nigerian banks, thereby increasing the level of fraud (Akpan, 2007).The current banking
crises in Nigeria, has been linked with governance malpractice within the consolidated banks
which has therefore become a way of life in large parts of the sector. He further opined that
corporate governance in many banks failed because boards ignored these practices for
reasons including being misled by executive management, participating themselves in
obtaining un-secured loans at the expense of depositors and not having the qualifications to
enforce good governance on bank management (Sanusi ,2010).

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to ascertain the impact of corporate governance on
performance in Nigerian commercial banks. To achieve this, the research is focused on the
following specific objectives:
i. Examinethe conceptual framework of corporate governance in commercial banks
inNigeria.
ii. Determine the extent of corporate governance practicesin operation in the banking sector
iii. Ascertainthe impact of Board Size on corporate performance.
iv. Determine how the level of independence of directors influences the returns of banks.
v. Ascertain the factors that affect the levels of governance adopted.
3
1.4 RESEARCH QUESTIONS
The study will attempt to answer the following research questions:
i. To what extent do commercial banks in Nigeria practice and adhere to corporate
governance principles?
ii. Does the size of a board have an impact on the corporate performance of banks in Nigeria?
iii. What influence does the level of independence of boards have on bank’s performance?
iv. What are the reasons that make firms adopt different levels of governance under the same
level of investor protection?

1.5 RESEARCH HYPOTHESES

Hypothesis One
H0:There is no significant relationship between the size of a board and firm performance

in the banking sector in Nigeria

H1: There is a significant relationship between the size of a board and firm performance

in the banking sector in Nigeria

Hypothesis Two
H0: Level of board independence has no impact on firm performance in the banking sector
H1:.Level of board independence impacts on firm performance in the banking sector

1.6 SIGNIFICANCE OF THE STUDY

The purpose of this study would be to critically examine, and understand while analyzing the
adherence to corporate governance in the Nigerian Commercial banking sector. The outcome
of this research is anticipated to contribute to existing body of knowledge.In addition; the
study wouldhighlight the regulatory and institutional factors which may affect the adoption,
sustainable observation and practices of good corporate governance by banks in Nigeria.
Since the corporate performance of banks and other financial intermediaries is crucial for
efficient resource allocation, at the micro and macro levels, this study would show the
importance for banks themselves to put in place sound corporate governance. In fact, no one
single factor contributes more to institutional problems, capable of precipitating crisis, than
the lack of effective corporate governance (Lawal, 2009).

4
1.7 SCOPE OF THE STUDY
This study investigatedcorporate governance and its impact on performance commercial
banks in Nigeria. The choice of this sector is based on the fact that the banking sector’s
stability has a large positive externality and banks are the key institutions maintaining the
payment system of an economy that is essential for the stability of the financial sector(Achua,
K,2007). Financial sector stability, in turn has a profound externality on the economy as a
whole. To this end, the study basically covered five of the commercial banks operating in
Nigeria till date that met the N25 billion capitalization dead-line of 2005. The study will
cover these banks’ activities during the post consolidation period i.e. 2006- 2012.

1.8DEFINITION OF KEY TERMS

CORPORATE GOVERNANCE:is the totalityof practices and principles by which a
company’s board of directors provide a framework for achieving a company’s objectives. It
encompasses every aspect of Management from the conceptualization of plans to the
evaluation of performance and disclosure of such performance.
PLANNING: is developing a strategy to accomplish specific objectives set to achieve
organizational performance.
ORGANIZATION PERFORMANCE: is the ability of an organization to fulfill its mission
through sound management, strong governance and a persistent rededication to achieving
results.
PRODUCTIVITY:is the effectiveness of all efforts geared towards set objectives, measured
as a relationship between the amount of output produced and the amount of input used to
produce that output.
PERFORMANCE:is the result of activities of an organization or investment over a given
period of time.
SHAREHOLDER:is an individual, group, or organization that owns one or more units of
shares in a companyand who partakes in the financial prosperity or otherwise of the
company.
STAKEHOLDERS:A person, group or organization that has an interest or concern in an
organization.

5
 CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 CORPORATE GOVERNANCE

The term corporate governance describes the system by which companies are directed and
controlled. The overall objective of good governance is to ensure sustained growth or
survival of companies and the attainment of multiple goals of corporate stakeholders, that is,
investors, employees, and society in general (Charkham,1994). It is defined as the system by
which companies are controlled, directed and made accountable to shareholders and other
stakeholders; control being understood as including indirect influences of financial markets
(Demirag, 1998).
Hence control is a major element of corporate governance, both in terms of environment and
organizational activities (Committee of Sponsoring Organizations of the Treadway
Commission(COSO), 1992; Public Oversight Board (POB), 1993; Cohen and Hanno, 2000)
Corporate governance has become an issue of global significance. The improvement of
corporate governance practices is widely recognized as one of the essential elements in
strengthening the foundation for the long-term economic performance of countries and
corporations (Ibrahim et al., 2010). It has received new urgency because of global financial
crisis and major corporate failures that shock major financial centers of the world (Imam &
Malik, 2007). Hence, corporate governance has become an important factor in managing
organizations in the current global and complex environment. Melvin and Hirt (2005)
described corporate governance as decision-making and control particularly the structure of
the board and its working procedures. Corporate governance is sometimes viewed as a
business culture fostering economic growth by building up confidence of investors (The HIH
Royal Commission Report 2003). Others (Schmidt and Tyrell, 1997) gave a rather brief
definition; “corporate governance is the totality of the institutional and organizational
mechanisms, and the corresponding decision-making, intervention and control rights, which
serve to resolve conflicts of interest between the various groups which have a stake in a firm
and which, either in isolation or in their interaction, determine how important decisions are
taken in a firm, and ultimately also determine which decisions are taken”.
In its broadest sense, corporate governance refers to a complementary set of legal, economic
and social institutions that protect the interest of a corporate owner (Javed and Igbal, 2007).
According to Jensen and Meckling (1976), the concept of corporate governance presumes a
6
fundamental tension between shareholders (owners) and management. While the objective of
corporation’s shareholders is return on their investments, managers are likely to have other
goals such as power and prestige of running a large and powerful organization (Javed and
Igbal, 2007). Corporate governance is therefore concerned with the relationship among the
management, board of directors, controlling shareholders, minority shareholders and other
stakeholders. Corporate governance involves a system by which governing institutions and all
other organizations relate to their communities and stakeholders to improve their quality of
life. (Ato, 2002). It is therefore important that good corporate governance ensures
transparency, accountability and fairness in reporting. In this regard, corporate governance is
not only concerned with corporate efficiency, it relates to a much wider range of company
strategies and life cycle development. (Mayer, 2007).

2.2 THEORETICAL FRAMEWORK OF THE STUDY

Corporate governance is an important factor affecting the firm performance which in turn
leads to an increase or decrease in the value of the firm. It lacks any accepted theoretical base
or commonly accepted pattern till date (Carver, 2000; Tricker, 2000; Larcker, Richardson, &
Tuna, 2004; Parum, 2005). The theoretical perspective that guided the current study is linked
to the idea that banks with an efficient corporate governance structure have better
performance than those without it. Jensen and Meckling (1976) laid out the theoretical
relationship between corporate governance and firm performance. The theory of the
ownership structure of a firm was coined from fragments of agency theory, theory of finance
and theory of property cost. It was observed that as a manager’s sense of ownership claim
declines, his motivation to contribute to maximize the firm’s value also declines and therefore
the agency cost will increase leading to the firm's net value to decrease. So as the
manager's ownership percentage increases, the firm value will increase as well.
Kawaura(2004) found that the ineffective governance structure was responsible for the crisis
of Japanese banks in the 1990s. Lehmann et al. (2004) examined the relationship between
companies that have more efficient governance structure and higher performance. They found
that the differences in the level of performance among companies were significantly
explained by their level of efficiency in governance.
On a general note, most researchers support their studies by following three prominent
theories to further explain the determinants of corporate governance. These are the
Stewardship Theory, Institutional Theory, and the Agency Theory. Other theories include the
7
Resource-dependency, Transaction cost and Complexity theories. Each of the theories has
received comprehensive treatment in previous studies including Abdullah and Valentine
(2009), Mintz, (2004), Khanna and Ken (2008), Heath and Norman (2004), Hua and Zin
(2007), Sanda, Mikailu and Garba (2005).

2.2.1 The Stewardship Theory

The stewardship theory suggests that there is no agency cost between principals (owners) and
the agents (managers). There is a consensus in the interests of the shareholders and managers
thus minimizing the necessity to monitor the management for increasing shareholders wealth.
The theory also comments that the board should have a significant proportion of inside
directors to ensure more effective and efficient decision making. This is because inside
directors (Executive Directors) know the business better and thus make better decisions than
outside directors (Non-Executive Directors). It is also assumed that enhanced firm
performance is closely related with the decisions of inside directors as they work for the
maximization of shareholders wealth (Davis, Schoorman, & Donaldson, 1997). There are
also arguments that these directors are very cautious about their relationship with
shareholders as they feel that any anomalies will tarnish their reputation (Donaldson & Davis,
1994).

2.2.2 The Institutional Theory

The institutional theory relates to the influence of those norms, values, beliefs, judicial, and
regulatory systems on the firms structure and behavior. North (1990) mentioned that firms
regulate economic activities through formal and informal rules throughout their business
dealings. The institutional governance variables like organizational values, politics and
principles will influence the behavior of a bureaucratic leader (Carpenter & Feroz, 2001). The
theory looks at firms who are functioning amidst norms, values, ethics and assumptions as to
what is appropriate or inappropriate behavior.

2.2.3 Agency Theory

The agency theory has been regarded as the common outline considered in analyzing internal
corporate governance mechanism (Jensen & Meckling, 1976). The theory is concerned with
the problems arising as a result of conflict of interest between principal and agent. Agency
theory basically explains how the unhealthy relationship between managers and shareholders
8
generate costs of inefficiencies thus affecting the firm performance. Morck, Shleifer, and
Vishny (1988) argued that though the traditional agency problems due to the separation of
ownership and control is minimized by greater levels of ownership, new problems may still
creep in.
Corporate governance is the relationship among shareholders, board of directors and the top
management in determining the direction and performance of the corporation. It includes the
relationship among the many players involved (the stakeholders) and the goals for which the
corporation is governed (Kim & Rasiah, 2010).
According to Imam and Malik (2007) the corporate governance theoretical framework is the
widest control mechanism of corporate factors to support the efficient use of corporate
resources. The challenge of corporate governance could help to align the interests of
individuals, corporations and society through a fundamental ethical basis and it fulfills the
long term strategic goal of the owners. It will certainly not be the same for all organizations,
but will take into account the expectations of all the key stakeholders (Imam & Malik, 2007).
So maintaining proper compliance with all the applicable legal and regulatory requirements
under which the company is carrying out its activities is also achieved by good practice of
corporate governance mechanism.

2.3 PRIOR EVIDENCE ON CORPORATE GOVERNANCE AND FIRM

PERFORMANCE
Kajola (2008) examined four corporate governance mechanisms together (board size, board
composition, chief executive status and audit committee). The study found out that the
relationship between board composition and the two performance measures (Return on
Equity and Profit Margin) is not statistically significant. The implication of this is that for the
sampled firms, there is no relationship between the firm’s financial performance and the
external director sitting on the board. The outcome also has the support of Forsherg (1989),
Weishach (1991), Bhagat and Black (2002) and Sand et al, (2005). The result of the
relationship between the chief executive and board chairman status is clear with the two
performance proxies-positive and significant relationship. It implies that the sampled firms
have separate persons occupying the posts of chief executive and board chairman. This has
influence on the financial performance of the sampled firms and in line with the tenet of the
code of corporate governance best practices of Nigeria.

9
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 other countries all witnessed financial failures in the 90s and in recent
periods. This view was supported by Bell et al (2000), that the last 20 years witnessed several
bank failures throughout the world. Financial distresses in most of these countries were
attributed to a high incidence of non – performing loans, weak management and poor credit
policy. In the view of Omankhanlen (2011), the development was said to have reflected the
deterioration in the quality of credit facilities, coupled with the ongoing reclassification of
bank assets. The banking institution occupies a vital position in the stability of the nation’s
economy. It plays essential roles on fund mobilization, credit allocation, payment and
settlement system as well as monetary policy implementation. Management is expected to
exhibit good governance practices to ensure achievement of it objectives and avoid the
consequences of failure leading to loss of confidence.

This view was supported by Wilson (2006) that poor corporate governance can lead the
market to lose confidence in the inability of a bank to properly manage its assets and liability,
including deposits which could in turn trigger a bank liquidity crisis. Oluyemi (2005)
considered corporate governance to be of special importance in ensuring stability of the
economy and successful realization of bank strategies. In achieving this, strict compliance to
standards of lending high risk loans should be adequately secured. Deposits as major sources
of income need to be well managed in a culture that depicts good banking practices and high
transparency level to safeguard the integrity of the banks. Alan Greenspan (2001) noted that
most bad loans were made through aggressive lending without considering credit worthiness
of the borrowers and the significance of collateral.
Several empirical studies have investigated the association between corporate governance and
firm performance with inconclusive results Black et al., 2003,Sanda et al., (2005). Adjaoud et
al. (2007) concluded that there is little evidence of a systematic relationship between the
characteristics of the board. Bhagat et al (2000) and Weir et al (1999) experienced a positive
relationship between corporate governance and firm performance. Albeit Eisenberg et al
(1998) observed a negative relationship between them. Corporate governance contains
various aspects of complex regimes as Zingales (1998) also examines it as a comprehensively
broad, multifaceted notion that is enormously relevant, while difficult to define, due to the
variety of scope that it encompasses. Friend and Lang (1998) examine that shareholders,
10
having high concentration in firms, play an important role to control and direct the
management to take keen interest in benefit of the concentration group. In addition corporate
governance regimes also allow shareholders to direct the management for betterment of their
investment. Shleifer et al (1997) describe that concentration groups with large share holdings;
check the manager’s activities better.

2. 3. 1 Board Structure
Veliyath (1999) pinpoints that the board serves as a bridge between owners and managers; its
duty is to protect shareholders’ interests. Specifically speaking, taking responsibility for
managing and supervising, the board should monitor managers’ behaviors for shareholders’
interests, make important decisions, employ management team and superintend firms to obey
the law. Jensen (1993) found out that directors in a large board have diverse opinions and
consensus is difficult to reach, then the efficiency being lower, the situation could deteriorate
if directors increase(Lipton and Lorsch, 1992). Yermack (1996), Eisenberg, Sundgren and
Wells (1998) and Singh and Davidson (2003) unveil that board size is negatively related to
corporate performance.
Nevertheless, Bacon (1973) holds an opposite opinion that larger board implies members
with diverse background and viewpoints, which is helpful for the quality of decisions;
additionally, a wide range of their interests may neutralize decisions. Also, Zahra and Pearce
(1989) and Kiel and Nicholson (2003) reveal board size is positively related to corporate
performance. As previously noted, board includes internal and external directors. Fama and
Jensen (1983) detect that internal directors, by virtue of their positions, possess much more
information, are likely to collude with managers and make decisions against shareholders.
Easley (1996) investigates the relation between board composition and financial scandals,
revealing that the ratio of independent directors in the firms with no scandals is higher than
the firms which have been caught manipulating financial reports. Bhagat and Black (2002)
take the ratio of independent directors minus the ratio of inside directors as a proxy, and the
result discloses that board independence, significantly and negatively, correlates with short-
term performance, but board independence makes no difference in improving corporate
performance.

11
2.3.2 Board Independence
Non Executive Directors are appointed by shareholders in order to represent their interests on
company boards. The primary fiduciary duty that NEDs owe is, therefore, to the company’s
shareholders. This means that they mustn’t allow themselves to be captured or unduly
influenced by the vested interests of other members of the company such as executive
directors, trade unions or middle management (Campbell, 2011).
A higher proportion of the independent non-executive directors on boards is expected to
induce a more effective monitoring function which then leads to more reliable financial
statements (Ebraheem & Mohamad, 2012). This is because of the incentive for independent
board members to develop reputation as experts in decision making). Board Independence –
the degree to whichboard members are dependent on the current CEO or organization is
considered key to the effectiveness of board monitoring (Fama & Jensen, 1983). Boards
consisting primarily of insiders (current or former managers/employees of the firm) or
dependent outside directors (directors who have business relationships with the firm and /or
family or social ties with the CEO) are considered to be less effective in monitoring because
of their dependence on the organization. Independent boards – those primarily consisting of
independent outside directors are thought to be most effective at monitoring because their
incentives are not compromised by dependence on the CEO or the organization (Silvia &
Antonio, 2007).

2.3.3 Ownership Structure

Berle and Means (1932) set forth that ownership dispersion implies management is
distinguished from ownership, which, as Jensen and Meckling (1976) emphasize, may
contribute to agency problems between managers and shareholders or shareholders and
debtors. On the other hand, Shleifer and Vishny (1986) and Morck, Shleifer and Vishny
(1988) detect the phenomenon of ownership concentration. La Porta et al. (1999) and
Claessens et al. (2000) usher in the conception of ultimate controlling shareholders of listed
firms predominate firms by means of pyramid structure and cross holding, which could result
in central agency problem.
Kao, Chiou and Chen (2004) reveal that firms in financial distress are closely related to high
ratio of the shares pledged by directors, causing concern about the agency problem resulting
from the pledge of corporation shares. Chiou, Hsiung and Kao (2002) indicate that, directors
and supervisors could fund by the collateralized shares and further purchase more firm stocks
12
to manipulate stock price or enhance their power. Directors’ and supervisors’ financial stress,
because of the collateralized shares, is closely related to share price. Share price slumping,
the value of the collateralized shares depreciates and even drops below the standard of the
required
Margin. Correspondingly, collateralizing shareholders will be requested to collateralize more
shares, while debtors fail to afford more shares as collaterals, financial institutions as
creditors will close the position of collateralized shares.
Board Independence and Board size were chosen as proxies for Corporate Governance in this
study. Board Size which represents the total number of Directors reflects the total number of
individuals saddled with the responsibility of governing the affairs of an organization. Board
Independence which represents the total number of independent directors to the total number
of directors reflects the existence or

2.4 CORPORATE GOVERNANCE MECHANISMS

One consequence of the separation of ownership from management is that the day to today
decision-making power (that is, the power to make decision over the use of the capital
supplied by the shareholders) rests with persons other than the shareholders themselves. The
separation of ownership and control has given rise to an agency problem whereby there is the
tendency for management to operate the firm in their own interests, rather than those of
shareholders’ (Jensen and Meckling, 1976; Fama and Jensen, 1983). This creates
opportunities for managers to build illegitimate empires and, in the extreme, outright
expropriation. Various suggestions have been made in the literature as to how the problem
can be reduced (Jensen and Meckling, 1976; Shleifer and Vishny, 1997 and Hermalin and
Weisbach, 1998). Some of the mechanisms (based on Shleifer and Vishny, 1997), and their
impediments to monitor and shape banks’ behaviour are discussed below:

2.4.1 Shareholders
Shareholders play a key role in the provision of corporate governance. Small 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 interests and oversee the myriad of managerial decisions.
Incentive contracts are a common mechanism for aligning the interests of managers with
those of shareholders. The Board of directors may negotiate managerial compensation with a

13
view to achieving particular results. Thus small shareholders may exert corporate governance
directly through their voting rights and indirectly through the board of directors elected by
them.

However, a variety of factors could prevent small shareholders from effectively exerting
corporate control. There are large information asymmetries between managers and small
shareholders as managers have enormous discretion over the flow of information. Also, small
shareholders often lack the expertise to monitor managers accompanied by each investor’s
small stake, which could induce a free-rider problem.

Large (concentrated) ownership is another corporate governance mechanism for preventing

managers from deviating too far from the interests of the owners. Large investors have the
incentives to acquire information and monitor managers. They can also elect their
representatives to the board of directors and thwart managerial control of the board. Large
and well-informed shareholders could be more effective at exercising their voting rights than
an ownership structure dominated by small, comparatively uninformed investors. Also, they
could effectively negotiate managerial incentive contracts that align owner and manager
interests than poorly informed small shareholders whose representatives, the board of
directors, can be manipulated by the management. However, concentrated ownership raises
some corporate governance problems. Large investors could exploit business relationships
with other firms they own which could profit them at the expense of the bank. In general,
large shareholders could maximize the private benefits of control at the expense of small
investors.

2.4.2 Debt Holders

Debt purchasers provide finance in return for a promised stream of payments and a variety of
other covenants relating to corporate behavior, such as the value and risk of corporate assets.
If the corporation violates these covenants or default on the payments, debt holders typically
could obtain the rights to repossess collateral, throw the corporation into bankruptcy
proceedings, vote in the decision to reorganize, and remove managers.

However, there could be barriers to diffuse debt holders to effectively exert corporate
governance as envisaged. Small debt holders may be unable to monitor complex organization
and could face the free-rider incentives, as small equity holders. Also, the effective exertion

14
of corporate control with diffuse debts depends largely on the efficiency of the legal and
bankruptcy systems. Large debt holders, like large equity holders, could ameliorate some of
the information and contract enforcement problems associated with diffuse debt. Due to their
large investment, they are more likely to have the ability and the incentives to exert control
over the firm by monitoring managers. Large creditors obtain various control rights in the
case of default or violation of covenants. In terms of cash flow, they can renegotiate the terms
of the loans, which may avoid inefficient bankruptcies. The effectiveness of large creditors
however, relies importantly on effective and efficient legal and bankruptcy systems. If the
legal system does not efficiently identify the violation of contracts and provide the means to
bankrupt and reorganize firms, then creditors could lose a crucial mechanism for exerting
corporate governance. Also, large creditors, like large shareholders, may attempt to shift the
activities of the bank to reflect their own preferences. Large creditors for example, as noted
by Myers (1997) may induce the company to forego good investments and take on too little
risk because the creditor bears some of the cost but will not share the benefits.According to
Oman (2001), corporate governance mechanisms including accounting and auditing standards
are designed to monitor managers and improve corporate transparency. Davis, Schoorman
and Donaldson (1997,) suggest that governance mechanisms “protect shareholders’ interest,
minimise agency costs and ensure agent-principal interest alignment”. They further opined
that “agency theory assumptions are based on delegation and control, where controls
“minimise the potential abuse of the delegation”. This control function is primarily exercised
by the board of directors.

2.5 INTERNAL MECHANISMS OF CORPORATE GOVERNANCE

2.5.1 Dividends
Dividends are considered to be the reward given to shareholders for helping in financing the
firm, as shares will be valueless without any dividend payout (Kumar, 2003). The literature
on dividend mainly centers on two theories namely the signaling theory and agency cost
theory. Dividend announcements may be seen to convey implicit information about the firm’s
future earnings potential. This proposition is known as the “information content of dividends”
or signaling hypothesis (Al-Malkawi, Rafferty, & Pillai, 2010). It is also assumed that
insiders usually have more information about the firm’s future cash flow and there is a
tendency to signal that information to outsiders (Bhattacharya, 1979; Miller & Rock, 1985;
Reddy, 2002). The agency cost theory on the contrary refers to the costs borne by the

15
shareholders for monitoring managers’ behavior, and these costs are considered as an implicit
cost due to the potential conflict of interest among shareholders and corporate managers.
Dividend declarations are deemed to be effective corporate governance mechanisms that
serve to align the interests and minimize agency problems between managers and
shareholders by increasing the potential default risk of firms and by reducing the available
funds to managers (Easterbrook, 1984; Jensen, 1986; Grossman & Hart, 1980; Han, Lee, &
Suk, 1999; H. DeAngelo, L. DeAngelo, & Stulz, 2006). Lack of funds forces managers to
approach capital markets to obtain external financing and these funds can be obtained only
after fulfilling the disclosure regulations set by the capital markets. The managers will thus be
under the scrutiny of the capital markets and at the same time will have to disclose financial
information which will in turn benefit shareholders and reduce agency cost. Managers who
opt for ploughing back the profits for personal reasons decrease the standards of governance
and minimize shareholder protection (Easterbrook, 1984). La Porta, Lopez, Shleifer, and
Vishny (2000) specified two competing hypotheses on the relationship between dividend and
agency theory. The first hypothesis which is the competing hypothesis suggested that if
minority shareholders are given protection and power they tend to pressurize managers to
distribute dividends. Thus dividend payouts tend to be a mechanism reducing agency cost and
increasing firm performance. The second hypothesis which is the substitution hypothesis
suggested that dividends act as a means of acquiring a positive image in the minds of
minority shareholders, thus making it easy to acquire additional capital (see also Rozeff,
1982).
According to Jensen (1986), firms with significant cash flows endure high agency costs. This
is due to the unwise decision taken by the management to invest in sub-optimal projects.
Extracting the excess funds of free cash flow in the hand of managers can also reduce over
investment in such projects. It is thus assumed that paying higher dividends is an effective
corporate governance mechanism that will provide an effective substitute for shareholder
monitoring, thus reduce the agency cost and increase the firm’s performance.
Dividend payout as a factor affecting the agency cost has been widely addressed in empirical
research. Alwi (2009) provided empirical evidence on the influence of dividends as an
internal governance mechanism affecting firm performance. He studied 200 firms listed on
the Indonesian Stock Exchange over the period 2000-2006. The study revealed that during
periods of high agency cost that is when there is an increase in cash flow but no investment
opportunities, dividend declarations are welcome by the shareholders. Dividends thus act as
16
an important corporate governance mechanism to reduce agency cost between majority and
minority shareholders within a high or low concentrated ownership structure thus increasing
firm performance. Similar results were seen in the studies conducted by Jensen (1986) and
Gugler and Yurtoglu (2003). A more recent study by Sulong and Nor (2010) stated that
dividends are effective governance mechanisms in exercising its control function to reduce
agency costs related to free cash flow and thus increase firm value.

2.5.2 Financial Leverage

Financial leverage relates to the extent of debt financing opted by a firm in its capital
structure and is considered as a significant internal governance mechanism to mitigate agency
costs. The main theories acting as a foundation for leverage as a factor affecting corporate
governance are the M&M approach (Modigliani & Miller, 1958) and Tradeoff Theory. The
M&M approach suggests that capital structure is not relevant in improving firm value. It
states that firms generally operate in a perfect market and there is no agency cost, bankruptcy
cost or transaction cost in such a market. The optimal debt structure is considered to be 100%
debt due to the tax benefits associated with debt. The absence of the costs mentioned earlier
makes the weighted average cost of capital (WACC) constant meaning that irrespective of the
debt content in the capital structure there will be no tax benefit from interest payments. This
implies that the inclusion or exclusion of debt causes no change to the company’s
performance and thus does not act as a governance mechanism to influence agency cost and
firm performance. Another theory explaining leverage is the trade-off theory and this theory
states that the tax benefit related to leverage is neutralized by the issues related to agency cost
of debt and the cost of raising finance (Jensen & Meckling, 1976; Myers, 1977; Morin &
Jarrell, 2001; Miller, 1977). The lenders or creditors assume the role of active monitors as
they require a reasonable return on their investments and for the agency cost faced by them.
Shleifer and Vishny (1997) provided arguments about creditors influence due to three
reasons:
Firstly, when a firm makes a default in debt repayments, the lenders automatically assume
certain control rights. Secondly, due to the fact that lending is usually preferred on a short
term basis, these lenders have to be approached more frequently for funds. Thirdly, the
liability to pay interests persuades management to be very attentive in generating cash flows
(Ogden, Jen, & O’Connor, 2003). Therefore, this theory supports the fact that inclusion of
debt will act as a governance mechanism in improving firm performance. Myers (1977)
17
suggested that agency conflicts between managers and shareholders such as the
underinvestment problem could be curtailed with short-term debt. Short-term debt could be
advantageous especially for high-quality companies due to its low refinancing risk (see also
Diamond, 1991). Furthermore, if the yield curve is downward sloping, issuing short-term
debt increases firm value (Brick & Ravid, 1985).
Heinrich (2002) argued that we must consider the costs and benefits involved in the usage of
debt. An increase in debt reduces the requirement for issuing shares, but it inspires the firm to
invest in riskier projects thus increasing the agency costs between creditors and shareholders.
Debt is also assumed to discipline the management and ensure solutions to free cash flow
(Jensen, 1986). The information asymmetries between borrowers and lenders instigate some
selection problems regarding the borrower’s quality. These high quality borrowers can prove
their quality by using the leverage content as a signal to show their quality over other
borrowers. Financing the company by debt rather than by equity conveys valuable and
credible information to the lenders as only good quality firms are more inclined to issue debt
due to their stringent repayment procedures. Therefore, there is a popular belief that agency
cost can be minimized if a firm employs more debt as it will be a silent supervisor of the cash
flow in the business and a transparent shield of monitoring also exists from the creditors.

An important objective of corporate governance, therefore, is to secure accountability of

corporate managers as shareholders’ agents who are provided with authority and incentives to
promote wealth Herbert & Taylor 2000). There is, therefore, strong governance because the
former is considered to be one of the core governance mechanisms along with others such
as,debt structure, board structure and incentives (Farooque et al. 2007). Corporate
governance, therefore, is to secure accountability of corporate managers as shareholders’
agents who are provided with authority and incentives to promote wealth-creating strategies
(Dockery, Herbert & Taylor 2000). There is, therefore, a strong connection between
ownership structure and corporate governance because the former is considered to be one of
the core governance mechanisms along with others such as, debt structure, board structure,
incentive-based compensation structure, dividend structure, and external auditing The need
for corporate governance derives from the ‘expectation gap’ problem which arises when the
behaviour of corporate enterprise falls short of the shareholders’ and other stakeholders’
expectation Silberton (1995) attribute the phenomenal pre incidence of corporate fraud and
corporate collapse on a previously unimagined scale; the dominance of the corporation in

18
modern business, occasioned principally by privatization and consolidations; the collapse of
socialism and centralized planning and; greedy bosses. Silberton (1995) attributes the
phenomenal pre-eminence accorded corporate governance recently to the increasing
incidence of corporate fraud and corporate collapse on a previously unimagined scale; the
dominance of the modern business, occasioned principally by privatization and
consolidations; the collapse of socialism and centralized planning and; greedy bosses.
Corporate governance, therefore, is to secure accountability of corporate managers as
creating strategies (Dockery, connection between ownership structure and corporate
governance because the former is considered to be one of the core governance mechanisms
along with others such as, Structure, and external auditing.

2.5.3 Institutional Shareholdings

The term institutions refer to the ownership stake in a company that is held by large financial
organizations, insurance companies corporate pension funds, college endowments,
commercial banks, hedge funds, mutual funds, and boutique asset management firms. But the
intensity of participation is completely dependent on the nature of the institutional investor.
In USA, the pension funds have a say in seeking greater director independence and in
choosing the lead directors for the post of the chairman infirms in which they invest their
funds (Hashim & Devi, 2004). On the contrary insurance companies and banks tend tobe
victims of pressure, mainly due to the fact that most of their revenue flows from corporations
in which they have a share in (Pallathitta, 2005). Gillan and Starks (2000,) observed that
“institutions that hold large equity positions in a company have been motivated to actively
participate in the company’s strategic direction”. It is also argued that greater institutional
shareholdings will facilitate take over’s due to the minimal transaction costs and the extent of
their holdings will minimize free rider issues that could force minority shareholders to accept
the decisions. These investors are well-informed and regularly practice their voting rights to
monitor the managers. The “active monitoring hypothesis” further explains this situation as
one which expects a positive relationship between institutional ownership and firm
performance as they are equipped with resources, expertise and capability to monitor the
attitude of the management and prevent their self serving behavior.
Other studies which echoed the same argument are Shleifer and Vishny (1986), McConnell
and Servaes (1990), Agrawal and Knoeber (1996), Koh (2003), Wan Hussin and Ibrahim

19
(2003). However, an argument was raised by Pound (1988) that the deliberate association
between the managers and institutional investors could lead to contrary results and shatters
the monitoring role. There are also arguments suggesting that institutional investors can
pressurize managers into making decisions that boost current earnings at the expense of long
term values (Jones, 1991; Laverty, 1996). Porter (1992) specified that some institutional
investors are “transientowners” who are overly focused on current earnings. But this attitude
is harmful for the long term growth of the company. Another argument raised by Burkat
(1995) was that severe counter bidding by existing block holders may reduce the likelihood
of takeover attempts. Brickley, Lease, and Smith Jr. (1988) added another opinion to the
former statement that antitakeover protests are greater when such proposals reduce
stockholders wealth. Institutional investors always prefer firms who give a fair and complete
disclosure of financial statements in order to reduce monitoring costs (Bushee & Noe, 2000).
There is also an argument that transparency isimproved when there is good governance and
this reduces the information asymmetry between insiders and outside investors. These
properly governed companies portray good stock market liquidity and comparatively lesser
trading costs (Chung, Elder, & Kim, 2010)

2.6 STANDARDIZING CORPORATE GOVERNANCE IN NIGERIA

The bitter experience of corporate failures in Nigeria and across the globe underscores the
importance of effective corporate governance procedures to the survival of the macro
economy. The crisis demonstrated in no unmistakable terms that “even strong economies
lacking transparent control, responsible corporate boards and shareholder’s confidence
collapse” (Sanakue, 2000). In addition to forestalling corporate collapse, interest in corporate
governance globally and in Nigeria in particular is associated with its positive link to national
growth and development. The basic Company and Allied Matters Act (CAMA) of 1990,
makes it mandatory for all companies operating in Nigeria to be registered and in section
357(1) also requires all limited liability companies to appoint an auditor to report on their
financial statements and abide by all financial reporting processes. Other company laws
guiding business operations in Nigeria include the Nigeria Deposit Insurance (NDIC) of
2006, Annual Credit Guidelines of Central Bank of Nigeria, Bankers and other Financial
Institution Act (BOFIA) 1991, Insurance Act 2003, Investment and Securities Act
2007,Financial Reporting Council of Nigeria Act 2011, amongst others.

20
All these laws, like corporate governance codes are aimed at formalizing the concept of
accountability by the board of directors, while stipulating unrestricted disclosures of all
aspects of corporate affairs and certification that the published accounts represent a true and
fair view of the enterprise affairs.In spite of this multiplicity of laws to guide the operation of
business entities in Nigeria, they have not been able to prevent the collapse of many
government owned establishments in Nigeria or the distress recorded in the banks and other
financial institutions in Nigeria.
To stem the tide, Securities and Exchange Commission (SEC) in collaboration with the
Corporate Affairs Commission (CAG) instituted the Atedo Peterside led committee with the
mandate to identify weaknesses in the current corporate governance (existing company laws )
and fashion unnecessary changes (Ejiofor, 2009). This was with the view to improve
corporate governance practices and align with the international best practices. The Committee
issued the report on corporate governance of public companies in Nigeria and Code of Best
Practices (2003). The document targets the board of directors as leaders of corporate
organizations, while stating the responsibilities of shareholders and other professional bodies.
The Central Bank of Nigeria also introduced another separate code of corporate governance
for banks (2006), to take care of post consolidation conflicts and other issues.
While corporate governance is being implemented in banks, the same may not be said of the
public sector. The reason is not farfetched. While the code on corporate governance for
public companies in Nigeria is not compulsory, that of CBN attracts sanctions. Ugo (2010)
argues that the problem of poor corporate governance standard in Nigeria lies in poor
enforcement. Eroke (2007) cited the Securities and Exchange Commission survey report
(2003), which revealed that corporate governance was at rudimentary stage with only 40
percent of quoted companies having code of corporate governance in place.
The World Bank, (1999), states that corporate governance comprises two mechanisms,
internal and external corporate governance. Internal corporate governance, giving priority to
shareholders’ interest, operates on the board of directors to monitor top management. On the
other hand, external corporate governance monitors and controls managers’ behaviors by
means of external regulations and force, in which many parties involved, such as suppliers,
debtors (stakeholders), accountants, lawyers, providers of credit ratings and investment bank
(professional institutions).

21
2.7 CORPORATE GOVERNANCE FRAMEWORKS IN NIGERIA
The framework for the corporate governance structure differs from one country to another
because of the differences in the economic climate and the historical experience of each
country. Nevertheless, the objectives of corporate governance share a common denominator
worldwide (Okike, 1999). The root of corporate governance in Nigeria could be traced to the
colonial days. “From the Bubble Act of 1720 to the Joint Stock Companies Act of 1844, the
cardinal of the Nigerian business laws which are entrenched in the companies’ Acts
definitely has evolutionary history”(Chambers, 2009). The country’s business laws
developed to the Companies Ordinance of 1922 and later the Companies Act of 1958. It later
evolved into the Business Act of 1968 before the formal Companies Act of 1968 emerged to
become the gamut of Nigeria business law for about twenty years. The Companies Act of
1968 Act was eventually replaced by Companies and Allied Matters Act of 1990 while the
Companies and Allied Matters Act 2004 is currently the pivot of the Nigerian business law
(Chambers, 2009).

The Nigerian Stock Exchange which was created in 1977classifies public companies into
twenty sectoral classifications. Banks, most importantly, belong to one of them. Companies
within each sector are governed by special rules and regulations peculiar to the sector. For
example, in addition to the requirements of the Companies Decree 1968, companies within
the financial services sector such as banks and insurance companies have additional
legislative requirements peculiar to their industry. The specific legislation which governed
the activities of banks (during the period 1978 to 1989 for example) is the Banking Act 1969
(as amended by the Banking (Amendment) Acts of 1970 and 1979), and that which governed
the operations of insurance companies is the Insurance Act, 1976 (ibid). One of the most
important requirements of the Act relates to the keeping of account books by all companies
incorporated in Nigeria (s.140). Also, s. 142(1) of the Act imposes a statutory duty on all
companies to disclose information that shall give a ‘true and fair view’ of their state of affairs
and operations, at least once in a financial year (ibid).

This author however shares the opinion of Okike (2007) who highlighted that the Nigerian
corporate governance system is deeply rooted in her constitution which actually mirrors the
UK constitutional pattern. For the banking sector, the Central Bank of Nigeria came up with
the Nigerian corporate governance guidelines for the post consolidated banks in 2006. CBN

22
has also recently reviewed this code while the Securities and Exchange Commission (SEC)
has a Code for Corporate Governance for Public Companies in Nigeria (2011). Efforts are
being made to unify all the corporate governance codes in Nigeria, a drive being championed
by the Financial Reporting Council in collaboration with other regulatory agencies.This
unified National Code of Corporate Governance would apply to the entire private sector as
against the different codes that are currently being used. According to Obazee (2013), the
issuance of a national Code of Corporate Governance is a very important deliverable that can
be used to enhance national competitiveness and address some socio-economic issues
including corruption and lack of independence.

23
 CHAPTER THREE
METHODOLOGY
3.2 RESEARCH DESIGN
The research design employed for this is was survey research method. According to
Awotunde and Ogodulunwa (2004) research design refers to the formulation of a plan that
guides the researcher in structuring of collection, analysis and interpretation of data. The
study used an approach that combined theoretical consideration (a prior criterion) with the
empirical observation and extracts maximum information from the available data. It enables
us therefore to observe the effects of explanatory variables on the dependent variables.

3.3 DATA DESCRIPTION AND SOURCES

The source of data for this study is secondary obtained from the audited financial statements
of the banks listed in the Nigerian Stock Exchange (NSE) over a period of seven years (2006-
2012). Data were collected from annual reports of the five selected banks for the seven years.
Financial ratios namely return on assets and return on equity were used as measures of firm
performance from 2006 – 2012. The independent variables which were used as measures of
corporate governance were Board Size (Number of directors on the board) and Board
Independence (the ratio of independent directors to the number of directors on the board).
After data collection, multiple regression analysis was used to identify the factors that affect
firm performance and to test the significance of the variables. The main tool of analysis was
the Ordinary Least Squares (OLS) using the multiple regression method.

3.4. SPECIFICATION OF MODEL

Return on Asset (ROA) - measures the overall efficiency of management. It gives an idea as
to how efficient management is at using its assets to generate earnings.

ROA = Profit before Tax

Total Assets

Return on Equity (ROE) - measures a firm’s financial performance by revealing how much
profit a company generates with the money shareholders have invested. It shows how well
the shareholders funds are managed and used to generate return.

ROE = Profit before Tax

24
 Total Equity

To estimate the impact of corporate governance mechanisms on the financial performance of

sample commercial banks in Nigeria the following general empirical research model is
developed:

Yit= β0 + ΣβKXit + εit

Where:

✓ Yit represents the dependent variables (ROA, ROE,) of bank i for time period t.

✓ β0 is the intercept

✓ βK represents the coefficients of the Xit variables

✓ Xit represents the explanatory variables (Board Size, and Independence,) of bank i for time
period t.

✓ εit is the error term

The above general empirical research model is estimated into the following equations to
define the impact of corporate governance mechanisms on banks’ financial performance as
follows:

ROAit = β0 + β1(BSit)+εit-----------(1)

ROAit = β0 + β1(INDEit)+εit-----------(2)

ROAit = β0 + β1(BSit) + β2 (INDEit)+εit-----------(3)

ROEit =β0 + β1(BSit) +εit---------(4)

ROEit =β0 + β1(INDEit) +εit---------(5)

ROEit =β0 + β1(BSit) + β2 (INDEit) +εit---------(6)

Where:

i denote banks ranging from 1 to 5 (cross-sectional dimension).

t denote years ranging from 2006 to 2012 (time-series dimension).

25
Dependent Variables

ROAit Return on Asset for ith bank and time period t

ROEit Return on Equity for ith bank and time period t

Independent variables

BSit= Board Size for ith bank and time period t

INDEit= Proportion of independent directors to total number of directors for ith bank and
time period t

Models 1, 3, 4 and 6 would be used to test hypotheses 1 while Models2, 3, 5 and 6 would be
used to test hypothesis 2.

3.5 PROCEDURE FOR DATA ANALYSIS

The methods of analysis adopted in this study are both descriptive and analytical. These
descriptive tools consist of averages and standard deviation. The analytical tool used is the
ordinary least square regression analysis. The secondary data used for the study were
processed using the Stata quantitative statistical package. This software was considered
suitable because of its efficiency in terms of output and adequacy of statistics generated. The
empirical study uses a simulation approach to investigate the relationship between the
corporate governance and firm performance.

26
 CHAPTER FOUR

PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA

4.1 MEASUREMENTS OF THE VARIABLES OF THE STUDY

In an attempt to provide answers to the research questions raised, achieve set objectives and
test hypotheses for this study, data were collected on the firms’ Board Size (BS) showing the
absolute number of directors on the board, Board Independence (INDE) showing the ratio of
independent directors to total number of directors, Return on Equity(ROE), and Return on
Assets (ROA) from the annual reports and accounts of the sampled Bank firms. These
data(used in testing the hypotheses of the study) for the respective sample banks are shown in
the Appendix while Table 4.2.1 and Chart 4.21 show a graphical representation of the
average values for the independent and dependent variables from 2006 to 2012 for the sample
banks.

Table 4.2.1: Average Board Size, Board Independence, Return on Assets and Return
on Equity of Banks from 2006-2012

Year Board Size (Number Board ROA ROE( Return on

of Directors on the Independence (Return on Equity)
Board) (Ratio of Assets)
Independent
Directors to total
number of
directors on the
board)

2006 11.8000 0.1528 4.8168 26.1079

2007 13.0000 0.1565 3.9302 15.2636

2008 12.6000 0.1440 3.0355 19.8026

2009 14.2000 0.1401 1.3600 7.0060

2010 14.8000 0.1364 1.8352 10.3023

2011 14.6000 0.1519 0.9499 6.1198

2012 14.6000 0.1648 3.3989 22.5526

27
Source: Annual Reports and Accounts of Sample Banks (Access Bank Plc, Diamond Bank
Plc, Zenith Bank Plc, First City Monument Bank Plc and Guaranty Trust Bank Plc) from
2006-2012
Chart 4.2.1

Average Board Size, Board Independence, Return on Assets and Return on

Equity of Banks from 2006-2012
30.0000

BS
20.0000
Inde
ROA
ROE
10.0000

0.0000
2006 2008 2007 2009 2010 2011 2012

4.2 DATA ANALYSIS

The data were analyzed using the Stata software package and inferences were drawn
accordingly. The summary of the regression and correlation results from the Stata output are
presented in a tabular form, from which detailed analyses and discussion are also given.

4.2.1 Data Validity Test

In order to ensure that the result is robust, several diagnostic tests were performed. In an
attempt to detect multicollinearity, the variance inflation factor (VIF) statistics was computed
as the VIF of the two independent variables were consistently smaller than 10 (rule of thumb)
indicating complete absence of multicollinearity among the variables ( Gujarati and
Sangeetha, 2007, as cited in Angahar & Iorpev, 2012). This shows the appropriateness of
fitting of the model of the study with the two independent variables. This further substantiates
the absence of multicollinearity in the model. Therefore, the model is used for our analysis.

4.3.2: DESCRIPTIVE STATISTICS

Table 4.3.1 below shows the descriptive statistics of all the variables used in the study.

Table 4.3.1: Descriptive Statistics

Mean Median Std. Deviation
ROA 2.76 2.39 3.19
28
 ROE 15.31 15.35 14.46
BS 13.66 14.00 1.57
INDE 0.15 0.14 0.04
Source: Computation from Field data via Microsoft Excel
The mean ROA of the sampled firms is about 2.76%. These results indicate that, on the
average, for every N100 turnover of the sampled firms, N2.76 was the profit earned. The
average board size of the five (5) firms used in this study is 14, while the ratio of the
independent directors to the total number of directors sitting on the board is about 0.15. The
result also indicates that directors of the sample banks own about 8.47% of the banks. The
Code of Corporate Governance for banks stipulates that a bank should have at least 2
independent directors. One can therefore infer that majority of the boards of the sampled
firms have non- independent directors.

4.3.3: CORRELATION ANALYSIS

This section of the study presents the results and discussions of the Pearson correlation
analysis. To identify the relationship among the variables namely corporate governance and
financial performance, Pearson correlation coefficients were used. The correlation
coefficients show the extent and direction of the linear relationship between corporate
governance variables and financial performance measures of the sample Nigerian commercial
banks. The correlation analysis has two sub-sections. The first sub-section shows the
relationship between return on asset and selected corporate governance variables. The second
sub-section is about the relationship between return on equity and corporate governance
variables. The probability is shown in parenthesis with the correlation coefficient for the
correlation matrix. The correlation coefficients are checked for the presence of high
collinearity among regressors. Since the correlation analysis shows only the degree of
association, it is followed by multiple regression analysis.

4.3.4 Correlation analysis of Return on Assets (ROA) and corporate governance

mechanisms

Tables 4.3.2, 4.3.3 and 4.3.4 below show the correlation matrices which show the
relationships of the return on asset with board size and board independence. Tables 4.3.2 and
4.3.3 show the models which show the relationship between each independent variable
(Board Size and Board Independence) and dependent variable (Return on Assets) used in this
study while Table 4.3.4 shows the multivariate relationship among the three variables.
29
Table 4.3.2 Correlation analysis of ROA and Board Size

. pwcorr roa bs, sig

roa bs

roa 1.0000

bs -0.4820 1.0000
0.0034

Table 4.3.2 shows that Board Size is negatively and significantly correlated with Return on
Asset with a correlation coefficient of -0.4820.

Table 4.3.3 Correlation analysis of ROA and Board Independence

. pwcorr roa inde, sig

roa inde

roa 1.0000

inde 0.1670 1.0000

0.3378

Table 4.3.3 shows that Board Independence is positively and significantly correlated with
Return on Asset with a correlation coefficient of 0.1670.

30
Table 4.3.4 Correlation analysis of ROA, Board Size and Board Independence

. pwcorr roa bs inde, sig

roa bs inde

roa 1.0000

bs -0.4820 1.0000
0.0034

inde 0.1670 -0.2104 1.0000

0.3378 0.2252

Table 4.3.4 shows the correlation of all the dependent variables (Board Size and Board
Independence) with Return on Assets. As shown in the previous tables, ROA is negatively
correlated with Board Size while it is positively correlated with Board Independence.
However, Table 4.33 further shows that Board Size is negatively correlated with Board
Independence with a coefficient of -0.2104.

4.3.5 Correlation analysis of Return on Equity (ROE) and corporate governance

mechanisms

Tables 4.3.5, 4.3.6 and 4.3.7 below show the correlation matrices which show the
relationships of return on equity with board size and board independence. Tables 4.3.5 and
4.3.6 show the models which show the relationship between each independent variable
(Board Size and Board Independence) and dependent variable (Return on Equity) used in this
study while Table 4.3.7 shows the multivariate relationship among the three variables.

31
Table 4.3.5 Correlation analysis of ROE and Board Size

. pwcorr roe bs, sig

roe bs

roe 1.0000

bs -0.4771 1.0000
0.0038

Table 4.3.5 shows that Board Size is negatively and significantly correlated with Return on
Equity with a correlation coefficient of -0.4771.

Table 4.3.6 Correlation Analysis of ROE and Board Independence

. pwcorr roe inde, sig

roe inde

roe 1.0000

inde 0.1758 1.0000

0.3125

Table 4.3.6 shows that Board Independence is positively and significantly correlated with
Return on Equity with a correlation coefficient of 0.1758.

32
Table 4.3.7 Correlation Analysis of ROE, Board Size and Board Independence

. pwcorr roe bs inde, sig

roe bs inde

roe 1.0000

bs -0.4771 1.0000
0.0038

inde 0.1758 -0.2104 1.0000

0.3125 0.2252

Table 4.3.7 shows the correlation of all the dependent variables (Board Size and Board
Independence) with Return on Equity. As shown in the previous tables, ROE is negatively
correlated with Board Size while it is positively correlated with Board Independence. Table
4.33 also reiterates that Board Size is negatively correlated with Board Independence with a
coefficient of -0.2104.

4.3.4: REGRESSION ANALYSIS

Tables 4.3.8, 4.3.9, 4.3.10, show the regression results for the models 1, 2 and 3 while Tables
4.3.11, 4.3.12 and 4.3.13 show the regression results for models 4, 5 and 6. The results are
presented below:

33
Table 4.3.8 Regression Analysis for Model 1

. xtreg roa bs, be

Between regression (regression on group means) Number of obs = 35

Group variable: id Number of groups = 5

R-sq: within = 0.1692 Obs per group: min = 7

between = 0.5989 avg = 7.0
overall = 0.2323 max = 7

F(1,3) = 4.48
sd(u_i + avg(e_i.))= 1.077497 Prob > F = 0.1246

roa Coef. Std. Err. t P>|t| [95% Conf. Interval]

bs -1.404282 .6635642 -2.12 0.125 -3.51604 .7074751

_cons 21.93941 9.075193 2.42 0.094 -6.941908 50.82072

From Table 4.3.8 above, it can be seen that Board Size has a coefficient of -1.404282,
showing a negative relationship with the ROA and implying that a unit increase in the Board
Size will decrease Performance (proxied by ROA) by 1.404282 times.The model is presented
below:

ROA = 21.93941 – 1.404282(BS) +e

Std error (9.075193) (0.6635642)

T Stat (2.42) (-2.42)

The R2overall figure of 0.2323 in model 1 shows that about 23% of the variation in Return on
Assets was explained by the Board Size, while about 77% of variation in return on asset is
due to other factors that are not included in this model.

34
Table 4.3.9 Regression Analysis for Model 2

. xtreg roa inde, be

Between regression (regression on group means) Number of obs = 35

Group variable: id Number of groups = 5

R-sq: within = 0.1412 Obs per group: min = 7

between = 0.1346 avg = 7.0
overall = 0.0279 max = 7

F(1,3) = 0.47
sd(u_i + avg(e_i.))= 1.582628 Prob > F = 0.5436

roa Coef. Std. Err. t P>|t| [95% Conf. Interval]

inde -18.76068 27.4667 -0.68 0.544 -106.172 68.65062

_cons 5.565859 4.167132 1.34 0.274 -7.695814 18.82753

From Table 4.3.9 above, it can be seen that Board Independence has a coefficient of -
18.76068, indicating a negative relationship with the ROA and implying that a unit increase
in the Board Independence will decrease Performance (proxied by ROA) 18.76068 times.The
model is presented below:

Thus, the model is presented below:

ROA = 5.565859 – 18.76068(INDE)+e

Std error (4.167132) (27.4667)

T test (1.34) (-0.68)

The R2overall figure of 0.0279 in model 2 shows that about 3% of the variation in Return on
Assets was explained by the Board Independence, while about 97% of variation in Return on
Assets is due to other factors that are not included in this model.

35
Table 4.3.10 Regression Analysis for Model 3

. xtreg roa bs inde, be

Between regression (regression on group means) Number of obs = 35

Group variable: id Number of groups = 5

R-sq: within = 0.0759 Obs per group: min = 7

between = 0.8337 avg = 7.0
overall = 0.1676 max = 7

F(2,2) = 5.01
sd(u_i + avg(e_i.))= .8496449 Prob > F = 0.1663

roa Coef. Std. Err. t P>|t| [95% Conf. Interval]

bs -1.533631 .5288735 -2.90 0.101 -3.80919 .7419284

inde -25.0499 14.90434 -1.68 0.235 -89.17811 39.0783
_cons 27.45118 7.87176 3.49 0.073 -6.418267 61.32063

From Table 4.3.10 above, it can be seen that Board Size has a coefficient of -1.533631 while
Board Independence has a coefficient of -25.0499, indicating negative relationships with the
ROA and implying that a unit increase in Board Size and Board Independence will decrease
Performance (proxied by ROA) 1.533631 and 25.0499 times respectively. The model is
presented below:

Thus, the model is presented below:

ROA = 27.45118-1.533631(BS)-25.0499(INDE)+e

Std error (7.87176) (0.5288735)(14.90434)

T test (3.49) (-2.90) (-1.68)

36
The R2overall figure of 0.1676 in model 3 shows that about 17% of the variation in Return on
Assets was explained by Board Size and Board Independence, while about 83% of variation
in Return on Assets is due to other factors that are not included in this model.

Table 4.3.11 Regression Analysis for Model 4

. xtreg roe bs, be

Between regression (regression on group means) Number of obs = 35

Group variable: id Number of groups = 5

R-sq: within = 0.1573 Obs per group: min = 7

between = 0.6005 avg = 7.0
overall = 0.2277 max = 7

F(1,3) = 4.51
sd(u_i + avg(e_i.))= 5.280423 Prob > F = 0.1238

roe Coef. Std. Err. t P>|t| [95% Conf. Interval]

bs -6.905859 3.251887 -2.12 0.124 -17.25482 3.443098

_cons 109.6221 44.47423 2.46 0.090 -31.91472 251.159

From Table 4.3.11 above, it can be seen that Board Size has a coefficient of -6.905859
indicating a negative relationship with the ROE and implying that a unit increase in Board
Size will decrease Performance (proxied by ROE) 6.905859 times respectively. The model is
presented below:

Thus, the model is presented below:

ROE = 109.6221-6.905859(BS) +e

Std error (44.47423) (3.251887)

T test (2.46) (-2.12)

The R2overall figure of 0.2277 in model 4 shows that about 23% of the variation in Return on
Equity was explained by Board Size, while about 77% of variation in Return on Equity is due
to other factors that are not included in this model.

37
Table 4.3.12 Regression Analysis for Model 5

. xtreg roe inde, be

Between regression (regression on group means) Number of obs = 35

Group variable: id Number of groups = 5

R-sq: within = 0.1321 Obs per group: min = 7

between = 0.0684 avg = 7.0
overall = 0.0309 max = 7

F(1,3) = 0.22
sd(u_i + avg(e_i.))= 8.063868 Prob > F = 0.6709

roe Coef. Std. Err. t P>|t| [95% Conf. Interval]

inde -65.67239 139.9494 -0.47 0.671 -511.0539 379.7092

_cons 25.1266 21.23254 1.18 0.322 -42.44481 92.69801

From Table 4.3.12 above, it can be seen that Board Independence has a coefficient of -
65.67239 indicating a negative relationship with the ROE and implying that a unit increase in
Board Size will decrease Performance (proxied by ROE) 65.67239 times respectively. The
model is presented below:

Thus, the model is presented below:

ROE = 25.1266-65.67239(INDE) +e

Std error (21.23254) (139.9494)

T test (1.18) (-0.47)

The R2overall figure of 0.0309 in model 5 shows that about 3% of the variation in Return on
Equity was explained by Board Independence, while about 97% of variation in Return on
Equity is due to other factors that are not included in this model.

38
Table 4.3.13 Regression Analysis for Model 6

. xtreg roe bs inde, be

Between regression (regression on group means) Number of obs = 35

Group variable: id Number of groups = 5

R-sq: within = 0.0878 Obs per group: min = 7

between = 0.7436 avg = 7.0
overall = 0.1788 max = 7

F(2,2) = 2.90
sd(u_i + avg(e_i.))= 5.18087 Prob > F = 0.2564

roe Coef. Std. Err. t P>|t| [95% Conf. Interval]

bs -7.4017 3.224906 -2.30 0.149 -21.27735 6.473949

inde -96.02582 90.88202 -1.06 0.401 -487.0596 295.008
_cons 130.7509 47.99953 2.72 0.112 -75.77448 337.2762

From Table 4.3.13 above, it can be seen that Board Size has a coefficient of -7.4017 while
Board Independence has a coefficient of -96.02582, indicating negative relationships with the
ROE and implying that a unit increase in Board Size and Board Independence will decrease
Performance (proxied by ROE) by7.4017 and 96.02582 times respectively. The model is
presented below:

Thus, the model is presented below:

ROE = 130.7509-7.4017(BS) -130.7509(INDE)+e

Std error (47.99953) (3.224906) (90.88202)

T test (2.72) (-2.30) (-1.06)

39
The R2overall figure of 0.1788 in model 6 shows that about 18% of the variation in Return on
Equity was explained by Board Size and Board Independence, while about 82% of variation
in Return on Equity is due to other factors that are not included in this model.

4.4 TEST OF HYPOTHESES

The decision rule to reject or accept the null hypotheses are as follows:

i. Reject null hypotheses: If the calculated t value is greater than the t tabulated value at
99% confidence level with n-2 degrees of freedom.
ii. Accept null hypotheses: If the calculated t value is less than the t tabulated value at
99% confidence level with n-2 degrees of freedom
4.4.1: Test of Hypothesis One

H0:. There is no significant relationship between the size of a board and firm performance

in the banking sector in Nigeria

Model 1:

Decision: The calculated t value for BS is -2.12 and the tabulated value is ±2.032 under 95%
confidence level with degree of freedom of 34, that is (n-1),where n=35, and Number of
independent variable is 1. Since the calculated BS value is greater than the tabulated value
(2.12>2.032), we therefore, reject the null hypothesis. We conclude that there is a significant
relationship between the size of a board and performance in the banking sector in Nigeria.

Model 3:

Decision: The calculated t value for BS is -2.90 and the tabulated value is ±2.037 under 95%
confidence level with degree of freedom of 33, that is (n-2),where n=35, and Number of
independent variable is 2. Since the calculated BS value is greater than the tabulated value
(2.90>2.037), we therefore, reject the null hypothesis. We conclude that there is a significant
relationship between the size of a board and performance in the banking sector in Nigeria.

Model 4:

Decision: The calculated t value for BS is -2.12 and the tabulated value is ±2.032 under 95%
confidence level with degree of freedom of 34, that is (n-1),where n=35, and Number of
40
independent variable is 1. Since the calculated BS value is greater than the tabulated value
(2.12>2.032), we therefore, reject the null hypothesis. We conclude that there is a significant
relationship between the size of a board and performance in the banking sector in Nigeria.

Model 6:

Decision: The calculated t value for BS is -2.30 and the tabulated value is ±2.037 under 95%
confidence level with degree of freedom of 33, that is (n-2),where n=35, and Number of
independent variable is 2. Since the calculated BS value is greater than the tabulated value
(2.30>2.037), we therefore, reject the null hypothesis. We conclude that there is a significant
relationship between the size of a board and performance in the banking sector in Nigeria.

4.4.2: Test of Hypothesis Two

H0: Level of board independence has no impact on firm performance in the banking sector
Model 2:
Decision: The calculated t value for INDE is -0.68 and the tabulated value is ±2.032 under
95% confidence level with degree of freedom of 34, that is (n-1),where n=35, and Number of
independent variable is 1. Since the calculated INDE value is less than the tabulated value
(0.68<2.032), we therefore, accept the null hypothesis. We conclude that there is no
significant relationship between the level of independence of the board and performance in
the banking sector in Nigeria.

Model 3:

Decision: The calculated t value for INDE is -1.68 and the tabulated value is ±2.037 under
95% confidence level with degree of freedom of 33, that is (n-2),where n=35, and Number of
independent variable is 2. Since the calculated INDE value is less than the tabulated value
(1.68<2.037), we therefore, reject the null hypothesis. We conclude that there is no
significant relationship between the level of independence of the board and performance in
the banking sector in Nigeria.

Model 5:

41
Decision: The calculated t value for INDE is -0.47 and the tabulated value is ±2.032 under
95% confidence level with degree of freedom of 34, that is (n-1),where n=35, and Number of
independent variable is 1. Since the calculated INDE value is less than the tabulated value
(0.47<2.032), we therefore, accept the null hypothesis. We conclude that there is no
significant relationship between the level of independence of the board and performance in
the banking sector in Nigeria.

Model 6

Decision: The calculated t value for INDE is -1.06 and the tabulated value is ±2.037 under
95% confidence level with degree of freedom of 33, that is (n-2),where n=35, and Number of
independent variable is 2. Since the calculated INDE value is less than the tabulated value
(1.06<2.037), we therefore, reject the null hypothesis. We conclude that there is no
significant relationship between the level of independence of the board and performance in
the banking sector in Nigeria.

4.5. DISCUSSION AND INTERPRETATION OF RESULT

Corporate governance mechanisms: Results and Discussion

Board Size

From the hypothesis test, null hypothesis was rejected therefore, Board Size has a significant
relationship with firm performance of commercial banks in Nigeria. As shown in the results,
this study found a negative relationship between Board Size (BS) and performance (proxied
by Return on Assets and Return on Equity) at 5% level of significance. It implies that the
number of directors on a board is negatively related with commercial banks’ financial
performance. In other words, increase in board size would only decrease financial
performance of commercial banks indicating that smaller boards may be effective in
monitoring and controlling banks management and this could help in reducing agency costs.
Free-riding and difficulty to reach in consensus in large groups inversely affect financial
performance.

Board Independence

The test of hypothesis 2 showed that Board Independence has no impact on banks’
performance. This implies therefore that Boards with higher number of independent directors
42
does not necessarily mean that the financial performance of such companies would increase.
The subject of independence is often shrouded in subjectivity as the independence of a
director diminishes over time as he continues to serve on the board of a company. This was
reiterated in the results of the test of hypothesis 2.

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 SUMMARY OF FINDINGS

The study is on the impact of Corporate Governance performance in the Nigerian banking
industry. This study made use of secondary data in analyzing the relationship between
corporate governance and firm performance of the five (5) banks listed in the Nigerian Stock
Exchange. The specific objectives of the study were to examinethe conceptual framework of
corporate governance in commercial banks inNigeria, determine the extent of corporate
governance practices in operation in the banking sector, ascertain the impact of Board Size on
corporate performance, ddetermine how the level of independence of directors influences the
returns of banks and ascertain the factors that affect the levels of governance adopted.

The research questions drawn to guide the study were to: To what extent do commercial
banks in Nigeria practice and adhere to corporate governance? Does the size of a board have
an impact on the corporate performance of banks in Nigeria? What influence does the level of
independence of boards have on bank’s returns? What are the reasons that make firms adopt
different levels of governance under the same level of investor protection?Also, two null
hypotheses were formulated to provide answers to the questions raised.

The population of the study was made up of all the banks listed on the Nigeria stock
exchange from which five firms were selected using the purposive sampling technique
between 2006 -2012. The multiple regressions analysis was employed to analyze the data.
The study reveals the following results that: There is a significant relationship between the
size of a board and firm performance in the banking sector in and the level of board
independence has no impact on firm performance in the banking sector.

43
 5.2 CONCLUSION
This study examined the impact of corporate governance on organizational firm perform ance.
It was found that the corporate governance variables used for the study had effect on the
firms’ performance. The number of directors on the board is important in the performance of
the oversight function on executive management. The complexity of the firm’s business
determines to a large extent the size that is appropriate for its operations. Firms in the
banking sector statutorily have a specified mix of independent and executive directors. The
direction of the result of this study shows that an overly large board size could be
counterproductive thereby having a negative impact on performance of the banks.

The level of independent directors on the board in relation to the total number of directors on
the board in issue does not have a significant impact on the performance of the firm.

5.3 RECOMMENDATIONS
 Board size should be relative to the firm’s business needs, scope and complexity.
Since no two firms are exactly alike in all ramifications, it is important that an
appropriate size be understood to be a function of each firm’s circumstances. Setting
arbitrary board size benchmarks may therefore be counterproductive
 Independence of directors on the board is desirable. However, more importantly is the
skills set the directors bring to the board. It is therefore recommended that directors
that are appointed on boards have adequate wealth of experience and the right skills to
enable them add value to the board and governance of the companies to which they’ve
been appointed.
 Arising from the foregoing conclusion, it is recommended that firms aim to strike a
balance between governance and maximising shareholders’ wealth. While the role of
good corporate governance cannot be over-emphasised, it is essential to note that
adhering to such codes is not a mere checklist compliant exercise but to ensure that
there is an adoption of good corporate governance practice, ensure that there is
transparency and adequate disclosure in the reporting process of companies.
 Steps should also be taken for higher level of compliance with the code of corporate
governance. Also, an effective legal framework should be developed that specifies the
rights and obligations of a bank, its directors, shareholders, specific disclosure

44
 requirements and provide for effective enforcement of the law as it relates to
corporate governance issues.
 The corporate governance mechanism in Nigeria should be bench-marked against
world best practices.
5.4 SUGGESTIONS FOR FURTHER STUDY
1. This study empirically investigated on the impact of corporate governance on the
financial performance of listed banks, the researcher thereby suggests for further
study; an extension of the scope to the other listed banks on the Nigerian Stock
Exchange and for the result to be more reliable and accurate, the sample size should
be increased and the corporate governance variables, particularly the inclusion of
ownership concentration/characteristics.
2. The need to examine the relationship between firm performance measures when debt
financing is introduced will enrich the outcome of the research.
3. More importantly, the empirical literature indicates a sample selection bias in favour
of very big banks. It is hereby suggested that attention should be devoted to the study
of micro finance banks and primary mortgage institutions with a view to
understanding how corporate governance mechanisms play out among these small
sized firms.

45
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Appendix
Table 1 Data Summary
ID Year ROA ROE BS INDE
Access Bank 2006 0.6413 3.8743 12.0000 0.1667
Access Bank 2007 0.2448 2.8338 12.0000 0.1667
Access Bank 2008 1.8249 11.1356 14.0000 0.2143
Access Bank 2009 -0.5738 -2.4679 14.0000 0.2143
Access Bank 2010 1.5805 7.6431 14.0000 0.2143
Access Bank 2011 1.6640 14.1135 15.0000 0.2000
Access Bank 2012 2.5717 18.6232 15.0000 0.2000
Diamond Bank 2006 2.3901 15.4679 14.0000 0.1429
Diamond Bank 2007 2.8112 16.5858 14.0000 0.1429
Diamond Bank 2008 2.5914 13.8277 15.0000 0.1333
Diamond Bank 2009 0.8653 5.1574 15.0000 0.1333
Diamond Bank 2010 0.8024 4.4571 16.0000 0.1250
Diamond Bank 2011 -2.0233 -17.4226 16.0000 0.1250
Diamond Bank 2012 2.5947 25.6080 15.0000 0.1333
Zenith Bank 2006 1.6025 15.4874 11.0000 0.0909
Zenith Bank 2007 4.1457 22.0484 13.0000 0.0769
Zenith Bank 2008 3.1083 15.2150 14.0000 0.0714
Zenith Bank 2009 2.3353 10.9820 15.0000 0.1333
Zenith Bank 2010 2.3055 11.6189 15.0000 0.1333
Zenith Bank 2011 2.6345 15.3606 12.0000 0.1667
Zenith Bank 2012 3.8594 21.4720 14.0000 0.2143
FCMB 2006 17.294 69.8443 11.0000 0.1818
3
FCMB 2007 2.8797 24.3351 12.0000 0.1667
FCMB 2008 4.3903 15.3514 11.0000 0.1818
FCMB 2009 0.9259 3.6990 13.0000 0.0769
FCMB 2010 1.6789 6.7657 15.0000 0.0667
FCMB 2011 -1.7757 -9.1000 16.0000 0.1250
FCMB 2012 1.7884 12.3067 15.0000 0.1333
GTB 2006 2.1560 25.8657 11.0000 0.1818
GTB 2007 5.0959 33.2100 12.0000 0.1667
GTB 2008 7.7359 20.7882 11.0000 0.1818
GTB 2009 3.2474 17.6594 14.0000 0.1429
GTB 2010 2.8088 21.0267 14.0000 0.1429
GTB 2011 4.2497 27.6476 14.0000 0.1429
GTB 2012 6.1804 34.7529 14.0000 0.1429
Data as extracted from the annual reports and accounts of banks from 2006-2012

50