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CHAPTER ONE

INTRODUCTION
1.1 Background to the Study
The issues of corporate governance have continued to attract
considerable national and international attention over the
years.

The

shocking

accounting

scandals

of

the

2001

perpetuated by Enron, Xerox, and WorldCom have placed the


credibility of corporate financial reports under suspicion, and
furthermore, eroding investors confidence. Thus, the issue of
corporate governance has become paramount and centre of the
agenda for both business leaders and regulators all over the
world following the global financial crisis which has provided
many illustrations of the collapse of corporate governance,
consequently, the international regulators are hard at work to
influence appropriate regulatory controls (Jegede, Akinlabi and
Soyebo, 2013).
As a follow up to this, the Sarbanes-Oxley Act was enacted in
2002 to enhance corporate government mechanism which is

viewed

as

the

priority

of

financial

revolution,

in

the

expectation that governance mechanism may be reinforced,


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public confidence retrieved, accuracy and reliability of financial


information assured (Ming-Cheng, Hsin-chaing, I-cheng & Chunfeng, 2008).
Corporate governance is about putting in place the structure,
processes and mechanisms that insure that the firm is being
directed and managed in a way that enhances long term
shareholder value through accountability of managers and
enhancing firm performance (Jegede, Akinlabi and Soyebo,
2013). In other words, through such structure, processes and
mechanisms, the well- known agency problem (which results
from the separation of ownership from management and leads
to conflict of interests within the firm) may be addressed such
that the interest of managers can be aligned with those of the
shareholders.
In Nigeria, It was discovered by the Securities and Exchange
Commission (SEC) (a regulatory organ responsible for the
supervision of corporations in Nigeria) in 2003 states that, poor
corporate governance was one of the major factors in virtually
all known instances of financial institutions distress in the
Nigerian financial sector. It was also found that only about 40%

of quoted companies, including banks, had recognized codes of


corporate governance in place (Ahmad & Kwanbo, 2012).
Consequently, in 2003, SEC in collaboration with the Corporate
Affairs Commission released a code of corporate governance.
Banks were expected to comply with the provisions of the code.
In addition to that, banks were further directed to comply with
the Code of Corporate Governance for Banks and Other
Financial Institutions approved earlier in the same year by the
Bankers Committee. However, in 2006, the consolidation of the
banking industry necessitated a review of the existing code for
the Nigerian Banks. A new code was therefore, developed to
compliment the earlier ones and enhance their effectiveness for
the Nigerian banking industry. Compliance with the provisions of
the Code was mandatory.
The reforms carried out by the CBN in the banking sector as
well as the code issued by the SEC were to bring about
optimized corporate governance practices in the industry
(Ahmad & Kwanbo, 2012). However, in 2008, the CBN and the
Nigerian Deposit Insurance Company (NDIC) carried out a stress
test in the banking industry. The stress test revealed some

unwholesome developments in the banking industry which were


as a result of noncompliance with the corporate governance
code by some banks (Ahmad & Kwanbo, 2012). This study
therefore

seeks

to

investigate

the

impact

of

corporate

governance mechanism on the performance of banks.


1.2 Statement of the problem
The integrity of financial reporting has been a consistent
concern among regulators and practitioners, especially after
high-profile accounting scandals involving once well-respected
companies such as Enron, WorldCom and Xerox (Zhou & Chen,
2004) and the Nigerian recapitalization exercise of the CBN in
2005. This has thus; rekindle the interest of researchers in
recent years to examine the impact of corporate governance on
the performance of firms (e.g. Macey and OHara, 2003; Levine,
2004; Adams and Mehran, 2008; Larcker, 2007; Caprio et al.,
2007, Taiwo & Okorie, 2013; Mohammed, 2012; Akpan & Riman,
2012, Ajala, Amuda and Arulogun, 2012 and Obeten, Ocheni, &
Sani, 2014).
Concerned about the dwindling loss of confidence by investors
in commercial banks due to absence of good corporate

governance, the CBN in 2004 made it compulsory for all


commercial banks to have sound corporate governance in their
respective banks.
However, there are absence of consensus amongst empirical
studies

that

seek

to

examine

the

relationship

between

corporate governance and firms performance especially as


regards the Nigerian banking sector. This could be explained by
the use of different corporate governance measures by different
researchers

in

different

economic

environment.

There

is

therefore need to examine relationship between corporate


governance and performance of firms in a typical economic
environment in Nigeria.
In the light of the forgoing, this present seeks to empirically
examine

the

impact

of

corporate

governance

on

the

performance of commercial banks in Nigeria.


1.3 Objectives of the Study
The main objective of this study is to empirically examine the
extent to which corporate governance mechanism affects the
performance of commercial banks in Nigeria. This study

specifically

seeks

to

accomplish

the

following

specific

objectives.
1. To examine the relationship between board size and the
return on equity (ROE) of commercial banks in Nigeria.
2. To examine the relationship between audit committee
independence

and

the

return

commercial banks in Nigeria.


3. To examine the relationship

on

equity

between

size

(ROE)
of

of

audit

committee and the return on equity (ROE) of commercial


banks in Nigeria.
1.4 Research Questions
The study specifically seeks for answers to the following
questions

via findings.

1. To what extent is the relationship between board size and


the return on equity (ROE) of commercial banks in Nigeria?
2. To what extent is the relationship between audit committee
independence and the return on equity (ROE) of commercial
banks in Nigeria?
3. To what extent is the relationship between size of audit
committee and the return on equity (ROE) of commercial
banks in Nigeria?

1.5 Research Hypotheses


The following null hypotheses have been formulated for this
study.
Ho1: There is no significant relationship between Board size the
return on equity (ROE) of commercial banks in Nigeria.
Ho2:

There

is

no

significant

relationship

between

audit

committee and the return on equity (ROE) of commercial


banks in Nigeria.
Ho3:

There

is

no

significant

relationship

between

audit

committee and the return on equity (ROE) of commercial


banks in Nigeria.
1.6
The

Significance of the Study


research

provides

management/owners

of

banks,

shareholders and other stake holders with valuable information


to reach a better understanding on the extent to which
corporate governance impact on banks performance.
This study will also be of benefit to the regulatory bodies like
the Security and exchange commission (SEC) and the central
bank of Nigeria (CBN) in a way that it will avail them with
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valuable

insight

on

how

sound

corporate

governance

mechanism could turn to impact performance of firms in Nigeria


thus

re-engineering

the

need

to

strengthen

corporate

governance in banks.
In addition, the government will also be made to understand the
need to strengthen regulatory agencies saddled with the
responsibility of issuing sound corporate governance in Nigeria.
More so, the study will also be of immense important in the
sense that it will add more statistical data to prior studies; this
will help to serve as a reference point to students, researchers
and the academia who desired to carry out further research on
related topics.
1.7 Scope of the Study
The scope of this study covers all the 21 commercial banks
quoted on the Nigerian stock exchange as at 2005. The scope in
relation to time covers a period of 8 years (i.e. from 20052013). The choice of this period is due to the researchers belief
that the period will provide findings that reflect current realities
in the banking sector.
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CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter looks at review of related literature on the impact
of corporate governance mechanism on banks performance.
The chapter will focus on conceptual frame work, theoretical
framework, an over view of corporate governance, importance
of corporate governance in the Nigerian baking industry review
of empirical works and summary of review.
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2.2 Theoretical Frame Work


An understanding of corporate governance proceeds from an
examination of a number of theories that attempt to explain the
basis and rationale behind this management imperative.
According to Anthony, (2007) these theories include the
following: Agency theory, Stakeholders theory, Stewardship
theory and Resource dependency theory. These theories are
succinctly examined below:

2.2.1 Agency Theory


It is an acknowledged fact that the principal-agent theory is
generally considered the starting point for any debate on the
issue of corporate governance emanating from the classical
thesis on the modern and private property by Berle and Means,
(1932). According to this thesis, the fundamental agency
problem in modern firms is primarily due to the separation
between finance and management. Modern firms are seen to
suffer from separation of ownership and control and therefore
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are run by professional managers (agents) who cannot be held


accountable by dispersed shareholders.
In this regard, the fundamental question is how to ensure that
managers follow the interest of shareholders in order to reduce
cost associated with principal agent theory? The principals are
confronted with two main problems. Apart from facing an
adverse selection problem in that they are faced with selecting
the most capable managers, they are also confronted with a
moral hazard problem; they must give agents (managers) the
right incentive to make decisions aligned with shareholders
interest.
In further explanation of the agency relationships and cost,
Jensen & Meckling, (1976) describe agency relationship as a
contract under which one or more persons (agent) to perform
some service on their behalf, which involves delegating some
decision making authority to the agent. In this scenario there
exist a conflicting of interests between managers or controlling
shareholders, and outside or minority shareholders leading to
the tendency that the former may extract perquisites or
(perks) out of a firms resources and be less interested to
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pursue

new

profitable

ventures.

Agency

costs

include

monitoring expenditures by the principal such as auditing,


budgeting,

control

and

compensation

systems,

bonding

expenditures by the agent and residual loss due to divergence


of interests between the principal and the agent. The share
price that (principal) pay reflects such agency costs. To increase
firms value, one must therefore reduce agency costs. The
following

represent

the

key

issues

towards

addressing

opportunistic behaviour from managers within the agency


theory:
2.2.2 Stakeholder Theory
One argument against the strict agency theory is its narrowness
by identifying shareholders as the only interested parties, the
stakeholder theory stipulate that a corporate entity invariably
seeks to provide a balance between the interest of its diverse
stakeholder in order to ensure that each constituency receives
some degree of satisfaction (Abrams, 1951). The stakeholder
theory therefore appears better in explaining the role of
corporate governance than the agency theory by highlighting
various constituents of a firm. Thus creditors, customers,
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employees, banks, governments and society are regarded as


relevant stakeholders.
Related to the above discussion, John and Senbet (1998),
provide a comprehensive review of the stakeholders theory of
corporate governance which points out the presence of many
parties with competing interest in the operations of the firm.
They also emphasis the role of non-market mechanism such as
size of the board, committee structure as important to firm
performance
Stakeholder theory has become more prominent because many
researchers have recognize that the activities of a corporate
entity

impact

on

the

external

environment

requiring

accountability of the organization to a wider audience than


simply its shareholders alone but exist within the society and
therefore, has responsibilities to that society. One must however
point out that large recognition of this fact has rather been a
recent phenomenon. Indeed it has realized that economic value
is created by people who voluntarily come together and
corporate to improve every ones position (Freeman et al, 2004
& Jensen, 2001).
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Critique of the stakeholders theory criticize it for assuring a


single-valued

objective

(gains

that

accrue

to

the

firms

constitutions). The argument of Jensen (2001) suggests that the


performance of a firm is not and other issues such as flow of
information from senior management to lower ranks, interpersonal relations, working environment etc. are all critical
issues that should be considered.
An extension of the theory called an enlightened stakeholder
theory was proposed. However, problems relating to empirical
testing of the extension have limited its relevance (Sanda et al,
2005).
2.2.3 Stewardship Theory
This theory, arguing against the agency theory posits that
managerial

opportunism

is

not

relevant

(Donaldson

and

Donaldson, 1991; Daris, Choorman and Donaldson, 1997;Muth


and Donaldson, 1998).
According to the steward theory, a managers objective is
primarily to maximize the firms performance because a
managers need of achievement and success are satisfied when
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the firm is performing well. One key distinguishing feature of


the theory of stewardship is that it replace theory refers with
respect for authority and inclination to ethical behaviour. The
theory considers the following summary as essential for
ensuring effective corporate governance in entity.
Board of Directors: the involvement of non-executive
directors (NEDS) is viewed as critical to enhance the
effectiveness of the boards activities because executive
directors fully enhance decision making and ensure the
sustainability of the business.
Leadership: Contrary to agency theory, the stewardship
theory stipulates that the positions of CEO and boards
chair should be concentrated in the same individual. The
reason being that it affords the CEO the opportunity to
carry through decision quickly without the hindrance of
undue bureaucracy. We must rather point out that this
position has been found to create higher agency costs. The
argument
effectively

is

that

working,

when
there

governance
should

structures
not

bureaucratic delays in any decision-making.

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be

are

undue

Board Sizes: Finally, it is argued that small board size


should be encouraged to promote effective communication
and decision-making. However, the theory does not
stipulate a rule for determining the optimal board size and
for that matter what constitute small.
Resource

Dependency

Theory:

This

theory

introduces

accessibility to resources, in addition to the separation of


ownership and control, as a critical dimension to the debate on
corporate governance.
Again the theory points out that organization usually tend to
reduce the uncertainty of external influence by ensuring that
resources are available for their survival and development. By
implication, this theory seems to suggest that the issue of
dichotomy between executive and non-executive directors is
actually irrelevant. How then does a firm operate efficiently? To
resolve this problem, the theory indicates that what is relevant
is the firms presence on the boards of directors of the
organizations to establish relationships in order to have access
to resources in the form of information which could then be
utilized to the firms advantage. Hence, this theory shows that
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the strength of a corporate organization lies in the amount of


relevant information it has at its disposal.
In the height of the foregoing analysis, it is clear that
governance mechanism seeks to protect the interest of all
stakeholders of a firm. In recent times, the structures of laws
and accountability issues regarding corporate governance is
changing world wide and directors are being held responsible
every day for the success and failures of the companies the
governance.
Corporate boards are responsible for major decisions like
changing corporation by laws, issues of shares, declaiming
dividends etc. this explains to some extent, the reason why
discussions of corporate governance usually focus on boards.
The board of directors is the apex of the controlling system in
an organization and is there to ensure that the interests of
shareholders are protected (Jensen 1993 and Short et al, 1998).
It acts as the fulcrum between the owners and controllers of the
corporation (Monks and Minow, 2001) and regarded as the
single most important corporate governance mechanism (Blair,
1995). The boards of directors are the institution to which
17

managers of a company are accountable before the law for the


companys activities Oxford Analytical Ltd 1992: 7).
2.3 Conceptual Frame work
2.3.1 Concept of Corporate Governance
Corporate governance relates to relationship between firms
various legitimate stakeholders. Corporate governance is about
making certain that the company is directed appropriately for
reasonable return on investments (Magdi and Nadereh, 2002). It
is considered to be a process in which affairs of the firm are
directed and controlled so as to protect the interest of all
stakeholders

(Sullivan,

2009).

The

corporate

governance

structure specifies the distribution of rights and responsibilities


among different participants in the corporation such as, the
board, managers, shareholders and other stakeholders, and
spells out the rules and procedures for making decisions on
corporate affairs (Uche, 2004 and Akinsulire, 2006).
Corporate

governance

is

concerned

with

the

processes,

systems, practices and procedures that govern institutions. It is


also concerned with the resolution of collective action problems
among dispersed investors and the reconciliation of conflicts of
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interest between various corporate claim holders, corporate


governance rules can be seen as the outcome of the
contracting

process

between

the

various

principals

or

constituencies and the CEO (Becht et al, 2005).


There are other perspectives on corporate governance, the
corporations perspective and the public policy perspectives.
The corporations perspective is about maximizing value subject
to meeting the corporations financial, legal, contractual, and
other obligations. This perspective stresses the need for boards
of directors to balance the interests of shareholders with those
of other stakeholders:

employees, customers, suppliers,

investors, etc.
In order to achieve long term sustained value for the
corporation.

From

public

policy

perspective,

corporate

governance is about nurturing enterprises while ensuring


accountability in the exercise of power and patronage by firms.
The role of public policy is to provide firms with the incentives
and discipline to minimize the divergence between private and
social returns and to protect the interests of stakeholders.
These two perspectives provide a framework for corporate

19

governance

that

reflects

the

interplay

between

internal

incentives and external forces that govern the behavior and


performance of the firm (Iskander, Magdi and Chamlou, 2000).
2.3.2 Overview of Bank Corporate Governance in Nigeria
Effective corporate governance practices are essential to
achieving and maintaining public trust and confidence in the
banking system, which are critical to proper functioning of the
banking sector and economy as a whole. Poor corporate
governance may contribute to bank failures, which could lead to
a run on the bank, unemployment and negative impact on the
economy.
Effective corporate governance is likely to give a bank access to
cheaper sources of funding through improving their reputation
with rating agencies, customers and investors. The corporate
governance landscape in Nigeria has been dynamic and
generating interest from within and outside the country.
In 2003, the Securities and Exchange Commission (SEC)
adopted a Code of Best Practices on Corporate Governance for
publicly quoted companies in Nigeria. At the end of the
consolidation exercise in the banking industry, the CBN in March

20

2006 released the Code of Corporate Governance for Banks in


Nigeria, to complement and enhance the effectiveness of the
SEC code. The three major governance issues that attracted the
attention of the regulators are related party transactions,
conflict of interest and creative accounting.
Globally,

corporate

governance

practices

in

the

banking

industry have attracted special attention because of the


importance of the industry to most economies. This led to the
Organization for Economic Co-operation and Development
(OECD) playing active role in defining guidelines for corporate
governance

in

the

banking

industry

through

its

Basel

Committee on Banking Supervision.


According to the Basel Committee on Banking Supervision
(2006),

corporate

governance

from

banking

industry

perspective involves the manner in which the business and


affairs of banks are governed by their boards of directors and
senior management, which affects how they:
Set corporate objectives;
Operate the banks business on a day-to-day basis;

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Meet the obligation of accountability to their shareholders


and take into account the interests of other recognized
stakeholders;
Align

corporate

activities

and

behaviour

with

the

expectation that banks will operate in a safe and sound


manner, and in compliance with applicable laws and
regulations; and
Protect the interests of depositors.
The Basel Committee on Banking Supervision came up with the
following principles, which are viewed as important elements of
an effective corporate governance process.
Principle 1 Board members should be qualified for their
positions, have a clear understanding of their role in corporate
governance and be able to exercise sound judgment about the
affairs of the bank.
This is because the board of directors is ultimately responsible
for the operations and financial soundness of the bank. In
addition the board and individual directors can strengthen the
corporate governance of a ban when they do the following:
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Understand and execute their oversight role;


Approve the overall business strategy of the bank;
Avoid conflict of interest in their activities;
Commit sufficient time and energy to fulfilling their
responsibilities;
Periodically

assess

the

effectiveness

of

their

own

governance practices;
Avoid participation as the board of directors in day-to-day
management of the bank.
For effective corporate governance boards are expected to
function with specialized committees which include Audit
committee,

Risk

management

committee,

Compensation

committee, and Nomination/corporate governance committee.


Principle 2 The board of directors should approve and
oversee the banks strategic objectives and corporate values
that are communicated throughout the banking organization.
This implies that the board must set the tone at the top and
build a corporate culture that will drive good corporate
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governance. The board of directors should ensure that senior


management implements the agreed strategy of the bank and
strategic

policies

and

procedures

designed

to

promote

professional behavior and integrity in the bank.


Principle 3 The board of directors should set and enforce
clear lines of responsibility and accountability throughout the
bank. This means that the authorities and key responsibilities of
the board and senior management are very clear to avoid
confusion.
Principle 4 The board should ensure that there is appropriate
oversight by senior management consistent with board policy.
Principle 5 The board should ensure that compensation
policies and practices are consistent with the banks corporate
culture,

long-term

objectives

and

strategy,

and

control

environment.
Principle 6 The bank should be governed in a transparent
manner since transparency is essential for sound and effective
corporate governance.

24

The Basel Committee recognizes that primary responsibility for


good corporate governance rests with the board of directors
and senior management of banks.
2.3.3

Corporate

Governance

Mechanism

and

Bank

Performance Measures
Prior studies on the relationship between corporate governance
mechanisms and corporate performance are seen to include
various internal and external mechanisms, among which board
size, board composition, board committees, CEOs positionduality, CEOs incentives and ownership interest, ownership
concentration of insiders and outsiders, multiple directorships,
debt

financing,

market

for

corporate

control

etc.

are

mentionable. However, this section of the chapter reviews only


mechanism relevant to the scope of this study. These include:
Board size, CEO duality, Audit committee independent, size of
the audit committee, company size and debt financing
1. Board Size
Board size refers to the total number of directors on the board
of any corporate organization. While a number of authors have

25

recommended large board size, there are others who believe


that a small board size is the ideal thing for any firm that wants
to sustain improved performance. Determining the ideal board
size for organizations is very important because the number
and quality of directors in a firm determines and influences the
board functioning and hence corporate performance.
There is a convergence of agreement on the argument that
board size is associated with firm performance. However,
conflicting results emerge on whether it is a large, rather than a
small board, that is more effective. For instance, while Yermack
(1996) had found that Tobins Q declines with board size, and
this finding was corroborated by those of Mak and Kusnadi
(2005) and Sanda, Mikailu and Garba (2005) which showed that
small boards were more positively associated with high firm
performance. However, results of the study of KyereboahColeman (2007) rather indicated that large boards enhanced
shareholders wealth more positively than smaller ones.
Ogbechie, (2011) reveal that the average size of the boards of
Nigerian banks is 14 directors, with the smallest having 8
directors and the largest 20 directors. A board size of 16
26

directors is the most popular. The Central bank of Nigeria (CBN)


corporate governance code for banks operating in Nigeria
recommend a maximum board size of 20 directors. All the
banks are compliant. However, United Bank for Africa Plc has
applied to the CBN for approval to increase their board size to
24.
2. CEO Duality
Separation of office of board chair and CEO Separation of office
of board chair from that of CEO generally seeks to reduce
agency costs for a firm. Kajola (2008) found a positive and
statistically significant relationship between performance and
separation of the office of board chair and CEO. Yermack (1996)
equally found that firms are more valuable when different
persons occupy the offices of board chair and CEO. KyereboahColeman (2007) proved that large and independent boards
enhance firm value, and the fusion of the two offices negatively
affects a firms performance, as the firm has less access to debt
finance. The results of the study of Klein (2002) suggest that
boards that are structured to be more independent of the CEO
are more effective in monitoring the corporate financial
27

accounting process and therefore more valuable. Fosberg


(2004) found that firms that separated the functions of board
chair and CEO had smaller debt ratios (financial debt/equity
capital). The amount of debt in a firms capital structure had an
inverse relationship with the percentage of the firms common
stock held by the CEO and other officers and directors. This
finding was corroborated by Abor and Biekpe (2005), who
demonstrated that duality of the both functions constitute a
factor that influences the financing decisions of the firm. They
found that firms with a structure separating these two functions
are more able to maintain the optimal amount of debt in their
capital structure than firms with duality. Accordingly, they
argued that a positive relationship exists between the duality of
these two functions and financial leverage.
2. Audit Committee
Consistent with the agency theory, audit committee works as
an

additional

control

mechanism

that

ensures

that

the

shareholders interests are being safeguarded. In consistent


with the Cadbury proposal as to formation of audit committee,
Central Bank of Nigeria and SEC have made it compulsory for all
28

banks to constitute a board audit committee consisting of a


minimum of seven (7) members and it will hold at least three
meetings in a year.
The committee will review the financial reporting process, the
internal control system and management of financial risks, the
audit process, conflicts of interest, infringement of laws etc.
Thus, audit committee works as another internal control
mechanism in the board structure, the impact of which should
be to improve the quality of the financial management of the
company and hence its performance (Weir et al, 2002).
Although results of Klein (2002) and Anderson, Mansi and Reeb
(2004) showed a strong association between audit committee
and firm performance, Kajola (2008) found no significant
relationship between both variables. This lack of consensus
presents scope for deeper research on the impact of this
corporate governance variable.

3. Size of the Audit Committee


29

This means the total number of directors on the audit


committee board. Bedard et al (2004) argue that it is important
to increase the number of members of the audit committee to
ensure more effective control of accounting and financial
processes. Similarly Pincus et al (1989) show that firms with
larger audit committees are expected to devote greater
resources to monitor the process of reporting accounting and
finance. In the same furrow, Anderson et al (2004) found that
large size audit committees can protect and control the process
of accounting and finance with respect to small committees by
introducing greater transparency with respect shareholders and
creditors

which

has

positive

impact

on

the

financial

performance of the company.


4. The Independence of Audit Committee Members
The report of the Blue Ribbon Committee (BRC) considers
independence as an essential quality of the audit committee in
order to fulfill its oversight role. Indeed, this report argues that
several recent studies have identified a correlation between the
independence of the audit committee, the level of supervision
and the level of fraud in the financial statements Several

30

previous studies use the percentage of outside directors to


measure independence like Marrakchi et al (2001) and Bradbury
et al (2006). In effect, these studies note that audit committees
composed mostly or exclusively by outside directors are more
independent than other committees.
Similarly, Klein (2002) shows that following the publication of
the

BRC,

the

NYSE

and

NASDAQ

have

changed

their

requirements concerning the audit committee. Indeed these


amendments concern the obligation to establish at least three
independent directors on the audit committee for listed
companies. Bryan et al (2004) find that the independence of the
audit committee has a positive influence on the quality of
earnings.
In addition, in a study on the main characteristics of audit
committees, Keasey et al (1993) show that the independence of
the members of the audit committee is the most important
criterion with effect on the reliability of financial statements.
4. Company Size
The size of company (proxied by total assets) is considered in
this study as control variable to have a relationship with other
31

factors, for example, there is a strong relationship between firm


size and CEO compensation (e.g., Murphy, 1985). The literature
is in harmony with this tendency. On average, larger companies
are better performers as they are able to diversify their risk
(Ghosh, 1998).
Furthermore, larger company has larger market share and
market

power

in

respect

of

customers

and

volume

of

investment. Larger firms have larger investors bases than


smaller ones. Again, company size may be measured in
different ways such as sales turnover, total assets, capital
employed, etc.
In this study, total assets have been used as the measure of
company size. Actually, to measure the magnitude of a
company, total assets is such a determinant that may
preferably be used than other measures as the accounting
measure because sometimes a medium firm may have larger
sales volume, for example, due to increase in assets turnover.
5. Debt Financing

32

Debt financing or leverage may play a significant role in


governance mechanisms especially in the banking sector for
two unique characteristics of banks: Opacity and strong
regulations. Due to opacity, depositors do not know the true
value of a banks loan portfolio as such information is
incommunicable and very costly to reveal, implying that a
banks loan portfolio is highly fungible (Bhattacharya et al.,
1998).
As a consequence of this asymmetric information problem, bank
managers have an incentive each period to invest in riskier
assets than they promised they would ex ante (Arun and Turner,
2003). The opaqueness of banks also makes it very costly for
depositors to constrain managerial discretion through debt
covenants (Capiro and Levine, 2002).
Referring different studies Haniffa and Hudaib (2006) assert
that debt forces managers to consume fewer perks and
become more efficient to avoid bankruptcy, the loss of control
as well as loss of reputation (Grossman and Hart, 1982).

33

Debt contracting may also result in improved managerial


performance and reduced cost of external capital (John and
Senbet, 1998). In short, debt may help yield a positive
disciplinary effect on performance.
On the other hand, debt can increase conflicts of interest over
risk and return between creditors and equity holders. Like other
variables, relationship of gearing ratio with performance shows
conflicting results in different studies.
Dowen (1995), McConnell and Servaes (1995), Short and
Keasey (1999) and Weir et al. (2002) found a significant
negative

relationship

between

gearing

and

corporate

performance. However, Hurdle (1974) found gearing to affect


profitability positively.
2.3.4.2 Bank Performance Measures
A companys operations and successfulness are integrally
connected. Studies show that then concept of companys
performance is multidimensional. But the fact is that the
companys investors, shareholders and other stakeholders find

34

its successfulness in the financial performance. The financial


performance measures can be divided into two major types:
1. Accounting- based measures (e.g., Return on Assets,
Return on Equity, or Return on Sales), and
2. Market- based measures (e.g. Tobins Q ratio).
There has been extensive empirical research using different
performance measures for examining the relationship between
corporate governance and firms performance. There are some
researches where either accounting-based measure or marketbased measure has been used but some researchers have used
both the measures. When both the measures have been used,
almost all the researchers have found significant relationship
with one measure but no relationship with other measures. This
may be attributed for using different type of numerators and
denominators used for calculating financial performance.
Different researchers argue differently in favour of their using
measurement base. Some argue that if the capital market is
unstructured and much volatile, Tobins Q ratios of different
companies give misleading results. Accounting measures have
been criticized on the grounds that they are subject to
35

manipulation, that they may systematically undervalue assets


as a consequence of accounting conservatism and that they
may create other distortions as well (Sanchez-Ballesta and
Garcia-Meca, 2007).
Joh (2003) argues that accounting profitability is a better
performance measure than stock market measures for at least
three

reasons.

First,

market

anomalies

may

act

as

an

impediment to all available information being reflected in the


stock price. Second, a firms accounting profitability is more
directly related to its financial survivability than is its stock
market value. Finally, accounting measures allow users to
evaluate the performance of privately held firms as well as that
of publicly traded firms.
2.4 Review of Empirical Studies
There exist a plethora of studies that seek to examine the
influence of corporate governance on firms performance. This
section of the chapter examines some of these studies.
Yinusa

and

between

Babalola

corporate

(2012)

investigated

governance

the

mechanisms

interaction
and

capital

structure decisions of Nigerian firms. Panel data methodology


36

was employed to analyse the data for the selected foods and
beverages companies and the results show that corporate
governance

has

important

implications

on

the

financing

decisions. They concluded that corporate governance can


greatly assist the food and beverages sector by infusing better
management

practices,

effective

control

and

accounting

systems, stringent monitoring, effective regulatory mechanism


and efficient utilization of firms resources resulting to improved
performance if it is properly and efficiently practice.
Abdul-Qadir and Kwanbo, (2012) studied corporate Governance
and Financial Performance of Banks in the post-consolidation
era in Nigeria using data from the period 2006-2010. The study
employed the use of t-test and ANOVA to test the three
hypotheses formulated for the study. Findings revealed a
significant impact of dispersed equity on the profitability of
banks and an insignificant impact of board size on profitability.
Mohammad, Islam and Ahmed, (2011) empirically investigated
the influence of corporate governance mechanisms on financial
performance of 25 listed banking companies in Bangladesh over
the period 2003- 2011. Estimated results demonstrate that the

37

general

public

ownership

and

the

frequencies

of

audit

committee meetings are positively and significantly associated


with return on assets (ROA), return on equity (ROE) and Tobins
Q while Directors ownership and independent directors have
significant positive effects on bank performance measured by
Tobins Q.
Mohammed, (2012) in a related study investigated the Impact
of Corporate Governance on Banks Performance in Nigeria. The
study made use of secondary data obtained from the financial
reports of nine (9) banks selected for a period of ten (10) years
(2001- 2010). Data were analyzed using multiple regression
analysis. Finding revealed that corporate governance positively
affects performance of banks. The findings of the study further
show that poor asset quality (defined as the ratio of nonperforming loans to credit) and loan deposit ratios negatively
affect financial performance and vice visa.
Ogbechie, (2011) studied corporate governance practices in
Nigerian

banks

with

regards

to

board

characteristics,

performance, culture and processes, and board effectiveness.


The study also attempted to identify the level of compliance of

38

Nigerian banks to the Central Bank of Nigeria (CBN) code of


corporate governance for banks operating in Nigeria. Empirical
findings indicate that boards of Nigerian banks frequently
undertake evaluation of their activities as a means of improving
performance. It was also revealed that almost all the banks
have been compliant with nearly all the Central Bank of Nigeria
(CBN) corporate governance guidelines.
Cheng Wu, Chiang Lin, Cheng Lin and Chun-Feng, (2008)
examined the impact of the corporate governance mechanism
on firm performance. Return on assets, stock return and Tobins
Q were the variables used in the regression model to measure
firms performance. The empirical results indicate that firm
performance has negative and significant relation to board size,
CEO duality, stock pledge ratio and deviation between voting
right and cash flow right. On the other hand, firm performance
has a positive and significant relation to board independence
and insider ownership.
Ahmad,

(2003)

investigated

the

impact

of

corporate

governance on banking performance in Pakistan. The study


measured efficiency of banks using Cobb-Douglas cost function

39

for the year 2000-2002. It is evident from the results that on


average,

overall

efficiency

remains

about

82

percent

throughout the period of analysis. However, it is observed that


public ownership show lowest efficiency among all the groups
i.e., 74 percent on average, which emphasizes on a competitive
environment in the banking sector that may improve the
efficiency of these institutions. Similarly, market share also
affects the performance of banks negatively, suggesting that
banks in a less competitive environment might feel less
pressure to control their costs. Moreover, introduction of
governance

variables

such

as

sound

management

and

concentration have significant impact on banking efficiency.


Omankhanlen et al (2013) investigated the role of corporate
governance in the growth of Nigerian Banks. A multiple linear
regression

analysis

involving

ordinary

least

square

was

employed to test the hypotheses. The statistical significance of


the variables was first determined using ANOVA statistics. The
findings reveal that the problems of corporate governance in
the Nigerian banking sector include: instability of board tenures,
board squabbles, ownership crises, high level of insider dealings

40

While the weaknesses of corporate governance have been


identified to include ineffective board oversight functions,
disagreement between boards and management giving rise to
board squabbles, lack of experience on the part of the Board of
directors members and weak internal control.
Adeyemi and Ajewole (2004) examine corporate governance
issues and challenges in the Nigerian banking sector. Both
primary and secondary sources of data were made use of. The
primary data collected through the use of questionnaire were
analyzed using simple descriptive statistics. Findings from the
study showed that the Nigerian banking sector is yet to learn
from the sad consequences of poor corporate governance of the
period between 1994-2003 in particular.
Akpan and Riman (2012) examined the relationship between
corporate governance and banks profitability in Nigeria. The
study discovered that good corporate governance and not
assets value determine the profitability of banks in Nigeria.
Ayorinde et al (2012) examined the effects of corporate
governance on the performance of Nigerian banking sector. The
secondary source of data was sought from published annual

41

reports of the quoted banks. The Person Correlation and the


regression analysis were used to find out whether there is a
relationship between the corporate governance variables and
firms performance. The study revealed that a negative but
significant relationship exists between board size and the
financial performance of these banks while a positive and
significant relationship was also observed between directors
equity interest, level of corporate governance disclosure index
and performance of the sampled banks.
Onakoya (2011) examines the impact of corporate governance
on bank performance in Nigeria during the period 2005 to 2009
based on a sample of six selected banks listed on Nigerian
Stock Exchange market making use of pooled time series data.
Findings from the study revealed that corporate governance
have been on the low side and have impacted negatively on
bank performance. The study therefore contends that strategic
training for board members and senior bank managers should
be embarked or improved upon, especially on courses that
promote corporate governance and banking ethics.

42

Ganiyu and Abiodun (2012) examined the interaction between


corporate

governance

mechanisms

and

capital

structure

decisions of Nigerian firms by testing the corporate governance


and capital structure theories using sample of ten selected
firms in the food and beverage sector listed on the Nigeria
Stock Exchange during the periods of 2000 2009. Panel data
methodology was employed to analyse the data for the selected
foods and beverages companies and the results show that
corporate governance has important implications on

the

financing decisions. Corporate governance can greatly assist


the food and beverages sector by infusing better management
practices, effective control and accounting systems, stringent
monitoring,

effective

regulatory

mechanism

and

efficient

utilization of firms resources resulting in improved performance


if it is properly and efficiently practiced.
Hoque et al (2012) empirically investigated the influence of
corporate governance mechanisms on financial performance of
25 listed banking companies in Bangladesh over the period
2003-2011. Estimated results demonstrate that the general
public ownership and the frequencies of audit committee
43

meetings are positively and significantly associated with return


on assets (ROA), return on equity (ROE) and Tobins Q.
Directors ownership and independent directors have significant
positive effects on bank performance measured by Tobins Q.
Chiang (2005) argues that as the independent directors are
more specialized to monitor the board than the inside directors
to run the business successfully by reducing the concentrated
power of the CEO, it helps the company to prevent misuse of
resources and enhance performance.
Krivogorsky

(2006)

also

observes

significant

positive

relationship between independent directors and performance of


81

European

companies.

In

contrast,

directors

who

are

unrelated to the firm may lack the knowledge or information to


be effective monitors. Yermack (1996), Agrawal and Knoeber
(1996) and Bhagat and Black (1998) find a negative relationship
between

the

proportion

of

performance.
2.5 Conclusions

44

independent

directors

and

In conclusion, the review of prior studies has identified ten


corporate governance characteristics that impact on firms
performance, albeit with mixed evidence as to the direction of
the relation.
Nevertheless, almost all this body of literature examined the
relationship

between

corporate

governance

and

firms

performance during economically healthy periods without any


financial distress.
As expected, the researchers differ on the extent to which
corporate governance influences the performance of firms.
Furthermore, each research study considered different set of
factors and used variety of measurements to assess the
performance of firms under investigation. Also most of these
study focus on advance countries of Asia, Europe and America
with Africa and Nigeria in particular receiving less research
attention. This study therefore seeks to fill this gap that has
hitherto existed in literature by empirically examining the
impact of corporate governance mechanism on performance of
commercial banks in Nigeria.

45

CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter examines the methodology that will be utilized to
reveal some statistical details about impact of corporate
governance on banks performance in Nigeria. This chapter will
mainly focus on the research design, the population and
sample of the study, Sources of data collection, Techniques of

46

data analysis, definition of variable/model specification and


weaknesses of the methodology.
3.2 Research Design
This study adopts the ex-post facto research design. This
research design is adopted for this study because of its
strengths as the most appropriate design to use when it is
impossible to select, control and manipulate all or any of the
independent variables or when laboratory control will be
impracticable, costly or ethically questionable (Akpa and
Angahar, 1999).

3.3 Population of the Study


A population is an aggregation of survey elements with
common features or characteristics that are of interest to the
researcher. The population of this study in view of the above
definition covers all the 21 banks quoted on the Nigerian stock
exchange as at 19th August 2014.
3.4 Sample Size of the Study

47

The sample is a subset of the population selected for the study


or

investigation.

This

study

purposively

selects

six

(6)

commercial banks namely Zenith Bank Plc, Guarantee Trust


Bank (GTB) Plc, First Bank Plc, Fidelity Bank Plc, Union Bank Plc,
United Bank for Africa (UBA) Plc from the existing 21 banks to
constitute the sample size of the study. The following criteria
were taken into cognizance in the selection process.
The commercial banks selected were only those that
survived the 2005 recapitalization exercise of the CBN
without changing their identity.
The commercial banks selected for the study must be from
the list of commercial banks that the CBNs and World
Banks ranking were adjudged to be the best performing
banks in terms of strong and vibrant banks (Vanguard 3,
July 2011).
3.5 Sources of Data Collection
This study adopts majorly the secondary kind of data in
obtaining all the information there in. The financial statement of
the six (6) sampled commercial banks from the period 2005-

48

2012 forms the major sources of data for this study (e.g. see
appendix I).
3.6 Techniques of Data Analysis
The following statistical tools will be employed in the analysis of
data generated from the annual financial statement of the six
(6)

sampled

statistics

and

commercial
multiple

banks

listed

regression

above:

statistics.

Descriptive

The

multiple

regression using the ordinary least squares (OLS) method was


adopted for the analysis. The OLS method was preferred
because it minimizes the errors between the points on the line
and the actual observed points of the regression line by giving
the best fit.
3.7 Definition of Variables
This study employed the following variables which are briefly
explained below.
Return on equity (ROE): This is an accounting based
performance indicator of companies. It measures the
returns accruable to shareholders from their equity
holdings. It is given by net profit /Shareholders equity.
49

Board size (BS): Board size refers to the total number of


directors on the board of a bank.
Independence of the Audit Committee (IAC): This
refers to the proportion of independent directors on the
audit committee.
Size of Audit Committee: This is the total number of
auditors that constitute the audit committee of a bank.
CEO Duality: This is a situation where one individual
occupies the positions of CEO and at the same time the
board chairperson of a company, thus increasing the
concentration of power in one individual and undue
influence of particular management and board members.
CEO duality exists in a situation where the owner of the
company in question still doubles as the chief executive
officer (CEO) of the company.

3.8 Model Specification


The following model has been formulated to guide the
researcher in the investigation.

50

ROE = + 1 BS + 2IDA+ 3 SAC +u


Where,
ROE = Return on Equity
BS = Board Size
IDA = independence of the Audit Committee Members
SAC = Size of the audit committee
= alpha, which represents the model constant
1 4 =Beta, representing the coefficients of variables used in
the model.
u = is the stochastic variable representing the error term in the
model. It is usually estimated at 5% (0.05) level of
significance.

Decision Rule
This study shall accept and reject the null and alternative
hypotheses using the following set criteria.

51

Accept the null hypothesis if the critical value of t at 0.05


level of significance in the t-table is greater than the
calculated value.
Reject the null hypothesis if the critical value of t at 0.05
level of significance is less than the calculated value
3.9 Weaknesses in the Methodology
There is no methodology that has no inherent weakness. It is
only left for the researcher to minimize them. The weakness of
this studys methodology is briefly discussed in subsequent
paragraphs.
Over reliance on secondary data is another weakness of the
methodology. Financial statements published do not have 100
%accuracy, so its reliability is not assured. The occurrence of
inflation as well affects the secondary data.
Also as a weakness of the methodology is the erroneous
assumption of the ability of linear and multiple regressions to
validly project into the future past relationship whereas the
relationship between the dependent and independent variables
established is only valid across the relevant range.
Furthermore the model equations are only estimations of the
independent value, the researcher cannot possibly account for
52

every factor that goes into each independent value, and there
will always be some error (either pure error or lack of fit error) in
a regression model.
The above weaknesses notwithstanding, the intent of the
research may not be deterred as the error term included in the
models

specified

above

takes

care

of

any

information

asymmetry either caused by inflation or reporting misfeasance.


The researcher also made use of SPSS version 20 for windows
application software to run the regression model for a more
reliable result that reflect current realities in the banking sector
and findings to meet all academic standards. Also the
secondary data used in this study will be sourced from reliable
source and human subjectivity will be suppressed to the barest
minimum so as to enable the researcher have a result devoid of
manipulation.

CHAPTER FOUR
53

DATA PRESENTATION, ANALYSIS AND FINDINGS


4.1 Introduction
This chapter focuses on the presentation and analysis of data.
In this regard, this chapter therefore presents findings from data
analysis using the research method earlier explained in chapter
three. This chapter will first present and analyse the data, test
the hypotheses and interpret and discuss the findings of the
study.
4.2 Data Presentation and Analysis
This section of the chapter presents and analyse the data
extracted

from

the

annual

financial

statement

of

the

commercial banks sampled for the study (see appendix I for the
raw data). Data analysis here was done with the aid of the
statistical package for social science (SPSS version 20). As a
reminder, this study has only one dependent variable: Return
on equity (ROE), three independent variables: board size (BS),
independence of audit committee (IDA), and size of the audit
committee (SAC). The analysis of data is presented in the
subsequent sections.
54

4.2.1 Data Validity Test


The researcher computed several diagnostic tests such as
Durbin Watson test, variance inflation factor (VIF) and Tolerance
statistics in order to ensure that the results of this study are
robust. This is shown in table 4.1, 4.3 & 4.4.
The Durbin Watson statistics is estimated at 2.0 (see table 4.3)
which is equal to the standard internationally recognized 2
(Gujarati, 2007). This thus indicates the absence of autocorrelation. The Durbin Watson statistics ensures that the
residuals of the proceeding and succeeding sets of data do not
affect each other to cause the problem of auto-correlation.
The

Variance

Inflation

Factor

(VIF)

statistics

for

all

the

independent variables consistently fall below 2 (see table 4.4).


This indicates the absence of multicollinearity problems among
the variables under investigation (see Berenson and Levine,
1999). This statistics ensures that the independent variables are
not so correlated to the point of distorting the results and
assists in filtering out those ones which are likely to impede the
55

robustness of the model. There is no formal VIF value for


determining presence of multicollinearity. Values of VIF that
exceed 10 are often regarded as indicating multicollinearity, but
in weaker models values above 2.5 may be a cause for concern
(Kouisoyiannis, 1977: Gujarati and Sangeetha, 2007). Thus, this
model exhibit low risk of potential multicollinearity problems as
all the independent variables have a variance inflation factor
(VIF) below 10 (Myers, 1990). This shows the appropriateness of
fitting of the model of the study with the three (3) independent
variables.
In addition, the tolerance values consistently lies between 0.945
and 0.996 (see table 4.4). Menard (1995) suggested that a
tolerance value of less than 0.1 almost certainly indicates a
serious collinearity problem. In this study, the tolerance values
are more than 0.1; this further substantiates the absence of
multicollinearity problems among the explanatory variables.
4.2.1.1 Correlation Results

56

This section of the chapter presents in the table below the


results of the correlation results between the dependent and
explanatory variables.

Table 4.1: Correlations Result for All Variables


ROE
Pearson Correlation
ROE

BS
1

SAC

.310*

.119

.300*

.030

.414

.036

N
Pearson Correlation

49
.310*

49
1

49
-.050

49
.228

Sig. (2-tailed)
N
Pearson Correlation

.030
49
.119

49
-.050

.732
49
1

.115
49
.026

Sig. (2-tailed)
N
Pearson Correlation

.414
49
.300*

.732
49
.228

49
.026

.861
49
1

Sig. (2-tailed)

.036

.115

.861

N
49
*. Correlation is significant at the 0.05 level (2-tailed).

49

49

BS

IDA

SAC

Sig. (2-tailed)

IDA

49

Source: SPSS Version 20 output


Table 4.1 shows the Pearson product movement correlation for
all the variables. Correlations result here is used as further
check for data validity. These types of checks are necessary
because high correlation cause problems about the relative
contribution of each predictor to the success of the model
(Guajariti, 2007). The correlation matrix above shows the

57

absence of multicollinearity among the explanatory variables as


all the variables are very low with the highest correlation
estimated at 0.310. This is less than 0.75 which is considered
harmful for the purpose of analysis (see Gujarati and Sangeeta,
2007, Berenson and Levine, 1999).

4.2.3 Descriptive Statistics


This subsection of the chapter presents and analyses the
descriptive statistics for both the dependent and independent
variables. The results are presented in table 4.2 and explained
subsequently.
Table 4.2: Descriptive Statistics for all Variables
N

Minimum

Maximum

Mean

Std. Deviation

ROE

49

11.62

39.45

22.6945

6.63261

BS

49

11.00

20.00

15.0000

2.09165

IDA

49

3.00

5.00

3.2449

.59619

SAC

49

5.00

6.00

5.8980

.30584

Valid N (listwise)

49

Source: SPSS Version 20 output


Table 4.2 presents the descriptive statistics for all the variables.
N represents the number of paired observations and therefore
the number of paired observation for this study is 49. The
58

performance of the selected commercial banks proxied by


Return on equity (ROE) reflects a low mean of 22.7% with
fluctuations of just 6.6. The maximum value during the period
of observation is at 39.45, and the minimum value during the
period of observation is at 11.62 while the maximum value of
39.45 indicates the highest ROE value from the sampled banks.
This result implies that on average, shareholders of Nigerian
commercial banks gets returns of 22.7% on their equity
investment during the period under investigation. This reveals
poor performance of the sampled commercial banks in terms of
returns to the shareholders. The reason for this may be that,
most firms make minimal profits and still pay taxes and other
deductibles before declaring dividend to their owners.
The result of the descriptive analysis further reflects a mean of
15 in respect to the Board Size (BS) with a fluctuation of 2. This
implies that on average, the number of persons who constitute
the Board Size of commercial bank during the period under
investigation is 15. The minimum and maximum mean stood at
11 and 20 respectively indicating that on average, the minimum
number of persons that constitute the board size of commercial
59

banks is 11 and the maximum is 20 in the period under


investigation.
The independence of audit committee of commercial banks in
Nigeria reflects a mean of 3 persons with a standard deviation
of 1. This implies that on average, the sampled commercial
banks have at least three independent directors on the audit
committee during the period under investigation. This is also in
line with statutory requirements of the CBN. The minimum and
maximum mean stood at 3 and 5 respectively. This indicates
that on average, the minimum number of persons that
constitute the independent members of the audit committee is
3 and the maximum is 5 in the period under investigation
Finally, the mean size of the audit committee (SAC) is estimated
at 6 with a fluctuation of 0. This also implies that on average,
the number of persons that constitute size of the audit
committees of the sampled commercial banks is six (6) which is
in line with statutory requirements of the CBN. The minimum
and maximum mean stood at 5 and 6 respectively. This
indicates that on average, the minimum number of persons that

60

constitute the size of the audit committee is 5 and the


maximum is 6 in the period under investigation.
4.2.4

Regression

Results

of

the

Estimated

Model

Summary
This section of the chapter presents the results produced by the
model summaries for further analysis.
Table 4.3: Model Summaryb
Model

Adjusted R

Std. Error

Square

Square

of the
Estimate

.409a

.167

.112

Change Statistics

DurbinWatson

R Square

Change

Change

6.25047

.167

3.016

df1

df2

Sig. F
Change

45

.040

a. Predictors: (Constant), SAC, IDA, BS


b. Dependent Variable: ROE

Source: SPSS Version 20 output


Table 4.3 presents the summary of results for all the
variables. From the model summary table above, the R value
of 0.409 shows that there is a weak relationship between the
dependent and independent variables. The R 2 stood at 0.167.
The R2 otherwise known as the coefficient of determination
shows the percentage of the total variation in the dependent
variable (ROE) that can be explained by the independent or
explanatory variables (BS, IDA and SAC). Thus the R 2 value of

61

2.034

0.167 indicates that 16.7% of the variation in the Return on


equity (ROE) of commercial banks can be explained by the
variation in the independent variables: (BS, IDA and SAC) while
the remaining 83.3% (i.e. 100-R2) could be explained by other
variables not included in this model.
The adjusted R2 of 0.112% indicates that if the entire
population is considered for this study, this result will deviate
from it by 5.5% (i.e. 16.7 11.2). This result implies that the
performance of commercial banks in Nigeria herein measured
by return on equity (ROE) is not very responsive to corporate
governance mechanism herein measured by BS, IDA and SAC.
This is why other factors account for most of the variation in
performance of Nigerian commercial banks.
The results further reveals an F-statistics of 3.016 which
indicate that the set of independent variables were as a whole
contributing to the variance in the dependent variable and that
there exist a statistically significant relationship at 0.040 (4.8%)
between ROE and the set of predictor variables (BS, IDA, SAC)
indicating that the overall equation is significant at 4.0% which
is below 5% level of significance.
62

In conclusion, the results of the model summary in table


4.3

revealed

that,

other

factors

other

than

corporate

governance measures (BS, IDA, and SAC) contribute mostly to


the variation in performance (ROE) of commercial banks in
Nigeria.
4.2.5 Regression Coefficients Results
Regression analysis is the main tool used for data analysis
in this study. Regression analysis shows how one variable
relates with another. The result of the regression is here by
presented in this section.

Table 4.4: Coefficients Result for all the Independent Variables


Model

Unstandardized

Standardized

Coefficients

Coefficients

Std.

Sig.

-24.674

18.206

BS

.831

.444

IDA

1.406

SAC

5.146

Correlations

Collinearity

Interval for B

Beta

Error
(Constant)

95.0% Confidence

Statistics

Lower

Upper

Zero-

Bound

Bound

order

Partial

Part

Toleranc

VIF

-1.355

.182

-61.342

11.995

.262

1.872

.068

-.063

1.724

.310

.269

.255

.945

1.058

1.516

.126

.927

.359

-1.648

4.460

.119

.137

.126

.996

1.004

3.032

.237

1.697

.097

-.961

11.252

.300

.245

.231

.947

1.056

a. Dependent Variable: ROE

63

Source: SPSS Version 20 output.


The regression result as presented in table 4.4 above to
determine the influence of corporate governance on the
performance of commercial banks revealed that when all the
explanatory variables are held stationary; the performance
variable (ROE) is estimated at -24.674. This simply implies that
when all variables are held constant, there will be an
insignificant negative return on equity (ROE) up to the tune of
-24.674 units occasioned by factors not incorporated in this
study. Thus, a unit change in the board size (BS) will lead to an
insignificant increase in the return on equity (ROE) by 26.2%
units. Similarly a unit change in the number of the independent
audit committee will lead to an insignificant increase in ROE by
12.6% units. Finally, a unit change in size of the audit
committee (SAC) will lead to an insignificant increase in ROE by
23.7% units.
4.3 Test of Research Hypotheses
Table 4.4 displays t-values for the independent variable
regressed with ROA and ROE. These t-values will be used for
64

testing the studys formulated hypotheses in consonance with


the decision rule earlier stated in chapter three (section 3.8).
These tests are performed in the following subsections.
4.3.1 Test of Hypothesis One
Ho1: There is no significant relationship between Board
size the return on equity (ROE) of commercial banks
in Nigeria.

Given that the critical value of t is 2.021 and the calculated


values of t is 1.872 which less than the critical value. The
researcher therefore accepts the null hypothesis and rejects the
alternative hypothesis and thus concludes that there is no
significant relationship between Board size the return on equity
(ROE) of commercial banks in Nigeria.
4.3.2 Test of Hypothesis Two
Ho2: There is no significant relationship between audit
committee independence and the return on equity
(ROE) of commercial banks in Nigeria.
Given that the critical value of t is 2.021 and the calculated
values of t is 0.927 which less than the critical value. The
researcher therefore accepts the null hypothesis and rejects the
alternative hypothesis and thus concludes that there is no
65

significant relationship between audit committee independence


and the return on equity (ROE) of commercial banks in Nigeria.
4.3.3 Test of Hypothesis Three
Ho3: There is no significant relationship between size of
the audit committee and the return on equity (ROE)
of commercial banks in Nigeria.

Given that the critical value of t is 2.021 and the calculated


values of t is 1.697 which less than the critical value. The
researcher therefore accepts the null hypothesis and rejects the
alternative hypothesis and thus concludes that there is no
significant relationship between audit committee independence
and the return on equity (ROE) of commercial banks in Nigeria.
4.4 Discussion and Interpretation of Results
This studys first objective was concerned with examining the
extent to which board size (BS) influences the performance of
commercial banks in Nigeria. Consequently, the null hypothesis
was formulated in line with this objective and was tested using
the t-test statistics at 5% level of significance. Findings from
this test reveal that board size (BS) does not significantly

66

influence the performance (i.e. ROE) of Nigerian commercial


banks. This finding corroborates the findings of Holthausen and
Larcker (1993) who found no significant association between
board size and performance of companies.
The second objective of this studys was concerned with
investigating
committee

the

extent

significantly

to

which

influences

independent
the

of

audit

performance

of

commercial banks in Nigeria. Consequently, the null hypothesis


was also formulated in line with this objective and was tested
using the t-test statistics at 5% level of significance. Findings
from this study reveal that the independence of the audit
committee does not significantly influence the performance of
commercial banks in Nigeria. This finding is inconsistent with
the recent study of Bouaziz, (2012) who found that the
independence of audit committee members positively and
significantly influences the financial performance of Tunisian
companies. This finding also is contrary to the study of Klein
(1998) which shows that the allocation of external directors
(independent) within the audit committee is likely to improve
the financial performance of the company.
67

Also the third objective of this study which was interested


in examining the extent to which size of the audit committee of
Nigerian

commercial

banks

significantly

influences

performance. Consequently, the null hypothesis was also


formulated in line with this objective and was tested using the ttest statistics at 5% level of significance. Findings from this
study reveal an insignificant influence of the size of the audit
committee (SAC) on the performance of commercial banks in
Nigeria. This finding is inconsistent with findings of Bouaziz
(2012) who found a significant relationship between size of
audit

committee

and

financial

performance

companies.

CHAPTER FIVE
68

of

Tunisian

SUMMARY, CONCLUSION AND RECOMMENDATION


5.1 Summary of Findings
The study arrives at the following major findings through the
test of the research hypotheses earlier formulated in this study.
These findings are summarily presented as follow:
1. Board size of commercial banks does not significantly
influence the performance (ROE) of commercial banks in
Nigeria.
2. Independence of the audit committee of commercial banks
does not significantly influence the performance (ROE) of
commercial banks in Nigeria.
3. The size of the audit committee of commercial banks does
not significantly influence the performance (ROE) of
commercial banks in Nigeria.
5.2 Conclusions
This study was carried out with the broad objective of
examining the extent to which corporate governance influences
the performance of commercial banks in Nigeria. The study has
one proxy for performance and three proxies for corporate
governance and each was used to form a research hypothesis
69

aimed at empirically answering the research questions the


study was set to solve. Based on the findings of this study from
the test of the three research hypotheses earlier formulated in
the study, the researcher has therefore come to the following
conclusions outlined in respect to each hypothesis.
1. The performance of commercial banks in Nigeria herein
measured by return on equity (ROE) is not significantly
impacted by the number of persons who sits on the board
(board size) of commercial banks in Nigeria. Thus an
increase in the Board size of commercial banks will result
to

an

insignificant

increase

in

the

performance

of

commercial banks in Nigeria.


2. The performance of commercial banks in Nigeria herein
measured by return on equity (ROE) is not significantly
impacted by the number independent audit committee
members on the board. Thus a change in the number of
independent audit committee members will result to an
insignificant increase in the performance of commercial
banks in Nigeria.
3. The performance of commercial banks in Nigeria herein
measured by return on equity (ROE) is not significantly
70

impacted by the number of person who constitutes the


audit

committee

(size

of

the

audit

committee)

of

commercial banks in Nigeria. Thus a variation in the size of


the audit committee will result to an insignificant increase
in the performance of commercial banks in Nigeria.
The results in the context of developing countries is
consistent with the findings of Fahy (2005) and PAIB Committee
(2004) that corporate governance of an organization ensure
conformance but does not directly ensure performance, rather
helps to achieve performance.
5.3 Recommendations
The following recommendations are made in line with the study
findings.
1. Commercial banks in Nigeria should adhere to the CBN
stipulated board size so as to help achieve performance.
Such board size should be made up of more independent
directors than non-independent directors. More so, the
compliance status needs to be identified in banks that are
yet to comply with this provision, so that efficiency and

71

effectiveness in management is complimented with other


internal controls.
2. Regulatory

authorities

should

impose

the

notion

of

independence of audit committee members in the boards


of directors of commercial banks to provide more security
for investors and comparing financial information from two
different sources namely the auditors report and / report
of the Audit Committee. In addition, individual audit
committees should consider adopting all of the audit
committee best practices that apply to their situations,
even those that are not required, such as oversight of
internal audit, oversight of company compliance with the
code of ethics, and increased monitoring over financial
reporting. The results imply that audit committees are very
good at taking on responsibilities when required. On the
other hand, their record for assuming non-required best
practices is mixed, at best. If audit committees do not
voluntarily assume best practices, regulators may find it
necessary to intervene. The effectiveness of the audit
committee should be evaluated at least annually in order
72

to ensure continued compliance with best practices


requirements and recommendations.
3. Due to the increasing complexity and large nature of
organizations, the apex regulatory bodies of commercial
banks should carry out an upward review in the size of the
audit committee so as to enhance their positive influence
on the overall performance of commercial banks in Nigeria.
5.4

Limitations of the Study

There is no research without its inherent limitations no matter


the methodology adopted by the researcher. Thus this study is
not an exception. The following are the inherent limitations of
this study that should be taken into consideration.
1. The current research is limited to only commercial banks in
Nigeria due to time and the cost involved, thus, making it
impossible for corporate governance practices of other
firms in different sectors of the economy to be considered
for

examination.

That

notwithstanding,

corporate

governance codes are issued by CBN therefore its practice


and application is uniform in any sector of the economy.

73

Thus these findings are valid across different companies in


different sectors of the economy.
2. Furthermore, this research was mainly conducted based on
the secondary data collection. The other data collection
methods had not been considered. As a result they may
not be 100% accurate. However, to avoid the adverse
incidence of these limitations on the findings of the study,
the research first and foremost carried out an intensive
data

validity

test before

using the secondary

data

generated for further analysis.


3. Also, appearing to be a limitation of this study is the
inability of this study to capture many other variables that
could impact on the performance of commercial banks in
Nigeria. The study only adopted the return on equity (ROE)
as a measure of performance. However, the use of the
return on equity was carefully selected as a measure of
performance base on the focus of this study which is
highly hinged on the agency theory.
5.5 Suggestions for Further Research
There is clearly enormous scope for more research that can
inform

an

understanding

on
74

the

workings

of

corporate

governance mechanism, how it impacts on performance of


firms. To develop specific policies and recommendations, this
study suggests the following for further research.
1. There are many companies listed on the NSE under
different sectors of the Nigerian economy. This study
succeeded in examining the corporate governance of on
the banking sector. Therefore, additional investigation is
required to examine the corporate governance and its
influence on performance of firms in other sectors of the
economy like the manufacturing sector.
2. Another research area that could be extended by further
studies is on the impact of corporate governance on the
profitability of non-listed firms.
3. There are some other factors that are also found to affect
the performance of commercial banks in Nigeria which are
not considered in this study. Some of these factors include:
Audit committees, capital structure, the regulations and
restrictions from the Central Bank of Nigeria and Nigeria
stock exchange. Therefore further investigation is required
to examine other factors other than corporate governance

75

that also influence performance of commercial banks in


Nigeria.

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APPENDIX I
RAW DATA IN RESPECT TO THE SELECTED BANKS
NAME OF BANKS
UBA

Year
2005

ROE
28.83

BS
19

84

IDA

SAC
6

CEO Duality
0

ECO BANK

ZENITH BANK

FIRST BANK

GTB

FIDELITY BANK

2006

35.75

19

2007

20.42

19

2008

22.50

19

2009

27.12

19

2010

23.42

19

2011

29.87

19

2012

37.01

19

2005

11.62

14

2006

22.06

14

2007

39.45

14

2008

12.28

14

2009

22.12

14

2010

21.34

14

2011

22.07

14

2012

23.67

14

2005

23.65

16

2006

16.53

16

2007

17.00

12

2008

22.46

18

2009

23.45

16

2010

19.23

16

2011

17.32

16

2012

18.89

16

2005

28.73

20

2006

21.01

20

2007

28.28

16

2008

16.85

14

2009

23.65

14

2010

22.32

14

2011

20.45

20

2012

16.23

20

2005

13.06

12

2006

16.16

12

2007

20.50

13

2008

25.01

13

2009

26.34

14

2010

25.67

14

2011

28.43

14

2012

30.67

14

2005

12.62

14

2006

22.06

14

2007

39.45

14

2008

15.28

14

2009

22.12

14

2010

23.34

14

2011

11.62

14

2012

22.06

14

3
3
3
3
4
3
5
3
3
3
3
5
3
3
3
3
3
3
3
4
3
3
3
3
3
3
3
4
3
5
3
3
3
3
5
3
3
3
3
3
3
3
4
3
3
3
3

SOURCE: Annual Published Account of Selected Banks.


APPENDIX II
T-TEST TABLE
85

86