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Chris Ogbechie*
Lagos Business School
Km 22, Lekki-Epe Expressway, Lagos
Tel: 002341 2711617-20
Fax: 002341 4616173
Dr. Dimitrios N. Koufopoulos,
Brunel Business School
Middlesex UB8 3PH,
Tel: (01895) 265250,
Fax: (01895) 269775,

January 2010

Biographical Note

Chris Ogbechie holds a First Class Honours Bachelors degree in Mechanical Engineering
from Manchester University and a Masters Degree in Business Administration (MBA) from
Manchester Business School. He is currently a Doctoral student in the Brunel Business
School. His main research interests are on upper echelons theory, board effectiveness and
corporate governance.

Dr. Dimitrios N. Koufopoulos (B.Sc, MBA, PhD, MCMI, FIMC) is Senior Lecturer in the
Brunel Business School. His work has appeared in the European Marketing Academy
Conference, British Academy of Management and Strategic Management Society proceedings
and in various journals like Long Range Planning Journal, Journal of Strategic Change and
Journal of Financial Services Marketing, Corporate Ownership and Control and Corporate
Board. His research interests are on strategic planning systems, top management teams,
corporate governance and corporate strategies.

This study evaluates corporate governance issues in Banks operating in Nigeria that deals
with board characteristics, composition, operations and processes, and as well as their degree
of compliance with Central bank of Nigeria Code of Corporate Governance,
The empirical findings of the study reveal useful insights with respect to Corporate
Governance Practices in Banks operating in Nigeria. The results show that Nigerian Banks
have embraced the principles of good Corporate Governance and have achieved high degree
of compliance with the Central Bank of Nigeria Code of Corporate Governance.
This paper draws a number of conclusions and recommendations and also highlights some
limitations that can be improved upon in future studies.

Keywords: Corporate Governance, Banks, Board Characteristics, Board Processes, Board

Appraisal, Board Relationships, Board Strategic Involvement.

The issues of corporate governance continue to attract considerable national and international
attention and have again appeared at the top of the agenda with the current global financial
meltdown. Corporate governance is about effective, transparent and accountable governance
of affairs of an organization by its management and board. It is about a decision-making
process that holds individuals accountable, encourages stakeholder participation and
facilitates the flow of information. The ongoing global financial crisis has further reinforced
the message that governance of firms, especially of financial institutions, should always aim
at protecting the interests of all stakeholders, which include shareholders, depositors,
creditors, regulators and the public.
The corporate governance of financial service sector and more specifically of banks in
developing economies has been almost ignored by researchers (Caprio and Levine, 2002).
Even in developed economies, the corporate governance of this sector has only recently been
discussed in the literature (Macay and OHara, 2001).
The corporate governance of banks in developing economies is important for several reasons.
First, banks have an overwhelmingly dominant position in the financial systems of
developing economies, and are extremely important engines of economic growth (King and
Levine 1993 a, b). Second, banks in these developing economies are typically one of the most
important sources of finance for the majority of firms. Third, banks in developing countries
are the main depository for the economys savings and provide the means for payment.
Given the importance of banks, their governance now assumes a central role in view of the
peculiar contractual form of banking, corporate governance mechanisms for banks should
encapsulate depositors and shareholders.

There is substantial evidence to show the positive link between finance sector development
(FSD), and economic growth and poverty reduction (King and Levine, 1993; Levine and
Zervos, 1998; and Rajan and Zingales, 1998). The Nigerian banking industry therefore has a
significant role to play in the development of the countrys economy. Banks have been the
main sources of financing in the Nigerian financial market and bank loans were the
predominant sources of debt financing in the economy (Central Bank of Nigeria Annual
Report 2006).
Corporate governance is particularly important in the Nigerian banking industry because a
number of recent financial failures, frauds and questionable business practices had adversely
affected investors confidence. In 1995 several CEOs and directors of banks in Nigeria where
arrested for non-performing loans that were given to themselves, relations and friends. Some
of the banks that could not meet the Central Bank of Nigeria (CBN) recapitalization
requirement in 2006, where found to be saddled with non-performing loans that were given to
directors and their friends. The financial health and performance of banks are important for
the economic growth of Nigeria. This is why the regulator of the industry in Nigeria, a result,
As a result,the Central Bank of Nigeria, had decided to reform the industry in order to
achieve global competitiveness.
The corporate governance landscape in Nigeria has been dynamic and has generated interest
from within and outside the country. In 2003, the Nigerian Securities and Exchange
Commission (SEC) adopted a Code of Best Practices on Corporate Governance for publicly
quoted companies in Nigeria and this code is currently being reviewed. At the end of the
consolidation exercise in the banking industry, the CBN, in March 2006, released the Code of
Corporate Governance for Banks in Nigeria, to complement and enhance the effectiveness of
the SEC code, which was implemented at the end of 2006. The three major governance issues

that attracted the attention of the regulators are directors dealings, conflict of interest and
creative accounting.

Boards and Corporate Governance
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 the economy of a country as a whole. Poor corporate governance may
contribute to bank failures, which could in turn lead to a run on the bank, unemployment and
negative impact on the economy (Basel Committee, 1999). In addition, problems or failures
of banks are likely to rapidly expand and have a disproportional adverse impact on the
smooth operation of the financial system of a country (Allen & Herring, 2001; Sbracia &
Zaghini, 2003). The board of directors has a significant role to play in ensuring good
corporate governance in the bank and at the heart of the corporate governance debate is the
view that the board of directors is the guardian of shareholders interest (Dalton, 1998).
Boards are being criticized for failing to meet their governance responsibilities. Major
institutional investors put pressure on (incompetent) directors and have long advocated
changes in the board structure (Monks and Minow, 2001). Their call has been strengthened
by many corporate governance reforms resulting from major corporate failures. These
reforms put great emphasis on formal issues such as board independence, board leadership
structure, board size and committees (Van den Berghe and De Ridder, 1999; Weil, Gotshal
and Manges, 2002). These structural measures are assumed to be important means to enhance
the power of the board, protect shareholders interest and hence increase shareholder wealth
(Westphal, 1998; Becht, 2002). Structural measures (board characteristics) are not
sufficient to understand the workings of boards and Zahra and Pearce (1989) argued that
there is a growing awareness of the need to understand better how boards can improve their
effectiveness as instruments of corporate governance.Board Characteristics and
Corporate Governance
Board characteristics refer to size, the division of labour between the board chair and the
CEO, and finally its composition and diversity.
Board Size refers to the total number of directors on the board of any corporate organization.
Determining the ideal board size for an organization is very important because the number
and quality of directors in a firm determines and influences the board functioning and hence
corporate performance. Proponents of large board size believe it provides an increased pool

of expertise because larger boards are likely to have more knowledge and skills at their
disposal. They are also capable of reducing the dominance of an overbearing CEO (Forbes
and Milliken, 1999) and hence put the necessary checks and balances. Boards monitoring
and supervising capacity is increased as more and more directors join the board (Jensen,
1993). Besides, there are authors who believe that large board size adversely affects the
performance and well being of any firm. Larger boards are difficult to coordinate, and are
very prone to fictionalizations and coalitions that will delay strategic decision making
processes (Forbes and Milliken, 1999).

Board Leadership structure is another critical aspect of board structure. In the independent
structure two individuals serve in the roles of CEO and Board chairperson. A situation in
which these roles are held by one individual is called CEO duality (Dalton, 1993).
Shareholders activist groups are against CEOs serving simultaneously as chairperson of the
board and some researchers also posited the same (Dobrzynski, 1991; Levy, 1993b; Cadbury,
1992; Goodstein et al, 1994). Due to agency theory anxiety over management domination of
the board, there is predilection for the separate board leadership structure (Dalton et al, 1998).
According to agency theory, duality structure can lead to entrenchment by the CEO, thereby
reducing the monitoring effectiveness of the board (Finkelstein and DAveni, 1994) and
inability to enforce good governance practices.
Board Composition refers to the distinction between inside and outside directors, and this is
traditionally shown as the percentage of outside directors on the board (Goergen and
Renneboog, 2000). For Baysinger and Butler (1985), composition may be easily
differentiated into inside directors, affiliate directors and outside directors. Inside directors
are those directors that are also managers and/or current officers in the firm while outside

directors are non-manager directors. Among the outside directors there are directors who are
affiliate, and others that are independent. Affiliate directors are non-employee directors with
personal or business relationship with the company while independent directors are those that
have neither personal nor business relationships with the company. Although inside and
outside directors have their respective merits and demerits, many authors favour outsidedominated boards (Pablo et al, 2005). Outside directors provide superior performance
benefits to the firm as a result of their independence from firms management (Baysinger and
Butler, 1985). They can increase the element of independence and objectivity in boards
strategic decision-making, and also help in providing independent supervision of the
companys management (Fama and Jensen, 1983), hence making the boards oversight
function more effective.
Board Diversity is defined as a concept used to depicts the varied personal characteristics that
make the workforce heterogeneous (DeCenzo and Robbins, 2005). So board diversity can be
said to be those varied personal characteristics and physical differences in people who are
members of the board that make the board heterogeneous. For boards to be effective there is
need for diverse perspective in the board to confront the thinking of management.
The promotion of diverse perspectives in a board can generate a wider range of solutions and
decision criteria for strategic decisions (Eisenhardt and Bourgeois, 1988; Goodstein et al,
1994; Kosnik, 1990). In the same vein corporate governance scholars believe that board
diversity can directly or indirectly impact firms (Kosnik, 1990).

Board Processes and Corporate Governance

A growing number of research works is now moving away from the organisational outcomes of
board structure and characteristics to greater focus on board processes and functions. Indeed, a
growing number of studies suggest that the agency framework should be used in conjunction
with complementary theories (Daily et al. 2003; Pettigrew 1992), including behavioural
(Hambrick and Mason 1984; Sanders and Carpenter 2003) and socio-cognitive research
(Carpenter et al. 2003; Carpenter and Sanders, 2002) in examining governance-related issues.

Whilst board structure conditions board effectiveness, it is the behavioural dynamics of a board
and the web of interpersonal and group relationships between executive and independent
directors that determine board effectiveness (Roberts et al. 2005). Therefore, good corporate
governance drivers may also be associated with factors that affect board dynamics and
interrelationships, such as the role of a Chairperson, information flows inside and outside the
firm, coalition formation, etc.

An unrestricted access to information is generally regarded as a source of directors power, as

well as directors in-depth knowledge of the business (Golden and Zajac 2002; Roberts et al.
2005; Useem 1993; Westphal 1999). This will ensure a more effective oversight function.
Other factors such as the board meeting agenda, the process and conduct of board meetings,
and process of open debate may increase board effectiveness (McNulty and Pettigrew 1999,
Pye 2002).

Boards require a high degree of specialized knowledge and skill to function effectively. The
knowledge and skills most relevant to boards are in two dimensions, functional area
knowledge and skills and firm-specific knowledge and skills. Functional area knowledge and
skills include accounting, finance, marketing, and law. Board members can either possess

these skills or have access to external networks that can provide them. Firm-specific
knowledge and skills refer to detailed information about the firm and an intimate
understanding of its operations and internal management issues. Boards often need this kind
of tacit knowledge (Nonaka, 1994) in order to deal effectively with strategic issues.

If boards are to perform their control tasks effectively, they must integrate their knowledge of
the firm with their expertise in the business areas. In addition, if boards are to perform their
service tasks effectively, they must be able to combine their knowledge of various functional
areas and apply that knowledge properly to firm-specific issues.

Board Culture and Corporate Governance

Board culture is a system of informal, unwritten, yet powerful norms derived from shared
values that influence behaviour (Nadler, 2004). Every board of directors creates a
governance culture which is referred as a pattern of belief, traditions and practices that
prevail when the board convenes to carry out their duties (Prybil, 2008).

Board must develop a culture of accountability and engagement (Reed 2003). Board leaders
should pay strict attention to how much board time is spent passively listening to reports and
how much time is spent discussing strategic issues and the duties of care and loyalty. Active
and vigorous board discussion, debate and questioning is not only a sign of a good board, it is
the sign of an engaged board. An open culture of cooperation and transparency is healthy and
will ensure good governance practices.


It is believed that effective governance requires a proactive culture of commitment and

engagement that drives both the board and the organization it governs toward high
performance. Engaged cultures are characterized by honesty and a willingness to challenge,
and they reflect the social and work dynamics of a high-performance team (Nadler, 2004).
The oversight role and responsibilities of boards require them to make many decisions that
shape the organization and its direction. The way in which a board move toward its decision
making processes is a basic part of its culture and has a major impact on the organizations
performance (Useem, 2006).

Strategic Process Involvement and Corporate Governance

The board of directors performs the pivotal role in any system of corporate governance. It is
accountable to the stakeholders and directs and controls the management. It stewards the
company, sets its strategic aim and financial goals, and oversees their implementation, puts in
place adequate internal controls and periodically reports the activities and progress of the
company in a transparent manner to the stakeholders.

Tregoe and Zimmermann (1980) define strategy as the framework, which guides those
choices that determine the nature and direction of an organization. In line with Tregoes
(1980) definition, strategic decisions are those decisions that border on the long-term thrust
and direction of any organization. Creating a vision, mission and values; developing
corporate culture and climate; positioning in the dynamic market; setting corporate direction,
reviewing and deciding key corporate resources; deciding on implementation model and
processes etc are all part of the strategic activities or decisions that the board uses in driving
or directing the thrust of an organizations future, particularly in the long-run (Garratt, 1996;
Pearce and Zahra, 1991). More specifically, Goodstein et al (1994) submitted that the

strategic role of the board is that of taking important decisions on strategic changes that help
the organization adapt to important environmental changes.

Board Relationships with CEO and Top Management and impact on Corporate
At the heart of any CEO-Board relationship is the need to acquire, control, or coordinate the
flow of information. Some researchers have noted that the CEO may influence the board
through selective use of information, control over boards agenda, and personal persuasion
through access to key board members (Zald, 1969; Mace, 1971) and this could have an
adverse effect on the boards oversight function.
For good corporate governance, it is important that the CEO does not dictate the agenda for
the board and control the outcomes of board decisions. The CEO should not be a member of
key board committees, and not participate in the selection of new board members (Jeffrey et
al, 1993).
Analysts have shown that one of the most important CEO-Board relationships is independent
monitoring and control. Independent monitoring and control are better provided by the true
independent directors who, most times use control function to protect the interest of all the
firms stakeholders. The extent to which this control function is applied determines the type
of relationship that exists between the CEO and the board of directors (particularly the
independent directors). In some cases, it produces negative relationship characterized by lack
of mutual understanding and distrust.
Boards of directors, in performing their oversight role, are expected to supervise the actions
of management, provide advice, and veto poor management decisions (Fama, 1980; Jensen,
1986). In their control capacity, boards of directors are also responsible for removing

ineffective management. The propensity to engage in such actions however, is often a

function of influence relationship, cognition about performance, and/or political action than
of boards actual effectiveness as a rational management control system (Mace, 1971;
Baysinger and Hoskisson, 1990).
According to agency perspective, while top managers are responsible for on-going decision
management, the board of directors is responsible for decision control which involves
monitoring and evaluating management decision making and performance (Fama & Jensen,
1983). This in effect implies that the board is an efficient control device that can help align
management decision making with shareholders interests (Beatty and Zajac, 1994).

Board Evaluation and Corporate Governance

Tricker (1999a) argues that just as professionalism in management today calls for assessment,
performance reviews, and training and development, so too should directors be evaluated.
Although advocates of corporate governance plead for a formal board and director
evaluation, this is still a bridge too far for most boards of directors. Several studies indicate
that it is still relatively unusual for boards to undertake an evaluation of their performance
both as a board and as individual directors, and that few boards carry out independent,
external review (Blake, 1999; Davies, 1999). Steinberg (2000) notes that fewer than 20
percent of US boards evaluate themselves as a board or appraise the performance of
individual directors. Van der Walt and Ingley (2001), from their research among boards of
New Zealand companies found that 86 percent claimed to carry out some kind of review. Van
den Beghe & Levrau (2004), argue that only a small number of companies evaluate the
performance of the entire board and that individual evaluation is also exceptional and occurs
mainly if a director stands for re-election.

Board appraisals could be rationalized on the basis that they assist in identifying weaknesses
and thereby helping boards and their members to enhance their performance. These will also
help to develop a board or director development programme for capabilities and so close
identified gaps in performance. Evaluations provide the opportunity to define the current and
future role of the board and an opportunity to determine if the associated skills of the board
and its members were appropriate (Van der Walt & Ingley, 2001).

Evaluations can help directors assess their performance over time as needs of a board shift,
and provide a basis for deciding whether a director should be reappointed. These evaluations
demonstrate to investors that the board is holding individual directors accountable for their
performance (Conger and Lawlor III, 2002).

It is apparent that developing meaningful evaluations as a tool for enhancing board, director
and organizational performance presents a significant challenge in terms of overcoming
resistance and gaining credibility and acceptance for the process.

Dilenschneider (1996), argues that the challenge in coming up with effective substantive
measures of directors performance requires a more sophisticated approach, including less
objective interpersonal factors such as teamwork, director selection and value contributed by
board members. Along with function and process, therefore, competence and interpersonal
dynamics should be included in the appraisal model. While such behavioural factors are more
difficult aspects to quantify, they are frequently vital in determining board effectiveness
(Staff, 2000).


How often board evaluation should be conducted is another crucial matter for consideration.
While some authors favour annual review or evaluation (because it is usually consistent with
the planning cycle adopted by most boards), others recommend that board evaluation should
be done every six months (biannual). There are also authors who believe that board
evaluation should be an on-going process, and not just an annual event (Carver, 1997a).

This paper evaluates the state of corporate governance in Nigerian Banking sector in terms of
compliance with the Central Bank of Nigeria (CBN) corporate governance guidelines and
global best practices. It also looks at the practices of the board in achieving good corporate
governance in their banks.

Research Objectives
The main objectives of the research are to:

Evaluate the level of compliance of the CBN corporate governance guidelines amongst
Nigerian banks.

Understand the following corporate governance issues in the Nigerian banking industry:
o The composition and procedures followed by the board of directors.
o Issues upon which the board of directors is/should be appraised.
o The involvement of the board of directors with the banks strategy development.
o Board relationship with the top management team and the CEO.
o Directors views regarding the future development of corporate governance.

Significance of the Research


Nigeria cannot afford to have an under-performing banking industry, which is seen as the
heartbeat of the economy. Since the banking industry in Nigeria has undergone many recent
changes, understanding the governance of Nigerian banks is arguably more important than
ever before. The practice of good corporate governance makes a bank to conduct its business
in an ethical way. This builds a good reputation for the bank and makes investors always
willing to invest in it. This is important as about 22 of the 24 banks in Nigeria are now
publicly quoted in the Nigerian Stock Exchange. In addition, if Nigerian banks are perceived
to have imbibed international best practices in corporate governance, they will be in good
positions to attract more foreign capital and at the same time be strongly positioned to operate
in foreign markets.

A sound banking industry will be in a strong position to drive the economic reforms of the
Federal Government of Nigeria and provide the support to grow the private sector.
Most of the 22 Nigerian banks now publicly quoted transformed from private banks to public
banks. It is important to find out how this transformation is being handled on the governance

The Nigerian Banking Industry

In 2005, there were 89 deposit banks operating in a highly concentrated market with the top
ten banks accounting for over 80 per cent of the total assets/liabilities. The statutory
capitalization requirement was N2 billion and the small size of these banks had an adverse
effect on their cost structure thus making the cost of intermediation high. The total
capitalization of all Nigerian banks then stood at N293 billion, which was just the size of the
fourth largest bank in South Africa. As a result Nigerian banks were unable to finance major


transactions in the growing oil and gas, and telecom sectors, which constitute the fastest
growing sectors in the Nigerian economy.
Prior to 2005, the Nigerian banking system could not deliver on its defined roles and was
characterized by:

Low aggregate banking credit to the domestic economy (18.4% as percentage of


Systemic crisis banks were frequently out of clearing

Inadequate capital base

Oligopolistic structure 10 out of 89 banks accounted for over 80% of total banking
system assets

Gross insider abuses that resulted in huge non-performing insider related activities

Over dependency on public sector deposits

Poor corporate governance

Low banking/population density 1: 30,432

Payment system that encouraged cash-based transactions.

These factors led the Central Bank of Nigeria (CBN), in 2004, to undertake a massive
transformation of the banking industry to achieve the following objectives (CBN Report

Establish a banking system that will rapidly drive Nigerias economic growth and

Integrate the Nigerian banking system into the global financial system.

Target at least one Nigerian bank in the top 100 banks in the world within 10 years.

In the long term make Nigeria Africas financial hub.


As a first step in actualizing these goals, the CBN on July 6, 2004 announced that all banks
operating in Nigeria should have a minimum capitalization of N25 billion on or before
December 31, 2005. This recapitalization could be achieved by either injection of new funds
or mergers and acquisitions.
The outcomes of the transformation have been impressive. At the end of the consolidation
exercise, the number of banks reduced from 89 to 25 as at January 2006. By the end of
February 2008, there were 11 banks with over $1 billion in tier 1 capital; several Nigerian
banks are operating in 16 African countries and in 7 other countries outside Africa. As at
2007, the total branch network was about 3,900 as against 2,600 in 2005. These banks are
universal banks offering all banking services and product range to corporate and individual
customers. Twenty two of these banks are publicly owned and listed on the Nigerian Stock
Exchange (NSE).
The banking business is based on trust and public confidence and as such it is important to
enthrone good corporate governance practices in the industry. In Nigeria the banking industry
is very critical to the countrys economic growth because of its role in the mobilization of
funds, the allocation of credits to the various sectors of the economy, the payment and
settlement system, and the implementation of monetary policy. Effective corporate
governance practices are therefore essential in achieving and maintaining public trust and
confidence in the banking sector.

Research Methodology
The research study was undertaken, between September 2007 and June 2008, to understand
and assess corporate governance practices in the Nigerian Banking Industry.


The methodology used in this research included a combination of questionnaires and

It also included interviews with two officials of the Central Bank of Nigeria, the regulatory
body of the banks.
Structured questionnaires were mailed to the chairpersons and directors of all banks in
Nigeria in October 2007, accompanied by a personalized letter. Follow up phone calls and
additional reminder mail wave were carried out between January and March 2008. About 250
questionnaires were sent out and a total of 110 responses were received. Only 2 of the
responses were discarded for not being properly completed. 108 responses were valid and this
represents 43.2 percent response rate.

Independent variables: Board size was measured by the absolute number of directors
(Dedman, 2000). Board composition was operationalised as the percentage of outside
directors on the board (Udueni, 1999). Board leadership structure is a binary variable coded
as 0 for those firms employing the separate board structure and 1 for those employing the
joint structure. The diversity of the board was captured by counting number of directors that
have similar background.
Dependent variables: A 7-point Likert scale from strongly disagree to strongly agree was
employed to measure the various constructs and variables. Eight items captured the strategic
processes (Dulewicz and Herbert, 1999); six items captured the relationship among the board
of directors and top management team (Dulewicz and Herbert, 1999). Six items captured the
boards culture and fourteen items captured the boards appraisal.



The survey results capture the current corporate governance practices in the Nigerian
Banking industry as regards Board of Directors characteristics, board processes, board
involvement in the strategic process, board relationship with the CEO and the top
management team.

Board Characteristics
Board Size
Results from the research show 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
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 but the Central Bank is yet to grant its approval.
The banks have gone for medium to large board sizes because most of them (22 of the 24
banks) are now publicly owned and as such more interest groups are now being represented.
In addition, each board should have enough number of directors to serve on the board
committees that they are expected to have.
Board Leadership (Duality)
The research results show that the boards of all the banks have separate chairman and chief
executive officer. This implies that all the banks comply with the Central Bank of Nigeria

corporate governance guideline, which stipulates that the chairman and CEO must be
Board Independence
Board independence is dependent on the composition of the board in terms of the distinction
between inside and outside directors, which is traditionally shown as the percentage of
outside directors on the board.
About 64% of directors on the boards of Nigerian banks are non-executive directors. This
means that the boards of banks in Nigeria can be said to be independent, which is in line with
the CBN guideline that the number of non-executive directors should be more than that of
executive directors. The number of executive (inside) directors on the boards of banks range
from 3 to 8 with the average being 5, while the number for non-executive (outside) directors
range from 4 to 13 with an average of 9. Among the non-executive directors, about 6 are
truly independent while about 2 are affiliates. Again this is in line with the CBN guideline
that states that at least two non-executive directors should be independent. The total number
of affiliates and executive directors is slightly more than that of truly independent directors
on the boards of banks in Nigeria. This will affect the true independence of the boards in
Board Diversity
Results of our survey show that directors of Nigerian banks believe that their boards are quite
diversified (with a score of 5.9 on a 7-point scale) in terms of having a mix of people with
different personality, educational, occupational and functional background.


Only 16 banks have female directors on their boards 12 of them have one female director
each, two have two female directors each, one has three female directors and one has four
female directors.
However, the four most dominant occupational background of members of the board of
directors are banking and financial services, accounting and finance, law, and general
management/business administration.
In spite of the diversity the directors see the skills of the board members are quite
complementary with a rating of 5.9 on a 7-point scale. They also see their members as being
very knowledgeable and experienced in business and financial matters in general and in the
banking business in particular, with a score of 6.1 on a 7-point scale.


Board Meetings
The modal average frequency of holding board meetings among the survey sample is every
three months or quarterly. This is the minimum standard prescribed in the CBN code and as
such the banks could be said to be in substantial compliance with the code.
According to the respondents, board meetings are conducted with openness and transparency.
Board Culture
In this case culture means the set of informal unwritten rules which regulates board and the
directors behaviour. The results of the survey (see figure 1) show the following cultural
characteristics of boards of Nigerian banks:


Most of the directors agree that their chairmen show strong leadership and keep control
without being dominant. And on a scale of 1 to 7 this issue was rated 6.4.
The directors also agreed that most of their boards pursue a common vision and that the
conduct of the boards business is pervaded with sense of humour, positive and constructive
attitude, and professionalism. These issues were rate 6.3 on a scale of 1 to 7.

The directors strongly agree that the boards have sufficient information that allows directors
to take decisions with full knowledge during board meetings. They also claim that the
business of their boards is conducted with openness and transparency and that director are
active and interested in the affairs of their bank. These three issues are rated 6.2.

Chairman's Leadership
Pursue common vision
Information to directors
Active and Value added
Openness and

Figure 1: Board Culture

Involvement in the Banks Strategy


The results show that boards are moderately involved in their banks strategy development as
the average ratings for the eight factors used in determining involvement are between 4.7 and
5.8 on a 7-point scale (see figure 2). The most important factor, with a rating of 5.8, is the
determination of the banks vision and mission to guide and set the pace for its operations and
future development. This shows the degree of importance directors place in shaping the
future of their bank. This will even become more important in the future because the Central
Bank of Nigeria will hold the directors of banks in Nigeria responsible for the performance
and state of affairs of their bank. The least important factor, with a rating of 4.7, is the
determination of the business units strategies and implementation. This is because the
directors expect their management to be more involved in the activities of business units.
Directors expect to be involved in determining and enforcing company policies for effective
running of the bank. In addition their involvement in the banks strategy process should
include the determination and review of the banks objectives to match its mission and
values; the review and evaluation of opportunities, threats and risks in the external
environment, and strengths, weaknesses and risks of their bank. Directors also see their
involvement in ensuring that their banks organization structure and capabilities are
appropriate for implementing its chosen strategies.


Maximum Point

Determine and enforces

company policies

Determine the
company's vision and
Ensures appropriate
capabilities for strategy

Undertakes SWOT

Ensures company's
objectives match vision
and mission
Selects strategic
options and provides
Adapts performance
measures to monitor the
Determines the
business unit strategies
and plans

Figure 2: Involvement in Banks Strategy

Board Dynamics
Our results show that good relationship among the board, top management team and the CEO
is important to the directors. This is being achieved by delegating authority to management
and monitoring its implementation of policies, strategies and business plans. This is rated as

the most important factor (6.1 on a 7-point scale) in ensuring good relationship between the
board and management. The second most important factor, with a score of 5.7, is ensuring
that internal control procedures provide valid and reliable information for monitoring the
operations and performance of the bank. Other factors that enhance good relationship
between the board and top management are: communicating performance of management to
them and aligning rewards and sanctions with performance; well defined evaluation process
for the CEO and appropriate reward that is linked to performance; good management
development programme; and succession planning.

Maximum point

Delegates authority to

Ensures effective internal

control procedures

Ensures appropriate
reward and development of

Rewards and evaluates the


Involved in management
development and

Figure 3: Relationship between the Board and Top Management


Appraisal of Board of Directors

Boards of banks in Nigeria have to do more to ensure the effectiveness of their over-sight
function. They must therefore be concerned with more than organizational and management
performance; they also need to review their own performance. Behavioural psychologists
and organizational learning experts agree that people and organizations cannot learn without
feedback and so, no matter how good a board is, its bound to get better if its reviewed
intelligently. Board evaluation and directors appraisals are now being regarded as tools that
can enhance board effectiveness.

Board evaluation can therefore provide a process for boards to identify sources of governance
failures. They will allow boards to take a closer look at areas of concern before they reach
crisis point. However, board evaluations are not a universal panacea for all board ills, but
when used correctly and regularly, they may play a major role in averting governance

76 percent of respondents claim that their boards are appraised, 65 percent claim that
individual directors are appraised, while 59 percent claim that the chairman is appraised. The
most common appraisal frequency is yearly with 73 percent of the respondents and the
appraisal is conducted by mainly external consultants (73 percent).

Respondents were asked to rate 14 issues on which the board of directors is appraised on a
scale of 1 to 7, where one is strongly disagree and 7 strongly agree. The three most important
issues upon which board of directors are being appraised that have ratings of over 5 are:

overall governing of the bank, shaping the long-term strategy of the bank, and managing the
bank during crisis. The long-term future and the survival of the bank are therefore seen as the
most important responsibilities of the board.

Other important issues on which the boards are evaluated include: monitoring strategy
implementation, effectively inquiring into major performance deficiencies, proposing
changes in the banks direction, bolstering the banks image, enhancing good government and
regulator relations, and balancing the interest of different stakeholders.

The directors are also of the view that boards should be appraised on how well they deal with
unforeseen corporate problems and possible threats to the banks survival, and how well they
handle CEO and top management succession.

Board appraisal is an annually event for most of the banks and for about 73 percent of the
respondents it is conducted by external consultants. However, for a small minority, (about 6.6
percent) of the respondents, appraisal is conducted by the CEO.


Shaping long term strategy
Governing Overall
Managing during crisis
Effectively inquiring into major performance
Proposing changes in company direction
Enhancing government relations
Monitoring strategy implementation
Bolstering the company's image in the community
Balacing interest of different stakeholders
Dealing with unseen corporate problems
Anticipating possible threats to company survival
Planning for top management
Involvement in CEO succession
Building Networks with strategic partners

Figure 4: Factors on which directors are appraised

Future Development of Corporate Governance

The views of directors of banks in Nigeria were sought as regards to the future direction of
corporate governance in Nigeria. The most important areas for improvement are: establishing
formal training programme for newly appointed directors and continuous training for

directors; monitoring the legal and ethical conduct of the bank; and regularly evaluating the
performance of Audit Committee.
Other issues that should be addressed in order to enhance corporate governance include
report to shareholders on state of corporate governance in the bank at annual general
meetings, establishment of remuneration and nomination committees, and establishment of
professional qualifications for board members as a means of ensuring high level of
professionalism and competence.


The empirical findings of this study have revealed a number of critical issues as regards
corporate governance practices in the Nigerian Banking industry. Most of the banks are now
publicly quoted and so obliged to make their financial performance public. It also means that
accountability and transparency will be of interest to the management of these banks.
Some of the Nigerian banks already have foreign investors and as the Nigerian banking
industry opens up to international investors, the banks that do try to improve their corporate
governance rating will have much to gain. The banks that adopt best practices will get the
most interest from international investors. The more Nigerian banks reach out to global
investors, the greater the pressure will be to adopt corporate governance best practices.
The Central Bank of Nigeria issued its code of corporate governance for banks operating in
Nigeria as a means of enhancing the stability and soundness of the Nigerian banking sector
through improved corporate performance. Our findings show that all Nigerian banks have
embarked on one or more corporate governance initiatives in response to this mandatory
CBN Code.

Most of the boards of Nigerian banks include members with relevant professional experience
and educational profile with banking and finance being the most popular background.
These boards are of relatively large size, ranging between eight to twenty board members,
with fourteen being the average. Ogbechie and Koufopoulos (2007) found that the average
size of boards in publicly quoted companies in Nigeria is about 8 and so banks in Nigeria can
be said to have large sizes. This large board size affords the banks to opportunity to have
directors with diverse experience and expertise that could add value to the bank.

These boards also exhibit a balanced board leadership structure with all of them having
different persons as CEO and board chairperson. This in turn indicates that theoretically the
boards are not under the influence of the CEO. However, in practice many of the banks have
chairpersons whose appointments were influenced by the CEOs and as such under
considerable influence of these CEOs.

The independence of boards of Nigerian banks is supported by the number of outside

directors on the board, who account for about 64% of the board. Nigerian banks seem to
favour the opinion that outside directors can bring their experience and social capital to add
value to the banks. It has been argued that firms with a higher proportion of external
directors and with CEOs being separate from the Chairpersons are more likely to have
superior performance as a result of their independence from firms management (Baysinger
and Butler, 1985). They can bring to the board a wealth of knowledge and experience, which
the companys own management may not possess. This seems to be confirmed in the case of
Nigerian banks. Based on the findings that for the majority of the banks, board leadership is


independent, CEO and Chairperson Seats are held by different persons, and Nigerian banks
have large boards.

Empirical findings indicate that boards of Nigerian banks significantly contribute to all stages
of the strategic process from analysis to formulation and finally implementation. The boards
frequency of meetings is also an indication of their involvement in the emergent strategy
development process that characterizes banks. This high level involvement for boards with
relatively high proportion of outside directors goes against the findings of Demb and
Neubauer (1992) that there is less chance for non-executive directors to intervene or to
submit their opinion in a firms strategy process.

The boards of directors in Nigerian banks are actively involved in the determination of their
banks vision and mission and also the determination and enforcement of the banks policies.
These factors are critical for the long-term success of firms. However, boards of Nigerian
banks seem to be reluctant in evaluating their CEO and in management development and
succession. This could imply that CEOs have a strong hold on their boards.

The intense competition in post-consolidation era and the close monitoring/supervision of the
regulatory agency, CBN, mean that Nigerian banks have to adjust their governance
structures. Adoption of good corporate governance practices will entail several advantages to
the banks, the most important being the access to capital for investment and the enhancement
of their corporate image. The empirical findings of this study show that the banks have
embraced the basic corporate governance principles and have to internalize them.
Most of the banks have a formal board evaluation process in place which is done by external
consultants. Planning for succession is rarely formalized. Risk management capabilities in

most of the banks are yet to go beyond credit risk management to include the full spectrum of
risks facing a bank
One of the factors that have so far hampered the rapid development of corporate governance
in the Nigerian banking industry is the lack of a strong institutional investor base that can
lobby banks to change their behaviour. The time is ripe for a transparent corporate
governance rating in Nigeria.

Further research on corporate governance in the banking industry is needed particularly on

the effectiveness of boards and the impact on bank performance. Corporate governance is not
just about playing watchdog over management, it is more about enhancing corporate
strategic choices, acknowledging and responding to the interests and concerns of
stakeholders, developing and bolstering managerial competencies and skills and ultimately
protecting and maximizing shareholder wealth.

The study of the Nigerian banks shed some light and contributes to the ongoing, emerging
and extremely important research stream that relates to financial services especially at this
time that there is more focus on the degree of regulation in this sector.

This research highlights some important elements of corporate governance in a dynamic

sector that has a strong influence on national economy, particularly in emerging markets.


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