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Corporate Governance and Financial Performance of Nigeria Listed Banks

Article  in  Journal of Advanced Research in Dynamical and Control Systems · January 2020

DOI: 10.5373/JARDCS/V12I1/20201002

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Jour of Adv Research in Dynamical & Control Systems, Vol. 12, No. 1, 2020

Corporate Governance and Financial

Performance of Nigeria Listed Banks
Umar Aliyu Mustapha, Faculty of Economics and Management Sciences, University Sultan Zainal Abidin (UniSZA),Terengganu,
Malaysia.
Norfadzilah Rashid*, Faculty of Economics and Management Sciences, University Sultan Zainal Abidin (UniSZA),Terengganu,
Malaysia. E-mail: nikmfadzilah@unisza.edu.my
Hussaini Bala, Department of Accounting, Faculty of Management Sciences Kaduna State University, Nigeria.
Habibu Musa, Department of Local Government and Development Studies Faculty of Administration, Ahmadu Bello University,
Zaria.
Abstract--- The issue of corporate governance and financial performance has always been an essential and critical
element of the banking sector in Nigeria. Good corporate governance practices are regarded as necessary in reducing
the risk for investors and improving performance. Precisely, this study investigates the relationship between
corporate governance inthe board of directors and the financial performance of Nigerian banks. Three board
attributes (board independence, board meetings and board gender) were used as proxies of the independent variables
while ROA was chosen as a measure of performance.Furthermore, the research made use of secondary data obtained
from the annual reports of fifteen (15) banks listed in the Nigeria Stock Exchange for the year 2013 to 2015. This
study utiliseda panel data method on 15 banks with 45 firm-year observations. The random effect model was used to
examine the effect of the predictors on financial performance. The results indicated that the relationship between
board independence and ROA is negatively insignificant. Board meeting and ROA were found to be negatively
significant. However, the relationship between board genders, board size and ROA were negatively insignificant.
While the relationship between firm size and ROA is positively significant. For bank age and ROA, the relationship
was found as negatively significant. This study provides a guide for regulators and the Nigerian banking industry.
Keywords--- Board Independence, Board Meeting, Board Gender, ROA and Banks Performance.

I. Introduction
The current corporate failure around the world has exposed several weaknesses in corporate governance
practices. The corporate scandals that involved giant companies such as Enron, WorldCom and Tycon in the United
State of America (USA), Transmile in Malaysia, Parmalat in Italy and HIH Insurance in Australia J. P. Morgan in
USA (Kanchanapoomi, 2005) raised a severe concern about corporate governance mechanism and financial
performance across the globe. Corporate governance in this manner refers to the procedures and structures by which
the affairs of business and institutions are managed and directed, to enhance shareholder’s value through improving
corporate accountability and performance while considering the interest of other shareholders (Jenkinson & Mayer,
1992).
Nigerian corporations are not let off from similar corporate scandals (Imeokparia, 2013). Most of the problems
of corporate governance in Nigeria are due to the inappropriate combination of the corporate governance attributes,
which lead to the failures of theexcellent financial performance of the companies (Bala, 2014). Financial institutions
are deeply involved in this menace which led to the collapse of many banks in Nigeria such as Savannah Bank Plc,
Society General Bank Ltd, Alpha Merchant Bank Ltd Afri Bank, Oceanic Bank, Bank PHB and Intercontinental
Bank (Momoh &Ukpong, 2013). Sound as well as effective corporate governance can fortify strong risk
management, internal control at banks and along these lines adding to financial performance (Bala, 2014).
In Nigeria, the subject of corporate governance is being given the front burner position by all parts of the
economy. For example, the Securities and Exchange Commission (SEC) set up a committee on corporate
governance in the public companies known as Peterside Committee. Another sub-committee on corporate
governance for banks and other financial institutions in Nigeria was set up by banker’s committee. That is an
acknowledgement of the serious roles played by corporate governance in the failure or success of banks in Nigeria
(Ogbechie, 2006). Given the above, this study is set to examine the influence of the board of directors and banks
performance in Nigeria.

DOI: 10.5373/JARDCS/V12I1/20201002
ISSN 1943-023X 5
Received: 10 Nov 2019/Accepted: 08 Dec 2019
Jour of Adv Research in Dynamical & Control Systems, Vol. 12, No. 1, 2020

II. Literature Review

2.1. Corporate Governance
Zingales and Raja (1998) define corporate governance as a various set of constraints which creates ex-post
bargaining over the quasi-rents produced by the firm. In other words, the firm is the centre of implicit and explicit
contracts. Incomplete contracts were owing to uncertainty, informational asymmetries, and contracting costs (Hart,
1995). Conflicts of interests arising from insiders and outsiders because of the separation between ownership and
control, all calls for the role of corporate governance (Jensen &Meckling, 1976). Malaysian High-Level Finance
Committee Report (MHLFCR) 1999 has defined corporate governance as “the process and structure used to direct
and manage the business and affairs of the company towards enhancing business prosperity and corporate
accountability with the ultimate objective of realising long-term shareholder value while taking into account the
interests of the other stakeholders”.
2.2 Financial Performance
It is known as the fact that a business entity’s purpose of existence is to create or increase the wealth of its
stakeholders through its economic activities. Therefore, the financial performance of a business entity is crucial, thus
requiring proper measurement. Financial performance for all banks and other financial and nonfinancial institutions
use to be measured by a mixture of financial ratios analysis such as, (ROA, ROE, and Tobin-Q) or by benchmarking
and sometimes measuring performance counter to budget or sometimes a combination of all the proxies (Avkiran,
2000).
The financial reports of banks in Nigeria which commonly published, comprehend a range of financial ratios that
are mainly designed to provide some indication of banking and other institutional performance. Therefore, the
dependent variable of this study is the firm performance. The firm performance indicator is represented by the return
on asset (ROA). The current study focuses on testing the firm performance by using the famous and common proxy
of performance accounting based measurement that is ROA as some of the previous studies have used this proxy of
performance (Al-Matari, Faudziah, & Al-Matari, 2012; Ibrahim & Abdul Samad, 2011; Herly&Sisnuhadi. 2011 and
Junqing, Zuhui, &Yongxiang. 2003).
2.3 Independent Directors and Financial Performance
Independent director is known as a non-executive director with integrity, good character, independently minded
and able to align the interest of equity investors and other stakeholders of a firm (Ponmu, 2008). This category of
directors is saddled with responsibilities of enhancing the transparency of financial reports (Marra, Mazzola,
&Prencipe, 2011).There are some empirical research findings which support the arguments such as studies of Al-
qallab (2014). The study finds out that independent director plays a vital role in influencing the incidence of
financial performance in a firm. While in the studies done by Xie, Davidson &DaDalt, (2003) & Hay, Knechel&
Wong (2006) and Habbash, Xiao & Salama (2014) all ascertain the negative relationship between independent
directors and financial performance.
The more the independent directors, the better to monitor the behaviour of managers. Some evidence from
studies indicated that independent directors are responsible to shareholders, able to devote their time to board
activities, to demonstrate the spirit of independence and balance of power between management and the board
(Fama& Jensen 1983). Nigerian regulators like the SEC argue that independent directors are in a higher position to
perform essential better choice functions and so mitigate agency conflicts between management and shareholders. In
line with the preceding, the study hypothesised that;
H 1 Independent directors have a positive relationship with financial performance.
2.4 Board Meeting and Firm Performance
Board meeting refers to the number of meetings held by the board every year. With regards to the Nigerian Code
of Corporate Governance (2011), the board should hold a meeting at least four times in the financial year. Board
meetings are essential because boards hold meetings on behalf of the company, and there is a process entailing the
board's collective action, which includes passing of a resolution on board meetings. More meetings mean more
chances of considering different decisions by the boards and quickly reaching the final results (Khan, Ilyas, Javid,
Visvanathan, &Jegatheesan, 2011). Some studies have confirmed the negative effect of the board meeting on firm
performance, such as Garcia-Sanchez (2010). Also, in the study of (Kakanda, Salim &Chandren, 2016 and
Kamardin, 2009). Other studies found that there is no significant relationship between board meetings and firm
performance (Ghabayen, 2012; and Kyereboah& Coleman, 2007).The board effectiveness depends on the frequency

DOI: 10.5373/JARDCS/V12I1/20201002
ISSN 1943-023X 6
Received: 10 Nov 2019/Accepted: 08 Dec 2019
Jour of Adv Research in Dynamical & Control Systems, Vol. 12, No. 1, 2020

of its meetings as this can enhance the performance of the firm, given the fact that the board provides with more
opportunity for monitoring and reviewing the performance of management (Hsu &Petchsakulwong, 2010). It is
consistent with Haan&Vlahu (2016), which revealed that the board of directors often increases the frequency of its
meetings in order to find solutions to problems concerning declining firm performance. Therefore, the study
hypothesised that
H 2 Board meetings have a positive relationship with financial performance.
2.5 Board Gender and Financial Performance
Some studies highlighted that the number of women in the composition of the board of directors is now
becoming larger than in previous years. According to Holton (1995) and Burgess &Tharenou, (2002) firms
beginning to see changes in women participation at the top positions such as the board of directors which may
impact the board composition as well as the corporate governance at large, as it is also agreed by Fagenson&Jackson
(1993). See the following justifications: Shrader, Blackburn & Iles (1997) inspected firm performance with gender
differences at the centre and upper-management and the leading group of highest levels for expensive firms. They
discovered general hierarchical impacts, yet few significant differing qualities consequences for execution and as a
rule announced a positive connection between gender diversity in administration positions with firm performance.
Shrader et al. (1997) spell out the positive execution relationship by recommending that these organisations were
enrolling from a moderately bigger ability pool, and in this manner enlisted more qualified candidates paying little
mind to gender. Likewise, in some studies such as Beihren& Strom (2007) and Adams & Ferreira (2009) have a
negative relationship in their studies on board gender and financial performance.Even though in Nigeria until today
the number of women at the top positions in both private and public sectors are still low, the male has the highest
number of composition on the board of directors forthe Nigerian banks; it was discovered that some board has no
single woman in their compositions. This study used gender as one of the study variablesto test the effect it has on
the financial performance of the Nigerian banks due to the inconsistencies of the previous studies on it. Therefore, it
is hypothesised that
H 3 Board gender has a positive relationship with financial performance.

III. Materials and Methods

This study has used a secondary source of data collection from annual reports and financial statements of the
selected banks. The data was generated from the Routers DataStream and Annual Reports of the banks. The study
covers a period of three years, from 2013 to the year 2015 based on the 2011 code of corporate governance. The
population of the study consists of twenty-two (22) banks listed in the Nigerian Stock Exchange in 2015. Fifteen
banks out of the population were selected due to the unavailability of the relevant data in the annual reports of some
banks. The 15 selected banks are based on the screening carried out in order to confirm the availability of the
necessary financial information in their annual reports. The screening procedure is similar to (Wahab, 2014). Due to
that, the research has been able to use only those banks with available information and excludes the others to arrive
at the final sample.
3.1 Model Specification
The application of panel regression analysis using state 14 was made in order to identify the effect of the board
of directors on banks performance in Nigeria. The model is as follows.
ROA it = α0 + β 1 INDEPDIRECT it + β 2 BOARDMEETG it + β 3 BOARDGENDER it + β 4
BOARDSIZE it + β 5 FIRMSIZE it + β 6 LEVERAGE it + β 7 BANKAGE it + ε it ... (1)

Where:
ROA= Return on Asset
INDEPDIRECT = the proportion of independent directors on the board of directors.
BOARDMEETG = the total number of the meeting held by the board in a year.
BOARDGENDER=the total number of women on the board.
BOARDSIZE = a total number of directors serving on the board of directors.
FIRMSIZE = the natural log of total assets
LEVERAGE = the ratio of total liabilities to total assets.
BANKAGE = numbers of years since the company start incorporation.
ε = Error term

DOI: 10.5373/JARDCS/V12I1/20201002
ISSN 1943-023X 7
Received: 10 Nov 2019/Accepted: 08 Dec 2019
Jour of Adv Research in Dynamical & Control Systems, Vol. 12, No. 1, 2020

α 0 = Constant
β0 = constraint (i=0), regression coefficients (i=1, 2, 3….7)

IV. Results
This study used descriptive statistical analysis. Meanwhile, the data for the study was gathered from one source,
i.e. documentary sources, different statistical tests were conducted in order to examine the relationship between the
variables in the study. The application of the descriptive statistics is used to determine the mean, standard deviation,
maximum and minimum values of the sample of this study. From an average score of each analysis, multiple
regression techniques were used to correlate the relationship between dependent and independent variables.
4.1. Descriptive Statistics
Table 1 illustrates descriptive statistics of continuous and dichotomous variables for the variables of the study,
which includes minimum, maximum, mean, median, and standard deviation. That is an attempt to interpret and
discuss the results obtained from descriptive statistics for the independent variables. Moreover, control variables for
the model are discussed together. Table 1 exhibits the dependent variable ROA. To interpret and discuss the results
from descriptive statistics, it was done by applying the linear regression analysis, the result of the descriptive
statistic is shown in the following table.
Table 1: Summary of Descriptive Statistics N=45
Variables Mean Std. Dev. Minimum Maximum
INDEPDIRECT 8.733333 1.321157 6 11
BOARDMEETG 6.4 2.517213 3 13
BOARDGENDER 2.822222 1.408849 0 5
BORDSIZE 13.75556 2.748186 7 18
FIRMSIZE (Log 10) 21.08457 .7652356 19.544 22.2639
LEVERAGE 12.18076 4.449208 5.39 26.16
BANKAGE 37.53333 29.1677 6 121
ROA 2.021333 1.6174090 -5.46 4.98
Base on Table 1 above, it is highlighted that the total observations are forty-five regarding the board
independence (INDEPDIRECT), the result reveals that the mean value of the board independence is nine with a
minimum of six and a maximum of eleven. That suggested the board of Nigerian banks contained a mix of executive
and non-executive directors. Thus, on average, there are nine independent directors on the board of Nigerian
banks.The result also indicates that the mean for board meeting (BOARDMEETG) is six times a year with a
minimum of three and a maximum of thirteen times. However, the Nigerian Code of Corporate Governance (2011)
stipulates that the board shall have a meeting at least four times a year. Concerning board gender
(BOARDGENDER), the result indicates that the mean of board gender is three members with a minimum of zero
women and a maximum of five women in the boards of directors of the Nigerian banks. It implies that women are
not much included in boards. Hence the men have the most significant number in the board of the Nigerian banks.
4.2 Linear Regression Analysis
Post-estimation analyses have been conducted before analysis of linear regression which was applied as a
statistical technique to examine the dependent variable ROA and three independent variables comprising board
independence, board meeting, and board gender on the listed Banks in Nigeria; Table 2 reveals the analysis of the
result for random effect model in the study. Based on the Table board independence (INDEPDIRECT) has a
negative impact on the ROA, and also it is not significant. The findings revealed that there is no significant
relationship between board independent and financial performance (ROA).
For the board meeting (BOARDMEETG), the regression has a negative effect on ROA and also the result is
significant. This finding suggests that there is a significant relationship between the board meeting and financial
performance. It implies that if there is an increase in a board meeting, financial performance (ROA) will decrease
and vice versa. Thus it implies that more frequent meetings reduce banks performance. A possible explanation for
this result could indicate that it can be observed from the descriptive statistics that some banks met up to thirteen
times in a year beyond the Nigeria SEC code (2011) recommendation and the global best practices. The global
recommendation is at least four meetings in a year. In that more frequent meetings, up to thirteen times in a year
may lead to tiredness which may provide discussions of irrelevant matters outside the objectives of the firm. In the
case of board gender (BOARDGENDER), the result shows a negative impact on the ROA and also not significant.

DOI: 10.5373/JARDCS/V12I1/20201002
ISSN 1943-023X 8
Received: 10 Nov 2019/Accepted: 08 Dec 2019
Jour of Adv Research in Dynamical & Control Systems, Vol. 12, No. 1, 2020

Therefore, it suggests that there is no significant relationship between board gender and financial performance
(ROA).
Table 2: Regression Result of the Model by Random Effects
ROA Coef. Std. Err. t-value p-value
INDEPDIRECT -0.3055024 0.2462629 -1.24 0.223
BOARDMEETG -0.2365163 0.0707511 -3.34 0.002***
BOARDGENDER -0.0581487 0.2618078 -0.22 0.825
BOADSIZE 0.1129332 0.1682016 0.67 0.506
FIRMSIZE 0.5744255 0.2447851 2.35 0.024**
LEVERAGE -0.0436763 0.1001014 -0.44 0.665
BANKAGE -0.0127696 0.0057529 -2.22 0.033**
_Cons -6.286477 5.966907 -1.05 0.299
Number of Obs 45
Number of groups 15
Wald chi2(7) -
F(7,37) 3.82
R2 0.3289
Prob > chi2 -
Prob > F 0.0032
NOTE: *** (0.01) significant level ** (0.05) significant level

V. Conclusions
This research has been able to study the effect of the board of directors on financial performance in the Nigerian
banking industry. The study is an addition to existing literature, which could be utilised in researching corporate
governance. There are many beneficiaries from this stud, which include: firms, researchers, and policymakers.
Future researchers will use this study to enhance their understanding on how the board of director’s effects on the
financial performance and it will also expand their frontier of knowledge in the area using providing additional
literature, particularly inthe Nigerian banking sector. The result of this study will provide a basis for improving the
current Code of Corporate Governance in Nigeria by the policymakers. Furthermore, for the firms, the result of this
research will improve corporate governance practices by management, and also improve corporate performance in
organisations most especially the banking industry across the globe.It is recommended that further research should
be conducted to generalise for all sectors of the Nigerian economy, both financial and non-financial.Also, new
research should try to expand the time frame of the period of study. Research also should be conducted to assess the
effect of changes in the Code of Corporate Governance in the financial sector of the country in order to have a
reasonable comparison between the previous and current Code.

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DOI: 10.5373/JARDCS/V12I1/20201002
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Received: 10 Nov 2019/Accepted: 08 Dec 2019
 Jour of Adv Research in Dynamical & Control Systems, Vol. 12, No. 1, 2020

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DOI: 10.5373/JARDCS/V12I1/20201002
ISSN 1943-023X 10
Received: 10 Nov 2019/Accepted: 08 Dec 2019

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