Poor Corporate Governance and Its Consequences on the Nigerian Banking Sector

Serbian Serbian Journal of Management 5 (2) (2010) 243 - 250 Journal of Management www.sjm06.com POOR CORPORATE GOVERNANCE AND ITS CONSEQUENCES ON THE NIGERIAN BANKING SECTOR

Ben Emukufia Akpoyomare Oghojafora, Olufemi Olabode Olayemia*, Patrick Sunday Okonjia and James Ugochukwu Okolieb

aDepartment of Business Administration, Faculty of Business Administration, University of Lagos, Akoka -Yaba , Lagos State,Nigeria- West Africa bDepartment of Accounting & Finance, Faculty of Management Sciences, Lagos State University, Ojo- Lagos State, Nigeria- West Africa

(Received 5 September 2009; accepted 23 July 2010) Abstract

The anxiety over the current banking crisis in Nigeria is understandable. This is borne out of the fact that the economic development of any country is directly tied to its banking sector. The effectiveness and efficiency with which the banks perform their intermediary roles between the surplus and deficit spending units of the economy determines to a very large extent the prosperity of any nation. Corporate governance is systematic and formalized manners of ensuring that top management represented by the board of directors do not make decision making powers occasioned by management and ownership separation to pursue personal interests at the expense of other stakeholders. This study made use of structured questionnaire to elicit responses from conveniently selected respondents comprising of investment experts, academics, banks customers, public and policy analysts with in Lagos metropolis. It was hypothesized and the study confirmed that poor governance culture and supervisory laxities were majorly responsible for the current banking crises. The study recommended an adherence to the execution of the tenets of good corporate governance in Nigerian banking sector and actions contrary to this should be dealt with appropriately by bringing offenders to book irrespective of their status in the society.

Key words: corporate governance, ownership separation, banking crises, effectiveness, efficiency, economic development

1. INTRODUCTION nation. The banking industry plays a major intermediation role in an economy by The anxiety over the current banking mobilizing savings from surplus units and sector crisis in Nigeria is understandable channeling these funds to the deficit units given the vital role played by the banking particularly the private enterprises for the sector in the economic development of any purpose of expanding their production

*Corresponding author: [email protected] 244 B.E.A.Oghojafor / SJM 5 (2) (2010) 243 - 250 capacities. The concern over corporate this study the hypotheses formulated were: governance stems from the fact that sound H1: Poor corporate governance culture governance practices by organizations, precipitated the current Nigerian banking banks inclusive results in higher firm’s sector crisis. market value, lower cost of funds and higher H2: Supervisory laxity has significantly profitability (Block, Jang & Kim, 2006 & contributed to the current Nigerian banking Claessen, 2006). sector crisis. Eight chief executives and executive directors of some Nigerian banks were summarily dismissed between August and 2. THEORETICAL FRAMEWORK October, 2009 due to issues related to poor corporate governance practices. This was The topicality of corporate governance sequel to the conclusion of audit has manifested in diverse definitions investigations embarked upon by the central depending on the interests and individuals Bank of Nigeria to determine the soundness involved. Cadbury (2000) defined “corporate of Nigerian banks. The release of these governance as being concerned with holding reports led CBN to conclude that the affected the balance between economic and social banks have acted in manners detrimental to goals and between individual and communal the interest of depositors and creditors. This goals. The corporate governance framework was at variance to the clean bill of good is there to encourage the efficient use of health earlier given to these banks by resources and equally to require regulatory authorities (CBN inclusive) and accountability for the stewardship of those their so called appointed reputable external resources. The aim is to align as nearly as auditors. possible the interests of individuals’ The contradictions and the resultant loss corporations and society.” Similar finding is in wealth and investor’s confidence have expressed by Orham and Yildirim (2009). necessitated this inquiry and therefore this OECD (1999) posits that corporate study, hopes to achieve the following governance is “the system by which business specific objectives: are directed and controlled. The corporate 1. to determine the extent to which non- governance structures specifies the compliance with corporate governance codes distribution of rights and responsibilities by the bank executives contributed to this among different participants in the present crisis corporation such as the board, managers, 2. to ascertain the extent of the shareholders and other stakeholders and spell regulatory authorities complicity and laxity out the rules and procedures for making in the present to the crises decisions on corporate affairs by doing this, 3. to examine and evaluate the role of it also provides the structure through which personal greed of executives in fostering this the company objectives are set and the crises and means of attaining these objectives and 4. to proffer possible solutions to monitoring performance”. Corporate resolve the crises and prevent future governance is concerned with the intrinsic reoccurrence nature, purpose, integrity and identity of the Based on the objectives and the focus of institution with a primary focus on the B.E.A.Oghojafor / SJM 5 (2) (2010) 243 - 250 245 entity’s relevance continuity and judiciary usually concerns mechanisms by which aspect. Governance involves monitoring and corporate managers are held accountable for overseeing strategic direction, socio- corporate conduct and performance. economic and cultural content externalities Several codes have been developed as a and constituencies of the institutions. guide to corporate governance; however, the According to Imala (2002) and Srivastava best guide to global corporate governance (2010) from the perspective of the banking was developed by the OECD. The OECD sector, corporate governance involves the (1999) principle of corporate governance is manner in which the business and affairs of as shown below; individual institutions are governed by their i. The rights of shareholders: the board of directors and senior management corporate governance framework should with depositors standing out clearly as the protect shareholders rights most important stakeholder. ii. The equitable treatment of An essential feature of a corporation is the shareholders: the corporate governance separation of ownership from management. framework should ensure the equitable To this end, the shareholders (owners) treatment of all shareholders including delegate decision making rights to managers minority and foreign shareholders. All to act on their behalf. However, this shareholders should have the opportunity to separation of ownership from control implies obtain effective redress for violation of their a loss of effective control by shareholders rights. over managerial decisions. Thus, the primary iii. The role of stakeholders in corporate objective of corporate governance is to governance: the corporate governance attempt an alignment of the managerial framework should recognize the rights of incentives with those of stakeholders. This is stakeholders as established by law and to check the tendency of selfishness by encourage active cooperation between managerial employees especially the top corporations and stakeholders in creating ones to ensure that delegated decisions wealth, jobs and the sustainability of making powers are not abused to the financially sound enterprises. detriment of shareholders and other iv. Disclosure and transparency: the stakeholders. corporate governance framework should The major elements of corporate ensure that timely and accurate disclosure is governance are good board practices, control made on all material matters regarding the environment, transparent disclosure, well corporation including the financial situation, defined shareholder rights and board performance, ownership and governance of commitment. The four pillars of corporate the company. governance are accountability, fairness, v. The responsibilities of the board: the transparency and independency (Omeiza- corporate governance framework should Micheal, 2009). Weil et al (2002) concluded ensure the strategic guidance of the that although, corporate governance can be company, the effective monitoring of defined in a variety of ways, generally, it management by the board and the boards involves the mechanisms by which a accountability to the company and the business enterprise organized in a limited shareholders. corporate form is directed and controlled. It 246 B.E.A.Oghojafor / SJM 5 (2) (2010) 243 - 250 3. PRINCIPLES OF CORPORATE 5. Levels of remunerations should be GOVERNANCE sufficient to attract and retain the directors to run the company successfully, but should not Given the globalization of business and be excessive. Part of the payment of directors the need to ensure uniformity in the practice should be in the form of performance related of corporate governance the world over, the element. Hampel Committee (1998) developed some 6. The board should use the annual basic principles of good corporate and sets general meeting to communicate with the out a code of best practices called the individual investors and encourage their “combined code”. The combined code participation. includes the following; In Nigeria the mechanism of corporate 1. Every listed company should be governance are the Companies and Allied headed by an effective board which should Matters Act (1990) and Securities and lead and control the company. The board Exchange Commission (2003) Corporate should meet regularly and should have a Governance Code. These are briefly formal schedule of matters reserved to it for discussed with emphasis on relevant section decisions; directors should bring an to this study. independent judgment to bear on issues of The CAMA (1990) requires the annual strategy, performance, resources and accounts reports of quoted companies to standards of conduct, directors should include: A statement of accounting policies; receive appropriate training on first Balance sheet as at the last day of the year; appointment and as necessary thereafter. Profits and loss accounts; Notes on the 2. There are two key tasks at the top of accounts; Auditor’s report; Director’s report; every public company- running of the board Statement of the source and application of (the chairman’s role and the executive funds; A value- added statement for the year; responsibility for the operation of the A five year financial summary; Group company’s business (Chief executive’s role). financial statements (for holding There should be a clear division of companies). responsibilities between the two roles, so as According to SEC (2003) an effective to ensure a balance of power and authority system of corporate governance provides the and thus avoid a situation where one person framework with in which board, has unfettered powers of decision. management, shareholders and other stake 3. The board should have a balance holders address their respective between executive and non- executive responsibilities. The code deals with: directors with at least 1/3rd from the latter. a. The roles of the board of directors The majority of non-executive should be and management independent of the management and free of b. The role of the audit committee and business relationships that could interfere c. The right of shareholders with their independence. 4. There should be a formal and transparent procedure for the appointment of directors and all directors should offer themselves for re-election every three years. B.E.A.Oghojafor / SJM 5 (2) (2010) 243 - 250 247 4. HOW COMPLIANCE ARE THE reports for banks over these years. NIGERIAN BANKS TO THE The inability of the board of directors to PRINCIPLES OF CORPORATE effectively supervise top management of GOVERNANCE? these banks has contributed more to this ugly situation. Most members of the board of Most analysts believed that the crisis in these banks were composed of surrogates of the banking sector is a clear manifestation of the chief executives and at times chairmen. It poor corporate governance practices in the is either they were unilaterally nominated by financial sectors. According to Chiejina the managing director or the chairman who (2009) the executives had abandoned the key holds controlling interest in the bank as the elements of good corporate principles of suppliers of capital. To this end, board honesty, trust, and integrity, openness, members have no financial contributions to performance orientation, responsibility, and the bank as their names were supplied to accountability, mutual respect and CBN in order to comply with statutory commitment to the organization for selfish requirements. It is therefore imperative for reasons. No wonder, the banks astronomical such members to rubber stamp all decisions growth and all indices used to package their of their benefactors. After all they are friends shares are not commensurate to economic or business associates. growth and transformation. It was obvious that the core banking practices have been traded off and the most beneficial are the 6. METHODS CEOs and their loyalists. Participants and Procedure: The sample of study consisted of 120 respondents who 5. CONSEQUENCES OF POOR were mainly investment analysts, financial CORPORATE GOVERNANCE experts, banks employees, shareholders and customers among others. The choice of Following the audit exercise conducted respondents was based on their knowledge by CBN’s examiners it was discovered that and experience in the industry. About 89 five of the banks had accumulated margin respondents finally participated in the study, loans of N500 billion, among other loans, which represented 71.16% response rate. that had gone bad and eroded their Among the respondent, 41.3% was male and shareholders’ funds. The primary factors 58.7% female. Majority of the respondent responsible for the current are laxity of are in the middle age which is between 31 to control by the regulatory authorities, 40 years (56.7%). 25.3% has been working corruptions, inactive boards and greed on the with the organization for more than 5 years part of the executives. The regulatory and 36.6% have been working between 3 to functions of the CBN to say the least have 4 years. Majority of the respondent have been non existent, which may be due to First degree (55%), while those with Masters dearth of qualified personnel experienced in Degree are 10% and only 35% with diploma the act of bank supervision and examination. qualification. Alternatively, the bank supervisors would Research Instrument: The structured have been compromised to issue clean of bill questionnaire was administered to obtain 248 B.E.A.Oghojafor / SJM 5 (2) (2010) 243 - 250 relevant information from conveniently Hypothesis two selected respondents with in Lagos metropolis who showed interest in the Supervisory laxity has significantly subject matter. The questionnaire consisted contributed to the current Nigerian banking of 20 questions in statement forms sector crisis. describing issues operationalised in the concept of corporate governance as it relates to the Nigerian banking sector. Responses 8. CHI-SQUARE TEST were measured using Likert five point-scale of; strongly agree to strongly disagree. The From the result shown in table 2, where response of the examinees are presented in Xcalc = 108.706, Xtab = 9.49, degree of Table 1. freedom df = 4. The extent of supervisory laxity was It clearly shows that the calculated value measured through possession of relevant of chi-square is greater than the tabulated skills and willingness to apply those skills value, hence the rejection of null hypothesis without compromising ones integrity. Poor and acceptance of the alternate hypothesis corporate cultures and practices were (H1), which states that poor corporate identified, examined and operationalized as culture precipitated the current banking key variables that are significant in this sector crisis. study. While the result in table 3 also shows that XCalc = 210.634, and Xtab = 9.49, degree 7. RESULTS AND DISCUSSIONS of freedom df = 4. Xtab in both hypotheses is the table value The questionnaire was analyzed and of the test statistics, which is read from the hypotheses earlier formulated were tested standard X2 table. It is the same for both using chi square. Results of the chi square hypotheses at 4degree of freedom and .05 test are presented in Table 2. level of significance since the same data that was used for analysis. Hypothesis One It can be inferred that the calculated value of chi-square is equally greater than the Poor corporate governance culture tabulated value, then the rejecion of the null precipitated the current Nigerian banking hypothesis and therefore conclude by sector crisis.

Table 1. The response of the examinees Table 2. Results of the Chi Square test of regarding hypothesis one thew hypothesis one Test Statistics Observed N Expected N Residual STRONGLY AGREE 123 61.2 61.8 RESPONSE AGREE 76 61.2 14.8 Chi-Square a 108.706 UNDECIDED 55 61.2 -6.2 df 4 DISAGREE 33 61.2 -28.2 Asymp. Sig. .000 STRONGLY DISAGREE 19 61.2 -42.2 a. 0 cells (.0%) have expected frequencies less than Total 306 5. The minimum expected cell frequency is 61.2. B.E.A.Oghojafor / SJM 5 (2) (2010) 243 - 250 249 Table 3. The response of the examinees Table 4.Results of the Chi Square test of regarding hypothesis two thew hypothesis two RESPONSE 2 Test Statistics Observed N Expected N Residual STRONGLY AGREE 156 61.2 94.8 RESPONSE 2 AGREE 70 61.2 8.8 Chi-Square a 210.634 UNDECIDED 35 61.2 -26.2 df 4 DISAGREE 31 61.2 -30.2 Asymp. Sig. .000 STRONGLY DISAGREE 14 61.2 -47.2 Total 306 a. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 61.2. accepting the alternate hypothesis (H2), which states that supervisory laxity has raised by the CBN governor to identify those significantly contributed to the present officials that examined and issued clean bills banking crisis. of health to affected banks. Thereafter, appropriate disciplinary measures should be taken against such CBN officials. This 9. CONCLUSIONS AND invariably will serves as lessons to other RECOMMENDATIONS public officials with the intention of making quick riches at the detriments of the general CBN supervisory officials are judged to populace. By so doing, Nigerian government lack integrity and boldness in carrying out will be sending the right signals to others and their oversight functions. Officials are the world in particular that, it has zero known to have compromised in issuing clean tolerance for corrupt practices. It will equally of bills of health in their bank examination complement the good efforts of truly report. Since the bank examination rebranding Nigeria. department became a ‘goldmine’ and most sought out department, some incompetent References staff have naturally found themselves there. It was also believe that most examiners’ Black, B.S., Jang, H. & Kin, W. (2006). Does skills are outdated given the technology Corporate Governance Predict firms market Values? driven banking operations. Fagbule (2009) Evidence from Korea. Journal of Law, Economics and Organization, 22 (2) 3-13. frankly stated that, the CBN failed just as the Cadbury, A. (2000). Global Corporate banks, since banking crisis are manifested by Governance Forum, World Bank, quoted by Hopkins weaknesses in regulation and lax banking in what if any is the relation between Corporate practices. Governance and Corporate Social Responsibility. The study observes that the explosion in (www.csmworld.org/publiccst-goverance). the numbers of banks and information Chiejina, A. (2009). Ensuring credibility and Corporate Governance in the Banking industry. technology has not been matched with CBN Business Day Monday 24, August. supervisory employees’ skills improvement. Claessens, S. (2006). Corporate Governance and Thus, there is the need to urgently intensify Development, The world bank Research Observer, the training and retraining of these officials. 21(1) 91-122. Besides, the house cleansing should begin Companies and Allied Matter Act (1990): with CBN itself. To this end, this study Enacted by the Federal Government of Nigeria. Fagbule, T. (2009). ”An inconvenient Truth” recommends that, an internal panel should be Business Day, Thursday 20, August pg 3. 250 B.E.A.Oghojafor / SJM 5 (2) (2010) 243 - 250 Hampel Committee (1998) central banks independence on growth volatility: a http://www.managementstandard.org pooled regression analysis, Serbian Journal of Imala, I. O. (2002). Regulatory Framework for Management 4 (2): 157 - 167. Ensuring Good Corporate Governance: A Focus on Sanusi, L. (2009). “CBN’s Report on the the Banking Industry, Paper delivered at the 18th Examination of Banks” Press Release, September, annual Directors seminars of The FITC, Abuja, 4-6 12. July. Securities & Exchange Commission (2003) Mucller, J. (1981). The Corporate World of http://www.sec.gov.ng.com/governance.htm Business, Oxford, Basil Blackwell. Sheikh, D.R., & Chatterjee S.K. (1995). OECD (1999) “Principles of Corporate Perspectives on Corporate Governance in Sheikh S Governance” http://www.encycogov.com and Rees W (Ed) Corporate Governance and Omeiza-Micheal, S. (2009). “Banks Built around Corporate Control, London, Cavendish Publishing Single Personalities, Weakened Corporate Company Ltd. Governance”. Business Day, Thursday 20, August pg Srivastava S., Srivastava, D., (2010). Interest rate 2. derivatives in Indian banks, Serbian Journal of Orhan A., Durmus, C. Y., (2009). The effect of Management 5 (1): 111 - 125. ЛОШЕ КОРПОРАТИВНО УПРАВЉАЊЕ И ПОСЛЕДИЦЕ ЗА НИГЕРИЈСКИ БАНКАРСКИ СЕКТОР

Ben Emukufia Akpoyomare Oghojafora, Olufemi Olabode Olayemia*, Patrick Sunday Okonjia and James Ugochukwu Okolieb

Извод

Разумљива је узнемиреност због тренутне кризе у нигеријском банкарском сектору. Разлог томе је у чињеници да је економски развој било које земље директно везан за њен банкарски сектор. Ефектност и ефикасност којом банке врше своју посредничку улогу између снабдевача и дефицитне тражње у економији пословања, одређује у знатно великој мери просперитет било које нације. Корпоративно управљање представља систематски и формализовани начин осигурања који обезбеђује да топ менаџери не доносе одлуке како би постигли личне интересе а на штету осталих стејкхолдера. Ова студије користи структуирани упитник како би сакупила одговоре одабране групе учесника која укључује инвестиционе експерте, научнике, клијенте банака, јавне и службене аналитичаре који живе и раде у Лагосу. Постављена је полазна хипотеза и студија је потврдила да лоша култура управљања и недостатак супервизије представљају највећи разлог тренутне кризе у банковном сектору. Студеија предлаже придржавање пракси доброг корпоративног управљања у Нигеријском банкарском сектору и акције које су насупрот овоме се морају процесуирати без обзира на социјални статус прекршиоца.

Кључне речи: корпоративно управљање, раздвајање власништва, банкарска криза, ефективност, ефектност, економски развој