BARRIERS TO EFFECTIVE CORPORATE GOVERNANCE IN THE BANKING INDUSTRY

ABSTRACT

Research into  corporate  governance  in  Nigerian Bank  was  born out  of

necessity to investigate the frequent collapse of some banks. Bank failure is so disturbing because it sits at the center of the economy. The first chapter discussed the causes of bank failures, Barriers and faults centralization of management, misreporting, insider abuses and  fraud,  violation and  non- compliance  of  internal  controls  put  in  place,  etc.  Review  of  literature

historically traced back bank distress in Nigeria from pre-independence to date. Reasons for the recorded failures were also identified. The procedures adopted in data generations, data collection, measurement criteria, analysis and  interpretations  were  highlighted  in  chapter  three.  The  empirical approach adopted in the research gave the work a scientific outlook. Sufficient data  generated were tabulated so  as  to  aid  analysis. Pictorial analytic tools graphs were employed in analyzing the data. In data analysis, a comparative study of the values given to various stakeholders of banks, insurance, conglomerates, breweries, food and beverages were done so as to determine their fairness or otherwise. Before arriving at a result data of various companies under review as contained in value added statement in the past  six  years  were  carefully analyzed.  The  analyzed data  presented  in graphs simplified the analysis. Conclusively, the study criticized the returns given to shareholders of banks and recommended a comparative review.

CHAPTER  ONE

1.0  INTRODUCTION

Corporate failure today is a global issue.  In 2010, we saw the collapse of large companies like Bank of Credit and Commerce International (BCC1), Enron and WorldCom In Nigeria, corporate failure is very rampant in the financial and non- financial services sector.

Soludo (2005) hinted  that  by  1998, a total number of  26 banks     have     been  liquidated  and  at  the     time     of consolidation, 11 banks were already dead literally.

John Clutter Buck in Al-Faki (2006) highlights that companies that failed shared some common characteristics and they are:-

a.     Leadership  of the company is  vested in an individual who   combines   the   office   of chairman and chief Executive with domineering tendency.

b.     Persistent violation and non-compliance with internal control of the company by the chief Executive.

c.     Optimistic (or even distorted) rather than prudential financial reporting.

d.     Irregular  board  meetings  often   without  adequate information given in advance.

e.     Minimal disclosure in the accounts of the company.

It  is the combination of  these  factors  that undermine  the ability    of  companies    to  withstand economic    downturns thus, leading to a collapse.

In  the  Nigerian  banking  scenario, issues  such as  lack of probity, transparency, integrity, accountability, inflation of balance  sheet  with unearned  income,  weak  capital base, unskilled   and inefficient management   also contributed   to the death of many banks . Such, also identified the reasons of early indigenous bank failure as mismanagement, and accounting incompetence.

What then is the adequacy of bank legislations in controlling and regulating the banking practices in the sector? The question is relevant   because   in spite   of the   exiting legislations, a number  of failures  and  distresses  have  been recorded in the industry . In an attempt to design codes that

will be appropriate to quell these irregularities, a global phenomenon termed corporate governance came into being. Today  it  has  become  a  contemporary   issue, which  has dominated  the  interest of all  business, legal and government circle  world   wide.  In  the  Nigerian scene,  the provisions in the  code of corporate  governance   was designed  to augment the provisions of Company and    Allied Matters Act (CAMA)1990 ; Bank and Other  Financial  Institution Decree (BOFID) 1991; Failed Banks and   Financial   Malpractices in Banks Decree, 1994; Nigeria Deposit  Insurance  Corporation Decree, 1988; Money Laundering Decree, 1995; Prudential Guidelines and other relevant banking codes.

1.1   CORPORATE GOVERNANCE: AN OVERVIEW

Corporate   governance   is   a   topical   issue   that   gained prominence in United Kingdom towards the end of the last century. Many reports have been issued on this subject matter in the UK and around the globe. Some  of these are Greenbury report, the   Hampel Report , the Turnbell committee Report, the king’s   report   (south Africa),   Sarbanes-Oxley Act (USA)

and   OECD Report   (Oki, 2005). Then in Nigeria we   have Peterside Report ,  Bankers   committee Report   and   CBN Report, each of these   reports   came   up with different suggestions on the subject  matter but shared  almost  similar definitions. Oki (2005) noted that Cadbury Report defined corporate governance as the system by which companies are directed and controlled. While in 1995, Greenbury code  went beyond   Cadbury   Report to stipulate   that director’s remuneration and  detailed  disclosures are to be  given in the annual  reports . Hampel  report  made  little  modifications in the  areas  of    duties    of      executive    and  non-executive directors , share holders and AGM , accountability, audit  and reporting.

Turnbull (1997) described  corporate  governance  as all the influence  affecting the institutional  processes, including those   for appointing   the controllers   and / or   regulators, involved  in  organizing  the production and sale  of goods and services. Described   in this   way, corporate   governance includes all  types    of    firms    whether    or    not  they  are incorporated under civil law.

Bob Tracker in Al-faki  (2006)  defined  it  as  ‘essentially the exercise  of  power  over  the  modern corporation (large and small), holding company and  subsidiary” .

Wofensohn (the   former   world   Bank president) defined corporate  governance  in terms  of  what have  come to be   generally   considered as   the principle of corporate governance. To him, corporate governance is all about promoting corporate fairness, transparency and accountability (Abbey, 2005).

Peter side  committee (2003)  accepted  the  definition of the  subject  matter  as “the  way  and manner  in which  the affairs  of  companies are  conducted  by  those  charged with the  responsibility.  And which has a positive link to national growth and development’’. Given   to the   peculiarity   and fragility   in the   banking   business,   a   special   code   of corporate   governance   for Banks   and     other   financial institutions in  Nigeria was drafted by the bankers.

1.2  STATEMENT OF THE PROBLEM

Banks  in Nigeria  ever  since  the  emergence  of  the early indigenous banks    in  1927    have    witnessed    series    of

systemic    distress and    failures.    The  collapse    is    quite particular   with   indigenous   banks while   foreign   banks established   in the colonial days   have   all   survived   the turbulent  Nigeria  economy . Example  of  those  banks  of foreign origin are  Bank of British  West  African (BBWA)  (now union   bank   plc)   and   British   and   French   Bank   of Commerce  and  Industry  (later  to become United  Bank for Africa)   were    established   in  1925 and 1948 respectively (Uche, 2001a). So  why  did  more  indigenous  banks  fail in spite   of the   recipes   of   G. Paton in 1958. Uche (2001b) summarily    insinuated    that  incidence    of    fraud    and unethical practices were behind the debacle of  these banks. Persistent  fraud and  unethical issues  are  then  the  indices of  weak corporate governance.

Weak   corporate   governance   has   been a   hydra- headed problem   to the industry   ever   since   the   emergence of indigenous banks. Many recipes have also failed to strengthen the integrity and enthrone ethical practices. More  still, poor banking  cultures, unethical  practices, centralized  ownership (though practically addressed by consolidation), incompetence

in management culminate  into  weak  corporate  governance. Weak corporate governance is the most disturbing issue in the industry today.  Now  that mega  banks  have   emerged  from the  consolidation, more  challenges  are posed  to  corporate governance.

1.3  THE RESEARCH QUESTION

The following research questions will guide the conduct of this study:

1.   Does corporate governance enhance efficiency in the organization?

2.     How equitable is the returns to shareholders of Nigeria banks over the years.

3.     Does corporate governance restore investors’ confidence?

4.      Is  there  a  proper  code  of  corporate  governance  in the industry ?

5.       Do government agencies oversee the implementation of corporate governance?

1.4  OBJECTIVES OF THE STUDY

i       To investigate the extent to which corporate governance enhances efficiency.

ii      To    highlight    the  criteria    and  parameters    which feasible corporate governance must follow.

iii      To    determine    the  fairness    of    returns    given  to shareholders of  Nigeria banks.

iv     To perform  a  comparative study  of how  value added is distributed to the various stakeholders.

v.     To ascertain how Nigeria banks have provided for the future business expansion and growth.

vi     To perform across the border comparism with the returns made to shareholders  of other foreign banks.

vii    To establish equity in the values given to the employee of

Nigeria banks.

viii   To  examine the relationship if  any  between corporate governance and investors’ confidence.

ix     To establish  relationship if  any between share  price  in the  secondary market    and  the    retained    earnings    and reserves of the banks over  the years.

1.5  SIGNIFICANCE OF THE STUDY

Sound corporate governance is not, and ends in itself but a means. It is not about strict policing of the managers,

who   are   the company agents; the bottom line   is about superior corporate   performance   based   on a   rescannable cost.   This   study celebrates   the   sprit   of   corporate governance  instead   of the   letter of   corporate governance. When managers and boards understand the relevance of their positive effort towards the promotion of corporate governance, the enforcement  of the code becomes easier.

This  study  will positively change  the banking  attitude of   Nigerians and   improve   the international perception   of Nigerians   banks. For students and researchers, this study will serve as a stepping stone in their work. This study will serve    also    as  the    writers    own    contribution  to  the

improvement  of corporate  governance  in both public  and non- public quoted organization.

1.6  SCOPE OF THE STUDY

The subject matter is a very deep and broad topic. The depth lies in the secrecy of the real account of what actually happens at the management. The insider  alone knows the depth.

The   cases   abound   of creative   account, which is   made available  to the regulatory  bodies  and  to  the public. This level   of   misreporting   conceals   the extent   of   bank mismanagement, which  may  not  be apparent to the whistle blower  and  to the  regulator. Fact finding in this study will not go beyond the published reports of banks.

The study  will draw  its conclusion  based  on 6 years comparative  analysis  of  samples  drawn  from  Nigeria and Non- Nigerian banks, Insurance, Conglomerates, Breweries, food  and  Beverages  Companies. The criteria for the selection will be discussed in chapter three.  This study will not  employ judgmental   approach   instead   it   will   adopt   a more pragmatic approach of  financial and situational analysis.

1.7  LIMITATIONS OF THE STUDY

More  thorough  analysis  of the subject matter  will require the availability    of undiluted  financial  and  non- financial details about the industry.  In the  Nigeria case, banks  are known for  misrepresenting   facts    and    figures   so as to conceal

abuses and unprofessional practices inherit in  some

banks. Therefore, total reliance on the published facts may limit the chances of optimum result in the research.

Research such  as  this  is  very  cost  intensive and requires good  time for  more  diligent study  of the  subject  matter. Time constraints and financial bottleneck were important limiting factors to this research.

1.8  ORGANIZATION OF THE STUDY

This project is a five- chapter research work. The first chapter sets direction for the entire work. It  builds  a firm background for the study, sets  the  objectives, determine the  scope , and establish  the bounds  and limits  of the study.  The work of other   researchers will be reviewed in chapter two.

Chapter three will simply  outline the research  Methodology used,   while   chapter four will concentrate   on the data presentation and   analysis of   some important variables necessary in answering the   research question. The fifth chapter will aptly give the summary of the findings, recommendations and conclusion.

At the end of every chapter, reference of all books, articles, journals, newspapers, codes and    websites, cited will be alphabetically arranged.

1.9 DEFINITION OF TERMS

Corporate:

That which belongs to body collectively or in general. It is also defined as something, which is owned by a group of persons or bodies.

Governance:

Although the term governance is  often used synonymously with  the term  government, it  tends  rather  to be  used to describe  the  proves   and  systems  by  which a government or   governor   operates.   The term government and governor describe the institutions and people involved. It is often use

by corporate organizations to describe the manner in which a corporation is directed and laws and customs supplying to that directions.

Efficiency:

According to Collins dictionary the term efficiency is defined as being capable,  able to perform duties well, competent. Privatization:

This   means   a shift   of   individuals involvement   from the whole   to the part   that is from public   action to private concerns.

Executive Director:

A director involved in the day- to- day management and / or in the full time employ of the company, or any of its subsidiaries (king II).

Non – Executive  Director : A director  not  involved      in the day  to day  management of the company and  not  a full time salaried employee of the company or  any of  its subsidiaries. Non – Executive Independent Directors:

Directors  who  do not represent  any particular shareholder interest  and    hold  no  special  business interest  with the bank and are appointed by the bank on merit (CBN, 2006).

Also    defined    by the banker’s    committee as    such director who has other relationship with management which could materially  interfere  with the exercise of  no significant financial or   personal   management, he is   free from any business  or  his/ her  independent  judgment, and  receives no compensation from institution   other   than directors remuneration or  shareholders dividends.

King   II defined  a non- executive  director as  director  who is not a representative  of  a shareholder  and  who has not been employed  by the company in any  executive   capacity for the preceding    three  financial    years  and    has  no  significant contractual relationship or  interest in the company or group. The new code/ CBN code of corporate governance. This   work recognizes code of corporate governance in Nigerian banks in the post consolidation period by central bank of Nigeria as the new code.

Shadow Directors: Individuals   who   are not directors   but who instruct, direct and guide  the  directors in their decision making. They work at the background while the directors are at the forefront (Aniemena, 2005).

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