Corporate Governance and Financial Performance of Listed Deposit Money Banks in Nigeria

Good corporate governance practice is required for effective management of organizational resources particularly in banking industry where there is management/shareholders separation. Since the introduction of corporate governance code after the CBN consolidation exercise in 2005, corporate governance has attracted an unprecedented attention of researchers. However, efforts aimed at improving corporate governance practice in Nigerian banking industry are yet to yield the desired result. It is against this basis that the study examines the impact of corporate governance on the financial performance of all listed deposit money banks in Nigeria for a period of seven (7) years (after consolidation). Data for the study were quantitatively retrieved from the annual reports and accounts of the studied banks. Regression analysis was used to analyze the data and it was found that larger board size contributes positively and significantly to the financial performance of deposit money banks in Nigeria. The study however, recommends among others that banks should increase their board size but within the maximum limit set by the code of corporate governance.


Introduction
Corporate governance has become a topical issue which has attracted the attention of academic scholars and practitioners. Revelations of corporate fraud all over the world in the past years have clearly shaken investors' confidence and historical antecedents in financial practices have indicated that financial crisis is the direct consequence of poor corporate governance [1]. For instance, the Enron saga and the crash of sub-prime mortgage institutions which led to the last global financial crisis. These problems transferred to other parts of the world through globalization which makes countries of the world to be interconnected as a result of trade liberalization and advancement in technology (telecommunication and transportation).
Africa particularly Nigeria had its own share of the contagious financial crises. In the recent past, financial institutions in Nigeria witnessed untold financial distress in which banks that were considered healthy by investors happened to be the most distressed. This made the Securities and Exchange Commission (SEC) in 2003 to posit that, the financial sector attracted poor corporate governance as a result of the fact that about 40% of companies including banks quoted in the exchange had recognized code of corporate governance. Subsequently, in 2003, the Nigerian Securities and Exchange Commission rolled out a code of best practices on corporate governance for all public quoted companies.
The banking sector crisis remained a subject of concern because of its role in facilitating and stimulating economic development. This however made the apex bank (CBN) to take a bold step in revitalizing the banking sector through the stipulation of N25 billion naira capital bases for all banks in Nigeria. This led to the emergence of 25 commercial banks in Nigeria as 31 st December, 2005. In 2006, the Central bank of Nigeria issued a code of corporate governance to complement the existing one and the provisions of the new code were said to be indispensable in achieving viable and successful banking practice.
Since the issuance of the code of corporate governance by the CBN, efforts have been made to evaluate its impact on the performance of banks. From empirical perspective, efforts aimed at studying the impact of corporate governance among scholars have yielded varying outcome where a consensus is yet to be reached. This led to continuous study in the area of corporate governance and the performance of banks in the post consolidation era. Most of the resent post consolidation studies on corporate governance and bank performance covered five years period with some of them using primary data. Majority of those that used secondary data have either used statistical package for social sciences (SPSS) as analytical software or covered less than the listed banks, example of studies in this category are [2][3][4][5]. There is therefore the need to increase the number of years of study, the sample size and to use different statistical software so as increase the reliability of findings. It is based on this vacuum created by previous studies that this study intends to fill.
The thrust of this study therefore is to examine the impact of corporate governance on the performance of Nigerian banks after consolidation.

Corporate governance
According to the Central Bank of Nigeria (CBN) code of corporate governance for banks and other financial institutions in Nigeria, corporate governance is the process by which the business activities of an institution are directed and managed. Adeusi et al. [6], explained that corporate governance is a set of rules and incentives through which the management of an organization is being directed and controlled. However, Lemo [7] emphasized that corporate governance consists of body of rules of the game by which companies are managed. This view was extended by Demaki [8] that, corporate governance is an institutional arrangement that checks the excesses of controlling managers. The whole essence of corporate governance according to Kajola [9] is to ensure that the business is run well and investors receive a fair return. A firm is said to have observed corporate governance rule if the firm is managed with diligence, transparency, responsibility and accountability aimed at maximizing shareholders' wealth [10]. Akinsulire [11] explained that, corporate governance is a term which covers the general mechanisms by which management is led to act in the best interest of the company owners. Corporate performance according to Adegbemi et al. [3] is an important concept which relates to the ways and manners in which the resources (human, machine, finance) of an institution are effectively used to achieve the overall corporate objective of an organization. What keeps an organization in business is simply its ability of judiciously use its available resources and make sure that the providers of economic resources and its managers mutually benefit from the use of the resources.
Though there exist different views about how scholars integrate the concept of governance but, however, at the end, they tend to point toward the same direction which is to ensure the well-being of the owners of organizations. A wider or broader rather than a narrow view of corporate governance should be adopted in the banking sector because of the peculiar contractual nature of banking which requires the extension of corporate governance benefit to depositors [4]. This broader view makes a lot of sense because apart from using owners' found in business transactions, money deposited by depositors are also used for business investment purposes, hence the need for broader view.

Review of related empirical studies
Generally studies which examine the relationship between corporate governance and firm performance can be grouped into two. The first group relates to examination of the relationship between corporate governance variables and some performance indicators across firms in various industries. This area is largely dominated by the studies of [6,8,12,13]. The second group consists of cross-sectional analysis which analyses specific governance variables or proxies against selected performance measures in a given industry such as banking over a period of time. Quite a large number of studies in this second category have been carried out some of which are found relevant to this research.

Board size and financial performance
Ajola et al. [4] studied the effect of corporate governance on the performance of Nigerian banking sector using the Pearson Correlation and Regression to analyze the relationship between corporate governance variables and banks' performance and found that a negative but significant relationship exist between board size and the financial performance of the selected banks covering a period of five years. Bawa and Lubabah [2] examined corporate governance and financial performance of banks on twelve banks in Nigeria covering a period of five years (2006-2010) and found negative relationship between board size and profitability of banks.
However, the study carried out by Akpan and Rima [5] on eleven (11) selected banks in Nigeria using linear regression analysis arrived at a conclusion which also tallies with the finding of Asuagwu [14], that smaller board size positively and significantly enhance performance and Yoshikawa and Phan [15] added that larger board size increases agency cost.
Mansi and Reeb [16] argued that larger board is better than smaller board size in that larger board size have the ability to push the managers to track lower cost of debt because creditors believe that such firms are more effective monitors of accounting process. This position is in consonance with the findings of Adeusi et al. [6] who also examined the effect of board size on the performance of ten selected banks for a period of six years (2005-2010) using econometric model of linear regression and found that increasing number of board size increases the performance of banks. The findings of Prakash and Martin (ND) on a study of corporate governance and efficiency in Nepalese commercial banks revealed that bigger board size lead to efficiency in commercial banks.

Board composition and financial performance
Weisbach, Hermalin and Weisbach [12], posited that the proposition of board composition is to help reduce agency problem. From this position, a positive relationship is expected between firm performance and the proportion of outside directors sitting on the board. Conflicting empirical evidence has evolved with respect to board composition in the recent past.
There exist mixed results from empirical studies on the effects of board composition and performance. Kajola [9] examined corporate governance and firm performance on some Nigerian listed banks between 2000 and 2006 and found no significant relationship between board composition and firm performance. This outcome has also, the support of [2,6,12,17] who further added that the performance of banks tends to be worse when there are more external board members.
However, the findings of Prakash and Martin (n.d.) on twenty-nine (29) Nepalese banks for a period of six (6) via the use of regression analysis, shows that outside directors have positive and significant effect on the bank performance. This is also the position taken by Bawa and Lubabah [2] and Ezzamel and Watson [18]. The code of corporate governance emphasizes board composition that has qualitative, qualified, experienced members and people of proven integrity [2]. Benerd et al. [19] argued that the board of directors' ability to monitor and advise a firm depends on their influence, competence and experience. This will reduce fraud and increase performance.

Audit committee size and financial performance
Shareholders' interests are protected through the activities of audit committee because management may not always act in the interest of corporation's owners. Studies in favour of larger audit committee posited that when more people are involved in checking the activities of managers, wrongdoings will be reduced and performance will be enhanced. A number of studies which revealed positive relationship between audit committee size and firm performance include [20,21]. However, other researchers like [9,22] reported that there is no positive relationship between audit committee size and the performance of firms. From the foregoing, there exist a mixed reaction with respect to the relationship between audit committee size and firm performance. The position of Prakash and Martins make logical sense as the interest of shareholders can be protected by a number of individuals who will be difficult to manipulate especially when they are large in number.

Chief Executive Officer (CEO) duality and financial performance
When an organization is structured in a way that the Chief Executive Officer (CEO) also serves as the Chairman of the board of directors of the same firm, then there is duality in the function of the CEO [23]. Orwall and Gentile cited in Mansur and Bawa [2] posited that CEO duality does not encourage effective communication between the CEO and the board. In order to enhance performance therefore, CEO duality should be discouraged in its totality.
Though there is evidence that having independent Chairman still does not prevent misconduct and malpractices [24]. Studies which examined the relationship between CEO duality and performance include Daily and Dalton, cited in Mansur and Bawa [2] and Calligham [23] and they found significant relationship between CEO duality and firm performance while Rhoades, Rechner and Murthy [25] found no significant relationship in firms having executive duality and performance. Also, in the work of Yermeela, cited in Kajola [9], evidence from 452 sampled USA public firms revealed that agency problems are higher when the same person occupies the position of CEO as well as that of the Chairman of the board.
From the reviewed empirical studies on the effect of corporate governance on the performance of banks in Nigeria, scholars appear to have varying conclusions. The position of scholars that posited that larger board size influences performance makes logical sense. This is because when more individuals are brought into the board, it increases the managerial ability of the bank as divergent views that will lead to proper positioning of bank are brought to bear thereby contributing meaningfully to the organization. This study also takes side with scholars' position on increased non-executive members on the board but the level of competence and experience of these non-executives is also of utmost important. The significant positive relationship between audit committee and performance is also logical as that will protect the interest of the owner since manipulations will be difficult without collusion. Also CEO duality appears the best way for managing the activities of an organization because decision taken by one person can be challenged by another person thereby propelling the organization towards better performance.

Theoretical framework
Smith was the earliest known economist that addressed the theoretical issues of the role of board of directors in the governance of firms [14]. Smith further observed that as a result of the fact that managers control resources other than theirs, it should not be expected that they will watch over the business with anxious vigilance as possibility of negligence abound. Negligence is the direct consequence of the separation of ownership from control which is very common in Modern Corporation [12]. The need to explain the theoretical framework within which the owners' and managers' relationship exist becomes indispensable.
Theories which are used to explain corporate governance and firm performance include and not limited to the following: The stewardship theory: Donaldson and Davis, cited in Akingunola et al. [1], explained that managers are good stewards who diligently work to attain high level of profit and shareholders' returns. This theory is based on the assumption that managers are motivated by achievement. Non-executive directors on the board serve this purpose better.

The stakeholder's theory:
This theory states that the firm is a system of stakeholders operating within a larger system of the society which provides the required legal and market infrastructure for the firm to thrive. The purpose of the firm in this case is to serve the general public who may have direct or indirect relationship with the firm. The management and the provision of information should be directed at satisfying the interest of the general public rather than shareholders.
Agency theory: This theory sees shareholders as the principals and management as their agents. Sanda et al. [12] explained further that the presence of information asymmetry can make agents to pursue interest that may be detrimental to the interest of the principal. The process of aligning these two interests can ignite conflict between the interest groups. In agency theory unlike stakeholder theory managers only optimize principal's objective rather optimizing multiple objectives.
From the foregoing, agency theory practically explains corporate governance and firm performance especially in the banking sector where the basic tenet of corporate governance is to protect the interests of absentee owners (shareholders) who are also the principal of the management (agents). On the basis, this study adopts agency theory alongside [1,12,14] as the theoretical basis for explaining corporate governance and bank performance.

Research design
This study employs ex-post facto research design using panel data for the periods under study (2006-2012) as it allows for the collection of past and multi-dimensional data which provide basis for the full establishment of the relationship between corporate governance and the financial performance of banks in Nigeria.

Population and sample size
The study uses all the banks that scale through the Central Bank of Nigeria (CBN) consolidation exercise which ended on the 31 st December, 2005. These banks were so used because they were considered viable and were seen to have the required financial wherewithal to carry on banking business in Nigeria. Also, the CBN code of corporate governance which regulates the operating activities of the consolidated banks was issued shortly after consolidation in 2006. As at December, 2005 (year of consolidation), only twenty five (25) banks emerged as most healthy banks in Nigeria. Table 1 therefore, shows the list of those banks.
From the above listed banks, a working population was drawn base on certain criterion. The criterion used in selecting the working population was based on the listing status of the banks on the Nigeria stock exchange. This is because only listed banks can be termed public banks (Plc.) which are also expected to comply fully with the requirements of CBN code of corporate governance. Also, being listed enabled the researcher to have access to the banks' annual reports. The working population of this study consists of fifteen listed banks. However, these banks are also taken as the sample size of the study. This is done to; apart from the fact that the required data for all the aforestated banks are available, provide wider range of generalizing the findings as previous studies in this area covered fewer banks. Functionally, wp = n, where wp equals working population and 'n' equals sample size. Bawa and Lubabah [2], also used working population as sample size in their study.

Variables specification and measurements
There are two basic variables used in this study. They are corporate governance (independent) and financial performance (dependent) variables respectively.

Dependent variable and its measurement
The dependent variable used in this study is the performance of banks which the researcher proxied by; Return on asset (ROA) measured by dividing the netprofit after tax by the total assets to examine how productive the banks' assets have been used to generate wealth. This method of measurement is in line with the work of Akpan [5].

Independent variable and its measurement
Corporate governance is the independent variable with the following proxies and measurements.

Board size (BS):
This is the total number of directors sitting on the board of a particular bank which in line with the code of corporate governance should not be more than 20. This study examines the extent to which bank performance will be affected by the size of the board.

Board composition (BC):
This is the number of non-executive directors on the board and it is measured by the percentage of outside directors (non-executive directors) on the total board members.
CEO duality (CD): CEO duality exists when a single person holds both the position of chairman and MD/CEO of the company. For banks with CEO as the chairman, a one (1) value is assigned and zero (o) otherwise [12].

Audit committee (AC):
This is taken as the total number of members in the audit committee. It is expected that the higher the number though within the limit set by code of corporate governance, the better the performance [26].

Control variable
Firm size (FS) is used as the control variable which is measured by the total value of each bank's assets. Because the values for total assets were too large for the regression analysis, then log of the assets was used to reduce the values. This control variable was introduced because of the notion that performance may also be affected by other factors not captured in the independent variables in which firm size is one [6].

Method of data collection and data analysis
The data used in this research were generated from the audited annual financial statements of the 15 banks under study covering a period of 7 years (2006-2012). This method of data collection was adopted because of the availability of data, convenience as well as the nature of the research design which required past and documented facts as basis for performance evaluation. This study used regression analysis in measuring the collected data via statistical software 'stata version 11' to examine the relationship between the identified variables andto confirm the viability of previous findings.

Model specification
This study adopts and modifies the econometric model used by Adeusi et al. [6] which is given as follows: Where: Y it represents bank performance variable; Return on Assets (ROA) for bank in time t, a 0 is the constant term, CG it is a vector of corporate governance variables; Board Size (BS), Board Composition (BC), CEO duality (CD), Audit committee (AC), C it is a vector of control variable 'Size of the firm' (FS) and e it , is the error term. The model is modified thus; ROA it = a 0 + β 1 BS it + β 2 BC it + β 3 CD it + β 4 AC it + β 5 FS it + e it

Data Analysis and Discussion
The data sets are summarized in Table 1 below, which provides the

S. No
Name of Banks summary statistics. The correlation matrix between the variables is also provided in Tables 2 and 3.
Of the 15 banks studied, the mean board size is about fourteen (14) which suggests that banks in Nigeria have relatively moderate board sizes as the mean value 14 is greater than the average of the maximum number of board size of 20. Also, with a maximum board size of twenty (20) and standard deviation of 2.47319, it implies that banks in Nigeria have relatively similar board sizes. The mean description for board composition is high compare to the maximum board composition suggesting that the ratio of outside directors to the total number of directors in Nigerian banks is very high. Generally, the summary for the standard deviation reveals that factors that influence performance are evenly distributed across all the banks. However CEO duality will be omitted from subsequent analyses because of lack of collinearity (Table 4).
There is no high correlation among the determinant variables used in measuring return on asset which shows that the predictive ability of each of the combined independent variables are different (Table 5).
Multi-collinearity exists when the predictor variables are themselves highly correlated. If the variables have VIF of above 10 and TV less than 0.10, then there is a strong indication of the existence of excess correlation, Gujarati. With the above values of VIF, all of which are less than 10 and the values of TV which are also more than 0.10, there is therefore absence of multi-collinearity ( Table 6).
The regression results presented in Table 3 above show that both board composition and firm size are negatively and insignificantly related to the performance of banks. However, audit committee has positive but insignificant relationship with performance.
Board size is positive and significant at 5 per cent on bank performance. The result indicates that increase in board size would increase the performance of the banks. The R 2 of 0.0608 suggests that the independent variables used can only account for about 6% of the banks' performance while other factors and variables not included in this study account for the remaining percentage.
From The above regression result, it shows that increase in board size would increase the performance of the banks. This result therefore takes side with studies that support the view that larger board size is better for corporate performance than smaller board size because in larger board, members have a wide range of expertise to help make better decisions and are also difficult for a powerful CEO to dominate.
The finding of this study is consistent with the findings of Adeusi [6] who all found bigger board size better than smaller board size in terms of contribution to performance of banks. This study therefore, does not support the views of [4,5,14,27] who all concluded that smaller board size contributes more to performance than larger board size [28][29][30].

Conclusion and Recommendation
The relationship between corporate governance and the financial performance of listed deposit money banks in Nigeria from 2006 to 2012 has been explored using data collected from the financial statements of all the fifteen listed (15) deposit money banks in the Nigerian stock exchange and it was discovered that bigger board size contributes more to performance than smaller board size. Also, when a board size is large, it will be difficult for a person (may be CEO) to dominate the board and decisions reached by the board are seen to have emanated from sound and constructive arguments. The result of the summary statistics revealed that the proportion of non-executive director serving in the boards of banks are high and this is in compliance with the specification of corporate governance code which specifies that the number of non-executive directors should be higher than the executive directors. Of to continue to enjoy the advantage of larger board size, efforts should be directed at bringing on board those with relevant credentials, competence and wide range of experience.
Sequel to the findings of this study, it is recommended that the size of the board (membership) should be increased but not exceeding the maximum number specified by the code of corporate governance for banks.  Source: generated from the financial statements of the studied banks using stata (version 11) Source: generated from the financial statements of the studied banks using stata (version 11) Source: generated from the financial statements of the studied banks using stata (version 11) R 2 = 0.0608 Source: Generated from the financial statements of the studied banks using stata (version 11) Table 6: Regression Result.