1.1 Background to the Study
From time immemorial, there wasn’t any need for corporate governance due to the fact that business institutions were owned and managed by their sole owners. In recent times, the owners have employed professionals to manage and direct the affairs of their institutions in anticipation of giving account of their stewardship. The issue of corporate governance has recently been given a great deal of attention in the global financial sector ensuring credibility, fairness and transparency in financial statement and protecting the interest of the owners. Corporate governance is one of the most critical issues in the financial industry across the globe. Failure of the industry in the past have made it important to promote good corporate. Corporate governance refers to the processes and structures by which the business and affairs of an institution are directed and managed in order to improve long–term shareholder value by enhancing corporate performance and accountability while taking into account the interest of the shareholders. The recent collapse of the stock market and uncovering of flagrant abuse of loans and perquisites in the banking sector and the Nigerian economy generally are enough to pose the question indeed of not corporate governance but actually its absence in this country.
The massive fraud and cooking of the books in companies, a notable example of which is Cadbury, not to mention insider dealings and compromised boards in many companies as well as spineless shareholders’ associations, audit committees and rubber stamp Annual General Meetings suggest the collapse of corporate governance in Nigeria (Oyebode,2009). The main reason for better practices in corporate governance can be traced to the UK when in the 1980s and 1990s, a number of companies unexpectedly collapsed (Bank of Credit, Commerce and Industry, the Mirror Group, Polly Peck Int’l and Barings Bank). In each case there appeared to be serious accounting and financial reporting irregularities and inadequate internal controls and risk management. In Nigeria, the mechanism of corporate governance are the Companies and Allied Matters Act 2004, Investment & Securities Act 2007, Securities and Exchange Commission 2011, Corporate Governance codes and various industry specific governance codes. (Osajie, 2014).
From a banking industry perspective, good corporate governance demands that banks will operate in a safe and sound manner, and will comply with applicable laws and regulations and will protect the interests of depositors. Interestingly, not many Nigerian banks are noted for their strict observance of corporate governance, best practices and high ethical standards in their operations. (Wilson, 2006). Given the various activities that have affected the efforts of banks to comply with various consolidation policies and the antecedents of some operators in the system, there are concerns on the need to strengthen corporate governance in banks. This will boost public confidence and ensure efficient and effective functioning of the banking system (Soludo, 2004). In line with these changes, the fact remains unchanged that there is need for countries to have sound resilient banking systems with good corporate governance (Uwuigbe, 2011). In developing economies, the banking sector and other sectors have also witnessed several cases of collapses, some of which include the Alpha Merchant Bank Ltd, Savannah Bank, Societe Generale Bank Ltd (all in Nigeria), The Continental Bank of Kenya Ltd, Capital Finance Ltd, Consolidated Bank of Kenya Ltd and Trust Bank of Kenya among others (Akpan, 2007).
Poor corporate governance was identified as one of the major factors in virtually all known instances of financial distress in Nigeria. It was because of this that 13-point agenda was introduced during the banking sector consolidation in 2004 thereby enforcing a new code of corporate governance for banks. The emergence of mega banks in the post consolidation era task the skills and competencies of boards and management in improving shareholder values against other stakeholder interests in a competitive environment. The aim of this study is to critically examine what corporate governance is, its mechanisms, measures of corporate performance in banks as well as the relationship between corporate performance and corporate governance.