CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Corporate governance has been of concern since the foundation of the joint-stock
company. Much of this concern focused on the separation of ownership from control. Adam
Smith (1776) expresses unease over separation of ownership and control; and subsequently
explored by Ross (1973) and Davis et al. (1997). However, recent discussion and interest in
corporate governance stems from issues relating to financial crises and high profile corporate
scandals. The most recent of such scandals are the Enron and the WorldCom saga in the United
States, the Vivendi and the Parmalat scandals in Europe.
Globalization and technological advancement also provide challenges for corporate
governance structure. Good corporate governance is necessary to facilitate effective firms‟
management in the current global and dynamic environment. Moreover, good corporate
governance is necessitated by the need for accountability due to deregulation and lesser
governmental control. Good corporate governance promotes economic growth and development.
The benefits of good corporate governance practices to a firm, among others, include: facilitating
greater access to finance, lower cost of capital, better performance and favourable treatment of
stakeholders (Claessens et al., 2002); promoting better disclosure in business reporting, thereby
facilitating greater market liquidity and capital formation (Frost et al., 2002); and increasing firm
valuations and boast profitability (Gompers et al., 2003). Nigeria had its share of inelegant
business practices that have resulted in failed corporate firms. Hence, several insurance
companies in Nigeria have gone out of business; while some have been acquired or merged due
to poor performance, following poor corporate governance practices. For a developing country,
like Nigeria, corporate governance is of critical importance.
Recently, Nigeria has initiated pillars of corporate governance by sponsoring a series of
legislative, economic and financial reforms which seek to promote transparency, accountability
and the rule of law in the nation‟s economy. Consequently, corporate governance is relevant in
insurance companies, as it promotes accountability, enhances transparency of operations,
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improves firm‟s profitability, protects stakeholders‟ interest by aligning their interest with that of
the managers, and facilitates growth of the insurance industry.
Corporate governance could be defined as “ways of bringing the interests of investors
and managers into line and ensuring that firms are run for the benefit of investors (Mayer, 1997).
Corporate governance is concerned with the relationship between the internal governance
mechanisms of corporations and society‟s conception of the scope of corporate accountability
(Deakin and Hughes, 1997). It has also been defined by Keasey et al. (1997) to include „the
structures, processes, cultures and systems that engender the successful operation of
organizations‟. From the foregoing analysis, we argue that corporate governance is represented
by the structures and processes laid down by a corporate entity to minimize the extent of agency
problems as a result of separation between ownership and control. It must also be indicated that
different systems of corporate governance will embody what are considered to be legitimate lines
of accountability by defining the nature of the relationship between the company and key
corporate constituencies.
The cost inherent in the agency problem can be reduced by investments in monitoring
and the structuring of relationships such that agents are induced to act in the interest of the
principals without a need for further monitoring such as offering bonuses and inducing them to
monitor each other. Another way is the payment of stock options as this aligns more closely with
the interest of the agents (Jensen & Meckling, 1976).
The Nigerian financial sector has experienced many changes over the last two decades
which included bank distress and reforms of major financial institutions. The radical changes in
financial developments in 1987 brought about by the structural adjustment programme of 1986
did not prevent bank crisis. The said innovations of the CBN in 1986 has not been able to
provide enough backbone for the financial industry as reflected by the down turn in the events of
late 1980s which were characterized by the unprecedented level of distress as depicted by large
volume of non-performing loans, insolvency, liquidity problem and default in meeting depositors
and inter-bank obligations. This poor state of the banking sector was exposed in 1989 with the
government directive to withdraw the deposits of governments and other public sector
institutions from banks to CBN. Thus, bank distress became obvious and increased from 7 in
1989 to a peak of 60 in 1995 while the amount required for recapitalization of distressed banks
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increased from N1.1 billion in 1989 to N30.5 billion in 1995, N43.9 billion in 1996 while
peaking at N98.1 billion in 2004. Non-performing loans for the distress banks increased from
N2.9 billion to N29.5 billion in 1994 and 1995, and increased further to N40.7 billion in 1997
while peaking at N149.6 billion in 2004 (Okpara, 2012)
1.2 STATEMENT OF THE PROBLEM
The issue of corporate governance in Nigeria was as a result of the financial crisis that
happen and the collapse of firms across the globe including Nigeria. As a result the federal
government issues a code of corporate governance in 2006, 2007, 2008 since that time banks are
still collapsing. Against this background this study wants to review the challenges and issues
surrounding practicing of effective corporate governance by banks in Nigeria. The study will
find out the reasons for these challenges facing the banks which are resulting to lack of corporate
governance in Nigeria. Thus, there are multiple code of corporate governance in Nigeria such as
2006, 2007, 2008 issued by CBN and SEC, still most of our banks are still collapsing so what are
the challenges facing corporate governance in order to practice effective corporate governance.
1.3 OBJECTIVE OF THE STUDY
The primary aim of this research work is to ascertain the issues and challenges of
corporate governance of banks in Nigera. Thus, the study aims at the following objectives:
i. To encourage the issues of corporate governance in Nigeria.
ii. To ascertain the challenges of corporate governance of banks in Nigeria.
iii. To encourage the adoption of corporate governance in Nigeria.
1.4 RESEARCH QUESTIONS
1. What are the challenges and changes of corporate governance in the Nigerian banks?
2. Has Nigerian firms adopt the code of corporate governance issued by the security exchange
commission SEC.
1.5 STATEMENT OF HYPOTHESIS
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Ho There is a relationship between effective corporate governance and regulatory framework,
enforcement, transparency and disclosure of corporate governance practices.
HI There is a relationship between effective corporate governance and the role and responsibility
of the board of directors
1.6 SIGNIFICANCE OF THE STUDY
This study analyzes the issues and challenges of corporate governance of banks in
Nigeria. This research will help to understand the general practices of corporate governance in
Nigeria including the challenges and issues on Nigerian banks. This will also act as a guide for
the financial managers to design their optimum policy to maximize the market value of the bank
and minimize the agency cost.
1.7 SCOPE OF STUDY
The scope of this study research will however be limited to only some banks in the public
and private sector of our country. The study was set to determine the issues and challenges of
corporate governance of bamks in Nigeria.
1.8 Organization of the Study
Chapter One
Chapter One highlight the background information, statement of the research problem, research
questions, Objective of the study, Scope and limitations of the study, research hypothesis and
definition of terms.
Chapter Two
Chapter two focuses on the theoretical and conceptual framework relevant to the study. Related
literatures were also reviewed.
Chapter Three
Chapter three discuses the research methodology, design, population and sample size research
instruments, method of data collection and data collection technique.
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Chapter Four
Chapter Four deals with the analysis of data collected the presentation and interpretation of the
result.
Chapter Five
Chapter five is centred on the summary of major findings conclusion and recommendations from
the study.
1.9 DEFINITION OF TERM
1. Corporation:- This is a company or group of people authorized to act as a single entity
(legally a person) and recognized as such in law.
2. Organization: A group of people or other legal entities with an explicit purpose and written
rules.
3. Effective Corporate Governance: Reasonable assurance that the entity‟s operational objectives
are achieved, practice a good corporate governance, and applicable laws and regulations are
complied with.
4. Firms: This means a company or business partnership.
5. Issues: This means personal problems or difficulties.
6. challenges: It is defined as a call to someone to participate in a contest or fight to decide who
is superior.
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