CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The growing number of high-profile corporate failures around the world has prompted considerable enquiry into why well-established and respected companies collapse. Corporate failure is today a global issue. On the international scene, we have seen the collapse of large companies such as Enron, WorldCom, Xerox, Parmalat and the Bank of Credit and Commerce International (BCCI), as well as the large-scale crisis that shook financial institutions in Asia. Comparative studies of such cases point to a common cluster of causes: ineffective boards, weak governance and control mechanisms, distorted incentive schemes, accounting irregularities, failures of auditors, and dominant chief executives (Soltani, 2014). Enron and Parmalat in particular are widely cited as cases in which management made the companies look healthier than they were, with the weaknesses in governance only becoming visible after collapse (Dibra, 2016).

In Nigeria, corporate failure has been rampant in the financial services sector, both in the past and at present. Cases of corporate collapse include Abacus Merchant Bank Nigeria Limited, Royal Merchant Bank Limited, Rims Merchant Bank Limited, Financial Merchant Bank Nigeria Limited and Progress Bank Plc, to mention only a few. It has been reported that by 1998 a total of 26 banks had been liquidated, and that by the time of the 2005 consolidation, eleven banks were already dead for practical purposes. The consolidation exercise itself, and the wider chronology of banking reforms that preceded it, have been well documented (Dogarawa, 2011). Outside the banking industry, creative accounting at African Petroleum, where debts in excess of N20 billion were concealed, and the overvaluation of shares in the case of Bonkolans Securities, among others, signalled impending trouble for those companies. This raises the question of what causes corporate failure in local and international, listed and unlisted, quoted and unquoted, public and private companies.

Studies of failed companies have identified a number of common characteristics. These are:

• leadership of the company vested in one individual who combines the offices of chairman and chief executive and has domineering tendencies;
• persistent violation of, and non-compliance with, the company's internal controls by the chief executive;
• optimistic or even distorted, rather than prudent, financial reporting;
• irregular board meetings, often held without adequate advance information; and
• minimal disclosure in the company's accounts.

These features echo the findings of the comparative literature (Soltani, 2014), and recent Nigerian evidence on listed deposit money banks is consistent with them. Otekunrin, Doorasamy, Wright, Aregbesola and Omojola (2024), using data for 2012 to 2019, found that CEO duality was negatively and significantly related to bank financial performance, while board independence, audit committee independence, board size and the frequency of board meetings were each positively and significantly related to it. It is the combination of such factors that weakens the ability of companies to withstand economic downturns and leads to collapse.

In the Nigerian banking industry, a lack of probity, transparency, integrity and accountability, the inflation of balance sheets with unearned income, weak capital bases, and unskilled and inefficient management have contributed to the death of many banks. The earliest failures among indigenous banks have likewise been traced to mismanagement and unprofessional practices (Obienusi & Obienusi, 2015). These are the problems that present-day legislation must confront, since the provisions of earlier years proved inadequate.

This raises the question of how adequate bank legislation is for controlling and regulating banking practice in the industry. The question is pertinent because, in spite of existing legislation, a number of failures and instances of distress have been recorded. In an attempt to design codes capable of curbing these irregularities, a global phenomenon termed "corporate governance" came into being. It has become a contemporary issue that dominates the interest of business, legal and government circles worldwide. In Nigeria, the provisions of the code of corporate governance were designed to supplement the Companies and Allied Matters Act 1990 (CAMA), the Banks and Other Financial Institutions Act (BOFIA) 2004, the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act 2004, the Nigeria Deposit Insurance Corporation Act 2006, the Money Laundering (Prohibition) Act 2004, the Economic and Financial Crimes Commission (Establishment) Act 2004, the Prudential Guidelines, and other relevant banking codes and prudential guidelines for deposit money banks in Nigeria.

The code itself has continued to evolve. The Central Bank of Nigeria issued its first Code of Corporate Governance for Banks after the consolidation programme, and it became effective in April 2006 because governance mechanisms in banks were notably weak (CBN, 2014). That code was revised in May 2014 as the Code of Corporate Governance for Banks and Discount Houses, together with Guidelines for Whistle Blowing (CBN, 2014). More recently, the CBN issued new corporate governance guidelines for commercial, merchant, non-interest and payment service banks, effective 1 August 2023, which supersede its earlier codes and circulars on the subject (CBN, 2023; PwC Nigeria, 2023). The period covered by this study is nevertheless the post-consolidation era governed by the 2006 code.

1.2 Statement of the Problem

Since the emergence of the first indigenous banks in the late 1920s, banks in Nigeria have experienced a series of systemic distresses and failures. The collapse has been particularly marked among indigenously owned banks, whereas the foreign banks established in the colonial period have all survived the turbulence of the Nigerian economy. Examples of banks of foreign origin are the Bank of British West Africa (BBWA), now First Bank of Nigeria Plc; Barclays Bank, now Union Bank Plc; and the British and French Bank of Commerce and Industry, later United Bank for Africa, established in 1894, 1925 and 1948 respectively. By one historical account, 21 of the 24 indigenous banks established up to 1954 failed, largely through self-liquidation, leaving depositors in hardship and confidence in the ability of Nigerians to manage banks badly shaken (Obienusi & Obienusi, 2015).

The question is why more indigenous banks failed despite the recommendations of the 1958 Paton inquiry, the bank deregulation induced by the Structural Adjustment Programme (SAP), the BOFIA of 2004 and other related regulatory policies. Fraud and unethical practices have been put forward as the main reasons behind the collapse of these banks. Persistent fraud and unethical conduct are in turn indicators of weak corporate governance.

Weak corporate governance has been a many-sided problem for the industry ever since indigenous banking emerged. Many remedies have failed to strengthen integrity and establish ethical practice. Poor banking cultures, lax ethical practices, concentrated ownership (although this was practically addressed by consolidation) and incompetent management all culminate in weak corporate governance. Recent legal scholarship argues that the CBN is statutorily the right regulator but functionally a poor enforcer of corporate governance in the banking sector, and that the industry has passed through two major waves of crisis, the first in the 1990s and the second after the consolidation, which suggests that something is wrong with the governance architecture of the industry (Imaekhai, 2017). Weak corporate governance is the most disturbing issue in the banking industry today. Following the N25 billion recapitalization exercise of the Central Bank of Nigeria, new mega banks have emerged, and these pose still greater challenges for corporate governance because the failure of a large bank could cause systemic problems.

The tension is high because failure of the industry is tantamount to collapse of the entire economy, the banking industry being the driver of the economy. The failure of the industry could also damage the perception of Nigerian banking among the public and international investors.

The distribution of the wealth that banks create is a central governance concern. Evidence from the post-consolidation period suggests that the interests of stakeholders (shareholders, employees, business contacts, depositors and government) conflict, and that the interests of shareholders in particular fare differently from those of the other groups (Yahaya & Salaudeen, 2017). The issue remains live: the value-added statements of the larger Nigerian banks for 2024 show that, although banks paid out a record N951 billion in dividends, government collected about N1.166 trillion in taxes, more than shareholders received (Aja, 2025).

1.3 Objectives of the Study

The objectives of this study are:

(i) To determine the fairness of the returns given to the shareholders of Nigerian banks.

(ii) To carry out a comparative study of how value added is distributed among the various stakeholders.

(iii) To compare the returns given to the shareholders of banks with those given to the shareholders of other industries, so as to establish fairness.

1.4 Research Questions

The research questions for this study are simple ones that address the key issues in the distribution of wealth to the various stakeholders, with particular emphasis on shareholders.

(i) How equitable are the returns given to the shareholders of Nigerian banks over the years?

(ii) How equitable is the distribution of value added among the various stakeholders?

(iii) How equitable are the returns given to the shareholders of banks compared with those given to the shareholders of other industries?

1.5 Research Hypotheses

The hypotheses of this study, stated in null form, are as follows:

(i) H0: Profit earned by the commercial bank is not related to the amount of dividend paid to shareholders.

(ii) H0: Value added by the commercial bank is not related to the amount distributed to the various stakeholders.

(iii) H0: Returns given to shareholders in commercial banks are not the same as those given to shareholders in other industries.

1.6 Significance of the Study

Corporate governance in Nigerian banks is a pertinent issue, especially in the post-consolidation period in which mega banks have emerged and strict compliance with the code is mandatory as a shield against persistent systemic distress. Sound corporate governance is not an end in itself but a means. It is not about strictly policing managers, who are the agents of the company; the bottom line is superior corporate performance at a reasonable cost. Recent evidence supports this view, linking stronger boards and audit committees to better bank performance (Otekunrin et al., 2024). This study celebrates the spirit of corporate governance rather than its letter.

When managers and board members understand the relevance of their positions to the promotion of corporate governance, enforcement of the code becomes easier. In particular:

(a) A study such as this will go a long way towards appraising and consolidating the revised code of corporate governance for banks in the post-consolidation period.

(b) This study will positively change the banking attitude of Nigerians and improve the international perception of Nigerian banks.

(c) The whole width and depth of corporate governance will be examined in this study.

1.7 Scope of the Study

This study will examine the colonial and post-colonial periods and the present time, in order to establish the challenges and practices of corporate governance in Nigerian banks.

The study will draw its conclusions from a five-year comparative analysis of a sample drawn from Nigerian banks. The criteria for selection will be discussed in Chapter Three.

In answering the research questions, this study will not employ a judgmental approach. Instead, it will adopt a more pragmatic approach based on financial and situational analysis.

1.8 Limitations of the Study

Corporate governance in Nigeria is a contemporary issue in the industry and, as such, not much has been written about it from the Nigerian perspective, so sourcing relevant literature was an onerous task.

A more thorough analysis of the subject matter requires the availability of undiluted financial and non-financial details about the industry. In the Nigerian case, banks are known to misrepresent facts and figures in order to conceal abuses and unprofessional practices that exist in some of them, a concern consistent with the accounting irregularities that characterize corporate failures elsewhere (Soltani, 2014). Total reliance on published figures may therefore limit the optimism that can be placed in the results of the research.

Time constraints and financial bottlenecks were also important limiting factors for this research.

1.9 Operational Definition of Terms

Executive Director: A director who is involved in the day-to-day management of the company and/or is a full-time employee of the company or any of its subsidiaries.

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

Non-Executive Independent Director: A director who does not represent the interest of any particular shareholder, holds no special business interest with the bank, and is appointed by the bank on merit (CBN, 2014). The Bankers' Committee similarly describes such directors as having no significant financial or personal ties to management, being free from any business or other relationship with management that could materially interfere with the exercise of independent judgment, and receiving no compensation from the institution other than directors' remuneration or shareholders' dividends. Under the South African King II code, a non-executive director is one who does not represent a shareholder, has not been employed by the company in an executive capacity during the preceding three financial years, and has no significant contractual relationship or interest in the company or group.

Extended Family: Members of the nuclear family, comprising the husband and wife, siblings and parents.

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

The New Code/CBN Code of Corporate Governance: In this thesis, the code of corporate governance for Nigerian banks released by the Central Bank of Nigeria for the post-consolidation period is referred to as the new code.

REFERENCES

Aja, I. (2025, April 23). Government earned N1.2 trillion from Nigerian banks in 2024, more than shareholders. Nairametrics. https://nairametrics.com/2025/04/23/government-earned-n1-2-trillion-from-nigerian-banks-in-2024-more-than-shareholders

Central Bank of Nigeria. (2014). Code of corporate governance for banks and discount houses in Nigeria and guidelines for whistle blowing in the Nigerian banking industry (Circular FPR/DIR/CIR/GEN/01/004). Central Bank of Nigeria.

Central Bank of Nigeria. (2023). Corporate governance guidelines for commercial, merchant, non-interest and payment service banks in Nigeria (Circular FPR/DIR/PUB/CIR/001/078; effective 1 August 2023). Central Bank of Nigeria.

Dibra, R. (2016). Corporate governance failure: The case of Enron and Parmalat. European Scientific Journal, 12(16), 283. https://doi.org/10.19044/esj.2016.v12n16p283

Dogarawa, A. B. (2011). Chronology of banking reforms in Nigeria. Journal of Financial Regulation and Compliance, 19(4), 370–382.

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Otekunrin, A. O., Doorasamy, M., Wright, O., Aregbesola, O. D., & Omojola, S. (2024). Financial performance of Nigerian deposit money banks and corporate governance. Banks and Bank Systems, 19(2), 152–160. https://doi.org/10.21511/bbs.19(2).2024.12

PwC Nigeria. (2023, August). CBN's 2023 corporate governance guidelines: Summary of key changes. https://www.pwc.com/ng/en/publications/cbn-corporate-governance-guidelines.html

Soltani, B. (2014). The anatomy of corporate fraud: A comparative analysis of high profile American and European corporate scandals. Journal of Business Ethics, 120(2), 251–274. https://doi.org/10.1007/s10551-013-1660-z

Yahaya, K. A., & Salaudeen, S. K. (2017). Impact of bank reform on the quality of financial statement of selected Nigerian banks. Journal of Public Administration, Finance and Law, (11).