CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The growing number of high-profile corporate failures around the world has prompted much enquiry into why well-established and respected companies collapse. Corporate failure is now a global issue. Internationally, we have seen the collapse of large companies such as Enron, WorldCom, Rank, Xerox and Parmalat, the failure of the Bank of Credit and Commerce International (BCCI), and the large-scale crisis that shook financial institutions in Asia. In Nigeria, corporate failure has been very common in the financial services sector, both some years ago and at present. Examples of corporate collapse include the deaths of Abacus Merchant Bank Nigeria Limited, Royal Merchant Bank Limited, Rims Merchant Bank Limited, Financial Merchant Bank Nigeria Limited and Progress Bank Plc, among others. It has been noted that by 1998 a total of 26 banks had been liquidated and that, by the time of the consolidation exercise in 2005, eleven banks were already dead in all but name. Outside the banking sector, the creative accounting at African Petroleum, whose concealed debts exceeded N20 billion, and the overvaluation of shares in the case of Bonkolans Securities, among others, were signs of impending collapse for those companies. This raises the question of what causes corporate failure in local and international, listed and unlisted, quoted and unquoted, and public and private companies.

It has been pointed out that companies that fail share certain common characteristics:

1. The leadership of the company is held by one individual who combines the offices of chairman and chief executive and has a domineering tendency.
2. The chief executive persistently violates or ignores the company's internal controls.
3. Financial reporting is optimistic, or even distorted, instead of prudent.
4. Board meetings are irregular, and directors are often not given adequate information beforehand.
5. The company's accounts disclose very little.

It is the combination of these factors that weakens a company's ability to withstand economic downturns and leads to collapse.

In the Nigerian banking industry, a lack of probity, transparency, integrity and accountability, balance sheets inflated with unearned income, weak capital bases, and unskilled and inefficient management also contributed to the death of many banks. The failures of the early indigenous banks have likewise been attributed to mismanagement and accounting incompetence. These are the problems that present-day legislation must combat, since the provisions of earlier years appeared to be adequate. Poor corporate governance has in fact been identified as the principal factor behind the failure of the Nigerian banking system in the past (Asogwa, 2016).

This raises the question of how adequate the legislation is for controlling and regulating banking practice in the industry. The question is pertinent because, despite existing laws, a number of failures and episodes of distress have been recorded. In an attempt to design codes suited to curbing these irregularities, a global phenomenon known as corporate governance emerged. It has now become a contemporary issue that has captured 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 of 1990 (CAMA), the Banks and Other Financial Institutions Act (BOFIA) of 2004, the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act of 2004, the Nigeria Deposit Insurance Corporation Act of 2006, the Money Laundering (Prohibition) Act of 2004, the Economic and Financial Crimes Commission (Establishment) Act of 2004, the Prudential Guidelines, and other relevant banking codes and prudential guidelines for deposit money banks in Nigeria (2010).

1.2 Statement of the Problem

Since the emergence of the first indigenous bank in 1927, banks in Nigeria have experienced a series of systemic distress episodes and failures. The collapse has been particularly marked among indigenous banks, while the foreign banks established in colonial days 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, which was established in 1894 (FBN Bank UK, n.d.); Barclays Bank, now Union Bank Plc, established in 1925 (Union Bank of Nigeria, n.d.); and the British and French Bank of Commerce and Industry, which later became United Bank for Africa, established in 1948. By 1952, the three foreign banks operating in Nigeria were the Bank of British West Africa, Barclays Bank and the British and French Bank, together with two indigenous banks (Federal Research Division, Library of Congress, n.d.).

Why, then, did so many more indigenous banks fail, despite the Paton recommendations of 1958, the bank deregulation induced by the Structural Adjustment Programme, BOFIA of 2004 and other related regulatory policies? Fraud and unethical practices have been cited as behind the collapse of these banks. Persistent fraud and unethical conduct are themselves indicators of weak corporate governance.

Weak corporate governance has been a many-headed problem for the industry since the emergence of indigenous banks. Many remedies have failed to strengthen integrity and establish ethical practice. In addition, poor banking culture, lax ethical practice, concentrated ownership (although the consolidation largely addressed this) and incompetent management combine to produce weak corporate governance, which is the most worrying issue in the banking industry today. The N25 billion recapitalisation exercise by the Central Bank of Nigeria produced new mega banks, which pose further challenges for corporate governance because the failure of a large bank can cause systemic problems.

The tension is high because the failure of the industry would be tantamount to the collapse of the whole economy, since the banking industry is the driver of the economy. Failures in the industry could damage the perception of Nigerian banking among the public and international investors.

1.3 Objectives of the Study

The objectives of this study are:

1. to determine the fairness of the returns given to shareholders of Nigerian banks;
2. to carry out a comparative study of how value added is distributed among the various stakeholders; and
3. to compare the returns given to shareholders of banks with those given to shareholders of other industries, in order to establish fairness.

1.4 Research Questions

The research questions for this study are simple ones that address the pointed issues in the distribution of wealth among stakeholders, with particular emphasis on shareholders:

1. How equitable have the returns given to shareholders of Nigerian banks been over the years?
2. How equitable is the distribution of value added among the various stakeholders?
3. How equitable are the returns given to shareholders of banks compared with those given to shareholders of other industries?

1.5 Research Hypotheses

The hypotheses of the study are as follows:

1. H0: The profit earned by a commercial bank is not related to the amount of dividend paid to shareholders.
2. H0: The value added by a commercial bank is not related to the amount distributed to the various stakeholders.
3. H0: The 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, when mega banks have emerged and strict compliance with the code is mandatory as a safeguard against persistent systemic distress. Sound corporate governance is a means, not an end in itself. 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. This study celebrates the spirit of corporate governance and not only its letter.

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

1. 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.
2. The study will positively change Nigerians' attitude towards banking and improve the international perception of Nigerian banks.
3. The full breadth and depth of corporate governance will be examined in this study.

1.7 Scope of the Study

The 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.

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

In answering the research questions, the study will not use 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 not much has been written on the topic from the Nigerian perspective, so sourcing relevant literature was an onerous task.

A more thorough analysis of the subject would require access to undiluted financial and non-financial information about the industry. In Nigeria, banks are known to misrepresent facts and figures in order to conceal abuses and unprofessional practices present in some of them. Total reliance on published information may therefore limit the prospects of obtaining optimistic results.

Time constraints and financial difficulties were also important limiting factors.

1.9 Operational Definition of Terms

Executive director: A director who is involved in the day-to-day management of the company, or who 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 any particular shareholder's interest, holds no special business interest with the bank, and is appointed by the bank on merit. The Bankers' Committee also defines such a director as one with no significant financial or personal ties to management, who is free from any business or other relationship with management that could materially interfere with the exercise of independent judgment, and who receives no compensation from the institution other than directors' remuneration or shareholders' dividends.

The King II report defines a non-executive director as a director who is not a representative of a shareholder, who has not been employed by the company in an executive capacity in the preceding three financial years, and who has no significant contractual relationship with or interest in the company or group.

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

Shadow directors: Individuals who are not directors but who instruct, direct and guide 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 recently released code of corporate governance for Nigerian banks issued by the Central Bank of Nigeria in the post-consolidation period.

REFERENCES

Asogwa, I. E. (2016). Corporate governance in Nigerian banks: A theoretical review. International Journal of Management Science and Business Administration, 2(7), 7–15. https://researchleap.com/corporate-governance-nigerian-banks-theoretical-review/

FBN Bank UK. (n.d.). Our history. https://www.fbnbank.co.uk/our-history/

Federal Research Division, Library of Congress. (n.d.). Nigeria: Banking and finance [Country study]. https://countrystudies.us/nigeria/66.htm

Union Bank of Nigeria. (n.d.). Our history. https://www.unionbankng.com/?p=1285