In the immediate past two decades the financial services industry has experienced fluctuating fortunes leading to high profile cases of corporate failure and consequent near loss of public confidence and hence, the banking reform kick starts in 2004. The industry’s problems in Nigeria are consequences (directly or indirectly) of bad corporate governance. The lack of effective corporate governance in Nigeria has worked to the decrement of shareholders and created a class of stakeholder who has lost interest in the banking system. The study therefore appraised Nigerian banks’ compliance to the CBN code of Corporate Governance as well as its effect on bank performance. Analysis of variance (ANOVA) was used to measure Nigerian bank’s compliance to the CBN code of corporate governance, while the panel data ordinary least square regression to measure the compliance effect on bank’s profitability. Among other codes of corporate governance for board size, audit committee, board diversity, and power separation. Nigerian commercial banks’ compliance to CBN best practice for board size was statistically insignificant. Therefore, commercial banks in Nigeria were up till the date of this study non-compliant with the CBN best practice for board size. The same was discovered for board diversity, audit committee, and power separation as the f-statistics evidenced in analysis of Variance showed a significant variance between the Nigerian commercial banks’ observed practices and the best practice code as dictated by the Central Bank of Nigeria (CBN). Nonetheless, Nigerian commercial banks significantly complied with the CBN best practice code for commercial banks’ board composition. This was evidenced in the analysis of variance as the f- calculated was less than the f- critical, signifying very little variance between commercial banks’ observed practices and the CBN best practice code for corporate board composition. It was recommended that Central Bank of Nigeria should strictly monitor Nigerian banks’ compliance to the code of corporate governance, especially board size, audit committee, board diversity, power separation, as a percentage increase in general compliance to the best practice. In conclusion, Compliance to Central Bank of Nigeria code of corporate governance significantly impacted on banks’ profitability in Nigeria. CBN code of corporate governance raises profitability of Nigerian banks by 3.53 percent. The direct relationship between general compliance to CBN code of corporate governance and profit of commercial banks will boost the profitability of the commercial banks.


Title page                                                                                                                    i

Declaration                                                                                                                  ii

Approval                                                                                                                     iii

Dedication                                                                                                                  iv

Acknowledge                                                                                                              v

Abstract                                                                                                                      vi

Table of Content                                                                                                  vii

List of Tables                                                                                                  viii

List of Figures                                                                                                             ix


  1. Background of the Study                                                                               1
    1. Statement of the problem                                                                4
    2. Research objectives                                                                             5

1.4.      Research Hypotheses                                                                                      5

1.5.      Scope of the Study                                                                                         6

1.6.      Significance of the Study                                                                              6

References                                                                                                      8


2.1 CONCEPTUAL FRAMEWORK                                                                     10

2.1.1 The Concept of Corporate Governance                                                 10

2.1.2 Corporate Governance in Banking Sector                                               12

2.1.3 External Corporate Governance Mechanism                                          13

2.1.4 Internal Corporate Governance Mechanism                                      14

2.1.5 Corporate Governance in Nigeria                                                            15

2.1.6 Key Areas of Failure of Corporate Governance in Banks                     17

2.1.7 Enhancing Corporate Governance in Banks in Nigeria                          22

2.2. THEORETICAL FRAMEWORK                                                                      34

2.2.1 Agency theory and the study of corporate governance                         36

2.2.2 Agency Costs and Corporate Governance Solutions (Origin and Development)                                                                                                 40

2.2.3 Agency Problems and Corporate Governance Solutions                     41

2.3 REVIEW OF EMPIRICAL LITERATURE                                                       43

2.3.1 Corporate Governance and Bank Performance.                                  46

2.3.2 Board Structure and Corporate Financial Performance in Nigeria.     52

2.3.3 Corporate Performance and Executive Compensation                        55

2.3.4. Existence of Audit Committee and Bank Performance                        55

2.3.5. Separation of Functions of the Chairman and the CEO and Bank Performance                                                                                                    56

2.3.6. Board Diversity and Bank Performance                                             57

2.3.7 Board Activity and Bank Performance                                                        57

2.3.8 Board Size and Bank Performance                                                            58

2.4.      SUMMARY                                                                                                   59

References                                                                                                                  61

CHAPTER THREE: METHODOLOGY                        

  • Research Design                                                                                             68
    • Nature and sources of data                                                                             68
    • Population Size                                                                                               68

3.4       Sample Size                                                                                                     69

3.5       Data Analysis Technique                                                                            69

3.6       Operationalization of the Variables                                                          71

3.7       Model Specification                                                                                73

References                                                                                                      75


4.1.      Data Presentation                                                                                 76

4.2       Commercial Bank’s Compliance to CBN Code of Corporate Governance   77

4.3       General Compliance to Code of Corporate Governance (COMP) and Profit after Tax (PAT)                                                                             84

4.4       Test of Hypotheses                                                                                 90



5.1       Summary                                                                                                         93

5.2       Conclusion                                                                                                      96

5.3.      Recommendations                                                                                          96

5.4       Contribution to Knowledge                                                                           97

5.5       Suggested Future Research Areas                                                                 97 

Bibliography                                                                                                   98

Appendices                                                                                                     105


Table 3.1         Estimation of Corporate Governance Variables                    60

Table 4.2.1      Correlation Test                                                                         77

Table   General compliance to all codes of corporate governance     78

Table   Compliance of Board Size (BS) to Best Practice code (BP*BS)       79

Table   Compliance of Audit Committee (AC) to Best Practice code (BP*AC)                                                                                            80

Table   Compliance of Board Diversity (BD) to Best Practice code(BP*BD)                                                                                            81

Table   Compliance of Board Composition (BC) to Best Practice code (BP*BC)                                                                  82

Table   Compliance of Power Separation (PS) to Best Practice code (BP*PS)                                                                                83

Table 4.3.1      Unit Root Test (Common Unit root Process)                            84

Table 4.3.2`Normality Test on the Variables                                           85

Table 4.3.3      Correlation Test                                                                     86

Table 4.3.4      Regression result                                                                        86

Table 4.3.5      Serial Correlation Test                                                        87

Table 4.3.6      Cross-Section Dependence (Serial correlation) test                88


Figure 4.1 Residual Normality and Heteroscedasticity test                        89

Figure 4.2 Residual Graph 89



  1. Background of the Study

The situation where the public loses confidence in the financial institutions can result in panic and consequentially financial and economic woes. The absence of confidence in any organisation is attributable to opaque management practices with deleterious effect on its performance Adegbemi, Ofoegbu and Ismail (2012).  Corporate performance is an important concept that relates to the way and manner in which financial, material and human resources available to an organization are judiciously used to achieve the overall corporate objective of an organization. Adegbemi, et al (2012). It keeps the organization in business and creates a greater prospect for future opportunities.

Zingales (1998) defined corporate governance as a group of mechanism that stakeholders use to guarantee that directors effectively manage corporate resources, a task that includes the way in which quassi-rents are developed and distributed. Shleifer and Vishny (1997) defined corporate governance as the way in which suppliers of finance to corporation ensure themselves of getting a return on their investments.

The bank corporate governance process is a complex framework. This governance framework encompasses a bank’s stockholders, its managers and other employees, and the board of directors Jegede, Akinlabi and Soyebo (2013). Separation of ownerships and controls of bank induces the problem of internal corporate governance. Managers (employees) who act as the agents have particular interests which may differ from those of consumers and owners of the bank. In order to reduce the agency conflict of interests between managers (agents) and owners (principals), a continuous improvement on compensation and incentive system should be provided by the bank owners. The owners also select and govern the board of directors who have high credibility and capability to serve them better. This mechanism refers to internal corporate governance. Through this mechanism, the owners expect managers to have the same perception and direction as well as owners about risk management (risk-taking behaviour) which is related to return or bank performance Eduardos, Hermeidito, Putu, Supriyatna (2007). Banks further operate under a unique system of public oversight in the form of bank supervisors and a comprehensive body of banking laws and regulations. The interaction between all of these elements determines how well the performance of a bank will satisfy the desires of its stockholders, while also complying with public objectives. For investors and regulators, bank corporate governance framework is thus of critical importance to a bank’s success and its daily operations. As a result, understanding the corporate governance of banks is especially important because of the systematic risk that banking activity poses for the economy at large as evidenced by the U.S. savings and loan crisis in the 1980’s, the Asian financial crisis in the 1990’s and the more recent supreme mortgage crisis Jegede et al.( 2013) citing Alexander (2006).

The Nigerian banking system has undergone remarkable changes over the years in terms of the number of institution, ownership structure and the depth and breadth of the operations. These changes have been influenced largely by the opportunities presented by the deregulation of the financial sector, globalization of operations, technological advancements, impact of global economic downturn and the adoption of regulatory guidelines that conform to international standards. The developments in the Nigerian banking industry show that absence of good corporate governance was mainly responsible for the dismal performance of the industry which should act as a catalyst for economic growth.