EFFECT OF BOARD STRUCTURE ON MARKET PERFORMANCE OF LISTED BANKS IN NIGERIA
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This study examined the effect of board structure on the market performance of listed banks in Nigeria. The specific objectives of the study are: to assess the influence of CEO duality on the market (financial) performance of commercial banks in Nigeria; to examine the influence of board gender on the market or financial performance of commercial banks in Nigeria; and to determine the influence of board size on the market performance of commercial banks in Nigeria. A total of eight commercial banks were used as sample size for the study. The study covered a five year period (i.e., 2016-2020). The study used secondary data to reach study findings. Data collected from the study were analysed using multiple regression technique processed on SPSS. From the analysis of the study, it is found out that only board size have significant influence on the financial performance of commercial banks in Nigeria. That is to say that CEO duality and board gender have no significant effect on the financial performance of commercial banks in Nigeria. The study therefore recommends a majority of board members be female to provide some additional skills and perspectives that may not be possible with all-male boards.
Table of Content
Abstract
Chapter One: Introduction
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objective of the Study
1.4 Research Questions
1.5 Research Hypothesis
1.6 Significance of the Study
1.7 Scope / Limitation of the Study
1.8 Definition of Terms
1.9 Organizations of the Study
Chapter Two: Review of Literature
2.1 Conceptual Framework
2.2 Theoretical Framework
2.3 Empirical Review
Chapter Three: Research Methodology
3.1 Research Design
3.2 Population of the Study
3.3 Sample Size Determination
3.4 Sample Size Selection Technique and Procedure
3.5 Research Instrument and Administration
3.6 Method of Data Collection
3.7 Method of Data Analysis
3.8 Validity of the Study
3.9 Reliability of the Study
Chapter Four: Data Presentation and Analysis
4.1 Data Presentation
4.2 Analysis of Data
4.3 Answering Research Questions
4.4 Test of Hypotheses
Chapter Five: Summary, Conclusion, and Recommendation
5.1 Summary
5.2 Conclusion
5.3 Recommendation
References
APPENDIX
QUESTIONNAIRE
CHAPTER ONE
1.0 INTRODUCTION
1.1 BCKGROUND OF THE STUDY
Besides performing the usual commercial banking functions, commercial banks in developing countries play an effective role in their economic development. The majority of people in such countries are poor, unemployed, engaged in traditional agriculture, and an acute shortage of capital. Individuals in developing economies lack initiative, enterprise, means of transport are undeveloped, and industry is depressed. The commercial banks help in overcoming these obstacles and promoting economic development.
For commercial banks in Nigeria to enjoy high performance, the importance of the board of directors to corporate developments cannot be overemphasized. The composition or structure of the board varies from country to country. In the United States, largely populated companies have their Boards’ chairmen and chief executive officers (CEO) combined. This is generally referred to as ‘CEO duality’. However, countries like the United Kingdom and Nigeria have the positions of the corporate chairman and that of the chief executive officer (CEO) separated in most cases. This separation enables a check and balance system. The chairman to the board focuses on the overall control of the company; while the CEO oversees the management of the day to day running of the business with the aid of his executives.
Corporate failures and massive corporate scandals in recent years have led to considerable interests in literature and research into corporate governance principles and codes of best practices with a view to improving corporate governance and enhancing corporate performance/survival. A key component in corporate governance implementation is the role of the board of directors. The board monitors the management and set the strategic direction for the organization. The board reviews and ratifies management proposals, and it is the primary and dominant internal corporate governance mechanism in the organization (Brennan, 2016). Corporate failures and scandals such as those of Enron, WorldCom and HIH, amongst others, have raised the question as to the ability of the board to effectively monitor management (Rashid, 2018). This question is particularly relevant given that the boards were apparently not effective enough to have been able to present a check on some of the corporate governance failures, as they later came to be identified. This then calls to question the structure and composition of such boards. According to Rashid (2018) this raises an important question, that is, “who will monitor the monitors? Although it is agreed that the shareholders will monitor the board by exercising their ownership right by appointing and removing board members, shareholders may not be aware of the inside activities of the firm.
It is therefore often argued that the board should be structured and composed of in such a way that it will act to monitor its own activities. Rashid (2018) further notes that corporate governance literature debated within two extreme streams of board practices examining whether the board composition in the form of representation of outside independent directors and structural dependence of the board influence the firm performance. The question therefore is does the composition of the board of directors influence the firm performance or does firm performance influence the composition of the board of directors? (Davidson et al., 2014). Existing literature on the relationship between the board composition and firm performance reflects mixed results. The idea of endogenous relationship between board composition and corporate performance was advanced by Hermalin et al. (2017), that is, board composition and corporate performance jointly influence each other rather the board composition influencing corporate performance or corporate performance influencing board composition. Davidson and Rowe (2014) note that board composition and financial performance influence each other but the effect is delayed. That is the idea in their intertemporal endogeneity in board structure and financial performance.
Board composition is measured in terms of different degrees of heterogeneity. Common assessments of board composition are usually, insider/outsider director ratio, executive/non- executive directors’ ratio, age and gender diversity among board members and board size. There are inconclusive findings between the relationship between board composition and firm performance (Finegold et al., 2017).
To test empirically whether board composition matters, one stream of research has examined the effect of board composition on firm performance, but the results of this research stream have been mixed and inconsistent (Dalton, Daily, Ellstrand & Johnson, 2018). In response to these inconsistent findings, several researchers have conducted meta-analytic reviews on the relationship between board composition and a firm’s financial performance. These reviews provide little evidence of a systematic relationship (Rhoades et al., 2010).
Another stream of research suggests that, rather than examining a board’s monitoring effectiveness by using the firm’s financial performance as a proxy, a more accurate evaluation can be gained by examining discrete decisions that involve a potential conflict of interest between management and shareholders (e.g., Mallette et al., 2015). A recent review of studies conducted on the effect of board composition on discrete critical decisions made by firms has found that the evidence on this relationship is equivocal (Bhagat et al., 2016).
Given the inconclusive findings in the extant research, the purpose of the present study is twofold. First, to examine whether a systematic relationship exist between board composition and financial performance of listed commercial banks in Nigeria. Second, to contribute to literature since most literature reviewed in this work were from developed economies, and based on the researcher’s knowledge, there is little study in our jurisdiction along this line. Consequently, this study aims to investigate the relationship between board structure and financial performance of commercial banks in Nigeria. This is to determine if the Nigerian situation is in line with global trend or if we can find a definite pattern of relationship between board composition and corporate performance for the Nigeria corporate world.
- STATEMENT OF THE PROBLEM
Boards of directors have been largely criticized for the decline in shareholders’ wealth and corporate failure. They have been in the spotlight for the fraud cases that had resulted in the failure of major corporations, such as Enron, WorldCom and Global Crossing. In Nigeria, a series of widelyl-publicized cases of accounting improprieties have been recorded (for example, Wema Bank, NAMPAK, Finbank and Spring Bank). Some of the reasons stated for these corporate failures are the lack of vigilant oversight functions by the board of directors, the board relinquishing control to corporate managers who pursue their own self-interests and the board being remiss in its accountability to stakeholders. As a result, various corporate governance reforms have specifically emphasized on appropriate changes to be made to the board of directors in terms of its composition, structure and ownership configuration (Abidin et al., 2019). Therefore, the study extends and contributes to the body of research using Nigerian data to investigate the likely impact of board structure on firms’ financial performance. The findings would be useful to stakeholders in the Nigerian Stock Exchange (NSE) as it provides evidence on the relationship between board structure and firm’s financial performance.
1.3 OBJECTIVES OF THE STUDY
The specific objectives of the study are:
- To assess the influence of CEO duality on the financial performance of commercial banks in Nigeria
- To examine the influence of board gender on the financial performance of commercial banks in Nigeria
- To determine the influence of board size on the financial performance of commercial banks in Nigeria.
1.4 RESEARCH QUESTIONS
The study attempts to find answers to the following specific questions:
- To what extent does board size affect market performance of banks in Nigeria?
- Does the number of outside directors have any relationship with banks financial performance in Nigeria?
- What impact does directors’ stockholding have on banks financial performance in Nigeria?
1.5 RESEARCH HYPOTHESES
The following hypotheses were formulated and tested for by the study:
H01: CEO duality does not significantly affect the financial performance of commercial banks in Nigeria.
H02: Board gender does not significantly affect the financial performance of commercial banks in Nigeria.
H03: Board size does not significantly affect the financial performance of commercial banks in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
This will serve as a means of knowing how the board size affect market performance of banks in Nigeria.
The study will also throw light on the effect of board diligence and board diversity on the performance of financial institutions in Nigeria.
Finally, the study will serve as a means of examining the relationship that exists between board characteristics and performance of quoted firms in Nigeria.
1.7 SCOPE / LIMITATION OF THE STUDY
The scope of this work covers assessing the influence of board structure on the financial performance of commercial banks in Nigeria. The study employed static panel regression model to analyses the effect of board structure on the financial performance of commercial banks in Nigeria.
1.8 DEFINITION OF TERMS
Useful and frequently used terms of this study are defined as below:
- Board structure: For financial institutions, boards typically comprise executive, nonexecutive, and independent directors elected by shareholders. This is known as a one-tier board structure. The board of directors often includes the CEO and sometimes the CFO of the institutions.
- Market performance: refers to the end results of these policies—the relationship of selling price to costs, the size of output, the efficiency of production, progressiveness in techniques and products.
- Financial institutions: include banks, credit unions, insurance companies, and investment companies. These entities offer various products and services for individual and commercial clients, such as deposits, loans, investments, and currency exchange
1.8 PROJECT ORGANISATION
The remainder of this paper is organized as follows: Section II discusses the relevant literatures on the study. The methodology adopted is discussed in Section III while Section IV captures results and discussion. Section V concludes the paper.
5.0 Conclusion and Recommendations
The study results confirm that there is no significant relationship between board composition in the form of CEO duality and gender diversity among directors and financial performance, implying that role duality and gender diversity cannot add potential economic value to commercial banks in Nigeria. It also revealed that board size have a significant positive influence on the financial performance under accounting based performance measure of ROA, implying that a firm benefits from a pool of human resources and expertise.
It is recommended that a remarkable degree of emphasis on the area of corporate governance and to some extent embark on eliminating CEO duality. The study therefore recommends a majority of board members be female to provide some additional skills and perspectives that may not be possible with all-male boards. The study also recommends the separation of the positions of chairperson of the board and the CEO.The study further recommends a board size (6 and 8) for better financial performance. This will reduce the problem of free rider and enhance effective monitoring and decision making. It will also bring about cohesion among the board members.
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