Effect of corporate governance on the financial performance of commercial banks in Nigeria

Abstract

Banks are expected to operate within acceptable standards of governance for consistent profitable operations. They run heavily on customer deposits, which is confidence-driven. Since the quality of governance is critical to winning and retaining customer confidence and patronage, the imperative for good governance practices in banks cannot be overemphasized. This research paper explores the nexus between governance practices and bank profitability in Nigeria. It adopts the size of bank board and directors’ stake as proxies for corporate governance, with return on assets and return on equity as representations for financial performance. The research incorporates firm size as a controlled variable. The estimation technique of the Generalized Method of Moments was employed. Evidence from the research reveals that board size, directors’ equity, and firm size substantially affect Nigerian banks’ financial performance. Besides, the study shows a robust effect of lagged return on equity on the current level of performance. Therefore, the study asserts that governance in business entities strongly affects their financial performance and recommends maintaining optimum board size to minimize boardroom conflicts. It further prescribes that the requirement for substantial equity stake by directors of banking institutions be sustained, as it secures commitment to governance practices that support profitability. AcknowledgmentThe authors acknowledge the support of Covenant University towards the publication of this paper.

Board Characteristics and Financial Performance of DMBs: Evidence from Nigeria

“…Therefore, an increase in board size will cause conflicts of Interest that may result in inefficiency of operations. This supports the findings of the work of Vo & Phan (2013); Raihan and Hoque (2013); Bebeji et al (2015); Boussaada and Karmani (2015); Orozco and Vargas (2018); Olokoyo et al (2019); Okoye et al (2020); and Ogunmakin et al (2020) who reported a negative significant effect of Board size on bank performance. However, we contradict (Filip et al 2014;Adekunle and Aghedo, 2014;Isik and Ince, 2016;Ene & Bello, 2016;Eluyela et al, 2018;and Bekiaris, 2021) who reported a positive significant effect of board size on bank Tobin's Q and ROA.…”

“…This supports Eluyela et al (2018) who found a negative significant relationship between DMBs' total assets and Tobin's Q. We contradict Bekiaris, 2021;Okoye et al, 2020;and Sanyaolu et al, 2020) who reported a positive and significant effect of banks total assets on ROE and ROA. Indicating that banks with more assets perform better.…”

“…Most of the empirical studies on board characteristics and firm performance of Nigerian DMBs measure bank performance using return on assets (ROA), return on equity (ROE) earnings per share EPS, profit after tax and share price (Ogunmakin et al, 2020;Sanyaolu et al, 2020;Okoye et al, 2020;Gwaison and Maimako, 2021;Esan et al, 2020;Osemwegie and Ugbogbo, 2019) This study uses Tobin's Q as a performance measure and expands the scope to cover the period 2011-2020. This paper addresses this significant research gap by re-examining board characteristics-performance nexus using recent data extracted from DMBs annual reports and audited financial statements covering the period 2011 -2020 as compiled by MachameRatios®.…”

Corporate Governance, Financial Performance and Macroeconomics: The Impact on Bank Profitability Information

“…Financial performance is substantially impacted by additional systems, such as a board of directors and audit committee, which serve as proxies for corporate governance. (Okoye et al, 2020). Similarly, (Rahman & Subagio, 2021) likewise conclude that corporate governance has a favorable and considerable impact on profitability.…”

“…Variables like the board of directors and audit committee have been used in previous studies on corporate governance (Ahmad et al, 2019). Some use bank board and directors' stakes as proxies for corporate governance (Okoye et al, 2020), and other studies use institutional ownership, managerial ownership, and independent commissioners (Priharta, 2017). The corporate governance perception index (CGPI) score is used in this study.…”