Chapter One 1.1 Background of The Study

CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Corporate governance is the performance of the task of administration in corporate

entities to enhance shareholder value without jeopardizing other interest groups’
legitimate expectations, thereby promoting firm sustainability. The underlying
principle is to resolve the agency dilemma prevalent in many organizations
(Oyarzún, 2011). It is designed to check corporate abuse arising from conflict of
interest whereby management, acting as the agent, deploys the organization’s
resources to advance own interests rather than of the stockholders (principals). The
concept of governance in business organizations is neither new to the world of
business nor is it new to economic literature but has attracted greater attention
since the early 1990s due to the increasing wave of globalization, requirements for
increased financial reporting, and rising episodes of corporate failures.
Poor corporate governance practice is a cankerworm that affects organizations and

has led to the collapse of private and public entities across economic sectors,
thereby impairing overall economic performance. It manifests in the sub-optimal
deployment of organizations’ resources with adverse macroeconomic implications.
For instance, despite the successful recapitalization of Nigerian banks in 2006,
Sanusi (2009) avers that poor governance led to systemic capital inadequacy and
illiquidity just within three years of the reform, which prompted the take-over of
eight banks by the Central Bank of Nigeria (CBN) and subsequent injection of six
hundred and twenty (620) billion naira bailout fund in the distressed banks. Of
eight banks, only Bank PHB (now Keystone Bank) and Union Bank survived,
indicating that mismanagement diverts resources away from productive uses.
Good and adequate corporate governance mechanisms support the going concern
principle of business and are critical elements of sustainable growth and
development. Business stakeholders like creditors, host communities, suppliers,
shareholders, employees, consumers, and the government are happy when
businesses are profitably managed because their interests are well catered for when
firms generate sufficient cash flows. For instance, the government receives steady
revenue in the form of corporate tax, which is required for infrastructural
development, and through improved tax revenue, corporate governance can
enhance capital formation (Okoye, Evbuomwan, Achugamonu, & Araghan, 2016).
For the banking sector, Okafor (2011) argues that good corporate governance
validates management integrity and defines the quality of financial services offered
by banks, thereby influencing the sector’s overall performance. Besides, sound
corporate governance practices stabilize and strengthen financial markets, protect
investors, promote firm performance, and attract investments (Cheema & Din,
2013).
Before introducing the Securities and Exchange Commission (SEC) corporate
governance code in 2003 in
Nigeria, poor governance practices led to incessant episodes of distress due to
declining profitability and erosion of public confidence in banking operations.
Banks gave out loans without adequate collateral or no collateral (in some cases),
directors gave loans to themselves (Akpan & Riman, 2012), and staff colluded
with outsiders to defraud banks, leading to massive non-performing loans. Though
the code was not directed solely at the banking sector, it was designed to check
corporate abuses and support sustainable business practices.
Apart from the 2003 landmark corporate governance code, the regulators have
introduced some other corporate governance guidelines overtime to regulate
Nigeria’s financial system. Among them is the corporate governance code for
banks (2006) designed by the Central Bank of Nigeria (CBN) to check observed
weaknesses in governance practices adopted by banks in the post-consolidation
period. There are also the revised CBN prudential guidelines for licensed banks
(2010), which contained specific provisions aimed at reinforcing and/or
complementing the 2006 corporate governance code. Other extant codes on
corporate governance include the PENCOM code of 2008 for pension fund
administrators, the NAICOM code (2009) for insurance companies, the Central
Bank of Nigeria code (2014), and the National Corporate Governance Code 2016
issued by the Financial Reporting Council of Nigeria.
1.2 Statement of the Problem
Corporate governance in the banking industry provides the platform that is used to
attract investors both local and foreign with the trust that their investment will be
safe and properly utilized in the best possible means of managing an investment
(Fanta, Kemai and Waka, 2013). Dharmastuti and Wahyudi (2013) suggested that
in an organization, especially a public corporation, functional specialization is
required to achieve more efficient goals. Thus an efficient governance structure
must be effective in the alleviation of such a giant problem (the agency problem)
and ultimately resulting in a better performance (Naushadi and Malik, 2015).
Despite the need for corporate governance in the banking industry, there are still
episodes of bank failures. Non-adherence to corporate governance was identified
as one of the critical issues in virtually all known instances of financial distress.
Tijjani and Anifowose (2013) suggest that the poor performance of boards in 2009
which almost led to the near-collapse of nine banks including the collapse of
Oceanic and Intercontinental banks has eroded investors' confidence in banks
leading them into divesting their investments and has painted a poor image on the
financial sector. It is based on this study sets out to analyze corporate governance
and financial performance of Nigeria banks with reference to First Bank Plc,
Presidential Road Enugu.
1.3 Objectives of the Study
The main objective of this study is to analyze corporate governance and financial
performance of Nigeria banks, a study of First Bank Plc, Presidential Road Enugu.
The specific objectives are:
i. To know if First Bank Plc, Presidential Road Enugu adopts corporate

governance in their banking system
ii. To examine the relationship between corporate governance and the financial
performance of First Bank Plc, Presidential Road Enugu
iii. To identify the problems of corporate governance in First Bank Plc,
Presidential Road Enugu
1.4 Research Questions
This study tends to provide answers to the following research questions
i. Does First Bank Plc, Presidential Road Enugu adopt corporate governance in
their banking system?
ii. What is the relationship between corporate governance and the financial
performance of First Bank Plc, Presidential Road Enugu?
iii. What are the problems of corporate governance in First Bank Plc,
Presidential Road Enugu?
1.5 Significance of the Study
This study is of immense value to bank regulators, investors, academics and other
relevant stakeholders. This study provides a picture of where banks stand in
relation to the codes and principles on corporate governance introduced by the
Central Bank of Nigeria. It further provides an insight into understanding the
degree to which the banks that are reporting on their corporate governance have
been compliant with different sections of the codes of best practice and where they
are experiencing difficulties. Boards of directors will find the information of value
in benchmarking the performance of their banks, against that of their peers. The
result of this study will also serve as a data base for further researchers in this field
of research.
1.6 Scope of the Study
This study is being conducted to analyze corporate governance and financial

performance of Nigeria banks. The study therefore is centered on First Bank Plc,
Presidential Road Enugu.
1.7 Limitations of the Study
Financial Constraint: insufficient fund tends to impede the efficiency of the

researcher in sourcing for the relevant materials, literature or information and in
the process of data collection (internet, questionnaire and interview).
Time Constraint: The researcher will simultaneously engage in this study with
other academic work. This consequently will cut down on the time devoted for the
research work.
1.8 Definition of Terms
Corporate Governance: Corporate governance is a system of rules, policies, and

practices that dictate how a company's board of directors manages and oversees the
operations of a company; Corporate governance includes principles of
transparency, accountability, and security.
Financial Performance: Financial performance is a subjective measure of how
well a firm can use assets from its primary mode of business and generate
revenues. The term is also used as a general measure of a firm's overall financial
health over a given period.
Banking Sector: The banking sector is an industry and a section of the economy
devoted to the holding of financial assets for others and investing those financial
assets as a leveraged way to create more wealth. The sector also includes the
regulation of banking activities by government agencies, insurance, mortgages,
investor services, and credit cards.
CBN: The Central Bank of Nigeria (CBN) is the central bank and apex monetary
authority of Nigeria established by the CBN Act of 1958 and commenced
operations on July 1, 1959

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CHAPTER ONE

1.1 Background of the Study

Corporate governance is the performance of the task of administration in corporate

Poor corporate governance practice is a cankerworm that affects organizations and

1.2 Statement of the Problem

1.3 Objectives of the Study

i. To know if First Bank Plc, Presidential Road Enugu adopts corporate

1.4 Research Questions

This study tends to provide answers to the following research questions

1.5 Significance of the Study

1.6 Scope of the Study

This study is being conducted to analyze corporate governance and financial

1.7 Limitations of the Study

Financial Constraint: insufficient fund tends to impede the efficiency of the

1.8 Definition of Terms

Corporate Governance: Corporate governance is a system of rules, policies, and

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