CORPORATE GOVERNANCE AND ITS RELATIONSHIP WITH DIVIDEND POLICIES OF BANKS IN NIGERIAN CAPITAL MARKET
1.1 BACKGROUND OF THE STUDY
The concept of corporate governance is one of the issues that have attracted the attention of researchers and organisation around the world. This is due to the fact that governance mechanisms involves a set of relationship among organisation’s management, its board, its shareholders and other stakeholders that provide structure in which organizational goals are set, and organizational performance are monitored. Therefore, there is need for proper incentives for the board and management to pursue objectives that are in interests of the company and its shareholders and also, there is need for enhanced effective monitoring (OECD 2004).
The separation of management from ownership gave rise to the adoption of a number of mechanisms globally. These mechanisms ensure enhancement of business sustainability and survival which directly enhance companies’ ability to pay dividend. However, financial regulators everywhere are scrambling to assess these mechanisms and administer them for the purpose of good corporate governance (Sandeep, Patel and Lilicare, 2002).
It is therefore necessary to point out that the concept of corporate governance of banks and very large firms have been a priority on the policy agenda in developed and developing market economies. Several events are responsible for the heightened interest in corporate governance especially in both developed and developing countries. The subject of corporate governance leapt to global business attention from relative vagueness after a string of collapses of high profile companies and banks. In Nigeria, the banking sector among other sectors has also witnessed several cases of collapses, some of which include the Alpha Merchant Bank Ltd, Savannah Bank Plc, Society General Bank Ltd among others.
Although the background of corporate governance in Nigeria can be said to be distorted and obscure, it cannot be detached from company law in general. Before corporate governance became popular, company law recognized and still recognizes two organs of a company namely: the board of director and the company in general meeting. Corporate governance merely emphasizes the greater focus on how a company should be run by those at the wheel of affairs. Unsurprisingly, the importance of the board of directors in instilling the principles of sound corporate governance in every company cannot be denied.
The Nigerian banking industry plays a major intermediation role in the Nigerian economy, considering that they are saddled with the responsibility of mobilizing savings from surplus units to deficit units, particularly private enterprises for the purpose of expanding their businesses (Oghojafor, Olayemi, Okonji and Okolie, 2010). It is also believed that corporate governance practices are important for banks because it results in higher market value, lower cost of funds and increased profit (Claessen, 2006). A major boost for corpor33ate governance in Nigerian banks was the consolidation exercise in 2005 which led to nearly 89 banks reduced to 25 mega banks in order to attain a minimum capital base of approximately 25billion naira. The processes of mergers and acquisitions brought unique governance challenges because of the new size of banks, which made the CBN to issue a mandatory corporate governance codes for Nigerian banks. Some other industries followed suit by introducing these codes in their respective sectors, especially the insurance and pension regulators (Soludo 2004).
Dividend are referred to as rewards for providing finances to a firm, as without any dividend payout, shares would not have any value ( Abdul-Halim & Adel 2013). Earnings distributed to shareholders are also called dividend (Pandey 2004). The need to receive dividend forms part of the primary motive why shareholders buy shares. In subscribing for a firm’s shares, investors always take into consideration a number of factors such as the dividend track record of the firm, the stock price at the floor, profile of board of directors as well as nature of firm’s investment. As a result, management strives to command a fair price for her stocks, while ensuring prompt payment of dividend. As the earnings record of a company improves, increase in cash dividend is expected to follow. The amount of dividend received by shareholders will depends considerably on the dividend policy of such organization. Dividend policy implies the payout policy that management adopts in deciding pattern of cash distribution to shareholders over time. It indicates the share of company’s earnings that are paid out to investors in cash. The study of dividend policy is increasingly becoming interesting for several reasons. First, it affects the capital structure of the firm and also changes the firm’s stock value (Nikolaos, 2005). Secondly, announcement of dividend signals information to investors about the firm’s efficiency in terms of profitability, liquidity and investment opportunity. Thirdly, through cash dividend policy, managers reduce principal-agent relationship costs.
Since the pioneering work of Miller & Modigliani (1958) in their seminal article, series of empirical and theoretical research in dividend policy have emerged and increased tremendously, some relaxing the assumptions of the M & M and offering theories and building models to guide managers formulate their dividend policy decisions. However, empirical evidences from these studies vary considerably. Some suggest that increase in dividend payout increases the firm’s market value, others posited that increase in dividend payout decreases the firm’s value, while some argue that dividend policy does not affect the market value of the firm. In spite of the continuous and increasing theoretical and empirical debate on dividend policy, there is still no generally accepted standard on how firms actually pay out dividend to shareholders at a given time period.
Dividend payment is deemed to be effective corporate governance mechanism that serves to align the interests and minimize agency problems between managers and shareholders. The agency cost refers to the cost borne by shareholders for monitoring behaviour and these cost are considered as implied cost due to the potential conflict of interest among shareholders and corporate managers (Husam ,Nizar & Rekhap, 2012).
Hence dividend policy is one of the most important policies in finance because it is directly related to shareholders. It is considered one of the issues that are still subject of debate among both academics and practitioners. Previous empirical researches shows that better investor protection is associated with greater dividend payout ratios (La Porta, Lopez-De-Silanes and Shleifer, 2008). This shows that corporate governance is an important mechanism in paying out dividend, and up till now literature on the relationship between corporate governance mechanisms and dividend policy especially in financial firms in Nigeria is limited, therefore, the aim of the study is to fill this gap in empirical data by examining corporate governance and its relationship with dividend policy of banks in the Nigerian capital market.
1.2 STATEMENT OF THE PROBLEM
In Nigeria, before the consolidation exercise, the banking industry had about 89 active players whose overall performance led to sagging of customers’ confidence. There was lingering distress in the industry, the supervisory structures were inadequate and there were cases of official recklessness amongst the managers and directors, while the industry was notorious for ethical abuses (Akpan, 2007). Poor corporate governance was identified as one of the major factors in virtually all known instances of bank distress in the country. Weak corporate governance was seen manifesting in form of weak internal control systems, excessive risk taking, override of internal control measures, absence of or non-adherence to limits of authority, disregard for cannons of prudent lending, absence of risk management processes, insider abuses and fraudulent practices remain a worrisome feature of the banking system (Soludo, 2004). This view is supported by the Nigeria Security and Exchange Commission (SEC) survey in April 2004, which shows that corporate governance was at a rudimentary stage, as only about 40% of quoted companies including banks had recognised codes of corporate governance in place. This, as suggested by the study may hinder the public trust particularly in the Nigerian banks if proper measures are not put in place by regulatory bodies.
Corporate governance is an important mechanism in paying out dividend. The going concern assumption of corporate entities gave rise to the need for corporate governance to enhance business sustainability and survival which directly enhance companies’ ability to pay dividend. If the survival of a firm be it bank or non-bank corporation is threatened, the ability of such a firm to pay dividend is affected and this also has a tremendous effect on the stakeholders of such a firm. Where such firm is a bank, the shareholders as well as depositors of the bank may suffer huge losses. As a result, the confidence of both investors and depositors would take a downward plunge and this has consequence on the nation’s economy.
The Central Bank of Nigeria (CBN) in July 2004 unveiled new banking guidelines designed to consolidate and restructure the industry through mergers and acquisition. This was to make Nigerian banks more competitive and be able to play in the global market. However, the successful operation in the global market requires accountability, transparency and respect for the rule of law. In section one of the Code of Corporate Governance for banks in Nigerian post consolidation (2006), it was stated that the industry consolidation poses additional corporate governance challenges arising from integration processes, Information Technology and culture.
The code further indicate that two-thirds of mergers world-wide failed due to inability to integrate personnel and systems and also as a result of the irreconcilable differences in corporate culture and management, resulting in board of management disputes.
Despite all these measures, the problem of corporate governance still remains unresolved among consolidated Nigerian banks, thereby increasing the level of fraud (Akpan, 2007). Data from the National Deposit Insurance Commission report (2006) shows 741 cases of attempted fraud and forgery involving N5.4 billion. Soludo (2004) also opined that a good corporate governance practice in the banking industry is imperative, if the industry is to effectively play a key role in the overall development of Nigeria. Caprio, Laeven & Levine (2008) opined that there should be a revision of bank supervision and corporate governance reforms to ensure that deliberate transparency reductions and risk mispricing are acted upon.
Furthermore, according to Sanusi (2010), the current banking crises in Nigeria, has been linked with governance malpractice within the consolidated banks which has therefore become a way of life in large parts of the banking sector. He further opined that corporate governance in many banks failed because boards ignored these practices for reasons including being misled by executive management, participating themselvhes in obtaining unsecured loans at the expense of depositors and not having the qualifications to enforce good governance on bank management.
The boards of directors were further criticized for the decline in shareholders’ wealth and corporate failure. They were said to have been in the spotlight for the fraud cases that had resulted in the failure of major corporations.
The series of widely publicized cases of accounting improprieties recorded in the Nigerian banking industry in 2009 were related to the lack of vigilant oversight functions by the boards 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. Some of these banks were Oceanic Bank, Intercontinental Bank, Union Bank, Afri Bank, Fin Bank and Spring Bank (Uadiale, 2010). As a result, various corporate governance reforms have been specifically emphasized on appropriate changes to be made to the board of directors in terms of its composition, size and structure (Abidin, Kamal and Jusoff, 2009).
Another major issue that has generated interest and which may affect dividend policy and should be of interest to all stakeholders in banking system is the Chairman of the Board of Directors serving as Chief Executive Officer (CEO). This no doubt, could present potential conflicts resulting from a single individual functioning in these dual roles. To ensure the protection of shareholders’ interest, a suitable governance structure that has been advocated is the one where the Chairman of the Board is not the same person as the CEO (OECD 2004).
Also, the need for banks to continue to recognize internal and external auditors as an important part of the corporate governance process cannot be overemphasized. Adequate internal control system continues to be a major problem to banks in Nigerian capital market and this is needed to help discipline banks in their daily business by ensuring compliance with internal and external regulations as well as help the board to effectively evaluate the bank’s risks and ultimately its future strategy (Basel Committee on Banking Supervision 2006).
It is in the light of the above problems that this research work seeks to answer the following questions:
i) Is there a relationship between board size and the dividend policy decision of banks in Nigeria Capital market?
ii) To what extent does the CEO duality affect the dividend policies of banks in Nigeria?
iii) Is there a relationship between composition of board of directors and the dividend policy of banks in Nigerian capital market?
iv) What is the relationship between the audit committee of Nigerian banks and their dividend policies?
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to examine corporate governance and its relationship with dividend policies of banks in Nigerian capital market. The specific objectives include:
i) To examine the relationship between board size and the dividend policy of quoted banks in Kwara State, Nigeria.
ii) To examine how CEO duality affects the dividend policy of quoted banks in Kwara State, Nigeria.
iii) To examine the relationship between the board compositions and dividend policy of quoted banks in Kwara State, Nigeria.
iv) To examine the relationship between the audit committee and dividend policy of quoted banks in Kwara State, Nigeria.
1.4 JUSTIFICATION OF THE STUDY
Various research works have been carried out on corporate governance and dividend policies of banks all over the world, in various countries, Nigeria included. These research works include: (Nwidobie 2013; Kurawa 2013; Odia and Osikhena 2012; Amarjit and John 2012; Bokpin 2011; Morad and Adel 2010, etc.) and these research works show that corporate governance is an important mechanism in paying out dividend. Up till now, literature on the relationship between corporate governance mechanisms and dividend policy especially in financial firms in Nigeria is limited. Therefore, the aim of the study is to fill this gap by examining corporate governance and its relationship with dividend policy of banks in the Nigerian capital market.
This study is of immense significance to banks, 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 how these corporate governance practices affect the dividend policy of these banks. Furthermore, this study will contribute to the existing literature and serve as reference point to further studies in this area of research.
1.5 HYPOTHESIS OF THE STUDY
The following null hypotheses will be tested to aid this study in achievement of its objectives:
Ho 1: There is no significant relationship between board size and dividend policy of quoted banks in Nigeria.
Ho 2: There is no significant relationship between board composition and dividend policy of quoted banks in Nigeria.
Ho 3: There is no significant relationship between CEO duality and dividend policy of quoted banks in Nigeria.
Ho 4: There is no significant relationship between audit committee and dividend policy of quoted banks in Nigeria.
1.6 SCOPE OF THE STUDY
This research work basically examines corporate governance and dividend policy of all quoted banks in Nigerian capital market between the period of 2004 and 2015.
1.7 PLAN OF THE STUDY
This research work contains five chapters. Chapter one contains the introduction and it comprises of background to the study, statement of the problem, research questions, objectives of the study, justification of the study, hypothesis of the study, scope of the study, plan of the study and definition of terms.
Chapter two contains the literature review, which comprises of the conceptual framework, theoretical framework, empirical framework of corporate governance and dividend policy.
Chapter three covers the research methodology which includes types and sources of data, population of the study, sample technique and sample size, method of data collection and method of data analysis.
Chapter four focuses on the data analysis and data presentation, as well as discussion of the results.
Chapter five consists of summary, conclusions and recommendation of the study.
1.8 DEFINITION OF TERMS
Corporate governance refers to the set of responsibilities and practices exercised by the board and executive management with the goal of providing strategic direction, ensuring that objectives are achieved, standards are maintained, ascertaining that risks are managed appropriately and verifying that the organization's resources are used responsibly. Corporate governance ensures transparency, fairness and accountability and it is a benchmark for the integrity and credibility of organizations.
Dividends are referred to as rewards for providing finances to a firm. Earnings distributed to shareholders are also called dividend. Without any dividend payout, shares would have no value.
Dividend policy is the set of rules which guide management in the distribution of profits to ordinary shareholders as dividends. Dividend policy is the policy used by a company to decide how and how much it will pay out to shareholders in dividends.
The Nigerian banking sector is saddled with the responsibility of mobilizing savings from surplus units to deficit units. The banking sector consists of the banking institutions in the financial system. Banks are the key institutions maintaining the financial system of the economy. The stability is of the banking sector is essential as it has a profound impact on the entire economy as a whole.
Capital market is a market where securities are traded. Capital market as an exchange system set up to deal in long-term credit instrument of high quality. The dealing in this high quality instrument facilitates the execution of some desirable and profitable project bearing direct relationship with economic development.
This is a situation where the chairman of the board of directors is also serving as Chief Executive Officer (CEO). CEO duality means that a single individual is functioning in these dual roles.