Corporate governance, risk management and financial performance of listed deposit money bank in Nigeria

Kafidipe, Abiola; Uwalomwa, Uwuigbe; Dahunsi, Olajide; Okeme, Faith Ojone Article Corporate governance, risk management and financial performance of listed deposit money bank in Nigeria Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Kafidipe, Abiola; Uwalomwa, Uwuigbe; Dahunsi, Olajide; Okeme, Faith Ojone (2021) : Corporate governance, risk management and financial performance of listed deposit money bank in Nigeria, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 8, Iss. 1, pp. 1-14, https://doi.org/10.1080/23311975.2021.1888679 This Version is available at: https://hdl.handle.net/10419/270234 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oabm20 Cogent Business & Management ISSN: (Print) (Online) Journal homepage: https://www.tandfonline.com/loi/oabm20 Corporate governance, risk management and financial performance of listed deposit money bank in Nigeria Abiola Kafidipe, Uwuigbe Uwalomwa, Olajide Dahunsi & Faith Ojone Okeme | To cite this article: Abiola Kafidipe, Uwuigbe Uwalomwa, Olajide Dahunsi & Faith Ojone Okeme | (2021) Corporate governance, risk management and financial performance of listed deposit money bank in Nigeria, Cogent Business & Management, 8:1, 1888679, DOI: 10.1080/23311975.2021.1888679 To link to this article: https://doi.org/10.1080/23311975.2021.1888679 © 2021 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. Published online: 06 Apr 2021. Submit your article to this journal Article views: 6074 View related articles View Crossmark data Citing articles: 4 View citing articles ACCOUNTING, CORPORATE GOVERNANCE & BUSINESS ETHICS | RESEARCH ARTICLE Corporate governance, risk management and financial performance of listed deposit money bank in Nigeria Abiola Kafidipe 1 , Uwuigbe Uwalomwa 1 , Olajide Dahunsi 1 * and Faith Ojone Okeme 1 Abstract: This study examined corporate governance, risk control in deposit money banks and how operational problems within commercial banks and information on them in Nigeria has been hoarded to a great extent. The result shows a negative but a significant impact on bank's financial performance. However, a corporategovernance system that is sound increases the profitability of loans as well as the stability of banks. Furthermore, the study finds that board size, board independence, directors’ shareholdings and board meetings are negative while the coefficient number of board committee is positive on Tobin Q. It, therefore, means that there exists between the corporate governance a significant relationship with financial performance. Shareholders, board meetings & members of the board does have negative relationship to performance. In contrast, the coefficient for the number of ABOUT THE AUTHOR Kafidipe Abiola is a postgraduate student in Accounting at Covenant University, Ota, Nigeria. Her research interest is in Corporate Governance. Uwalomwa Uwuigbe is a professor in Accounting at Covenant University, Ota, Nigeria where he is currently dean, College of Business and Social Science. His research interest includes Corporate Governance, Oil and Gas Accounting, Risk Management, Capital Markets, Accounting Regulations (IFRS/IAS) and Taxation. He has several articles published in International Journal of Financial Research, Problems and Perspective in Management, Investment Management and Financial Innovation, Banks and Banks Systems, Academy of Strategic Management Journal and many other Scopus Indexed Journal. Dahunsi Olajide is a postgraduate student in Accounting at Covenant University, Ota, Nigeria. He has publication in Cogent Business and Management, and Heliyon. His research interests include Taxation, Management Accounting, Corporate Governance, and other Critical and Contemporary Issues in Accounting. Okeme Faith Ojone is a postgraduate student in Accounting at Covenant University, Ota, Nigeria. Her specialization is in Taxation, Corporate Governance, and Ethical Issues in Accounting. PUBLIC INTEREST STATEMENT The objective of this paper is to analyze the nexus between corporate governance, risk management and financial performance of listed money deposit bank in Nigeria. This study is imperative because the post-financial crisis suffered by distressed banks in Nigeria required systematic approach to understanding how governance characteristics and risk management attitude affects financial performance of listed deposit money bank in Nigeria. it is believed that this study will contribute to the growing scholarly debates on corporate governance mechanisms and risk management how they provide great deal of latitude for influencing financial performance of listed money deposit bank in Nigeria. Kafidipe et al., Cogent Business & Management (2021), 8: 1888679 https://doi.org/10.1080/23311975.2021.1888679 Page 1 of 14 Received: 22 December 2020 Accepted: 07 February 2021 *Corresponding author: Olajide Dahunsi, Department of Accounting, Covenant University, Ota, Ogun State, Nigeria E-mail: [email protected] Reviewing editor: Collins G. Ntim, Accounting, University of Southampton, United Kingdom Additional information is available at the end of the article © 2021 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. board sizes, board independence & board committees are positive on ROE-Return on Equity. This shows that any increase in shareholding of directors, the directors of the board and board of directors would result in decreased ROE of deposit money banks (DMB) in the economy of Nigeria. This research then recommends proper corporate risk management practices should be encouraged with financial institutions carrying out frequent quality control checks to ensure compliance. Subjects: African Studies; Finance; Business, Management and Accounting Keywords: Corporate governance indicator; risk management indicators; principal component analysis; financial performance 1. Introduction In the past decades, the Nigerian banking history has witnessed a series of distress and failures, for instance, the liquidation of Abacus Merchant bank Ltd; Allied Bank of Nigeria PLC; Allstates Trust Bank Plc; Amicable Bank of Nigeria PLC; Lobi Bank of Nigeria Ltd; Metropolitan-Bank Ltd; North- South Bank Nig Ltd, etc. Banks that have performed well have reported big losses unexpectedly as a result of credit-exposures that have turned sour, interest rate place taken, in addition to that exposure that might or might not have been thought to be hedge balance-sheet risk. (Obi, 2002). Chiejina (2016) noted that financial crises in banking sector has been worrisome for either bank regulators & owners as a result of an increase in occurrence. This concern has been largely attributed to bank failures. Considering the Nigerian banking sector, it was gathered, management of poor credit-risk, internal as well as external supervision needs impede stability as well as the profitability of banks (Obi, 2012). To support this argument, Nweze (2012) argued that one of Nigeria’s most critical symptoms of bank defaults is described as non-performing loans (NPLs) resulting from credit risk management that is poor. Nweze in 2012 noted that, in the time past, Nigeria banks have always carried toxic-assets in the form of an enormous amount which keeps rising progressively from 1 year to another and has neither been resolved through good credit-risk-management. An example, include the period 1994 & 2000, many banks were liquidated totaling 33, in Nigeria. This has resulted in a considerable amount of the non-performing loans (NPL), which exceeded 200 billion naira. Thus, it is vital to keep note of the fact that management of risk is an indispensable aspect of the success of an organization, most especially as it relates to the financial sector since it is a crucial aspect of an economy. Due to the high-risk nature of financial sectors operations, that is, the high-risk involvement with not just the business but the risk of their respective clients (Res et al., 2016). Mehmood et al. (2019) stated that the stability and underlying performance of listed deposit money banks within the economy is vital & paramount to macroeconomic development of a nation. Not only that, corporate governance failure linked to banks’ poor performance and reporting failure are very worrisome as the impact of high-profile cases cumulatively had resulted in a steady-loss of investments, credibility & confidence in banks’ ability in payback of depositors’ funds and their credit risks (Walker, 2011). There is a lack of risk management, such as absence of basic mechanisms for controls, weak corporate governance, excessive exposure to credit, weak disclosure of finance and openness to Nigeria’s financial sector (Audu, 2014). Moreover, the facts of the banking industry are large non-performing loans (NPL), inter-bank leverage, violation of supervisory & regulatory provisions, poor internal regulation, insider clash, massive-exposure to a few bonds, macroeconomic volatility & incessant banking distress and loss. (Okorie & Uwaleke, 2010 by Okorie & Uwaleke). To help resolve these issues, the Central Bank has a supervisory role in maintaining a balance between financial performance and effective corporate governance while considering inherent risk Kafidipe et al., Cogent Business & Management (2021), 8: 1888679 https://doi.org/10.1080/23311975.2021.1888679 Page 2 of 14 factors. Performance is relative, and it is peculiar to the strategy under which various financial institutions use to manage risks. These risks can be managed effectively where quality control is in place (Olamide et al., 2015). It is important to note that, it is essential to ensure adequate corporate governance compliance ethics among banks. This follows that non-compliance with corporate governance ethics among banks is a major factor affecting the proper management of risks, affecting performance of deposit listed-banks. Adeusi et al. (2013) stated that this can be attributed to huge debts resulting from credit risk facilities that banks offer to their customers which become bad debts in the long run. This research aims at investigating the role which corporate governance & effective risk-management play in Nigeria’s listed deposit money bank’s financial performance. However, A major issue facing bank management is in the aspect of corporate governance which has two dimensional interpretations. First relates to corporate activity openness, while protecting the interests of investors; a reference to the agency problem. The second aspect relates to the development of a system of sound riskmanagement system; specific reference to banks (Nemati, 2015). Corporate governance has been viewed from a theoretical point-of-view as a discipline of economics that explores how, through the aid of operational structures, contracts, laws, & corporate law, increases the performance of such firms. There has been no argument that banks are essential to an economy. Hence, to achieve positive results, they must have clear as well as sound corporate governance for this to be accomplished. The significance of corporate governance in banks in economies thar are emerging was stressed by King & Levine in 1993 as well as Levine in1997; they noted that: first, banks do possess dominating role in the financial-sectors of developing nations & therefore are highly expedient drivers in economic development. Second, since capital-markets are generally underdeveloped, the most significant source of financing for most businesses is normally banks in developing nations. Third, banks in countries that are developing do normally have largest depositories of savings within the economy, in addition to offering universally accepted terms of payment (Olamide et al., 2015). Hetteš (2002) what he referred to as “right corporate governance” if it does not exist, then banking regulation cannot work, because from experience emphasis has been placed for an acceptable standard of accountability, oversight as well as balancing of core competencies for each institutional bank. Further stating Hettes opined that appropriate corporate governance among the management of the bank as well as the banking supervisory authority makes the work of banking regulation easy which adds to corporate governance. Crespi et al. (2002) suggest corporate governance of the banks applies to the different strategies through which bank-owners aim at compelling executives in adopting policies that optimize profit. They acknowledged the approaches which they said could be external to the business, like the corporate control market/the level of competitiveness within commodity & labor markets, as well as the presence of internal processes, including administrative action by shareholders; referred to as substitute in fighting or involvement by the board-of-directors. Donald Brash, at the June 2001 Commonwealth Central Banks Conference on Corporate Governance for the Banking Sector in London, (Governor of New Zealand Reserve Bank), claimed that strengthening corporate governance is an essential means of fostering stability in finance. Internal governance structures of the Bank have a very critical impact on the effectiveness as well as the capacity of the Bank to recognize, track & control its risks (Pakhchanyan, 2016). While several causes, several of existing outside the bank management control are triggering banking crises, almost any failure by bank, is resulting from corruption & negligence on the part of the banks. At the long-run, mismanagement is an internal governance failure. While banking monitoring and supervision of bank risk roles can somehow mitigate the consequences of bad governance, any external official agency oversight is not a replacement for practices of corporate Kafidipe et al., Cogent Business & Management (2021), 8: 1888679 https://doi.org/10.1080/23311975.2021.1888679 Page 3 of 14 governance that is sound. Eventually, by promoting sound risk control practices inside individual banks, banking risks are more likely to be minimized to reasonable standards. 2. Background Better corporate governance will lead to a better corporate performance by avoiding the controlling owner’s expropriation, thus guaranteeing more dependable decision-making. The valuation of the organization could react instantaneously to the information signaling improved corporate governance in expectation of such change. Nevertheless, there is reasonably little objective evidence that supports the presence of a correlation between the standard of corporate governance as well as the performance of firms (Gizaw et al., 2015; Imam, 2006). A proper Governance structure means that expropriation is excluded from the company wealth by management/controlling shareholders, leading in more better-allocation of resources as well as improved outcomes. They are faced with lower capital costs as owners & lenders are more likely to bring their resources into firms with good-governing structures, and is an alternative source of improved market results. Relationships with them are expected to be more stable, fairer, as well as long-lasting as relationships with businesses with-less efficient governance. Implications are also evident for the nation as a whole. Since the economy is less vulnerable to structural threats, economic growth would be more sustainable. With better investor security at the firm level, the stock market, which is important for sustainable economic growth, will also be boosted and grown. Similarly, strong corporate governance is essential for maintaining a fair & a society that is free of corruption. Poor corporate-governance is fertile-soil for collusion in big companies as well as a corrupt-symbiosis between business & political elites (Amza, 2017). Limited expropriation of minority-owners & less abusive relations between big business & government influence would lead to a more favorable business atmosphere for smaller businesses as well as a fairer allocation of income (Iskander & Chamlou, 2000). 2.1. Deposit money bank loan theory Deposit money bank loan theory has widely gained acceptance in empirical literatures as one the most compatible theory addressing corporate governance issues globally. This theory notes that the deposit money bank’s cash was immediately acquired by the self-liquidation of the loan issued for a limited period of time as well as the funding of working capital, where the creditors successfully repaid the loaned funds at the conclusion of their business cycles. According to this hypothesis, regardless of the duration of the anticipated payback period of these loans, banks do not lend capital to purchase real estate or luxury goods/invest in stocks &bonds, where this theory is suitable for traders who need to fund their individual trading activities & for a limited time (Okoh, Nkechukwu, & Ezy, 2016). 2.2. Comparative study of corporate governance and performance of money listed deposit bank in Nigeria For the period 2011–2016, Olalekan et al. (2018) examined the board size, risk management, and financial performance of listed deposit money banks in Nigeria. There are (15) registered deposit money banks in Nigeria, of which, due to the accessibility & availability of data, fourteen (14) sample-size was utilized in the study analysis. Size of corporate-board and risk control as an independent-variable was employed as the representation of number of boards of directors, liquidity risk, default risk & operational risk, while the financial result proxy was the return on equity (ROE) as well as earnings per share (EPS). Data for the time under review were gotten from secondary-sources, via the yearly report & bank accounts, as well as the data were analyzed using various techniques of panel regression. The outcome of analysis revealed that there is a substantial negative-impact on equity return (ROE) as well as earnings per share (EPS) on the scale of the board, both credit-risk as well as risk of operations. The analysis also indicates that the risk of liquidity affects the ROE & EPS of the study of Nigerian’s banks most insignificantly. From the argument, between several number of studies, concerning banks legislating their management of Kafidipe et al., Cogent Business & Management (2021), 8: 1888679 https://doi.org/10.1080/23311975.2021.1888679 Page 4 of 14 risk scheme in ensuring that the non-performing loan is mitigated as it has been empirically shown to minimize the financial performance of the company’s efficiency. For better results, they can also lower their operating costs. Okere et al. (2018) examined the effect of risk management (credit & liquidity) on the economic performance of money deposit banks in Nigeria. In the analysis, panel methodology as well as other econometric tools were used, such as the Hausman-test as well as descriptive statistics. The findings of the panel regression illustrate a positive association between risk control and the financial success of money deposit banks. The study advises that banks in Nigeria should expand their ability in liquidity risk analysis, credit risk analysis and credit management, while regulatory bodies should pay more attention to banks’ compliance with the Bank’s and other financial institutions’ prudential guidelines. 3. Methods and materials Twelve (12) banks are included in the panel data spanning the period 2013–2018 using Descriptivestatistics. To investigate the presence of existing relationship amongst variables, the Pearsoncorrelation analysis is utilized. However, panel data estimation strategies such as pooled regression, fixed effect as well as random effect regression were also used to identify the presence of collinearity among the variables. In contrast, the Hausman test is used to select the appropriate estimator; (i.e. random effect regression). 3.1. Model specification In order to investigate corporate governance; risk-management as well as financial performance in Nigeria, the research adopted the Improved/modified econometric-model version which the study Coleman and Nicholas (2006) adopts. Consequently, below is the Econometric-model; The model is expressed in its implicit form first: yit ¼β1þXitβ2þεit Where: the dependent-variable isyit&Xitis the explanatory/Independent variable &εit as error term. In addition, the econometric model is represented in the following explicit-form: 3.1.1. Model 1 β0 Where β14= Intercept or constant εit= Coefficient of the independent-variables β0= Error term, t = year & i = firm Refer to Table 1 for definition of Variables 3.1.2. Model 2 β14 Where εit= Intercept or constant β0= Coefficient of the independent-variables Kafidipe et al., Cogent Business & Management (2021), 8: 1888679 https://doi.org/10.1080/23311975.2021.1888679 Page 5 of 14 Table 1. Descriptive statistics Acronym Variables Measurements Dependent Variables (firm performance measures) TobinQ TobinQ Net book -value of an asset minus equity book value & equity of market value divided by total book-value-assets. ROA Return on Assets Profit-after-Interest & Taxation divided by Total Asset ROE Return on Equity Profit after Interest and Taxation divided by Total Asset Corporate Governance Indicators BS Board size The total-number of members on the board BIN Board independence The ratio of independent director to total board BC Board committee Number of Board Committees DOH Directors’ shareholding Percentage of number of shares held by directors to total shares BI Board insider The proportion of executive directors to the size of the board BM Board meeting The meetings held per year Enterprise Risk Management Indicators ERM Enterprise risk management index Reference to section 3.6.2.2 BRCS Size of board risk committee Total number of people on the board risk committee BRCM Meetings of board risk committee Number of meetings holding by the Risk Board BRCI Board risk-committee independence Number of independence directors on the Risk Board Control Variables Size Firm size Natural Logarithm of Total Asset. Lev Leverage Total-debt divided by (Total Common Equity & Total-Debt). Tan Tangibility Fixed Assets dividing by the Total Assets. Age Firm age The Nigerian Stock-Market Natural Log of the Year under Observation Minus Listing Year. Kafidipe et al., Cogent Business & Management (2021), 8: 1888679 https://doi.org/10.1080/23311975.2021.1888679 Page 6 of 14 β14= Error term, t = year & i = firm Refer to Table 1 for definition of Variables 3.1.3. Model 3 εit Where β0= Intercept or constant β14=Coefficient of the independent-variables εit= Error term, t = year & i = firm 4. Results and discussion In this section, empirical analysis of regression was presented. Other analysis presented includes descriptive statistics, correlation analysis, and Tobin Q. The descriptive figures of the factors used for the overall study are provided in Observation Table 2., mean; standard deviation; minimum value & maximum-value of each component are stated in the descriptive description. The Tobin’s average of q reflecting the business position of the sampled banks is 0.9633 from the company performance measures in Table 5. This result indicates that most sampled banks’ shares are undervalued (i.e. the cost to replace a firm’s assets exceeds its share value) as the mean value is below 1. Whereas the sampled banks’ minimum-value of Tobin’s q is 0.84, the maximum value of Tobin’s q is 1.212. In comparison, the standard-deviation of Tobin’s q is 0.079, which suggests that the sampled banks have low uncertainty. Descriptive overview return-on-asset (ROA) and also return on equity-ROE. The ROA has a mean value of 0.035, with a minimum-value of 0.01 & a maximum-value of 0.283, respectively. This means that an estimate of 3.5% of the income before tax of the banks that are sampled, attributable realized from the overall reserves. The standard deviation for the return on asset is 0.049, which implies low-profit variability of the selected banks. Furthermore, the return on equity (ROE) exhibits average value of 0.114, which implies that 11.4% of sampled banks' profit are derived from the shareholders' equity. The standard deviation of 0.098 shows low variability between the minimum and maximum value of the selected banks. 5. Findings The board size, director’s shareholding, independent board & the meeting of the board-of- directors are negative. At the same time, Tobin q. has a positive coefficient for the number of board committees. This suggests that there exists substantial partnership between the Deposit Money Banks-DMB, listed in Nigeria’s corporate governance (board composition, shareholdings of directors, board independence & board meetings) & financial results (Tobin q). However, at a 5% degree of importance, only the board’s independence remains statistically negligible. The average size of the Board Risk Board & the Enterprise Risk Management Index coefficients is 5% negative & statistically relevant. The findings indicate that a sophisticated risk management approach diminishes the business efficiency of listed deposit money banks (DMB) in Nigeria. Kafidipe et al., Cogent Business & Management (2021), 8: 1888679 https://doi.org/10.1080/23311975.2021.1888679 Page 7 of 14 Okere, W., Isiaka, M. A., & Ogunlowore, A. J. (2018). Risk management and financial performance of deposit money banks in Nigeria. European Journal of Business, Economics and Accountancy, 6(2), 30–44. Okorie, G., & Uwaleke, U. J. (2010). An overview of financial sector reforms and intermediation in Nigeria. Central Bank of Nigeria Bullion, 34(2), 19–29. Olalekan, L. I., Mustapha, L. O., Irom, I. M., & Emily, B. N. CORPORATE BOARD SIZE, RISK MANAGEMENT AND FINANCIAL PERFORMANCE OF LISTED DEPOSIT MONEY BANKS IN NIGERIA. Olamide, O., Uwalomwa, U., & Ranti, U. O. (2015). The effect of risk management on bank’s financial performance in Nigeria. Journal of Accounting and Auditing: Research & Practice, 1–7. Pakhchanyan, S. (2016). Operational risk management in financial institutions: A literature review. International Journal Financial Studies, 4(20), 1–21. https://doi.org/10.3390/ijfs4040020 Res, I. J., Sa, K., & Gemechu, D. (2016). Risk management techniques and financial performance of insurance companies. International Journal of Accounting Research, 4(1), 1–5. © 2021 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. You are free to: Share — copy and redistribute the material in any medium or format. Adapt — remix, transform, and build upon the material for any purpose, even commercially. The licensor cannot revoke these freedoms as long as you follow the license terms. Under the following terms: Attribution — You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. No additional restrictions You may not apply legal terms or technological measures that legally restrict others from doing anything the license permits. Cogent Business & Management (ISSN: 2331-1975) is published by Cogent OA, part of Taylor & Francis Group. Publishing with Cogent OA ensures: • Immediate, universal access to your article on publication • High visibility and discoverability via the Cogent OA website as well as Taylor & Francis Online • Download and citation statistics for your article • Rapid online publication • Input from, and dialog with, expert editors and editorial boards • Retention of full copyright of your article • Guaranteed legacy preservation of your article • Discounts and waivers for authors in developing regions Submit your manuscript to a Cogent OA journal at www.CogentOA.com Kafidipe et al., Cogent Business & Management (2021), 8: 1888679 https://doi.org/10.1080/23311975.2021.1888679 Page 14 of 14