CHAPTER ONE
INTRODUCTION
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 corporate 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).