CORPORATE GOVERNANCE: A Study Of The Effects Of Employee Ownership And Board Composition On The Performance Of Microfinance Banks In South-East Nigeria

Kenneth Ezeani 146 PAGES (61429 WORDS) Thesis
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ABSTRACT

Flowing from the perceived success of the reforms in the banking industry in Nigeria in 2006, the Central Bank of Nigeria (CBN) extended the policy to the community banks with their conversion to and renaming to Microfinance banks (MFBs) in 2008. The regulatory framework guiding this process set out guidelines of the corporate governance (CG) structure and mechanisms to be adopted by this class of banks different from those with the universal banking license. This work reviewed the CG mechanisms of board composition and ownership structure in relation to performance three years into the 2008 consolidation and three years hence. The aim was to determine which CG variables and in what combination most affects performance and in what direction, in order to advance a CG model for the MFBs based on observed best practice. The study also traced the history of microfinance in the country in order to set a contextual background for any class of readers. The CG variables of board size and character; and ownership character were related to the performance variables of Return on Assets and annual lending of these MFBs. Regarding board composition, we found that there was a preference for the board size to remain at 7 for optimum performance while an additional executive director should be included to join the CEO on the board. The study also found that as stated earlier, the outside directors should be experts and experienced and should preferably be residing within the state or region the MFB is located. This is because the unavailability of the directors weakens the relevance of boards during meetings. On the side of employee ownership, I found an overwhelming preference for more employees to be given opportunities to own shares within the company citing motivation as a direct result of this. This agrees with many studies on employee stock ownership and is also intuitive. However, the employee ownership of shares only becomes effective if the employee actually sees his increased effort leading to improved performance. This might involve more work by the Human resource and line managers to entrench this tenet of psychological ownership.


Table of Content

 DECLARATION ............................................................................................................................................... ii ACKNOWLEDGEMENTS ................................................................................................................................ iii

 ABSTRACT ..................................................................................................................................................... iv LIST OF TABLES .............................................................................................................................................. x 

LIST OF FIGURES ........................................................................................................................................... xi CHAPTER 1  INTRODUCTION ..................................................................................................................... 1 

1.1  Background To The Study ................................................................................................. 1 

1.2  Statement of Research Problem ....................................................................................... 4 

1.3  Research Aim .................................................................................................................... 5 

1.4  Research Objectives .......................................................................................................... 5 

1.5  Research Questions........................................................................................................... 5 

1.6  Significance of the Study ................................................................................................... 6 

1.7  Scope of the study............................................................................................................. 6

 1.8  Country Profile: Microfinance in Nigeria in the 21st century ........................................... 6 1.8.1  The present state of Microfinance in Nigeria. ...................................................................... 7 

1.9  Layout of chapters in the thesis ........................................................................................ 8 


CHAPTER 2  LITERATURE REVIEW ............................................................................................................. 9

 2.1  Conceptual Framework ..................................................................................................... 9 

2.1.1  Corporate Governance .......................................................................................................... 9 

2.1.2  Corporate Performance ...................................................................................................... 10 

2.2  Theoretical Framework: Theories of Corporate Governance ......................................... 11 

2.2.1  Agency Theory ..................................................................................................................... 11 2.2.2  Stewardship Theory: A Good Reputation Always Pays ....................................................... 12 

2.2.3  Stakeholder Theory:  Do Too Many Hands Spoil the Broth? .............................................. 13 

2.2.4  Justification for Theoretical framework .............................................................................. 14

 2.3  Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance ............................................................................................................................ 15

 2.3.1  The Roundtables and the Principles: what they have to say .............................................. 16

 2.4  Corporate Governance and Capital Markets .................................................................. 17 

2.5  Corporate Governance and Cost of Capital .................................................................... 18 

2.6  The Global Financial Crisis ............................................................................................... 19 

 vi   

2.6.1  Corporate Governance and the Crisis ................................................................................. 21 

2.6.2  CG failures in the crisis ........................................................................................................ 22

 2.7  Corporate Governance and Banks .................................................................................. 

2.8  Corporate Governance and the crisis in the Nigerian Banking sector ............................ 25 

2.9  Operation of the Corporate Governance Variables ........................................................ 28 

2.9.1  Board Type .......................................................................................................................... 28

 2.9.2  Board Size ............................................................................................................................ 28 2.9.3  Board Gender Composition ................................................................................................ 29

 2.9.4  CEO Duality ......................................................................................................................... 30 

2.9.5  Independent/Outside Directors .......................................................................................... 30 2.9.6  Board Competency/Educational Level ................................................................................ 31 

2.9.7  Board Experience in Finance Sector .................................................................................... 31

 2.9.8  Meeting frequency of board ............................................................................................... 31 

2.9.9  Board compensation ........................................................................................................... 32 

2.10  Factors Affecting MFB Performance ............................................................................... 32 2.11  Capital: ............................................................................................................................ 33 2.12  Ownership Structure ....................................................................................................... 34 2.12.1  Employee ownership: Its foundational works .................................................................... 35 

2.12.3  Attributes of employee ownership ..................................................................................... 38 2.12.4  Employee ownership and work attitudes ........................................................................... 38 

2.12.5  Employee share ownership and cultural values ................................................................. 40

 2.12.6  Other conclusions on effect of EO on attitudes and performance ..................................... 40

 2.12.7  Implications for Public Policy .............................................................................................. 41 

2.13  Summary of Nigerian Corporate Governance Regulations ............................................. 42

 2.13.1  Corporate Governance Code for Public Companies in Nigeria (CGCPCN) .......................... 43 

2.13.2  Revised Regulatory and Supervisory Guidelines for Microfinance Banks in Nigeria (RRSGMFBN) ....................................................................................................................................... 44

 2.14  Microfinance in Nigeria ................................................................................................... 44 2.14.1  Pre-Independence (<1960) ................................................................................................. 45 2.14.2  Post Independence (from 1960-2000) ................................................................................ 47 2.15  Research Gap .................................................................................................................. 48 2.16  Research Aim .................................................................................................................. 49 

 vii   2.17  Research objectives ........................................................................................................ 49 2.18  Research hypotheses ...................................................................................................... 49 2.19  Chapter Summary ........................................................................................................... 50 CHAPTER 3  METHODOLOGY .................................................................................................................. 52 3.1  Introduction .................................................................................................................... 52 3.2  Ontology .......................................................................................................................... 52 3.3  Epistemological position ................................................................................................. 52 3.4  Research methodology ................................................................................................... 53 3.4.1  Philosophy of Methodology ................................................................................................ 53 3.4.2  Qualitative Survey methodology ........................................................................................ 53 3.4.3  Justifying the use of Qualitative/analytical survey research .............................................. 54 3.5  Survey Design .................................................................................................................. 55 3.5.1  Sampling .............................................................................................................................. 55 3.6  Data collection methods ................................................................................................. 55 3.6.1  Pilot study ........................................................................................................................... 55 3.6.2  Interview: ............................................................................................................................ 56 3.6.3  Document reviews: ............................................................................................................. 57 3.7  Justification for interviews .............................................................................................. 57 3.8  The Research model ........................................................................................................ 57 3.9  Variables used in the study ............................................................................................. 58 3.9.1  Board composition .............................................................................................................. 58 

3.9.2  Ownership Structure ........................................................................................................... 59 

3.9.3  Performance........................................................................................................................ 59 3.9.4  Justification for choice of variables ..................................................................................... 59

 3.10  Research questions and Hypotheses .............................................................................. 60 3.11  Method of Data Analysis: Thematic Analysis .................................................................. 61 3.12  Chapter Summary ........................................................................................................... 62 


CHAPTER 4:  FIELD WORK AND ANALYTICAL FRAMEWORK .................................................................... 63 

4.1  Introduction .................................................................................................................... 63 

4.2  Field work ........................................................................................................................ 63 

4.3  Pilot study ....................................................................................................................... 63 

4.3.1  Definition of Pilot study ...................................................................................................... 63 

4.3.2  The value of a pilot study .................................................................................................... 64 

4.3.3  The Goal of a pilot study ..................................................................................................... 65

 4.3.4  Lessons learnt from Pilot Study .......................................................................................... 65 

4.4  Negotiating entry into the field ...................................................................................... 66 

4.5  Description of the Microfinance banks and their officials interviewed .......................... 68 

4.6  Content of Pilot study guidance form ............................................................................. 68 

4.7  Guidance form construction ........................................................................................... 69 

4.8  Interview ......................................................................................................................... 69 

4.9  Sample size estimation for qualitative analysis .............................................................. 70 

4.10  Chapter Summary ........................................................................................................... 71 

CHAPTER 5  RESULTS ............................................................................................................................... 72 

5.1  Introduction .................................................................................................................... 72 5.2  Research questions: ........................................................................................................ 72 5.3  Themes emerging from interviews ................................................................................. 73 5.3.1  Factors affecting performance ............................................................................................ 73 

5.3.2  INTERVIEW QUESTION 2: Do you think the ratio of executive to non-executive directors on your board has any effect on performance? ................................................................................. 74 

5.3.3  INTERVIEW QUESTION 3: What is your ideal board size? ................................................... 78 

5.3.4  Interview Question 4: Do you think employees should be shareholders? ......................... 83 

5.3.5  Interview Question 5: Are there any effects of employee shareholding on performance?  85

 5.4  Concluding statement ..................................................................................................... 90


 CHAPTER 6: DISCUSSION, CONCLUSION AND RECOMMENDATIONS ......................................................... 91

 6.1  Introduction .................................................................................................................... 91 6.2  Research Question 1: What is the effect of employee ownership on performance ...... 91 

6.3  Research Question 2: What is the ideal mix of inside/outside directors for optimum performance? 92 

6.4  Research Question 3: What is the effect of board size on growth rates and profitability?  92

 6.5  Summary of Findings ....................................................................................................... 93 

6.6  Review of research objectives ........................................................................................ 94

 6.6.1  Research objective 1: To determine the current understanding of employee ownership and board composition in Nigeria and world literature. .................................................................... 94 

 6.6.2  Research objective 2: To investigate how MFB MDs view the impact of employee ownership and board composition on performance .......................................................................... 95 

6.6.3  Research objective 3: To determine the perception of the MDs of the effectiveness of current corporate governance structures applicable to MFBs’ financial performance ..................... 96 

6.6.4  Research objective 4: To determine MFB MDs’ views of the most efficient board composition mix for corporate performance ..................................................................................... 96

 6.7  Recommendations .......................................................................................................... 96

 6.9  Contribution to Knowledge ............................................................................................. 97 

6.9.1  Contribution to literature ................................................................................................... 97

 6.9.2  Contribution to theory ........................................................................................................ 97 6.10  Suggestions for Further Study ......................................................................................... 98 6.11  Limitations and Generalisability ...................................................................................... 98 REFERENCES ................................................................................................................................................ 99 APPENDIX .................................................................................................................................................. 122 Appendix 1: SURVEY/PILOT STUDY TOOL ............................................................................................. 122 

Appendix 2: PARTICIPANT INFORMATION LETTER ............................................................................... 123 

Appendix 3: RESEARCH PARTICIPANT CONSENT FORM ....................................................................... 124 

Appendix 4: FORMAL MICROFINANCE INSTITUTIONS IN NIGERIA ....................................................... 125 

Policy Aims of microfinance in Nigeria ........................................................................................ 125 

The policy targets stated by the same author (p.91) include ................................................... 125 

Types of Microfinance Institutions (MFIs) in Nigeria ........................................................................ 125 

i.  Universal banks: ..................................................................................................................... 125

 ii.  Microfinance Banks (MFBs): ................................................................................................ 126

 iii.  Non-Governmental Organisation Microfinance Institutions (NGO-MFIs): ..................... 126

 iv.  Public Sector Poverty Alleviation Agencies:................................................................... 126 v.  Special microfinance schemes:...................................................................................... 126 

vi.  Donor agencies: ................................................................................................................. 126 

Overview of Government’s Microfinance Initiatives In Nigeria Since 1970 ..................................... 127 

Appendix 5: CORPORATE GOVERNANCE STANDARDS AND PRINCIPLES AROUND THE WORLD .......... 128 

United Kingdom ................................................................................................................................ 128

 Australia ............................................................................................................................................ 130 United States ..................................................................................................................................... 130 

 x 

  Appendix 6: DEVELOPING THE RESEARCH INSTRUMENTS ................................................................... 132

 Cover letters .............................................................................................................................. 132 

Interview questions .......................................................................................................................... 132 

Interview instrument ........................................................................................................................ 132

 Appendix 7: FURTHER INFORMATION ON THE RESPONDENTS ............................................................ 133                 

LIST OF TABLES 

Table 2.1:A Comparison of Theoretical Perspectives on Organizational Governance (Cornforth, 2001 p.9) .................................................................................................................................................................... 14 

Table 4.2:MFB profile of Southeast region as at study time in 2014 .......................................................... 66 

Table 4.3: Brief data of interviewees .......................................................................................................... 68

Table 4.4: Sample frame of MFBs in SE region ........................................................................................... 70

Table 5.4: Ownership of MFBs in the states of the SE region ..................................................................... 71 

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APA

Kenneth, E (2019). CORPORATE GOVERNANCE: A Study Of The Effects Of Employee Ownership And Board Composition On The Performance Of Microfinance Banks In South-East Nigeria. Afribary.com: Retrieved November 18, 2019, from https://afribary.com/works/corporate-governance-a-study-of-the-effects-of-employee-ownership-and-board-composition-on-the-performance-of-microfinance-banks-in-south-east-nigeria

MLA 8th

Ezeani, Kenneth. "CORPORATE GOVERNANCE: A Study Of The Effects Of Employee Ownership And Board Composition On The Performance Of Microfinance Banks In South-East Nigeria" Afribary.com. Afribary.com, 04 Nov. 2019, https://afribary.com/works/corporate-governance-a-study-of-the-effects-of-employee-ownership-and-board-composition-on-the-performance-of-microfinance-banks-in-south-east-nigeria . Accessed 18 Nov. 2019.

MLA7

Ezeani, Kenneth. "CORPORATE GOVERNANCE: A Study Of The Effects Of Employee Ownership And Board Composition On The Performance Of Microfinance Banks In South-East Nigeria". Afribary.com, Afribary.com, 04 Nov. 2019. Web. 18 Nov. 2019. < https://afribary.com/works/corporate-governance-a-study-of-the-effects-of-employee-ownership-and-board-composition-on-the-performance-of-microfinance-banks-in-south-east-nigeria >.

Chicago

Ezeani, Kenneth. "CORPORATE GOVERNANCE: A Study Of The Effects Of Employee Ownership And Board Composition On The Performance Of Microfinance Banks In South-East Nigeria" Afribary.com (2019). Accessed November 18, 2019. https://afribary.com/works/corporate-governance-a-study-of-the-effects-of-employee-ownership-and-board-composition-on-the-performance-of-microfinance-banks-in-south-east-nigeria