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

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 (