TABLE OF CONTENTS
LIST OF TABLES ......................................................................................................................... iv
ABSTRACT ................................................................................................................................... ix
CHAPTER ONE ............................................................................................................................. 1
INTRODUCTION .......................................................................................................................... 1
1.1 Background of the Study .......................................................................................................... 1
1.2 Problem Statement .................................................................................................................... 2
1.3 Objectives of the Study ............................................................................................................. 4
1.4 Research Questions ................................................................................................................... 5
1.5 Scope of Study .......................................................................................................................... 5
1.6 Limitations of the Study............................................................................................................ 5
1.7 Significance of the Study .......................................................................................................... 6
1.8 Organization of the Study ......................................................................................................... 6
CHAPTER TWO ............................................................................................................................ 8
LITERATURE REVIEW ............................................................................................................... 8
2.1 Introduction ............................................................................................................................... 8
1
2.2 Corporate Governance .............................................................................................................. 8
2.3 Corporate Governance Mechanisms ......................................................................................... 9
2.3.1 Endogenous Corporate Governance Mechanisms ................................................................. 9
2.3.2 Exogenous Corporate Governance Mechanism ................................................................... 10
2.4 Corporate Governance Codes ................................................................................................. 10
2.5 Corporate Governance Mechanisms ....................................................................................... 13
2.6 Measuring Financial Institutions Performance ....................................................................... 16
2.6.1 Corporate Governance and Financial Performance ............................................................. 18
2.7 Theoretical Review ................................................................................................................. 20
2.8 Empirical Review.................................................................................................................... 26
CHAPTER THREE ...................................................................................................................... 31
RESEARCH METHODOLOGY.................................................................................................. 31
3.1 Introduction ............................................................................................................................. 31
3.2 Research Design...................................................................................................................... 31
3.3 Population and Sampling Size ................................................................................................ 31
3.4 Sampling Technique ............................................................................................................... 32
2
3.5 Sources of Data ....................................................................................................................... 32
3
3.6 Data Analysis Methods ....................................................................................................... .... 32
Model Specification and Variable Definition ............................................................................... 33
CHAPTER FOUR ......................................................................................................................... 35
RESULTS AND FINDINGS ........................................................................................................ 35
4.1 Introduction ............................................................................................................. ................ 35
4.2 Correlation Analysis of Board Size and Financial Performance ............................................ 36
4.3 Correlation Analysis of Directors’ Equity Interest and Financial Performance ..................... 36
4.4 Correlation Analysis of Board Gender Diversity and Financial Performance ........................ 37
4.5 Multiple Regression Analysis ................................................................................................. 38
4.5.1 Return on Assets (ROA) ...................................................................................................... 38
4.5.2 Return on Equity .................................................................................................................. 40
4.6 Discussion of Findings ............................................................................................................ 42
4.6.1 Board Size and Financial Performance of Commercial Banks ............................................ 42
4.6.2 Directors’ Equity Interest and Financial Performance ......................................................... 43
4.6.3 Board Gender Diversity and Financial Performance ........................................................... 44
CHAPTER FIVE........................................................................................................................... 47
SUMMARY, CONCLUSION AND RECOMMENDATIONS ................................................... 47
5.2 Summary ........................................................................................................................ ......... 47
5.3 Conclusion .............................................................................................................................. 48
5.4 Recommendations ................................................................................................................... 49
5.5 Recommendations for Further Study ...................................................................................... 50
5.6 Limitations of the Study .......................................................................................................... 50
REFERENCES................................................................................................................... ........... 51
LIST OF TABLES
Table 4.1 Descriptive Statistic of ROE, ROA, BS, DEI and
BGD……………………………...45
4
Table 4.2: Correlation Analysis of Board Size and Financial Performance .................................... 46
Table 4.3: Correlation Analysis of Directors’ Equity Interest and Financial Performance .......... 47
Table 4.4: Correlation Analysis of Board Gender Diversity and Financial Performance ............. 47
Table 4.5: Model Summary ................................................................................................................... 48
Table 4.6: ANOVA(b)............................................................................................................................. 48
Table 4.7: Coefficients(a) ....................................................................................................................... 49
Table 4.8: Model Summary ................................................................................................................... 49
Table 4.9: ANOVA (b) ........................................................................................................................... 50
Table 4.10: Coefficients (a).................................................................................................................... 50
ABSTRACT
The study examined the impact of corporate governance and cooperate performance of
Nigerian banking industry using First Bank Plc as case study. Board composition, board
size, CEO’s duality status and number of shareholders were proxies for corporate
governance and return on asset, return on equity and net profit margin were proxies for
financial performance. The objectives of the study were to examine the impact of corporate
governance variables on return on asset, return on equity and net profit margin. Secondary
5
data related to the variables of interest were obtained from the annual financial statement of
the sampled bank between 2011 and 2016. The data obtained were subjected to the statistical
techniques of descriptive statistics, Pearson correlation analysis and regression analysis. The
results amongst others, indicated that corporate governance has significant impact on return
on asset, return on equity and net profit margin. Furthermore, it was found that board size
negatively impact on financial performance while board composition and number of
shareholder positively impact on financial performance. The regression coefficient of CEO’s
duality status was not obtained because the sampled bank has different persons occupying
the positions of CEO and board chairman within the period estimated. To this end, the study
suggests amongst others that companies should ensure that majority of their board members
are independent, meaning that the directors are not employees of the companies and do not
depend on it for their livelihood so that they can fearlessly and honestly monitor the activities
of the CEO and other executive directors. This will also help to limit the possibility of the
CEO and executive directors to exploit the company to their own advantage.
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
The growth and development of every economy depends on the country’s financial system. In
Nigeria, the banking industry practically commands the financial sector. The industry has
undergone series of restructuring all geared towards protecting deposit funds, maintaining
and ensuring soundness of banking and improving the welfare of employees and
stakeholders. The banking sector has been bedeviled with internal (workers and investors)
and external (public and depositors) dissatisfaction culminating to image problem. As a
result, most banks have sort for improved techniques like information and communication
technology (ICT), total quality management strategies, corporate governance strategies,
6
repackaging and rebranding, to compete more effectively to solve these problems and as well
to enhance their financial and corporate performance (Akintoye, 2010; Adekunle, 2013).
Corporate governance has been an issue of global concern long before now. However, it
came to limelight in the 1980s as a result of the fallout of the Cadbury report in the United
Kingdom, which concentrated on the financial aspects of corporate governance. Immediately
followed suits, the issue of corporate governance transmitted across all developed and
developing countries (Akpan & Rima, 2012). Proper governance of companies is now as
crucial to the world economy as the proper governance of countries and will converge in
associated issues of competitiveness, corporate citizenship, social and environmental
responsibility. The governance of banks becomes even more prominent considering their role
in financial intermediation in developing economies. Commercial banks are the main
providers of funds to enterprise and where there is thin or absence of good capital market,
their failure becomes the failure of system. Simpson (2009) notes that the impact of the
failure of the banking system can have immense cost, as it has been repeatedly been seen that
bank failure cost developing countries up to 15% of their GDP and losses that outweighs aids
received. The major challenge of world’s economy today is not in the area of manufacturing
modern equipments that will help fight government rebellions or any such crises that may
occur in the economy. However, solving the problem of governance can help to totally
strengthen an economy and improve the living standards of its citizenry. This is evident in the
fact that many companies all over the world suffer from the impact of bad governance and
which in effects results to costly impact on the performance of organizations in the economy
(Bebeji, etal, 2015).
Commercial banks play crucial roles in propelling the entire economy of any nation by
channeling surplus funds to the deficit units, of which there is dire need for repositioning to
achieve efficient financial performance through a reform process geared towards forestalling
bank collapse. In Nigeria, the reform process of the banking sector is part and parcel of
government strategic agenda aimed at restructuring and integrating the Nigerian banking
7
sector into continental and global financial system. To make the banking sector sound
according to Akpan and Rima (2012), the sector has undergone remarkable changes over the
years in terms of number of institutions, structure of ownership, as well as breadth and depth
of operations. These changes have been influenced mostly by the constraints posed by
deregulation of the financial system, globalization of operations, technology advancement
and implementation of supervisory and prudential requirements that conform to international
regulations and standards, which corporate governance is inclusive.
Corporate governance is generally the systems of rules, practices and processes by which a
company is directed and controlled. According to Akintoye (2010) corporate governance
involves the balancing the interest of a company’s many stakeholders such as shareholders,
management, customers, suppliers, financier, government and the community. Corporate
governance also provides the platform for attaining company’s objectives and it covers
practically every sphere of management from actions plans and internal controls to
performance measurement and corporate disclosure. Good corporate governance wields
more profits for the firms, raises their valuation and sales growth and it has the possibility of
reducing their capital expenditure. It has been reported by Love (2006) that good corporate
governance increases the confidence of stakeholders and stimulates the goodwill of the
organization. Corporate governance is a tool to ensure the existence of equity, fairness,
accountability and transparency in corporate reporting. Mayer (2011) notes that corporate
governance is not only about improving corporate efficiency, it also encompasses two major
issues namely the company’s strategy and life cycle development. It therefore, ensures that
management of organizations pursues those strategies that will safeguard the interest of the
shareholders. Good corporate governance is generally identified as those governance
mechanisms that are based on a higher level of corporate responsibility that an organization
exude in relation to transparency, accountability and ethical issues (Bebeji, etal, 2015).
Corporate governance is usually targeted to enhance competition, while allowing customers
the option of making a choice. However, corporate governance arrangement and institutions
8
vary from place to place but the focus is to promote corporate unbiasedness, accountability
and probity (Akpan & Rima, 2012). Thus, good corporate governance represents a central
issue for the operation of modern banking industry in the world today as it has the capacity of
affecting their profitability, solvency and liquidity levels.
1.2.
STATEMENT OF PROBLEM
Aremu (2014) observed that corporate governance is still at infancy in the Nigerian banking
industry as only 40% of quoted commercial banks seem to have recognized corporate
governance codes. The weakness inherent in the application of corporate governance ethics is
perhaps the most vital factor responsible for corporate failures and financial distress among
banks. The recent overtime is high profile of corporate fraud which tends to lead to failures in
the Nigerian banking industry. Poor application of corporate governance mechanism is
identified as one of the major possible factor in virtually all known instance of banks’ failure
in the country due to their non-compliance to corporate government ethics. Aremu (2014)
lamented that the past distresses experienced by Nigerian banks is as a result of lack of proper
oversight, regulatory, supervisory and corporate governance functions by the board of
directors, in which some them run their organizations for their own personal interest.
1.3.
OBJECTIVE OF THE STUDY
The main objective of the study is to examine the impact of corporate governance on
financial performance of the Nigerian banks using a case study of First Bank of Nigeria. The
specific objectives of the study are:
1. To examine the impact of corporate governance on returns on asset of First Bank Plc.
2. To examine the impact of corporate governance on returns on equity of First Bank Plc.
3. To examine the impact of corporate governance on net profit margin of the First Bank Plc.
1.4.
RESEARCH QUESTIONS
The study is aimed to provide relevant answers to the following research questions and they
are:
1. Does corporate governance impact on returns on asset of First Bank Plc?
9
2. Does corporate governance impact on returns on equity of First Bank Plc?
3. Does corporate governance impact on net profit margin of First Bank Plc?
1.5.
RESEARCH HYPOTHESES
Based on the objectives and questions raised in the study, three hypotheses were developed to
guide the study. The three hypotheses are stated in their null form and they include:
1. H01: Corporate governance has no significant impact on returns on asset of First Bank Plc.
2. H02: Corporate governance has no significant impact on returns on equity of First Bank Plc.
3. H03: Corporate governance has no significant impact on net profit margin of First Bank Plc.
1.6.
SIGNIFICANCE OF THE STUDY
The 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 will further provides an
insight into understanding the degree to which the banks that are reporting on corporate
governance have been compliant with different section of the codes of the best practice and
where they are experiencing difficulties.
Financial institutions, non-financial institutions, private sectors, stakeholders in financial
system and as well as other corporate titans will find this study as an invaluable asset which
spelt out ways of improving an organization’s financial performance via corporate
governance
The research study will also be beneficial to future researchers and undergraduate and
postgraduate students wishing to carry out similar study in their future research undertakings.
1.7.
SCOPE OF THE STUDY
The study is delineated to examine the impact of corporate governance on financial
performance by placing strong emphasis on First Bank Plc between the periods 2011-2016.
1.8.
METHODOLOGY
Secondary data sourced from the Nigerian Stock Exchange (NSE) and financial statements of
First Bank Plc for the period considered were used in the study. Returns on asset (ROA),
returns on equity (ROE) and net profit margin (NPM) were used as indices to measure
10
financial performance while board size (BS), board composition (BC), chief executive
officer’s duality status (CDS) and number of shareholders (NS) were used as indices to
measure corporate governance.
Three models are developed to estimate the impact of corporate governance on financial
performance of the sampled bank. The first model estimates the impact of corporate
governance (BS, BC, CDS, NS) on returns on asset (ROA). The second model estimates the
impact of corporate governance (BS, BC, CDS, NS) on returns on equity (ROE). The third
model estimates the impact of corporate governance corporate governance (BS, BC, CDS,
NS) on net profit margin (NPM).
The regression analysis is therefore employed to estimate the coefficients of parameters
estimate in each of the models.
1.9.
DEFINITION OF KEY TERMS
CORPORATE GOVERNANCE: These refer to the set of rules, controls, policies and
resolutions put in place to dictate corporate behavior to the stakeholders of a firm.
FINANCIAL PERFORMANCE: This is a measure of how well a firm can use assets from its
primary mode of business and generates revenue. This term is also used as a general measure
of firm’s over all financial health over a given period of time.
RETURNS ON ASSET: This measure of a company’s profitability equals to a fiscal year’s
earnings divided by its total asset, expressed as a percentage.
RETURNS ON EQUITY: This measure of how well a company used re-invested earning to
generate additional earnings, equal to fiscal year after-tax income (after preferred stock
dividends but before common stock dividends) divided by book value expressed as a
percentage.
TOTAL ASSETS: This refers to the final amount of all gross investments, cash and
equivalents, receivables and other assets presented on a firm’s balance sheet. Total assets are
the aggregation of fixed assets and current assets.
11
NET PROFIT MARGIN: This refers to how much of a company’s revenue are kept as net
income. The net profit margin is generally expressed as a percentage.
12
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter presents a comprehensive review of relevant literature in an attempt to position
the study in an appropriate theoretical framework. Thus, it discusses findings of related
researches to this study.
2.2 Corporate Governance
The role of corporate governance in finance has increased in the last two decades as a
prominent and prevalent area of research (Ganguli, 2013). Corporate governance issues
around the world after the collapse of Enron, World.com, and Arthur Anderson in the United
States attracted research on improvement of corporate governance (Adewale, 2013).
However, there is no standard, acceptable definition of corporate governance. Shungu,
Ngirande, and Ndiovu (2014) noted several definitions of corporate governance, most
stemming from the work of Fama and Jensen (2013). The term corporate governance
stemmed from the Greek word kyberman, which means to direct, control or govern
(Ayandele & Emmanuel, 2013). Corporate governance specifies the principles, procedures,
or regulations to manage, supervise, and regulate business (Adewale, 2013).
Claessens and Yurtoglu (2012) described corporate governance as techniques that guard
operation of an organization to distinguish owners from the managers. They noted this definition
is similar to that of Sir Cadbury, who defined corporate governance as a process through which
companies receive management and direction. According to Shungu et al. (2014), the
Organization for Economic Cooperation and Development defined corporate governance as a
process by which organizations receive direction on management on behalf of
13
the shareholders. Nwagbara (2012) described corporate governance as techniques and
strategies for company control, steering and directing managerial governance exploits.
2.3 Corporate Governance Mechanisms
The governance mechanisms can be categorized in two: endogenous systems and exogenous
systems.
2.3.1 Endogenous Corporate Governance Mechanisms
Internal corporate governance is about mechanisms for the accountability, monitoring, and
control of a firm’s management with respect to the use of resources and risk taking
(Llewellyn & Sinha, 2010). Internal corporate governance starts with the board of directors.
The Board of Directors: The board of directors is the supreme governing body of bank. The
board is responsible for setting the strategic direction of the bank and overseeing the risk
management policies of the bank. The board of directors is appointed by the shareholders of
the company. The board has the ultimate responsibility for the manner in which the
operations/business of a bank is conducted. Among its responsibilities are: appointing senior
management, establishing operational policies and, above all, taking responsibility for
ensuring the soundness of a bank. A board must be strong, independent and actively involved
in the activities of a bank (Llewellyn & Sinha, 2010).
Although a bank’s directors may not be experts in banking, it is important that they have the
skills, knowledge, and experience to enable them to perform their duties effectively. The board
oversees and supports management efforts, tests and probes recommendations before approving
them. It should make sure that adequate controls and systems are in place to identify and address
concerns before they become major problems. During bad times, a board that is
active and involved can help a bank survive if it is able to evaluate problems, take corrective
actions, and when necessary, keep the institution on track (Greuning & Bratanovic, 2013).
14
2.3.2 Exogenous Corporate Governance Mechanism
Ciancanelli and Gonzales (2010) state that in the banking sector, the regulation and regulator
represent external corporate governance mechanisms. In the conventional literature on
corporate governance, the market is the only external governance force with the power to
discipline the agent. The existence of regulation means there is an additional external force
with the power to discipline the agent. This force is quite different than the market. This
implies that the power of regulation has different effects to those produced by markets.
Financial institution regulation represents the existence of interests different from the private
interests of the firm. As a governance force, regulation aims to serve the public interests,
particularly the interests of the customers of the banking services. The regulator does not
have a contractual relationship either with the firm’s principal or with the banking
organizations because of differing interests from those of the principals (Ciancanelli &
Gonzales, 2010). The role of bank regulators and supervisors in the corporate governance
process is mainly seen through the laws and legislations that are promulgated. Such laws
pertain to capital adequacy requirements, reserve requirements and others
2.4 Corporate Governance Codes
Codes of corporate governance are defined as “a set of ‘best practice’ recommendations with
regard to the behavior and structure of the board of directors of a firm” (Aguilera, CuervoCazurra, & Kim, 2008). The first highly recognized national corporate governance code was
published in the United Kingdom in 1992. The publication was produced by a committee which
was led by Sir Adrian Cadbury. The title of the code was “The Financial Aspects of Corporate
Governance”. It was also simply referred to as the Cadbury Code. A great deal of emphasis must
of necessity be made on the fact that governance codes are expressed as principles and not as
laws which may attract penalties when not complied with. This is the case because those
15
responsible for formulating the codes take cognizance of the reality that circumstances of various
companies may differ, and codes can offer some flexibility. Codes are meant to continue from the
point where rules cease (Aguilera, Cuervo-Cazurra, & Kim, 2008).
International Codes: International bodies which have released Codes of Corporate
Governance include the Organization for Economic Co-operation and Development (OECD),
the International Corporate Governance Network (ICGN) and the United Nations. The OECD
Principles of Corporate Governance was initially released in 1999, after it received an
endorsement from the OECD Ministers. The OECD code has subsequently turned into a
global standard for decision makers, shareholders, enterprises and other stakeholders around
the world. They have propelled the corporate governance agenda and have given customized
direction for regulatory activities in countries both within and outside OECD jurisdiction The
OECD code was reviewed and the revised principles published in 2004 to factor new
happenings in OECD member and non-member countries at the time(Aguilera, CuervoCazurra, & Kim, 2008).
The International Corporate Governance Network (ICGN) is a governance organization led
by investors which was formed in 1995 and is established in over 50 countries. Its aim is to
promote effective corporate governance standards to assist in further developing efficient
markets and economies globally. The ICGN Global Governance Principles (“the Principles”)
describe the responsibilities of boards and shareholders respectively and aim to promote a
deeper level of discussion between the two parties. The current edition, which is the fourth,
was published in 2014. The United Nations Conference on Trade and Development
(UNCTAD) published the Guidance on Good Practices in Corporate Governance Disclosure
in 2006. This guidance was meant to serve as an optional technical aid for policy makers and
16
firms in developing economies and emerging markets (Aguilera, Cuervo-Cazurra, & Kim,
2008).
The emphasis of the document was put on generally relevant disclosure issues that should
apply to most organizations in order to enhance the benefits expected from the document.
The guidance draws heavily from some of the major codes like the UK Combined Code, the
OECD Principles of Corporate Governance (OECD Principles), the International Corporate
Governance Network Corporate Governance Principles, and also the Sarbanes Oxley Act,
and draws some insights from the contents of these documents, with an emphasis on an array
of disclosures including finance-related information, information relating to general
meetings, information regarding the level of adherence to rules pertaining to their respective
jurisdictions and how timeously and the manner in which information is disclosed(Aguilera,
Cuervo-Cazurra, & Kim, 2008).
National Codes: Ghana’s Corporate Governance Guidelines of Best Practices was published
in 2010 by the SEC. The code applies to every corporate entity sanctioned as stock
exchanges, dealers and investment advisers under the Securities Industry Law, the managers,
operators, trustees and custodian of unit trusts and mutual funds and the issuers of publicly
traded securities. However, like codes in other jurisdictions, the practices embodied in the
Ghana code are not in the form of rules and thus, violations are not met with legal penalties.
They are principally meant to provide direction to companies and benchmarks against which
levels of governance achieved by companies may be measured (Ghana SEC, 2010).
Ghana SEC (2010) noted certain common elements that are associated with good corporate
governance upon which further changes and improvements in governance structures are built
upon today. They are: (1) shareholder rights (2) the equitable treatment of shareholders; (3)
the roles of stakeholders; (4) disclosure and transparency; (5) the responsibilities of the
board. These central themes are explicitly uncovered in the 2010 guidelines of best practices
17
published by the Ghana Securities and Exchange Commission through more than a hundred
provisions contained in the code.
2.5 Corporate Governance Mechanisms
Corporate governance involves the set of institutional and market mechanisms that induce
self-interested managers to increase the value of the residual cash flows of the company to
optimal levels on behalf of the owners of the entity. To have the necessary impact, a
governance mechanism should bridge the gap between the interests of management and
shareholders, and must have a substantial and positive impact on corporate performance and
value (Denis, 2011). Various mechanisms are therefore set in place with the view that they
will ultimately enhance the firm’s performance and maximize shareholder wealth.
Separation of CEO and Chairman: The two topmost positions in an organization are that of the
CEO and the Board Chairman. When a single individual occupies both positions, he is assumed
to be excessively powerful, a situation which may be detrimental to the organization. According
to Cadbury (2012), combined leadership structure happens when the CEO plays two different
roles, firstly as the CEO and then also serves as the board chairman. On the other hand, when two
separate individuals occupy the position of CEO and Board Chairman, then there is separate
leadership (Rechner & Dalton, 2011). The distinction of the two roles of CEO and board chair is
rooted fundamentally in agency theory (Dalton et al. 2008).
Since the main responsibilities of the board includes supervising management and
safeguarding the investment made the shareholders, merging the duties of the CEO and the
chairman, will lead to too much power being entrusted to one person, thereby potentially
making him excessively dominant, and this may result in ineffective monitoring of
management by the board (Lam & Lee, 2008). A separation of the two positions is believed
to result in a more independent assessment of the CEO and executive management as a
whole, creating the atmosphere for better accountability (Monks & Minow, 2014). On the
18
contrary, there are suggestions from other quarters that CEO duality enhances the fortunes of
the organization. Suryanarayana (2015) advocates that leadership is strengthened when the
positions of CEO and Chairman are merged. Dehaene, De Vuyst and Ooghe (2011), find that
a combined leadership structure impacts on ROA significantly.
Board Size: The optimal board size for a firm has been discussed over the years, with
differing views been shared. Jensen (2013) was of the view that board sizes should be
restricted, as a large board is likely to have many of its members being inactive (or freeriding). When this happens, the board becomes more of a mere formality and less effective in
its role as part of the management process. However, a board which is too small in size may
also lack the diversity of knowledge, skills and experience that may help the board to be
effective. The UK Combined Code is of the opinion that the board should be sizeable enough
such that the requirements of the business can be met and that changes to the constitution of
the board as well as the make-up of its committees can be managed without unnecessary
disruption. It should also not be too large such that it is not adequately managed to be
effective in its role (Jensen, 2013).
Board Composition: Board composition refers to the manner in which executive and nonexecutive directors, including independent non-executive directors are represented on the
board. Singapore’s Corporate Governance Code (2012) directs that there should be a strong
element on the board, which is able to exercise independent and objective judgment on
corporate affairs. No person or small group of persons should be given the leeway to be
domineering during the board’s decision making. The presence of executive directors on the
board is highly essential. They bring to bear their expertise in specific areas and a vast
amount of knowledge to the entity (Weir and Laing, 2011).
19
Dalton et al (2008) therefore asserted that the larger proportion of a properly functioning
board should comprise of non-executive directors who are expected to provide better
performance because of their independence from the entity’s management. Studies conducted
by and Fama and Jensen (2013) point to the fact that non-executive directors are more
inclined to protect the interest of the entity’s owners, because of the need to preserve their
reputation within the business circles. This view is supported by Weisbach (2008), who states
that non-executive directors are more effective at monitoring than executive directors because
of their concern for maintaining their reputation.
Board Committees: Board committees as part of the manner in which boards are organized, play
vital roles by rendering objective and non-biased supervisory and consultancy services to the
company with the aim of preserving the interest of shareholders (Harrison, 2017). In many
jurisdictions, it is now required of the Boards of companies to have committees performing
certain key functions. Keong (2012) argues that board committees may be rendered useless and
ineffective unless their members are objective and unbiased, well informed and have access to
expert advice. They must also have an appreciable level of financial acumen.
Director Remuneration: The compensation and incentive packages given to board members
and senior management must be at a level that will be attractive enough to court and retain
those with the requisite qualification and expertise. The pay structure, including severance
pay should not be complex, and it should promote the medium to long-term interests of the
company. Thus, the system should be such that management and board members would be
dissuaded from acting in their own selfish interest rather than the company’s, and failing board
members would not be rewarded for their incompetence upon termination of their appointment.
According to Jensen and Meckling (2016), higher levels of remuneration and other forms of
financial incentives should have a positive impact on firm performance. However, Jensen and
Murphy (2011) show that executive salary is not an effective mechanism for increasing the value
20
of the organization. Brennan (2015) also argues that financial packages are insufficient to ensure
complete harmony between the interests of hired executives and the firm’s owners.
Corporate Reporting and disclosures: Many investors consider the annual report, more than
anything else, as the most valuable source of input for making investment decisions (ACCA,
2013). Corporate reporting is important because it is a major means by which Boards account to
shareholders. The essence of corporate reporting is to make essential information known to all
interested parties in the organization. (Zairi & Letza, 2014). Corporate reporting involves both
financial reporting and non-financial reporting. Financial reports are sought after because of
information asymmetry and conflict between company executives and shareholders. (Healey
& Palepu, 2011). Studies have shown that systems of corporate governance which produce a
more transparent and accountable system of leadership have a greater propensity to disclose
information voluntarily (Huafang & Jianguo, 2017).
2.6 Measuring Financial Institutions Performance
Before a good assessment of performance can be done, it is important to ascertain the variables
that constitute good performance indicators. Oakland (2009) posited that a good performance
indicator must be measurable, relevant and important to the performance of the organization. It
must also be meaningful, and the cost of obtaining it should be less than the benefit that would be
derived from it. Various methods may be used to measure a firm’s performance. According to
Kiel and Nicholson (2013), financial measures used in empirical research on
corporate governance fit into two broad categories, namely accounting-based measures and
market-based measures. They also assert that return on assets (ROA) is the most commonly
used accounting-based measure.
21
Baysinger and Butler (2015) identify return on equity (ROE) as a widely used accountingbased measure. A great deal of debate continues to ensue about which measures are most
reliable. Available records of findings obtained through empirical studies on the relationship
between measures of a company’s performance as depicted by accounting and market-based
performance indicators, and corporate governance attributes show varied outcomes. A metaanalytic review of corporate governance literature seams to reveal a lack of consensus with
respect to the dependability of one measure over the other. (Dalton et al. 2008).
Return on Assets: Return on assets (ROA) is a performance measure widely used in the
governance literature for accounting-based measures (Kiel & Nicholson 2013). ROA is calculated
as net income divided by total assets and is an indicator of short-term performance (Finkelstein &
D'Aveni, 2014). It is a measure which assesses the efficiency of assets employed (Bonn,
Yoshikawa & Phan, 2014). According to Epps and Cereola (2008), ROA shows investors the
earnings that have been generated by funds which have been channeled into capital assets.
Efficient use of an organization’s assets is best shown by the rate of return on its assets. Since an
entity’s management is responsible for the activities of the firm and deployment of the company’s
assets, ROA is a measure that allows users to ascertain how well an organization’s corporate
governance system is functioning so far as enhancing the level to which the entity’s management
is running efficiently is concerned. (Epps & Cereola, 2008).
Return on Equity: This is another key accounting-based measure of an entity’s performance
which is used in researching on corporate governance practices. (Dehaene, De Vuyst & Ooghe,
2011). Epps and Cereola (2008) assert that one of the principal reasons for which companies
operate is to make profits which will reward its shareholders. As such, ROE is a measure which
shows shareholders, as well as other stakeholders, the earnings which have resulted from the
money put in by investors. It is arrived at by dividing net income by common equity. The ROE is
22
described as having certain limitations. These include the fact that it is not risk-sensitive (for
example, the proportion of risky assets and the solvency situation is missing in the ROE figure), it
does not take into account the institution’s long-term strategy or significant extra-ordinary
elements). ROE is therefore not a stand-alone performance measure.
Earnings per Share: Earnings per share (EPS) is the portion of a company's profit allocated
to each outstanding share of common stock. EPS serves as an indicator of a company's
profitability (Investopedia, 2015). It is the subject of IAS 33, released by the International
Accounting Standards Board (IASB). EPS may be calculated in two forms- basic and diluted.
Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders of the
parent entity by the weighted average number of shares outstanding during the period.
Diluted EPS takes into consideration options and other dilutive potential ordinary shares such
as convertibles and warrants in arriving at the weighted average number of shares outstanding
(Deloitte, 2015).
2.6.1 Corporate Governance and Financial Performance
The recent poor performance of financial institutions linked to the contravention of several
codes of corporate governance (Oghoghomeh & Ogbeta, 2014). The viability of financial
institutions is a crucial concern for regulators, and corporate governance efficiency requires
regulators to monitor managers’ decisions (Leventis & Dimitropoulos, 2012). Fanta, Kemal,
and Waka (2013) noted that corporate governance is essential because of the separation of
ownership and control in publicly held organizations. In accordance with agency theory,
Valenti, Luce, and Mayfield (2011) asserted that good governance policies are crucial to high
performance. If an organization considers protecting the interest of the investors,
organization
23
can channel its resources appropriately to reduce waste and boost profitability, resulting in a
better return to the shareholders.
Fanta, Kemal, and Waka (2013) stated that good corporate governance enhances economic
performance, stimulates growth, and strengthens shareholder confidence. Oghoghomeh and
Ogbeta (2014) noted that good governance and solid ethical conduct improves banking
performance because governance safeguards the stability of the economy and promises a higher
realization of corporate objectives. Kasum and Etudaiye-Muthar (2014) noted the main concern
of corporate governance is ensuring that manager will apply the organization’s resources in the
interest of the investors to resolve agent-principal problems. Mishra and Monhanty (2014)
observed a properly governed organization have the prospect of raising funds from a financial
institution at a more reasonable rate than a poorly governed organization does.
Mishra and Mohanty predicted investors would advance towards investment in a firm with lower
cost of capital because of its higher enterprising worth and stock cost for a particular cash flow
estimate. Shareholders may be willing to pay extra for a properly governed organization (Mishra
& Monhanty, 2014). Waweru (2014) indicated organizations with enhanced financial
performance have the wealth that improves their capability to adhere to the expectations of the
corporate governance code, which would improve corporate governance. Doucouliagos, Haman,
and Stanley (2012) stated that compliance with the Code of Corporate Governance in ensuring
long-term sustainability of the business, as suggested by the Cadbury Committee in the United
Kingdom, would improve an organization’s performance. Mishra and Mohanty revealed that an
organization with strong corporate governance would be more likely to report exceptional
financial performance than an organization with poor management.
Leventis and Dimitripoulos (2012) examined the role of corporate governance in earning
manipulation in the United States and noted corporate governance systems affect risk and
returns for an organization. Leventis and Dimistripolous suggested that appropriate corporate
governance would reduce agency conflict and assist shareholders in making adequate
24
investment decisions. Rachid and Ameur (2011) showed that bank board attributes and
formation often could have a critical role in bank performance and bank risk taking. Siagian,
Siregar, and Rahadian (2013) examined corporate governance and accounting reporting as
related to a firm’s value. Siagian et al. noted that corporate governance benefits investors.
Siagian et al. explained that transparency and disclosure reduce the agency problem between
investors and managers, resulting in less risk and better profit for the organization. Siagian et
al. found that organizations that implement superior corporate governance have a higher
profit. Ibrahim (2013) observed that corporate governance improves the quality of the
financial report and is a deciding factor for investment decisions.
2.7 Theoretical Review
This section discusses the theoretical frameworks which informed the study. The theoretical
framework is any empirical or quasi-empirical theory of special and/or psychological process at a
variety of levels that can be applied as ‘lens’ to the understanding of the phenomenon” (Creswell,
2013). Hence, the theoretical framework brings out the rationale for conducting a study. With
regards to corporate governance, there is always the issue of conflicting intentions between
managers and shareholders (Delpiano & Chin-Loy, 2014). Different theories have therefore been
propounded in this regard, all aimed at explaining the corporate governance practice, in an
attempt to highlight the objective of the firm and how it should respond to its different
obligations. These include the stewardship theory, the managerialism theory, the
agency theory, the stakeholder theory, the resource dependence theory, and the institutional
theory. The theories are briefly discussed below.
The Stewardship Theory: According to the stewardship theory, managerial opportunism is
not relevant (Tirore, 2015). This is in contrast to the agency theory. The implication is that,
whether management seeks to fulfil their own interest or not is not a cardinal concern. Their
main objective is to maximize the firm’s performance since that communicates the success
25
and achievements of management. Tirore (2015), further argues that managerial opportunism
does not exist because the manager’s main aspiration is “to do a good job, to be a good
steward of corporate assets”. Thus, mangers’ personal wishes, interest are fulfilled when the
firm’s performance is better.
The unique significant feature of the stewardship theory is that it replaces the lack of trust to
which the agency theory refers with respect for authority and inclination to ethical behavior.
Hence, the stewardship theory considers the board of directors, leadership and the small
board size as critical in ensuring the effect on corporate governance (Zingales, 2017). In view
of the prior studies, it is evident that governance mechanism seeks to protect the interest of all
stakeholders of a firm. Lately, there have been changes in regulatory structures in relation to
corporate governance and thus directors are being held responsible for success and failures of
firms they control (Wagner, 2011).
The discussion on corporate governance usually focus on boards since they are mostly
responsible for all the core decisions, such as changing the corporation bye laws, issuing of
shares, declaring of dividends, acquisitions, etc. The board of directors is the “apex” of the
controlling system in an organization and is there to monitor the activities of the top
management in order to ensure that the interest of the shareholders’ are well-protected (Shil,
2009).
The Managerialism Theory: The concept of the Managerialism Theory came about as a
result of studies conducted by Black (2008) on shareholder activism and corporate
governance practices in the United States. This concept particularly emerged in modeling the
effect of separating ownership and managerial control on the firm’s goals. “Managerialism
has been defined as the pursuit of goals by managers other than profit maximization” (Brav,
Jiang, & Thomas, 2008). “Managerialism has been described as a concentration on the
interest of management which has resulted in closer examination of the processes and
26
responsibilities of management”. “The concept implies that certain core functions of
management are applicable across both private and public sectors (Adams & Mehran, 2010)”
Bebchuk and Weisbach (2009), suggested that “managerialism refers to the aim of making
management the driving force of the competitively successful society by providing leadership
through the transformation of culture”. “Managers should be free to develop corporate plans
which identify specific objectives and targets, incentives and constraints in order to focus on
the essential of efficiency and effectiveness” (Delpiano & Chin-Loy, 2014). Generally, a vast
literature found out that the earliest reference traced to ‘managerialism’ is MacNeil (2010).
MacNeil (2010) argued that while mangers were responsible for improvements in methods of
production, their actions had an influence beyond the sphere of their firm’s operations,
leading to a more “managerial” economy. “Managerialism stresses the accountability of
individual managers and management techniques and this is reflected in a greater devolution
of managerial responsibility to junior and middle level managers” (Davis, 2012).
More recently, limitations on managerial control have been identified (Delpiano & Chin-Loy,
2014). These authors identified four competing perspectives: mainstream managerialism
which emphasizes technical superiority as rational for managerial control; mainstream antimanagerialism which focuses on accountability to owners (and which is embedded in agency
theory); radical managerialism which sees managerial self-interest in self-perpetuating
bureaucracies; and radical anti-managerialism which sees organizations as constrained by the
interest of a capitalist class (Delpiano & Chin-Loy, 2014). The origins of managerialism are
largely within the perspective of the mainstream managerialism.
The Agency Theory: The Agency Theory, which seeks to expound the inter-relationship
between the “Principal” and the “Agent” within the corporate setting, originally originated
from the neo-classical theory of the firm, whereby the aim is to increase economic efficiency
as a means of increasing shareholder wealth. As shareholders are the providers of firm
capital, they are also the owners and as a result must bear the risk of failure. Eisenhardt
27
(2008) puts it that the principal and the agent may prefer different actions because of the
different attitudes toward risk. Thus, the basis of corporate governance starts from the
principal-agent theory emanating from the classical theory in the modern cooperation and
private property by Tirore (2015). According to this theory, the fundamental agency problem,
exist due to separation of ownership and control of modern firms. Thus, the separation of
ownership and control increases the power of professional managers and leaves them free to
pursue their own aims and serve their own interest at the expense of shareholders
There are two problems occurring in the agency relationship with which agency theory is
concerned. The first is that it is difficult for the principal (owner) to verify whether the agent
(manager) has behaved appropriately leading to information asymmetry. Information asymmetry
leads to situations whereby the agent behaves in a way that would not be acceptable
to the principal, if the same information existed for both. It is for that reason that the board of
directors exist; it is their job to minimize the principal-agent problem (MacNeil, 2010). Since
contributions of capital (principals) may not have the required expertise or time to effectively
run their businesses and manage their capital, they hand them over to agents (managers) for
control, and day-to-day operations, hence the separation of ownership from control. In
running firms, principals (owners) appoints from their positions board of directors as their
representatives to ensure that management act in their interest. Management may also have
different objectives that deem fit which may contradict the expectation of owners.
Because of the separation of ownership from control, management may attempt to over
compensate themselves and award disproportionate bonuses, which are not acceptable to
shareholders, but due to asymmetrical information, etc., the shareholders may not be able to
control the agents’ actions (Wagner, 2011). Such incongruity breeds the agent-principal
problem. In this regard, the fundamental question is how do owners of capital (principals)
ensure that managers act in their favorable interest in order to reduce cost associated with
principal-agent conflict?
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The Stakeholders Theory: The stakeholder theory (Davis, 2012), suggests that a more long-term
approach, whereby the firm not only attempts to increase shareholder value, but also stakeholder
value. This theory builds on the shareholder theories by expanding the narrow arguments of
restricting shareholders as the only beneficiary of firm performance by incorporating other
beneficiaries or looking at the theory in the broader spectrum hence stakeholders. A stakeholder
is defined as “any group or individual who can affect or is affected by the achievement of the
firm objectives” (Eyenbuo, 2013), and this is “meant to generalize the notion of stock holder as
the only group to whom management need to be responsive”. It explains the fact that stakeholders
of an organization include creditors, customers, employees, banks, governments, and society at
large and that these groups also have interest in the operations of a firm. It is the belief that each
stakeholder group “contributes to the success of the corporation, and without their
contributions, there would be no profit for the shareholders” (Zingales, 2017). In view of this,
the stakeholder theory stipulates that firms needs to pay special attention to the various
stakeholder groups in addition to the traditional attention given to investors (OECD, 2014).
Expanding the spectrum of interested parties, the stakeholder theory specifies that, a corporate
entity invariably seeks to provide a balance between the interests of its diverse stakeholders in
order to ensure that each interest constituency receives some degree of satisfaction (Kandel,
Massa, & Simonov, 2011). Thus, the representation of all these stakeholders on board is deemed
fit for effective corporate governance. The board of directors is hence seen as the place where
conflicting interest are mediated, and where the necessary cohesion is created (Renneboog &
Szilagyi, 2011). The stakeholder theory therefore appears better in explaining the role of
corporate governance than the shareholder theories by highlighting the various constituents of
firm. Stakeholder theory has become more prominent because many researchers have recognized
29
that the activities of a corporate entity impact on the external environment requiring
accountability of the organization to a wider audience that simply its shareholders.
Resource Dependency Theory: “This theory forms a component of the basis of good corporate
governance and thus asserts that provisions of or accessibility to some resources are the key for
the proper functioning of firms” (Abor, 2017). “Firms attempt to reduce the uncertainty of outside
influences to ensure the availability of resources necessary to their survival and development”.
Adams and Mehran (2010) further suggest that the “resource dependency theory is a key
determinant of board composition”. The resource dependence approach, developed by Tirore
(2015), and Tirore (2015), emphasizes that non-executive directors enhance the ability of a firm
to protect itself against the external environment, reduce
30
uncertainty of outside influences to ensure the availability of resources necessary to their
survival and development.
2.8 Empirical Review
Ranti, (2011) undertook a study on “corporate governance and the financial performance of listed
banks in Nigeria”. The purpose of the study was to “examine the relationships that exist between
corporate governance mechanisms and the financial performance among Nigerian consolidated
banks, and to further find out if there was any significant relationship between the level of
corporate governance disclosure index among Nigerian banks and their performance”. “The
Pearson Correlation and the regression analysis were used to find out whether there is a
relationship between the corporate governance variables and the performance of the listed banks”.
“In examining the level of corporate governance disclosures of the sampled banks, a disclosure
index was developed guided by the Central Bank of Nigeria’s (CBN) code of governance, and
also on the basis of the papers prepared by the United Nation Secretariat for the nineteenth
session of the ISAR (International Standards of Accounting and Reporting)”.
“The study therefore observed that a negative but significant relationship exists between
board size, board composition, and the financial performance of the banks, while a positive
and significant relationship was also noticed between directors’ equity interest, level of
governance disclosure, and performance”. Again, the t-test result indicated that while a
significant difference was observed in the profitability of the healthy and rescued banks, no
difference was seen in the profitability of banks with foreign directors and that of banks
without foreign directors”. “The study therefore concluded that, there was no uniformity in
the disclosure of corporate governance practices by the banks in Nigeria”.
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A study was conducted by Marashdeh (2014), on “the effect of corporate governance on the
firm performance of Jordanian organizations. According to Marashdeh (2014), the majority
of research concerning corporate governance and its effect on firm performance has been
undertaken in developed countries and markets, particularly, the United Kingdom and the
United States of America, but relatively little evidence provided in the Middle, East,
specifically Jordan.
Marashdeh (2014), investigated the effects of corporate governance on the firm performance
of the Jordanian industrial and services companies, from the period 2000 to 2010. The study
employed primarily the agency theory to investigate the relationship between corporate
governance and firm performance. The multiple regression panel data analysis was the main
tool deployed in the study. The statistical method used to test the impact of corporate
governance on firm performance was the Generalized Least Square (GLS) Random Effects
Model. The study was based on three sets of data: a sample of 115 firms listed on the Amman
Stock Exchange, corporate governance data collected from the Osiris database, and data
gathered through the annual reports of the listed firms.
The empirical investigations according to Marashdeh (2014), revealed a set of mixed results. The
findings failed to reveal any significant impact of board size on firm performance. However, the
chief executive officer (CEO) duality seems to have a positive effect on firm performance,
indicating that the Jordanian firms performed better where the chairman and CEO roles are
combined in a single individual. The study further revealed that the non-executive directors
(NEDs) have a negative impact on firm performance, which is inconsistent with the monitoring
hypothesis of the agency theory, which holds that the NEDs paly an indispensable role on the
board as a source of experience, monitoring services, reputation and expert knowledge with the
likelihood to improve firm performance. The again portrayed positive and
32
negative impacts of managerial ownership and ownership concentration on firm performance
(respectively). Finally, the findings of the study also reported a positive relationship between
foreign ownership and firm performance”.
Mbalwa, Kombo, Chepkoech, Koech, and Shavulimbo (2014) conducted a research on “the
effect of corporate governance on the performance of sugar manufacturing firms in Western
Kenya”. “Their study sought to determine the effect of corporate governance on the
organizational performance of sugar manufacturing firms in western Kenya”. “The research
employed the correlational research survey design”. “The population of the study consisted of
eleven sugar manufacturing firms in western Kenya”. “The convenience sampling technique
was used to analyze the collected data”. “Primary data was collected using the structured selfadministered questionnaires”. “Descriptive and inferential statistics were used to summarize
the collected data”. “The Pearson’s Correlation Coefficient was used to determine the
relationship between corporate governance and the organizational performance of the sugar
manufacturing companies”.
“The multiple regression analysis was further used to determine the effect of corporate
governance on the organizational -performance of the sugar manufacturing firms”. “The
findings of the study revealed that, the corporate governance practices were positively related
to the organizational performance of the sugar manufacturing companies located at the
western province of Kenya, although not very strongly (p=0.001<0.05)”. “The implication is
that, the corporate governance practices which involved the board characteristics, board size,
top management characteristics, and shareholders’ communication policy and continuous
disclosure had an impact on the organizational performance of the sugar manufacturing
companies in western Kenya”.
In Ghana, Dedzo (2015) undertook a study on the “composition of the board of directors and
its effect on service delivery and firm performance in the Ghanaian banking industry”. “The
study additionally, explored how service delivery and firm performance differ with respect to
33
ownership identities”. “The cross-sectional panel survey was purposively drawn to sample
fourteen banking firms in Ghana, over the period of 2008 to 2013”. “Firm performance and
service delivery was measured using the Return on Assets (ROA), Return on Equity (ROE),
Net Interest Margin (NIM), and Fees Operating Income (FEEOP)”. “Spearman findings
indicated some validity and support for the relevance of corporate governance to firm
performance in the Ghanaian banking industry”.
“Using the GMM, fixed and random effect econometric models, board size and the presence
of independent non-executive directors were observed to have significant positive effects,
whilst board member political attachment was found to have a profound significant adverse
influence on firm performance”. “The results whilst further suggesting that female members
and foreign national presence on one hand promotes the effectiveness of the firms, proved
inconclusive on whether age, business and economic competence other than experience and
shill diversity promotes performance”. “Meanwhile, no significant differences were observed
between ownership identity and firm performance”.
In Ghana again, Tutu (2017), did a study on a study on “the effects of corporate governance on
the performance of insurance companies in Ghana”. “The main aim of the study was to determine
the effects of corporate governance on the efficiency and productivity performance of insurance
firms in Ghana”. “The study employed a panel data of fourteen (14) life insurers and fifteen (15)
non-life insurers to assess the efficiency and productivity of insurers in Ghana between the years
2005 to 2014. “Apart from the static efficiency measure, the study assessed
the dynamic productivity of the insurance firms by using the Cost Malmquist Index to
incorporate the time effect resulting in efficiency changes over time”. “The study equally
compared the efficiency and productivity of life insurers and non-life insurers and also
examined the effect of corporate governance mechanisms on insurers’ efficiency and
productivity”.
34
“The study found out that, there has been an average of a 3% cost productivity growth in the
Ghanaian insurance industry”. “Productivity growth according to the results peaked between
2008 and 2009 at 43% cost productivity growth”. This productivity growth was driven
mainly by managerial efficiency rather than technological growth”. “The study also found out
that life insurers were more productive than the non-life insurers, which can be attributed to
some form of economies of scale that they were enjoying”. “The study revealed that
corporate governance affected both insurance efficiency and the cost productivity of
insurance firms in Ghana”. “Whereas a larger board size was found to improve both the cost
and productivity efficiencies, a large proportion of directors with an expertise in finance
negatively impacted on the cost and productivity efficiencies of the insurance industry”.
“Again, a highly independent board reduces cost efficiency, but not cost productivity”.
35
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter of the study discusses the research approaches and techniques chosen to address the
research questions. The chapter is presented in sections that address the research design,
population and sampling design, data collection, research procedures and data analysis methods.
3.2 Research Design
The study selected the descriptive research design as the blueprint for the research. The
descriptive research design was preferred for this study as it sought to establish the effect of
corporate governance on financial performance of universal banks in Ghana. Research designs
can be categorized into two approaches, the cross-sectional research and longitudinal research
survey. A cross-sectional study investigates a specific problem at a defined period of time
(Saunders et al., 2017). A study can also be longitudinal where a specific phenomenon is
investigated at different periods of time (Malhotra & Birks, 2017). The researcher adopted the
longitudinal study as it sought to analyze the effect of corporate governance mechanisms (board
size, directors’ equity interest, gender board diversity) on financial performance of universal
banks in Ghana from the year 2010-2019.
36
3.3 Population and Sampling Size
Cox (2010) defines target population as the complete group of units for which the research data are
used to make conclusions. Hence, the target population refers to units for which the findings of a
study are meant to generalize (Lavrakas, 2008). The target population for this study was first bank
plc, afikpo.
3.4 Sampling Technique
The study adopted a purposive sampling technique. The purposive sampling technique was
preferred because the researcher was interested in universal banks in Ghana. Purposive sampling
provides biased estimate and it is not statistically recognized. This technique can be used only
for some specific purposes (Ajay & Micah, 2014).
3.5 Sources of Data
The study relied on secondary data to investigate the relationship between board size, board
equity interest and board gender diversity and firm performance of selected universal banks in
Ghana. Secondary data refers to data which was collected for other purposes but is useful in the
present study (Kothari, 2010). Secondary data was appropriate for the study as it is readily
available and has been used to study corporate governance and financial performance of firms.
The study used data from annual financial statements reports that show the number of directors
in order to measure the influence of board size on bank performance.
3.6 Data Analysis Methods
37
Data analysis refers to the process of making sense from raw data collected during the course of the
study. The data for the study was collected from secondary sources and was entered into
Version 20 of the Statistical Package for Social Sciences (SPSS) to conduct analysis. The study used
regression and correlation analysis to measure the strength of relationship and direction of the
relationship between financial performance and corporate governance mechanisms (Gender diversity,
board size, directors’ equity ownership). A multiple regression analysis was then performed to
establish the magnitude of the predictor variables on the response variable. Bank performance which
is the dependent variable was measured by ROE and ROA.
Model Specification and Variable Definition
The proposed regression model is:
ROE = β0 + β1BSit + β2DEIit + β3BGDit + ⋯ +μit
ROA = β0 + β1BSit + β2DEIit + β3BGDit + ⋯ + μit
where:
ROE= Return on Equity
ROA=Return on Asset
BS = Board Size
DEI = Directors’ Equity Interest
BGD = Board Gender Diversity
38
β1, β2, β3 = Partial regression coefficient attached to variables μ
= error term
The Pearson correlation was used to measure the degree of association between predictors and
response variables. Further analysis included regression analysis to measure the impact of board
size on financial performance of universal banks. This approach has been used in previous
studies (Uwuigbe & Fakile, 2012). The operating performance data was collected
from financial statements, while corporate governance mechanisms were collected from annual
reports available on the banks’ websites.
The variable of director’s equity interest was measured by members of the board of directors
having equity in the universal banks. Directors’ equity interest will be measured by using ZainalAbidin et al. (2009) and Sanda et al. (2010) where the proportion to outstanding shares and the
net shares directors’ own. There are different ways in which gender diversity has been measured
in past studies. In order to measure the variable of board gender diversity, the number of female
directors on the board of each bank is used. The study used accounting-based performance
indicators as dependent variables. In this study, ROE and ROA were adopted as measures of
financial performance.
39