The Extent to which Audit Committees Composition Affects Banks

Performance in Nigeria
2.5.3 Composition of Audit Committee and the Performance of Banks
Committees are important corporate governance tools to monitor corporate
activities and can play a valuable role in the protection of shareholder value
(Kesner, 1988). Italian Corporate Governance Self Discipline Code and
theSupervisory Provisions Concerning Banks Organization and Corporate
Governance of Bank of Italy (2008) require as a best practice that Italian
listed companies and banks have control and risk (audit) committee,
remuneration committee and nomination committee; the first one should
consist of non-executive directors, the majority of which should be
independent. Literature (Larcker et al., 2007) suggests that the presence of
independent directors in the audit committee can imply a strong
independence of the board.
Adams and Mehran (2003) find that US bank holding companies boards
have more committees than manufacturing firms. Later, the same Authors
(Adams and Mehran, 2005) show a significant and negative relationship
between performance and the number of committees. Differently, Selvam et
al. (2006) state that the number of board committees is one of the yardsticks
for better functioning of banks; they find that the number of board

committees is statistically significant to performance for banks where

government has considerable stakes.
Among the committees that can be created within the board of directors,
previous researches assign the most relevant role to the audit committee,
charged with the task of giving advice and making proposals on problems
considered relevant to the internal control of the companys activities. As a
matter of fact, empirical studies show that US firms committing financial
reporting fraud are less likely to have an audit committee (Dechow et al.,
1996; Beasley et al.; 2000; Uzun et al., 2004).
In the light of the higher relevance of the audit committee compared to the
others, we decide to focus our attention on two specific attributes of it: the
size and the membership.
Although the size of audit committee is influenced mainly by the size of the
company and of its board of directors, a larger audit committee may not
necessary cause in more effective functioning, as a larger committee may
lead to unnecessary debates and delay the decisions (Lin et al., 2008).
However, some Authors have highlighted that a larger audit committee is
required to better perform its role, as it requires more discussions and
assures more skills, backgrounds and competences (Garcia-Sanchez et al.,

2012; Alkdai and Hanefak, 2012; Raghunandan and Rama, 2007). Despite
these considerations, a smaller audit committee can enhance directors sense
of participation, can make the group of directors more cohesive and able to
reach consensus (Lipton and Lorsch, 1992; Dalton et al., 1999). This
cohesiveness can increase audit committee vigilance over the board
decisions and curtail potential managerial opportunism (Yermack, 1996).
The second important aspect we decide to focus on is audit committee
membership. Prior researches have principally investigated committee
membership in terms of type, gender and occupation of directors (Kesner,
1988; Klein, 1995; Spira and Bender, 2004). In particular these Authors find
that the presence of outside directors in committees facilitates the strategic
and monitoring role of the board, because they can provide their experience,
external associations and knowledge, and can be more objective. According
to Najjar (2011) outside directors in the audit committee can be considered
as a key monitoring tool since these directors improve the monitoring
resources for financial reporting (Beasley, 1996; Dechow et al., 1996;
Sharma et al., 2009; Romano and Guerrini, 2012). Similarly, Klein (2002)
argues that the greater the number of non-executive directors, the higher the
chances of having more audit committee independence, and hypothesizes a
positive relationship between non-executive directors and audit composition.

Deli and Gillan (2000) and Menon and Williams (1994) follow the same
argument. Raghunandan and Rama (2007) argue that non-executive directors
are important in reflecting efficient corporate governance. Also many
Corporate Governance Codes suggest that audit committee should be
composed by non executive directors, for most independent, in order to
ensure the independence of the audit committee. The rationale behind this is
that outside directors are more likely to defend the interests of outside
shareholders (Belkhir, 2009).
The population of this study is made of all banks that are quoted on the
Nigerian Stock Exchange (NSE).
Due to the requirements of the empirical models, filtering procedures have
been adopted to eliminate some of the banks that were considered unsuitable
for the study. A non- probability method in the form of judgmental sampling
technique was employed in selecting banks into the sample. In nutshell, the
sample size is based on the following criteria;
I.
II.
III.

Banks with missing values for the variable used were excluded.
The bank was not involved in any merger during the study period.
For the empirical part of this study, the data is limited to bank that is
in existence throughout the period of the study.

After applying the above criteria, five banks were selected. Below is the list
of the banks.
I.

Access Bank Plc.

II.

Eco Bank Nigeria Plc.

III.

First Bank Nigeria Plc.

IV.

Guarantee Trust Bank Plc.

V.

Union bank of Nigeria Plc.

3.4 Sources and Methods of Data Collection

This study will utilise only the secondary source of data. This is because the
estimation of the models in the study requires the use of cross sectional/time
series data in the form of financial information which are available through
the financial statements of the sample banks. Also, Aitken and Harrison
(1990) and Feinberg and Majumdar (2001) have defended the use of
secondary data in advanced research work provided the available data are
accurate, relevant and timely. The data were sourced from the annual reports
and accounts of the sampled companies for all the relevant years covered by
the study. The study will cover a period of nine (9) years from 2004-2012.

This source of data has one feature that makes it a very good source for this
study. The data are also available in the Nigerian Stock Exchange fact books.
3.5 Method of Data Analysis
This study adopts econometric method of data analysis to investigate the
impact of corporate governance on the performance of Nigerian banks. This
method is considered essential as it allows the study to quantify the rate of
bank performance that is due to some explanatory factor identified in the
study. It also enables the study to reveal the individual directional effect of
these variables on bank performance. Specifically, the method involves a
multivariate regression analysis where bank performance is linked to four
explanatory variables (board size, board composition, composition of audit
committee and managerial shareholding). The data will also be analysed
using descriptive statistics. Furthermore, the study will employed correlation
matrix to examine the nature and the degree of relationship among variables
of consideration.
Finally, the behaviour of the data collected in relation to the selected
variables will be investigated using normal distribution and Augmented
Dickey Fuller (ADF). The ADF consists of running regression of the first
difference of the series against the series lagged once, lagged difference
terms and optionally, by employing a constant and time trend. This is

premised on the need to ensure that findings of the study are statistically
reliable.
3.6 Empirical Model Specification
To investigate the impact of corporate governance on the performance of
Nigerian banks, the study will employ the use of Multivariate Regression
models to analyse the relationship that exist between the variables under
consideration.
The model employed is an Ordinary Least Squares (OLS) regression to
examine the separate and combined effect of board size, board composition,
composition of audit committee bank risk and gender diversity on the
performance of banks in Nigeria. The models are in line with previous
empirical work. See for instance, Klapper and Love (2002), Sanda, Mikailu
and Tukur (2004), Musa (2006), Tahir (2008), and Hassan (2011).
The models are stated below.
ROA = + BS + BC+ AC + BR + bGD + . (i)
ROE = + BS + BC+ AC + MS + bGD + . (ii)
Where:
ROA = Return on asset

ROE = Return on equity

BS = Board Size
BC = Board Composition
ACC = Composition of Audit Committee
BR = Bank Risk
GD = Gender Diversity
= Intercept
= Error term
, , , and b are coefficients of board size, board composition,
composition of audit committee, bank risk and gender diversity respectively.

3.7 Measurement of Variables

3.7.1

Dependent Variable

The dependent variable is bank performance. Several variables have been

used by previous studies as proxies for bank performance. For instance,
Chou (2008) uses profitability measured by return on total assets and equity
as proxies for performance of banks. Also, the same proxies were used in the
studies of Romano and Rigolini (2012), Bino and Tomar (2007), Staikouras

et al., (2007) and Dutta and Boss (2006). Because of the popularity of these
variables, the performance of banks will be measure in this study through
return on asset (ROA) and return on equity (ROE).
3.7.2Explanatory Variables
The independent variable is corporate governance. There are several
corporate governance attributes. However, this study will only consider four
of those attributes in line with the objectives of the study. These attributes
are board size, board composition, composition of audit committee and
managerial shareholding. Each of these attributes constitutes an independent
variable.

Table 3.1 Estimation of Variable

S/ VARIABL
N
E
ESTIMATION
Return on Ratio of profit
1 Asset
after tax to total
(ROA)
assets
Return on Ratio of profit
2 Equity
after tax to total
(ROE)
equity
This is described
as the number of
3 Board size directors on the
board at the end
of financial year.
4
Board
This is referred to
compositi the mix of inside

FORMULA
Profit after tax
Total asset
Profit after tax
Total no. of ord. Shares
Total number of
directors
Non-executive directors
Total no. of directors

on

5
6

Audit
committe
e
compositi
on
Bank risk

to
outside
directors in the
board room.
The
ratio
of
directors
to
shareholders
in
the
Audit
Committee.

No. of directors in audit

Cttee
Total no. of Audit Cttee

The number of No. of female directors

Gender
women in the
Total no. of directors
7
diversity
board room
Source: Authors estimation
4.2

Descriptive Statistics

Table 4.1 shows the minimum, maximum, mean, and standard deviation
values of the variables used in the study.
Table 4.1

Sample Descriptive Statistics

Variables*

ROE

ROA

BS

BC

ACC

BR

GD

Minimum
Maximum
Mean
Std. Deviation

-0.31064
0.144407
0.017356
0.059969

-42.3639
17.47091
1.670671
7.751281

8
23
14.55556
2.927577

0.428571
0.8
0.623598
0.081182

0
1
0.450899
0.164804

0.1942
0.5823
0.2566
0.0123

0
0.277778
0.113923
0.066452

Observations

45
45
45
45
45
45
45
Source:EconometricViews Output Result
*ROE =Return on Equity, ROA= Return on Asset, BS=Board Size, BC=Board Composition,
ACC=Audit Committee Composition, BR=Bank Risk and GD=Gender Diversity.

The table indicates that, on average, returns on equity and asset have mean
values of about 1.7%. and 167% respectively which are proxies for bank
performance. Board size, board composition, audit committee composition

have mean values of about 146%, 62%, and 45%, respectively. Gender
composition on the other hand has mean values of about 11%. The range of
the variables were given by the minimum and the maximum values. The
variable with the highest standard deviation among the explanatory variables
is board size with a value of about 2.928 while gender composition has the
least standard deviation of about 7%. This result is consistent with the idea
that gender diversity is a very important variable in the model formulated.
The variable with the least standard deviation among the two measurement
of bank performance employed in the study is return on equity with a value
of about 6%. This suggests that return on equity is a more appropriate
measure of bank performance over return on asset. The study used a total of
45 observations for each metric variable considered.
4.3.1 Augmented Dickey fuller (ADF) Stationarity Test
The Augmented Dickey Fuller (ADF) has been employed to test the unit
roots of the concerned time series metric variables.
Table 4.2 below displays the estimates of the Augmented Dickey fuller
(ADF) test in levels of the data with an intercept only, with an intercept and
trend and with no intercept and trend. The test has been performed using the
McKinnon Critical Values.

Table 4.2 Stationary Testa

Variableb

ROE

Test with
Intercept
Levels
-3.1259***

Test with Intercept and Test with no Intercept and

Trend
Trend
Levels
Levels
-3.2019**
-2.7221***

ROA

-3.1855***

-3.2221*

-2.8025***

BS

-3.7264**

-3.7636**

-2.9649***

BC

-3.3275***

-3.5921**

-0.6191***

ACC

-3.4229***

-3.12219**

-2.7824***

BR

-3.3255***

-3.2321**

-0.5191***

GD

-3.4759***

-3.5919**

-2.7824***

Source: EconometricViews Output Result

*ROE =Return on Equity, ROA= Return on Asset, BS=Board Size, BC=Board Composition,
ACC=Audit Committee Composition, BR=Bank Risk and GD=Gender Ddiversity

The ADF test with an intercept implies that all variables are stationary at
levels at 1% level of significance except board size which is stationary at 5%
level. Similarly, the test with intercept and trend also shows that the
variables are stationary within acceptable level of significance in levels. The

variables are also stationary for ADF test with no intercept and trend.
Collectively, all test results imply that all variables are stationary at levels
and hence variables are integrated at levels. The economic implications of
these results indicate that the time series metric variables employed in this
study are suitable for econometric analysis.
4.3.2 Normality Distribution Test
Diagram 4.1 shows the normal distribution of the univariate time series
employed.

5
0
5
0
4
0
4
0
3
0
3
0
2
0
2
0
1
0
1
0
02
02
0
.
0
4
0
.
0
6
0
.
0
8
0
.
0
0
.
0
4
0
.
0
6
0
.
0
8
0
.
0
5
0
4
0

F
re
q
u
n
c
y

F
re
q
u
n
c
y F
re
q
u
n
c
y

Diagram 4.1 Normal Distribution curves

3
0
2
0
1
0
02
0
.04
0
.06
0
.08
0
.0

Return on Equity Distribution

Return on Asset Distribution

Board Size Distribution

F
re
q
u
n
c
y

F
re
q
u
n
c
y F
re
q
u
n
c
y

5
0
5
0
4
0
4
0
3
0
3
0
2
0
2
0
1
0
1
0
0
02
0
.
0
4
0
.
0
6
0
.
0
8
0
.
0
2
0
.
0
4
0
.
0
6
0
.
0
8
0
.
0
5
0
4
0
3
0
2
0
1
0
02
0
.04
0
.06
0
.08
0
.0
5
0
4
0
3
0
2
0
1
0
02
0
.04
0
.06
0
.08
0
.0

Audit Committee
distribution distribution

Bank

Composition

F
re
q
u
n
c
y

Board Composition distribution

Gender Diversity distribution

The curves of all the diagrams indicate that the metric variables are normally
distributed. The implication of this is that the univariate time series data
employed are suitable for mutivariate regression analysis.
4.4

Correlation Matrix

Table 4.2 below shows the correlation matrix for the time series metric
variables employed in the study. Precisely, the matrix did not only show the

relationship between the variables but also indicates the direction of the
relationship.
Table 4.3 Correlation matrix for the sample observations
Variablea ROE BS
BC
ACC
ROE
1
BS
0.004 1
BC
0.101 0.257 1
ACC
0.026 0.16
0.32
1
BR
-0.434 -0.035 -0.322 0.006
GD
-0.434 -0.025 0.343 0.063
Source: EconometricViews Output Result

BR

GD

1
-0.561 1

ROE =Return on Equity, ROA= Return on Asset, BS=Board Size, BC=Board Composition,
ACC=Audit Committee Composition, BR=Bank Risk and GD=Gender Diversity

The above table indicates that there is a positive relationship between board
size, board composition and audit committee composition and the dependent
variable. However, the correlation result shows that there is a negative
relationship between bank risk and gender composition and bank
performance. Results shown in Table 4.3 indicates that most crosscorrelation terms for the independent variables are fairly small, thus, giving
little cause for concern about the problem of multicollinearity among the
independent variables.
4.5

Empirical Results

This section presents and interprets the regression results in respect of the
bank performance and corporate governance equations formulated. The

study used two models for the purpose of examining the effects of corporate
governance on the performance of banks in Nigeria. Table 4.4 presents the
regression result in line with the first model using return on asset as
measurement of bank performance while table 4.5 presents the regression
result in line with the second model using return on equity as the
performance measure. The study hypothesized a relationship between board
size, board composition, audit composition, bank risk, and gender diversity
on one hand and bank performance on the other hand.
Table 4.4

Regression Results on Model 1a

Variableb

Coefficients

T-Statistics

Intercept

0.967*

20.646

BS

-0.101*

-2.663

BC

0.0271*

5.475

ACC

0.006*

0.644

BR

-0.478*

-12.387

GD

-0.252*

-18.733

R-Squared

0.456

Adjusted R-Squared

0.449

F-Statistics
74.297*
Source: EconometricViews Output Result
a
T-Statistics are in parentheses. * indicate that values are significant at 1%

BS=Board Size, BC=Board Composition, ACC=Audit Committee Composition, BR=Bank Risk

and GD=Gender Diversity

Table 4.4 shows the regression results on the relationship between board
size, board composition, audit composition, bank risk, and gender diversity
on one hand and bank performance on the other hand. The estimated
regression

relationship

for

the

model

is

The parameters of all the variables under consideration are statistically

significant at 1% level.
Furthermore, the results also show the coefficient of determination for the
model. This coefficient measures the proportion of the total variation in the
performance of banks that is explained by the considered variables.
Precisely, the adjusted R-squared for the model is approximately 45% which
offers an explanation of the variations in ROA explained by variation in the
independent variables. Also, the value of the F-statistics is 74.297 with a pvalue of 0.001, indicates fitness of the model.
Table 4.5 below also shows the regression results on the relationship
between board size, board composition, audit composition, bank risk, and
gender diversity on one hand and bank performance on the other hand using

return on asset as the proxy for bank performance. The estimated regression
relationship

for

the

model

is

The parameters of all the variables under consideration are statistically

significant at 1% level.

Table 4.5

Regression Results on Model 1a

Variableb
Intercept

Coefficients

T-Statistics

0.568

6.747

BS

-0.131*

-3.977

BC

0.059*

5.997

ACC

0.058*

4.867

BR

-0.394*

-7.348

GD

-0.178*

-12.907

R-Squared

0.758

Adjusted R-Squared

0.706

F-Statistics

14.681*

Source: EconometricViews Output Result

a
T-Statistics are in parentheses. * indicate that values are significant at 1%
b

BS=Board Size, BC=Board Composition, ACC=Audit Committee Composition, BR=Bank Risk

and GD=Gender Diversity

The results also show the coefficient of determination for the model. This
coefficient as mentioned earlier measures the proportion of the total
variation in the performance of banks that is explained by the considered
variables. The adjusted coefficient of determination (R2) of approximately
71% offers a better explanation of the variations in ROE occasioned by
variation in the independent variables. Also, the value of the F-statistics is
74. 297 with a p-value of 0.001, indicates fitness of the model.
The following five sub-sections present the discussion of findings on the
effect of corporate governance characteristics and the performance of banks
in Nigeria.
4.6.3 Effect of Audit Committee Composition on the Performance of
Banks in Nigeria.
The regression results indicate that Audit committee composition has
coefficients of 0.006 and 0.058 for the two models which are both
statistically significant at 1%. These results provide evidence for the
rejection of the third hypothesis which states that there is no significant
relationship between audit committee composition and performance of

banks in Nigeria. The results show that audit committee composition

significantly affects bank performance in Nigeria positively. The implication
of these results is that the greater the number of non-executive directors, the
higher the chances of having more audit committee independence and the
better the performance on banks. These further suggest that presence of
outside directors in committees facilitates the strategic and monitoring role
of the board, because they can provide their experience, external
associations and knowledge, and can be more objective.
This result confirms the findings of Klein (2002), Deli and Gillan (2000) and
Menon and Williams (1994) who hypothesized a positive relationship
between audit committee composition and performance of banks. However,
the results of Adams and Mehran (2003) revealed otherwise. Their empirical
results revealed a significant and negative relationship between bank
performance and the number of committees

V.1 Conclusions
Based on the findings of the research, the study concludes that the five
corporate governance characteristics analysed in this study have the
following effects on the performance of banks in Nigeria:

I.

Board size has significant negative impact on the performance of

banks in Nigeria. This signifies that an increase in Board size would
lead to a decrease in ROE and ROA.

II.

The composition of board members has a significant positive effect on

the performance of banks in Nigeria. This signifies that an increase in
Board size would lead to a decrease in ROE and ROA.

III.

Audit committee composition has a significant positive effect on the

performance of banks in Nigeria.

IV.

Bank risk has significant negative impact on the performance of banks

in Nigeria.

V.

Gender diversity has significant negative impact on the performance

of banks in Nigeria.

The overall conclusion of the study is that corporate governance has

significant effect on the performance of banks in Nigeria. However, while
some corporate governance characteristics such as board composition and
audit committee composition positively influenced the performance of banks
in Nigeria, other characteristics such as board size, bank risk and gender
diversity negatively affect the performance of banks in Nigeria.
V.2 Recommendations

The recommendations of this study are directed at different

parties that are involved in monitoring the institutionalization
of an effective system of corporate governance in Nigeria.
These parties include, shareholders, board of directors,
government/regulatory bodies and future researchers.
V.2.1 Shareholders
Shareholders of banks should seek to positively influence the standard of
corporate governance in the bank in which they invest by making sure
there is strict compliance with the code of corporate governance.
It is the responsibility of the shareholders to ensure that the committee is
constituted in the manner stipulated and is able to effectively discharge
its statutory duties and responsibilities.
V.2.2 Board of Directors
The study indicated that corporate governance characteristics affect the
performance of banks in Nigeria. On the basis of this revelation, the
following recommendations are being made to banks boards of directors.

Banks should have adequate board size to the scale and complexity of
the companys operations and be composed in such a way as to ensure
diversity

of

experience

without

compromising

independence,

compatibility, integrity and availability of members to attend meetings.

The board size should not be too large and must be made up of qualified
professional who are conversant with oversight function

The Board should comprise a mix of executive and non-executive

directors, headed by a Chairman. The majority of Board members
should be non-executive directors whom should be independent
directors.

A bank should have a risk management function (including a chief risk

officer (CRO) or equivalent, a compliance function and an internal
audit function, each with sufficient authority, stature, independence,
resources and access to the board;

An internal controls system which is effective in design and operation

should be in place;

The sophistication of a banks risk management, compliance and

internal control infrastructures should keep pace with any changes to its
risk profile (including its growth) and to the external risk landscape;
and

Effective risk management requires frank and timely internal

communication within the bank about risk, both across the organization
and through reporting to the board and senior management.

V.2.3 Government/Regulators

There

should

be

periodic

monitoring

functions

by

government/regulators of the application of the principles of code of

corporate governance so as to detect rule violations and also monitor
systemic problems for early solutions.

Finally, on the issue of enforcement, government/regulators should

analyze why some banks adhere responsibly to regulatory standards
and why others do not. Such analysis would help enhance governments
ability to pursue optimal enforcement, instead of under- or overenforcement.

The current code of governance should be reviewed after sometimes so

as accommodate frequent changes in the banking industry.