Abstract:

Maximising shareholders’ wealth requires a strategic approach that balances income generation and loss reduction. The pursuit of income may however sometimes have unintended consequences of eroding values through inappropriate default risk management, especially in the light of short-term focus of managers based on performance-pay incentive. This led to the liquidation of several banks in Nigeria before the banking consolidation exercise which ended in 2005. The banking industry presents a unique dimension to corporate governance because of the existence of other critical stakeholders of importance such as the depositors, and regulators. The importance of default risk of banks has taken a different turn in Nigeria, with the introduction of new regulations by the Central Bank of Nigeria (CBN) which prevent banks with high non-performing loans from dividend pay-out. This aspect of bank performance especially in developing countries has received limited attention in literature. Using panel data technique, this paper examined the effect of a set of corporate governance mechanisms (i.e. CEO tenure, CEO remuneration, CEO age, Board size, Ethnic homogeneity, and Board gender), and control variables (firm size and leverage) on the non-performing loans of eight deposit money banks in Nigeria, using 88 firm-year observations between 2006 and 2016. The findings of the study show that increasing CEO remuneration results in a worsening non-performing loan, whilst the CEO age shows a converse significant relationship. Firm leverage and firm size have positive and negative significant effect at 5% on non-performing loan respectively, while board size has a positive and significant effect only at 10% significance level. This study therefore recommends amongst others, a regulatory restriction on age blended with quality of experience to attain CEO status, a redesign of CEO remuneration scheme, development of a credit rating database, and the sanction and prosecution of culpable board members. Our results suggest that corporate governance mechanisms can be strategically designed to enhance the asset quality of Nigerian Deposit Money banks.