CHAPTER ONE

INTRODUCTION

1.1.      BACKGROUND TO THE STUDY

Banks are commercial organizations that participate in providing services to customers in order to improve their organizational performance and maximize profits. Performance of firms is of vital importance for investors, stakeholders and the economy at large. For investors, the return on their investments is highly valuable, and a well performing business can bring high and long-term returns for their investors (Mirza and Javed 2013). The performance of firms is very important in any economy. This is so because first, the profits to the firm means income to the shareholders. Second, the corporate taxes that the government earns enable the implementation of infrastructural projects and social welfare programs. Third, when firms experience high performance, it means they can attract more investors and hence raise large capital for bigger and high return projects. Finally, high performing firms that are profitable are able to employ more people hence creating employment. A firm”s performance is the measurement of what has been attained by the firm, which is an indicator of the good conditions for a period of time.

 Organizational performance is the company”s ability to generate new resources, from day-to-day operation over a given period of time and it is gauged by net income and cash from operation (Poudel, 2012). Organizational performance is used to measure firm”s overall financial health over a given period of time (Yahaya and Lamidi 2015). The higher the firm”s performance the more it”s successes, because the company is earning more money on less investment (Jenter, and Kanaan 2015). This implies that organisations must make concerted effort to put together appropriate measures to ensure that the chief executive officer (CEO) positively impact on organisational performance.

The chief executive officers” (CEO) characteristics are variables or attributes that explain the quality of managing directors of any firm over a period of time. The variables are said to have roles in explaining a firms” level of performance. The CEO characteristics include the following variables such as CEO tenure, age, educational qualification, ownership structure, expertise, gender among others.

These explanatory or independent variables are contained in the financial report and financial statement of banks. Iyoha (2011) explains that CEO”s tenure is the number of years the executive has held the CEO position up to the current year. It is measured as the difference between CEO”s beginning year and the current fiscal year. The 2014 corporate governance code of the Central Bank of Nigeria fixed the maximum period of ten (10) years for CEO tenure and may be broken down into periods not exceeding five (5) years at a time.  CEO age refers to the number of years of the CEO”s existence in life. That is, the period from the time of birth to the current position as CEO of firm. Haas and Speckbacher (2017), refer to CEO education as the educational qualification of the CEO/managing director. Furthermore, the CEO gender is the sex of the chief executive, either a male or female CEO. According to agency theory, CEO ownership refer to the managers/CEO holding a fraction of a firm”s shares, the interests of these managers will become more aligned with those of outside shareholders (Jensen and Meckling, 1976).

The emergence of a firm brought with it an attendant need for managing directors/chief executive officer (CEO) to ensure its smooth running as agents of the shareholders. Furthermore, board of management of a company appoints the CEO as well as top management staff to oversee the activities and ensure good performance of the firms, which are more consistent with the shareholders” objectives (Yusuf and Abubakar, 2014). According to Kokeno and Muturi (2016), the numerous and growing challenges which businesses face, particularly in the area of operations, cost-cutting and production efficiency makes the need to examine how CEO characteristics could be beneficial for firm performance very relevant.

This premise is especially evident, and perhaps most conceivable, when considering chief executive officers (CEOs) (Hambrick and Quigley, 2014). A number of theories, such as upper echelons theory (UET), resource dependency theory (RDT), and expectancy theory among others underscore the role of CEOs in instituting strategy on businesses decision which will create value (Rumelt, 2011). According to Kokeno and Muturi, (2016) as cited in (Ofa Hosea Ayaba 2012), they argue that CEO characteristics and firm performance has gained impetus in recent times from the assumption that CEOs have a strategic role to play in the performance of a firm given the symbolic power that they exercise on decision making and key operations of a firm

According to Nigeria”s code of corporate governance of 2014 for banks as amended, which explains that the board and CEO are accountable and responsible for the performance and affairs of the bank. Similarly, it is broadly acknowledged that executives face substantial limits on their actions to creating value in organisations. They are constrained by their organizations” pre-existing asset configurations, entrenched cultures, pre-existing organisational characteristics and various other path dependencies (Fondas 1997; Hannan and Freeman, 1997). The Upper Echelon Theory (UET) view CEOs as the most powerful and main decision makers in an organization, thus their personality, characteristics, preferences and leadership style will have pronounced influence on the performance of the organization (Hambrick, and Mason, 1984; Hambrick, 2014). This implies that CEO characteristics manifest in organisation strategic actions, which eventually shape future performance of such organisation.

A number of prior studies such as Bertrand and Schoar (2003); Bhagat and Bolton (2008); Davidson et al (2007); Jiraporn,  et al (2008); Kim, Al-Shammari, and Lee (2009); Ryan and Wiggins, (2001) and Virtanen (2010) have documented evidence signifying that executive characteristics proxied by executive”s experience, power, age, quality, education and busyness affect organisational performance with mixed and divergent result. This necessitates a further study on the impact of CEO characteristics on organizational performance of deposit money banks (DMBs) in Nigeria.

Bertrand  and Schoar (2003) submit that the characteristics of managers in general are vital determinants of several performance indicators. This underscores the need for further empirical research to examine the CEO characteristics that drive organisational performance. This study therefore examines the impact of chief executive officer”s ownership, gender and tenure as the independent variables to proxy CEO characteristics, while firm size is used as a control variable. The dependent variable, which is the organisational performance is measured by return on asset (ROA). The justification for adopting the CEO attributes is due to the fact that CEO is important to business organization and is both accountable and responsible for the performance and the affairs of the bank. Specifically, and in line with the provisions in the Companies and Allied Matters Act (CAMA) 2004, managing directors owe the bank the duty of care and loyalty and to act in the interest of the bank”s stakeholders.

Jensen and Meckling (1976) explain that managerial/CEOs share ownership increases the owner manager”s interest converges with shareholders. Therefore, there is a growing incentive for the chief executive officers to maximize the value of the firm as managerial/CEOs ownership increases. On the other hand, Morck, Shleifer,and Vishny (1988) suggest a non-linear model in which increased ownership by the CEO leads to entrenchment, where the manager indulges in non-value-maximizing behaviour. Thus, CEO share ownership can be seen as a way of aligning interests of shareholders and management and thereby increase the performance of the firm. Thus, a CEO with a large share ownership stake can also lead to being entrenched and thereby more difficult to remove (Dikolli, Mayew, and Nanda, 2014; and Fisman et al 2014).

Hence, this study is motivated by the importance of the characteristics of CEOs of listed deposit money banks (DMBs) in Nigeria because they have a fundamental role of conveying credibility across the firms, attract investment and ensure confidence throughout the business and therefore, contribute to its improved organisational performance. Furthermore, the CEOs have a strategic role to play in the performance of a firm given the symbolic power entrusted on them by the corporate governance code of 2014 in Nigeria and also because most previous studies only focused on a single CEO characteristic (managerial ownership) with other  performance measurement, for instance in the study of (Deitiana and Habibuw, 2015). This necessitates the importance of studying the impact of CEOs characteristics on performance of listed deposit money banks (DMBs) in the Nigerian stock exchange.

1.2.      STATEMENT OF THE PROBLEM

It is pertinent that many companies today have been suffering various forms of operational and financial management problems which could eventually lead to collapse or wind up of the business operation. Omondi and Muturi, (2013) as cited in Kokeno and Muturi (2016) explain the increasing trend of sudden corporate failure in both global and local context, shareholders and other stakeholders are increasingly becoming more concerned with the financial performance of their firms. However, despite impressive performance at the Nigeria Securities Exchange, a number of problems relating to the way companies are controlled and directed by CEO ownership have been identified and this was revealed by the study of (Kokeno and Muturi 2016). According Lasisi, Mustapha and Movis (2018) the recent collapse of the financial institutions in Nigeria emanated from global economic meltdown which was attributed to the badly functioned subprime mortgage lending to firms and people by the top management officials such as CEOs. In that regards, there were persistent corporate merger and acquisition in the banking industry in Nigeria which has raised a serious suspicion and criticism among their existing and potential stake holders on the perceived financial mismanagement by the top management of the banks with the CEOs at the helm of affairs.

More recently, old Skye Bank of Nigeria was taken over by CBN and eventually converted to Polaris Bank. Also, Diamond Bank of Nigeria Plc was merged with Access Bank of Nigeria Plc. This is no doubt; a perceived proof that the merger and acquisition emanated from poor operation and financial mismanagement by the top management led by the CEOs of the banks. According to Popoola (2018), following the regulatory action taken by the Central Bank of Nigeria (CBN), Assets Management Corporation of Nigeria (AMCON) and Nigeria Deposit Insurance Commission (NDIC) respectively against the former Skye Bank Nigeria Plc due to financial distress discovered in its general operation. However, a direct intervention was essentially taken by CBN in July 2016 which led to the resignation of the chairman, all non-executive directors on the Board as well as the managing director, executive directors on the management team, as CBN considered the action taken as important strategy towards safeguarding depositors” funds. In the same vain, a fresh takeover of the old Skye Bank by Polaris Bank was initiated on 24 September, 2018 by the CBN in order to ensure that the “going-concern” principle for the bank, being a systematically important bank in the country to remain in business; also, to stem the imminent job losses to staff if a liquidation option had been considered the best option. Also, in more recent times, Olasupo (2018) reveals that the Federal High Court in Lagos approved the transfer of all the assets and liabilities and undertakings by Diamond Bank to Access Bank, as the Access Bank was authorized to issue and allot all Diamond Bank shareholders two fully paid ordinary share of 50 kobo each being exchange for every seven ordinary shares of equivalent value held by all Diamond bank holders. Also, the court concluded by referring to all legal proceedings, claims and litigation matters by Diamond Bank pending in court by or against Diamond bank will be continued by Access Bank, while Diamond Bank will be dissolved without being wound up.

In relation to the above, the academic literature provides accounts of the widely shared belief that the Chief Executive Officer (CEO) is the most powerful organizational member in the modern corporation (Fortune,1991; Eisenhardt, and Bourgeois, 1988). Therefore, the long history of controversies focused on how much impact CEOs characteristics have over the organizational performance (Mackey, 2008; Quiley and Hambrick, 2014). In this regard, some theorists have argued that chief executive characteristics substantially influence in the performance of their organisation (Rumelt, 2011). On the contrary, others have argued that chief executives are greatly constrained by organizational inertia, path-dependence, rigid resource configurations, and pressures to adopt institutionalized norms such that, on average, executives do not hold much influence over what happens to their organisations (Havemen 1993). This controversy reveals the significance of studying the influence of the CEOs characteristics in the organizational management.

Organisational management scholars have long sought to understand the best characteristics of CEO that impact on their organisational performance and the magnitude of such impact. Adequately estimating the CEO impact is indispensable to the field of organisational management. Sufficient understanding of the “CEO characteristics has vital implications for management research, in terms of the best characteristics of CEOs that significantly affect organisational performance and influence the policy and regulation of how management are overseen (Quigley and Hambrick 2014).

In addition, studies looking into whether CEOs actually impact firm performance are divided, with scholars debating whether they act as mere figureheads or actual leaders that determine organisational performance and strategy (Quigley and Hambrick 2014). A study by Mackey, (2008) sums up the arguments and examines variance in firm performance based on CEOs characteristics. Mackey concludes that CEOs impact organisational performance, but identifying the best characteristics of CEO that drives organisational performance to a greater level posed a serious problem. Past researches into the direct effect of CEOs characteristics on firm performance have presented mixed results (Mackey, 2008).

Review of literature indicates that majority of past empirical studies have analyzed the CEO characteristics on performance based on different indicators such as the study of (Mackey, 2008; Quigley and Hambrick 2014; Bernile, Bhagwat and Rau 2017). The indicator that has been used in most studies such as the work of Kokeno and Muturi (2016) used CEO education and CEO age, Mirza and Javed (2013) used only ownership structure as an indicator, Uwalomwa, Olamide, and Francis (2015) used CEO duality for their study Deitiana and Habibuw  (2015) used managerial ownership, more so, the study of Vintila and Gherghina (2014) used CEO resident, CEO status, CEO founder, CEO age, CEO tenure as CEO attributes, Sitthipongpanich and Polsiri, (2005) focus on CEO gender, CEO age and CEO education. Based on the above reviews and in as much as a lot of researches have been done on CEO characteristics on performance, it has been established that most studies are conducted in foreign countries and most studies reviewed, did not combine the three independent variables together which this study attempts to do; which are – CEO tenure, CEO gender and CEO share ownership. More so, none of the studies used firm size as control variable. This research is conducted to fill these pertinent gaps in literature by studying the effect of CEO characteristics on performance of listed deposit banks in Nigeria covering the period between 2010 to 2018.

1.3       RESEARCH QUESTIONS

In line with the above statement of problem, the study was guided by the following basic questions:

i.          Does CEO tenure have impact on organizational performance of listed DMBs in Nigeria?

ii.         What is the impact of CEO gender on organizational performance of listed DMBs in Nigeria?

iii.        What is the impact of CEO share ownership on organizational performance of listed DMBs in Nigeria?

1.4       OBJECTIVES OF THE STUDY

The main objective of this study was to empirically examine the impact of CEO characteristics on Organizational performance of listed DMBs in Nigeria. The specific objectives were to:

i.          examine the impact of CEO tenure on organizational performance of listed DMBs in Nigeria;

ii.         measure the impact of CEO gender on organizational performance of listed DMBs in Nigeria; and

iii.        investigate the impact of CEO share ownership on organizational performance of listed DMBs in Nigeria.

1.5 RESEARCH HYPOTHESES

The hypotheses tested in this study were stated in null form as follows:

HO1: CEO tenure has no significant impact on organizational performance of listed DMBs

in Nigeria.

HO2: CEO gender has no significant impact on organizational performance listed DMBs in

Nigeria.

HO3: CEO share ownership has no significant impact on organizational performance of listed

DMBs in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

Identifying suitable characteristics of chief executive officer of listed DMBs on the Nigeria Stock Exchange is very vital to its survival and continuity both in the short and long run. A closer and proper empirical examination of these characteristics among Nigerian listed DMBs will be of topmost benefit to top management/chief executive officers of the listed DMBs, investors/shareholders in explaining short and long run characteristics that are responsible in driving organizational performance among listed DMBs in Nigeria. Specifically, the study will benefit the management, shareholders and academic community in the following ways:

Management/CEOs who are saddled with the responsibility of making important decisions, and ensuring optimum performance that continually places the organization on a competitive edge. Shareholders, who own investments in organizations, would be interested in knowing the right characteristics of executives that drive organizational performance. This would aid them in electing suitable executives to chair the affairs of their organization. Furthermore, the result of this study provides empirical foundation for further research and serves as a reference purpose in the world of academics. It would provide support or cast shadows of doubt to previous works that have been done in this area. It would also add to the body of existing literature especially in developing nations where much has not been done with respect to CEOs characteristics.

1.7. SCOPE OF THE STUDY

This study empirically examined the impact of CEO characteristic on organizational performance of listed deposit money banks in Nigeria over a period of nine (9) years: 2010 to 2018. The study considers organizational performance represented by return on assets (ROA) as dependent variable and CEO characteristics proxied by CEO tenure, CEO gender and CEO share ownership as independent variables, while firm size is considered as control variable of the study.

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