BOARD INDEPENDENCE AND BANK ASSET QUALITY: MODERATION THE EFFECT OF EXECUTIVE COMPENSATION ON NIGERIAN DEPOSIT MONEY BANKS

Abstract The incessant occurrence of crisis in the Nigerian banking sector said to be replete with corporate governance failure and non-performing exposures remains a bane of banking industry development in the country. These problems which appear to be a regulatory conundrum have been a threat to the safety of customers’ deposits and investors’ funds in the industry. While the issue of non-performing exposures reverses the bank asset quality, that of corporate governance inadequacies retards the banks’ smooth running. This is despite payment of huge executive compensation in the industry. To address this problem, this study examined the impact of Board Independence on the bank asset quality in Nigeria considering the moderating influence of executive compensation. Data were hand-extracted from the annual reports of a sample of thirteen (13) Deposit Money Banks (DMBs) and equally obtained from World Development Indicators database over the period 2014-2023. The data collected were analyzed using static panel models of fixed-effects, fixed-effects with robust standard errors and random-effects after a number of diagnostic tests. Based on the three (3) indicators of asset quality: loans-to-deposits ratio (LDR); loans-to-assets ratio (LTTA); and non-performing loans ratio (NPFL), the results showed that board independence does not have significant effect on bank asset quality. Further, findings revealed that executive compensation does not largely have significant impact on bank asset quality but its interaction with other board independence showed some level of positive effect but with weak estimates. Based on these results, the study concluded that “boys’ club syndrome” in the appointment of independent directors retard asset quality. Further inference showed that over-reliance on executive compensation as only tool by Nigerian banks’ owners to align their interests with those of managers is anti-asset quality while the satisfactory preponderance of non-executive directors has tendency to compel executive directors to work towards improved bank asset quality despite huge compensation among others. The study recommended that the regulators endeavor to make realistic provisions for the excess of independent directors over other non-executive directors as contained in country’s corporate governance code.