Professional Documents
Culture Documents
George T. Peters,
Department of Accountancy, Faculty of Management Sciences,
Rivers State University of Science and Technology, Nigeria.
Email: peters.george@ust.edu.ng
Karibo B. Bagshaw,
Department of Management, Faculty of Management Sciences,
Rivers State University of Science and Technology, Nigeria.
Email: bagshaw.karibo@ust.edu.ng
_________________________________________________________________
Abstract
The aim of this study was to examine empirically the impact of corporate governance
mechanisms on firm financial performance using listed firms in Nigeria as case study for
two years 2010 and 2011. The study adopted a content analytical approach to obtain
data through the corporate website of the respective firms and website of the Securities
and Exchange Commission. A total of 33 firms were selected for the study cutting across
three sectors: manufacturing, financial and oil and gas. The result of the study showed
that most of the corporate governance items were disclosed by the case study firms. The
result also showed that the banking sector has the highest level of corporate governance
disclosure compared to the other two sectors. The result thus indicates that the nature of
control over the sector have an impact on companies’ decision to disclose online
information about their corporate governance in Nigeria; and that there were no
significant differences among firms with low corporate governance quotient and those
with higher corporate governance in terms of their financial performance. The result
also suggests an existence of variations between sectors with respect to their corporate
governance reporting. Thus among others the study recommends that deliberate steps be
taken in mandatory compliance with SEC code of best practice for all sectors in Nigeria.
Furthermore, deliberate efforts should be made in setting up a follow-up and compliance
team to make sure that all firms across Nigerian sectors do not only comply but meet up
with the different expectations of the regulatory body as mandated in the code of
corporate governance.
____________________________________________________________________
Keywords: Corporate Governance, Financial Performance, Nigeria, Listed Firms
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1. Introduction
This study provides an analysis of the impact of corporate governance on financial
performance of listed firms in Nigeria. A general proposition have surfaced and
resurfaced time after time that the governance structure and control mechanisms of
corporate entity significantly affect corporations‟ ability to respond positively to both
internal and external factors and thus have a bearing on performance. We extend this
literature by examining the corporate-governance link in Nigeria which presents a
number of key characteristics for business and governance practices as it is well
established that there are differences in the corporate governance practices between
countries (Bollaert, Daher, Derro & Dupire-Declerk 2010).
Several empirical studies have provided the nexus between corporate governance
and firm performance. Bebchuk, Cohen and Ferrell (2004) postulates that “a well
governed firm have higher firm performance”; Gompers, Ishii & Metrick (2003)
demonstrate through their study that firms with poor corporate governance quality enjoy
lower stock returns than those with a higher level of governance quality. Financial
devastation of many corporations such as those of USA, South East Asia and Europe
have been premised on the failure of corporate governance; high profile scandals
throughput the world such as Enron and World.Com in the United States, Transmile,
Megan Media and Nasioncom in Malaysia brought about the importance of good
corporate governance to limelight. Each of these corporate cases was directly linked to
corporate governance failures (Hussin & Othman 2012; Abdul-Qadir & Kwambo, 2012).
Nigeria is not left out of this phenomenon as similar financial and accounting
scandal has enshroud which include the banking sector with 26 banks liquidated in 1997
and the falsification of the company and financial statement in Cadbury Nigeria Plc. in
2006 and more recent events in 2009 post consolidation banking crises when ten banks
were declared insolvent and eight (8) executive management teams of the banks removed
by the Central Bank of Nigeria (CBN 2010). Also, the economic meltdown especially
that of 2008 has forced the Nigerian firms to realise the need for the practice of good
corporate governance.
According to Ogbulu & Emini (2012), an effective corporate governance
decentralizes powers and creates room for checks and balances which most times ensures
that managers invest in positive net present value projects thus helping the relationship
between management and shareholders to be characterized by transparency and fairness.
Thus, Nigerian code of best practices was introduced by the Securities and Exchange
Commission (SEC) and the Corporate Affairs Commission (CAC) in 2003. The CBN
also in 2006 introduced a code on corporate governance for banks on March 1 2006
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(effective April 3, 2006). The CBN code states that the role of the Board is to “retain full
and effective control of the bank and monitor executive management”. However, as at
2006 only 40% of quoted companies at the Nigerian stock exchange had recognized code
of corporate governance in place.
This study will therefore fill a gap in the literature by examining the nexus between
performance and corporate governance practices of firms generally and specifically the
corporate governance practices of Nigerian firms. Furthermore, it will add to the general
body of literature on the impact of corporate governance and performance of firms in
Nigeria. It also expands the body of literature in terms of its scope by incorporating all
firms in the industry and also narrowing to sectoral macro analysis. The rest of the paper
is structured as follows: section 2 presents literature inculcating the conceptual
framework, corporate governance mechanisms, theoretical framework and empirical
review on relationship between corporate governance and firm financial performance.
Section three presents the methodology. Section four focuses on data and results. Lastly,
conclusions and recommendations are discussed in section five.
2. Literature Review
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assets (Epps and Cereola 2008). The return on assets (ROA) is a measure which shows
the amount of earnings that have been generated from invested capital. It is an indication
of the number of kobo earned on each naira worth of assets. It allows users, stakeholders
and monitoring agencies to assess how well a firm‟s corporate governance mechanism is
in securing and motivating efficient management of the firm (Chagbadari 2011). The
ROA is the ratio of annual net income to average total assets of a business during a
financial year. It is measured thus:
ROA = Annual Net Income
Average Total Assets
2.3 Corporate Governance Mechanisms
Mechanisms of corporate governance relates to the tools, techniques and instruments
via which accountability is ensured; it is the various medium through which stakeholders
monitor and shape behaviour to align with set goals and objectives. Adekoya (2012 p.
40) defined corporate governance mechanism as “the processes and systems by which a
country‟s company laws and corporate governance codes are enforced”. This study
considers some Corporate Governance Mechanisms from the perspective of Board
Composition, Board size and Board committees.
2.3.1 Board Composition
One important mechanism of board structure is the composition of the board,
which refers to executive and non-executive director representation on the board. Both
agency theory and stewardship theory apply to board composition. Boards dominated
by non-executive directors are largely grounded in agency theory. In contrast, a
majority executive director representation on the board is grounded in stewardship
theory, which argues that managers are good stewards of the organization and work to
attain higher profits and shareholder returns (Donaldson & Davis 1994). An effective
board should comprise of majority of non-executive directors (Dalton et al. 1998).
However, executive director‟s responsibility is the day-to-day operation of the business
such as finance and marketing, etc. They bring specialised expertise and a wealth of
knowledge to the company (Weir & Laing, David 2001).
2.3.2 Board Size
Board size is the number of members on the board. Identifying appropriate board
size that affects its ability to function effectively has been a matter of continuing debate
(Jensen 1993; Yermack, 1996; Dalton, Daily, Johnson & Ellstrand, 1999; Hermalin &
Weisbach, 2003). Some scholars have been in favour of smaller boards (e.g., Lipton &
Lorsch, 1992; Jensen 1993; Yermack, 1996). Lipton and Lorsch (1992) support small
boards, suggesting that larger groups face problems of social loafing and free riding. As
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board increase in size, free riding increases and reduces the efficiency of the board. On
the other hand,large boards were supported on the ground that they would provide
greater monitoring and advice (Pfeffer, 1972; Klein, 1998; Adam & Mehran, 2003;
Anderson et al., 2004; Coles, et al., 2008). For example, Klein (1998) argues that CEO‟s
need for advice will increase with complexity of the organisation. Diversified firms and
those operating in multiple segments require greater need for advice (Hermalin &
Weisbach, 2003; Yermack, 1996). However, Singh &Harianto (1989) found that large
boards improve board performance by reducing CEO domination within board, thereby
making it difficult to adopt golden parachute contracts that might not be in the
shareholder‟s interest.
2.3.3 Board Committees
Board committees are also an important mechanism of the board structure providing
independent professional oversight of corporate activities to protect shareholders
interests (Harrison 1987). The agency theory principle of separating the monitoring and
execution function is established to monitor the execution functions of audit,
remuneration and nomination (Roche 2005). Corporate failures in the past focused
criticism on the inadequacy of governance structures to take corrective actions by the
boards of failed firms. Importance of these committees was adopted by the business
world (Petra 2007). As a result the Cadbury Committee report in 1992, recommended
that boards should nominate sub-committees to address the following three functions:
• Audit committees to oversee the accounting procedures and external audits;
• Remuneration committees to decide the pay of corporate executives; and
• Nominating committees to nominate directors and officers to the board;
These named committees can be just a window dressing unless they are independent,
have access to information and professional advice, and contain members who are
financially literate (Keong 2002). Therefore, the Cadbury committee and OECD
principles recommended that these committees should be composed exclusively of
independent non-executive directors to strengthen the internal control systems of firms
(Davis 2002; Laing & Weir 1999).
[
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corporate resources. The challenge of corporate governance could help to align the
interests of individuals, corporations and society through a fundamental ethical basis and
it fulfils the long term strategic goal of the owners. It will certainly not be the same for
all organizations, but will take into account the expectations of all the key stakeholders
(Imam & Malik, 2007). So maintaining proper compliance with all the applicable legal
and regulatory requirements under which the company is carrying out its activities is also
achieved by good practice of corporate governance mechanisms. There are a number of
theoretical perspectives which are used in explaining the impact of corporate governance
mechanisms on firms‟ financial performance. The most important theories are the agency
theory, stakeholders‟ theory and resource dependency theory (Maher & Andersson,
1999).
2.4.1 Agency Theory
Agency theory is a theory that has been applied to many fields in the social and
management sciences: politics, economics, sociology, management, marketing,
accounting and administration. The agency theory a neoclassical economic theory (Ping
& Wing 2011) and is usually the starting point for any debate on the corporate
governance. The theory is based on the idea of separation of ownership (principal) and
management (agent). It states that “in the presence of information asymmetry the agent is
likely to pursue interest that may hurt the principal (Sanda,Mikailu& Garba 2005). It is
earmarked on the assumptions that: parties who enter into a contract will act to maximize
their own self-interest and that all actors have the freedom to enter into a contract or to
contract elsewhere. Furthermore, it is concerned with ensuring that agents act in the best
interest of the principals.
2.4.2 Stakeholders’ Theory
The stakeholders‟ theory was adopted to fill the observed gap created by omission
found in the agency theory which identifies shareholders as the only interest group of a
corporate entity. Within the framework of the stakeholders‟ theory the problem of
agency has been widened to include multiple principals (Sand, Garba & Mikailu 2011).
The stakeholders‟ theory attempts to address the questions of which group of
stakeholders deserve the attention of management. The stakeholders‟ theory proposes
that companies have a social responsibility that requires them to consider the interest of
all parties affected by their actions. The original proponent of the stakeholders‟ theory
suggested a re-structuring of the theoretical perspectives that extends beyond the owner-
manager-employee position and recognises the numerous interest groups. Freeman,
Wicks & Parmar (2004), suggested that: “If organizations want to be effective, they will
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pay attention to all and only those relationships that can affect or be affected by the
achievement of the organization‟s purpose”.
2.4.3 Resource Dependency Theory
Whilst the stakeholder theory focuses on relationships with many groups for
individual benefits, resource dependency theory concentrates on the role of board
directors in providing access to resources needed by the firm (Abdullah & Valentine,
2009). According to this theory the primary function of the board of directors is to
provide resources to the firm. Directors are viewed as an important resource to the firm.
When directors are considered as resource providers, various dimensions of director
diversity clearly become important such as gender, experience, qualification and the like.
According to Abdullah and Valentine, directors bring resources to the firm, such as
information, skills, business expertise, access to key constituents such as suppliers,
buyers, public policy makers, social groups as well as legitimacy. Boards of directors
provide expertise, skills, information and potential linkage with environment for firms
(Ayuso & Argandona, 2007).The resource based approach notes that the board of
directors could support the management in areas where in-firm knowledge is limited or
lacking. The resource dependence model suggests that the board of directors could be
used as a mechanism to form links with the external environment in order to support the
management in the achievement of organizational goals (Wang, 2009). The agency
theory concentrated on the monitoring and controlling role of board of directors whereas
the resource dependency theory focus on the advisory and counselling role of directors to
a firm management.
Each of the three theories is useful in considering the efficiency and effectiveness of
the monitoring and control functions of corporate governance. But, many of these
theoretical perspectives are intended as complements to, not substitutes for, agency
theory (Habbash, 2010). Among the various theories discussed, agency theory is the
most popular and has received the most attention from academics and practitioners.
According to Habbash (2010), the influence of agency theory has been instrumental in
the development of corporate governance standards, principles and codes. Mallin (2007)
provides a comprehensive discussion of corporate governance theories and argues that
the agency approach is the most appropriate because it provides a better explanation for
corporate governance roles (as cited by Habash, 2010).
2.5 Empirical Review of Literature
The state of corporate governance in an economy plays a dominant role in attracting
and holding foreign investors, for building a robust capital market and for
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Bankers‟ Committee. Study by Kojola (2008) for 20 firms in Nigeria showed that a
positive and significant relationship exist between ROE and board size, profit margin
and chief executive officer‟s status, ROE board composition and audit committees and
finally between profit margin (as dependent variables) and board size, board composition
and audit committee as independent variables.
Study on board composition in Nigeria by Okhalumeh, Ohiokha & Ohiokha (2011)
who seek to examine the influence of board composition in the form of the
representation of the outsider non-executive directors on the economic performance of
firms in Nigeria showed that there was no significant relationship between board
composition and any of the performance measure (ROE, ROCE, ROAM, EPS and DPS)
using a simple regression analysis through survey for a sample of 38 listed firms in
Nigeria. For leadership structure, Adenikinju & Ayorinde (2001), using Nigerian data
investigated whether ownership mix and concentration has any variation in corporate
performance of publicly listed firms in Nigeria. The study finds that Nigerian firms are
highly concentrated and there is significant presence of foreign ownership. The study
went further to find that ownership structure has no impact on corporate performance in
Nigeria.
A study on board size by Eyenubo (2013) for Nigeria using regression analysis for
50 firms quoted on the Nigerian Stock Exchange during the period 201-2010 showed
that bigger board size had a significant negative relationship with the indicator of firm
financial performance (NPAT). Finally, Uwuigbe (2013) study for fifteen (15) listed
firms in manufacturing and banking sector in the Nigerian Stock Exchange showed that
corporate governance mechanisms ownership structure has negative and insignificant
relationship with share price. Conclusively for this study, higher number of shareholders
on the board has a negative effect of share price. On the other hand corporate governance
mechanisms audit committee independence was found to have a positive and significant
correlation with share price. This suggest thus, the higher the number of shareholders
compared to directors on the audit committee, the better the share price value of the
company.
Of interest to this study are findings on the impact of corporate governance on firm
financial performance using descriptive content analysis; similar methodology was
adopted by Mariri & Chipunza (2011) among 10 selected mining companies listed in the
Johannesburg Stock Exchange using secondary data in the form of companies‟ annual
reports. The study adopted a descriptive quantitative design. The study revealed
interesting outcome of governance, CSR and sustainability reporting within the South
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African Mining Industry. The results showed high corporate governance reporting
among the firms considered for the study which correlated with CSR performance.
A critical appraisal of the literature reviewed shows that while some studies provide
evidence for negative relationship between corporate governance proxy variables and
firm financial performance, others found positive relationship while some found
independent and mixed relationship between the two proxies. Several explanations have
been adduced for these inconsistencies: use of public data, survey data (fraught with
biases) which are generally restricted in scope (Kyereboah-Coleman 2007). This study
attempts to close this research gap by providing more empirical evidence for the case of
Nigeria.
3. Methodology
This study adopts the judgemental sampling technique to select 33 firms from more
than 200 listed firms on the Nigerian Stock Exchange (NSE). The selection was based
only on those firms with web presence and whose annual reports for the period (2010
and 2011) under review is in the domain of the NSE.
3.1 Research Instrument
In determining the level of corporate governance disclosure among the listed firms in
Nigeria, the study made use of „descriptive content analysis‟ technique as a means of
eliciting data from the audited annual reports of the listed firms. Over the past decades,
the use of „content analysis‟ have become common among researchers especially as it
relates to corporate governance performance and financial reporting (Beattie & Thomson
2007). The core questions of content analysis are “who says what, to whom, why, to
what extent and with what effects?” (Fooladi & Farhadi 2011). Researchers have used
content analysis of annual reports and corporate documents to derive indicators of
commitment to social expectations (Cook & Deakin 1999); it involves the „codification‟
of qualitative and quantitative information into pre-defined categories in order to derive
patterns in the presentation and reporting of information (Bhasin 2011). The coding
process for this study involved reading through the annual reports of each of the 33 firms
selected for the study and coding the information according to pre-defined categories of
corporate governance indicators as shown in the table below.
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index using the CBN post consolidation code of best practices and guided by the OECD
code and papers prepared by the UN secretariat for the 19th session of International
Standards of Accounting and Reporting (ISAR) (2011) entitled “transparency and
disclosure requirements for corporate governance” and the twentieth session of ISAR
(2002) entitled “guidance on Good Practices in corporate governance disclosure” for the
firms in this study.
In order to determine the rating of corporate governance practices for each of the
sample firms each of the desired corporate governance parameter was calculated to
obtain a Corporate Governance Index (CGI) for that corporate governance item using the
following formula:
1 Financial 15 45.5
2 Oil and Gas 4 12.1
3 Manufacturing 14 42.4
Total 33 100
14
12
10
0
Financial Oil and Gas Manufacturing
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42% Financial
46%
Oil and Gas
Manufacturing
12%
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governance and only two companies from the financial sector - First Bank (100%) and
Continental Insurance (94%) met this standard.
Table 3: Corporate Governance Quotient of Case Study Firms
S/N SECTOR/FIRMS Total S/N SECTOR/FIRMS Total
CGV CGV
1 Access Bank 88% 18 Nestle Nigeria 71%
2 Diamond Bank 88% 19 Dangote Flour Mills 65%
3 First Bank 100% 20 National Salt Company 71%
(Nigeria)
4 Guarantee Trust Bank 88% 21 Honey Wells Flour Mills 71%
5 ECO Bank Nigeria 88% 22 Guinness Nigeria Plc 71%
6 First City Monument Bank 88% 23 Beta Glass Plc 71%
7 Sterling Bank 88% 24 Dangote Cement Plc 76%
8 United Bank for Africa 88% 25 First Aluminium 65%
9 Royal Exchange 76% 26 Lafarge Wapco Plc 76%
10 Mansard Insurance 82% 27 Paints & Coatings MFG Nig. 65%
Plc
11 NEM Insurance 59% 28 Unilever Nigeria 88%
12 Oasis Insurance 59% 29 Eterna Plc 65%
13 Consolidated Hallmark 76% 30 Japaul oil and Maritime 65%
Insurance Service
14 Cornerstone Insurance 82% 31 Oando Nigeria Plc 82%
15 Continental Reinsurance 94% 32 Total Nigeria Plc 82%
16 Nigerian Breweries 71% 33 Con Oil 72%
17 PZ Cussons 71%
Source: Authors‟ Calculation based on CGV formula
With regard to sectors, the banking sector has the highest mean (82.93) compared
with the other sectors. This is due to the fact that all banks report at least one piece of
information as regards corporate governance as mandated in the code of corporate
governance by CBN (2006) with First Bank and Continental Insurance having the
highest disclosure scores in the sector as well as among the firms.
Table 4: Mean Disclosure Scores according to Sector
S/N Sector Total Number of Number of Minimum Maximum Mean
Directorship in firms in
the Sector Sectors
1 Financial 186 15 59% 100% 82.93
3 Oil and Gas 39 4 65% 72% 71.21
4 Manufacturing 127 14 65% 88% 75.25
Total 352 33 10.6
Source: Authors‟ Calculation based on content Analysis
The financial sector was closely followed by the oil and gas sector with an average
disclosure score of 75.25% and the manufacturing sectors having a disclosure score of
71.21%. Descriptive statistics for the board size is shown in Table 4 and 5 below.
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Fig 4: Bar chart showing Corporate Governance Quotient and Return on Equity for 33 Firms
Fig 5: Bar chart showing Corporate Governance Quotient and Return on Assets for 33 Firms
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table 4.7, figures 4 and 5 clearly shows that the banking sector which had the highest
CGV recorded lowest ROE and ROA values compared to sectors in the manufacturing
and oil and gas. First bank and Continental Insurance with the highest CGV of 100% and
94% respectively recorded ROE and ROA values of 1.25% and 0.22% for First bank in
2010 with a loss in 2011 and 10.59% and 6.55% for continental Insurance in 2010 while
Nestle Plc with a low CGV score of 65% had the highest ROE and ROA scores at
84.78% and 20.78% respectively. More so, NEM Insurance and Oasis Insurance which
had the lowest CGV score in 2010 and 2011 did better than first bank and continental
Insurance with ROE and ROA values of 14.75% and 11.86% in 2010 and 20.08% and
16.14% in 2011 for NEM Insurance and 2.45% and 2.17% in 2010 for Oasis Insurance
and 2.99% and 2.59% for 2011.
This findings is affirmed by empirical studies for Nigeria. For instance study for
Nigeria by Okhalumeh, Ohiokha & Ohiokha (2011) on the influence of board
composition in the form of the representation of the outsider non-executive directors on
the economic performance of firms in Nigeria showed that there was no significant
relationship between board composition and any of the performance measure (ROE,
ROCE, ROAM, EPS and DPS) using a simple regression analysis through survey for a
sample of 38 listed firms in Nigeria. Furthermore, the study corroborates empirical
findings by Eyenubo (2013) for Nigeria. Results showed that bigger board size had a
significant negative relationship with the indicator of firm financial performance (NPAT)
using regression analysis for 50 firms quoted on the Nigerian Stock Exchange during the
period 2001-2010 as well as study by Uwuigbe (2013) for fifteen (15) listed firms in
manufacturing and banking sector in the Nigerian Stock Exchange which confirmed that
corporate governance mechanism ownership structure has negative and insignificant
relationship with share price. The study however violates a number of findings using
quantitative approaches (ANOVA and regression) which provided evidence of a high
degree of correlation between corporate governance mechanisms and firm financial
performance (Adams & Mehran 2003, Brown &Caylor 2009). Conclusively for this
study, higher number of shareholders on the board has a negative effect of share price.
5. Conclusion and Recommendations
This study investigated the relationship between corporate governance mechanism
and the financial performance of listed firms in Nigeria for two years 2010 and 2011.In
examining the level of corporate governance disclosure a disclosure index was developed
using the SEC code of corporate governance and CBN post consolidation cost of best
practices and guided by different empirical reviews; from these issues the corporate
governance disclosure were classified into four broad categories; financial disclosure,
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The main limitations of this study was that the study did not cover the entire 220
firms that are listed on the Nigerian stock exchange and the 33 firms selected might be a
good representation of the entire population; this is however justified by the nature of the
study which requires availability of information from companies corporate websites.
Thus, this study suggests a need for large population especially after mandatory
compliance of companies to disclose financial information from 2013.
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