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Corporate Governance Mechanisms and Financial Performance
of Listed Firms in Nigeria: A Content Analysis
George T. Peters,
Department of Accountancy, Faculty of Management Sciences,
Rivers State University of Science and Technology, Nigeria.
Email: [email protected]
Karibo B. Bagshaw,
Department of Management, Faculty of Management Sciences,
Rivers State University of Science and Technology, Nigeria.
Email: [email protected]
_________________________________________________________________
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
Fig 1: Model of Corporate Governance and Firm Financial
Performance
Conceptual Framework of Corporate Governance Mechanisms and
Firms Financial Performance
Source: Researchers Desk
The model above shows the path of the study which is aimed at
examining the
impact of corporate governance mechanisms (board composition,
board size, and board
committee) moderated by firm age and firm size on firm financial
performance as
proxied by firms Return on Assets (ROA), and Return on Equity
(ROE)
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2.1 Corporate Governance
Corporate governance has no single accepted definition; this is
often attributed to the
huge differences in countries corporate governance codes
(Solomon, 2010). The
definition varies based on the framework and cultural situation
of the country under
consideration (Armstrong and Sweeney, 2002). Also, the
differences in definition can be
as a result of the different viewpoint from the different
perspectives of the policy-maker,
researcher, practitioner, or theorist (Solomon, 2010). The term
corporate governance
came into use in the 1980s to broadly describe the general
principles by which
businesses and management of companies were directed and
controlled (Dor et al.
2011). ODonovan (2003 p. 2) see corporate governance as an
internal system
encompassing policies, processes and people which serves the
needs of shareholders and
other stakeholders by directing and controlling management
activities with good
business savvy, objectivity and integrity. In other words it
defines the legal, ethical and
moral values of a corporation in order to safeguard the interest
of its stakeholders.
The aim of corporate governance is to ensure that corporations
are managed in the
best interests of their owners and shareholders (Ahmed, Alam,
Jafar & Zaman 2008).
This applies specifically to listed companies where the majority
of the shareholders are
not in participatory everyday management positions; although, it
can also apply to other
forms of corporations such as companies with few principal
owners and a large group of
smaller shareholders, public corporations (where all citizens
are stakeholders) partner-
owned companies and privately owned companies where the
ownership has been divided
through inheritance in one or several generations (Ahmed, Alam,
Jafar & Zaman 2008).
Another essence of corporate governance is establishing
transparency and accountability
throughout the organization. This is feasible as corporate
governance system is premised
on a strict division of power and responsibilities between the
shareholders through the
annual general meeting, the board of directors, the executive
management and the
auditors.
Fig 2 Basic Structure of a Corporate Governance System
Source: Adapted from Ahmed, Alam, Jafar & Zaman 2008
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2.2 Firm Performance
Financial performance which assesses the fulfilment of a firms
economic goals has
long being an issue of interest in managerial researches. Firm
financial performance
relates to the various subjective measures of how well a firm
can use its given assets
from primary mode of operation to generate profit. Kothari
(2001) defined the value of a
firm as the present value of the expected future cash flows
after adjusting for risk at an
appropriate rate of return. To (Eyenubo 2013) it is the success
in meeting pre-defined
objectives, targets and goal within a specified time target.
Qureshi, (2007), put forward
four different approaches in which the value of a firm has been
identified in corporate
finance literature. These are: the financial management approach
which focus on the
evaluation of cash flows and investment levels before
identifying and assessing the
impact of financing sources on firm value; the capital structure
approach which studies
the impact of capital structure changes on the value of firm and
how different factors
impact directly or inversely the debt and equity component of
the firm capital structure;
the resource based approach which explains the value of firm as
an outcome of firms
resources; and finally, the sustainable growth approach whichis
a summary of the above
three approaches to firm value, taking into account the firms
operating performance, its
investment and financing needs, the financing sources, and its
financing and dividend
policies for sustainable development of firms resources and
maximization of firm value.
This study examines two key accounting measures of firms
financial performance which
are Return on Equity and Return on Assets.
2.2.1 Return on Equity (ROE)
One accounting based measure of performance in corporate
governance research is
return on equity (ROE). (Baysinger & Butler 1985; Dehaene,
De Vuyst & Ooghe
2001).The primary aim of an organizations operation is to
generate profits for the
benefit of the investors. Therefore, return on equity is a
measure that shows investors the
profit generated from the money invested by the shareholders
(Epps & Cereola 2008). It
measures the profitability of shareholders investment and shows
the net income as a
percentage of shareholders equity. It is calculated as:
ROE = Annual Net Income
Average stockholders equity
2.2.2 Return on Assets (ROA)
One of the widely used accounting based measures of corporate
governance in
literature is the Return on Asset (ROA) (Finkelstein and DAveni
1994; Weir and Laing
1999). It assesses the effectiveness of capital employed and
provides a basis in which
investors can measure the earnings generated by the firm from
its investment in capital
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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 firms 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
countrys 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 directors 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 CEOs
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
shareholders 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). [
2.4 Theoretical Framework
Corporate governance is the relationship among shareholders,
board of directors and
the top management in determining the direction and performance
of the corporation. It
includes the relationship among the many players involved (the
stakeholders) and the
goals for which the corporation is governed (Kim & Rasiah,
2010).
According to Imam & Malik (2007) the corporate governance
theoretical framework
is the widest control mechanism of corporate factors to support
the efficient use of
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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 organizations 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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maintaining/restoring the confidence of both domestic and
foreign investors (Ahmed,
Alam, Jafar & Zaman 2008).
In a study conducted by Mckinsey and Company and cited in Adams
and Mehan
(2003), 78% of the professional investors in Malaysia expressed
that they are willing to
pay a premium for a well-governed company. In another study
carried out by Mardjono
(2005) who attempted to analyze the reasons for the failure of
two giant corporations
Enron Inc and HIH Insurance concluded that both firms did not
fail because they were in
bad business, but because they violated the key principles of
good corporate governance.
In line with the interest of this study, this section discusses
how companies compliance
with corporate governance principles experiences certain
benefits and growth
opportunities, while citing various forms of research on firm
performance.
Analysis of 51 corporate governance factors was carried out on
2,327 firms in the
United States by Brown &Caylor (2009) based on a data set
generated by Institutional
Shareholder Service. Their findings indicate that corporate
governance principled firms
are relatively more profitable, more valuable and pay more
dividends to their
shareholders. This finding is in line with findings for cross
sectional study conducted on
German firms by Drobetz Schillhofer & Zimmermann (2004) who
found a positive and
significant relationship between governance practices and firm
valuation. On corporate
governance mechanisms it is hypothesized that a positive
relationship is expected
between firm performance and the proportion of independent
(outside) directors sit on
the board; this is premised on a conviction that unlike inside
directors outside directors
are better able to challenge the CEOs to obtain results in line
with set objectives (Sanda,
Mikaila & Garba 2005). The code of corporate governance of
countries specifies that
there should be a proportion of outside directors on the board
of every listed firm, for the
UK a minimum of 3 independent board directors is required while
in the US it is
stipulated that they constitute at least two-third () of the
board (Bhagat &Black 2002).
Study by Erkens, Hung & Matos (2010) found that firms with
more independent boards
and higher institutional ownership experience worse stock
returns during a crises using
international sample of 196 financial firms from 30 countries.
Further they found that
firms with more independent boards raised more equity capital
during crisis, which led to
a wealth of transfer from existing shareholders to debt
holders.
In Nigeria, corporate governance has also received maximum
attention as its effects
of continuance of a firm have been recognised. This recognition
has seen actions such as
the setting up of the Peterside Commission on corporate
governance in public
corporations by the Securities and Exchange Commission (SEC) and
the setting up of the
sub-committee on corporate governance for banks and other
financial institutions by the
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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 officers 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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Table 1: Corporate Governance Compliance Checklist of Listed
Firms in the
Nigerian Stock Exchange
S/N Financial Indicators:
1 Financial and Operating Result
2 Critical Accounting Ratios
3 Critical Accounting Policies
4 Corporate Reporting Framework (Segment Reporting)
5 Risks and Estimates in Preparing and Presenting Financial
Statements
6 Information Regarding Future Plan
7 Dividend
Corporate Governance Indicators:
8 Size Of Board
9 Board Composition
10 Division Between Chairman and CEO
11 Information About Independent Director
12 Role and Functions of Board
13 Changes in Board Structure
14 Composition of the Committee
15 Function of the Committee
16 Audit Committee Report
Timing And Means Of Corporate Governance Disclosure
17 Separate Corporate Governance Statement
18 Annual Report through the Internet
19 Frequency of Board Meetings Source: Uwuigbe 2013; Samala,
Dahaway, Hussainey, Stapleton 2010; SEC 2010
The content analysis is divided into two (2) basic sections
covering both financial
performance aspects and the corporate governance aspects.
Content analysis is basically
used to assess the level of compliance with corporate governance
code of conduct in
prior studies. The following forms of content analysis is
identified: number of sentences
disclosed, number of words used, pages or proportion of pages,
average number of lines
and Yes and No approach (Krippendorff 2003). This study however
adopts the Yes and
No approach identified by various corporate governance studies
as a more reliable
method in analysing annual reports of firms for governance
practices because it avoid the
element of subjectivity. Using these criteria, a score of 0
meant that no meaningful
information was provided on the specific evaluation item while a
score of 1 indicated
that the report included that information to some degree. That
is, if there was evidence of
the criteria then a Yes rating was given for that element,
otherwise No; where Yes
indicates 1 and No indicates 0. This criterion is used for both
the financial performance
and corporate governance indicators because these reporting
items are fairly
straightforward and unlikely to need robust illustrations from
reporting companies.
The content of the corporate governance section of each of the
firm were analysed,
the study followed the methodology by Uwuigbe (2013) who
developed a disclosure
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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:
4. Results and Discussion
4.1 Descriptive Statistics
Table 1 shows the number of companies under the three different
sectors finally
utilized for the analysis. Fifteen (15) of these companies were
from the financial sector
having a total of eight (8) commercial banks and seven (7)
insurance companies; 14 were
from the manufacturing while 4 firms were drawn from oil and gas
sector.
Table 2: Classification of Sampled Firms by Sector
S/N Sector No. of Firms Percentage (%)
1 Financial 15 45.5
2 Oil and Gas 4 12.1
3 Manufacturing 14 42.4
Total 33 100
Figure 2: Distribution of Firm by Sector
0
2
4
6
8
10
12
14
16
Financial Oil and Gas Manufacturing
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Figure 3: Percentage Distribution of Firms by Sector
4.2 Variations between Sectors
Descriptive statistics showing the corporate governance
quotients for all the firms is
shown in table 2 below. As earlier stated, with the help of the
list of corporate
governance items (under all the issues a total of 17 corporate
governance indicators are
arrived at), the corporate annual reports of the firms were
examined, a dichotomous
procedure was followed to score each of the corporate governance
items. Each firm was
awarded a score of 1 if it has the required number of item as
depicted in the SEC
(2003) and the Act (1990) corporate governance codes, otherwise
0. The range of
disclosure scores for the companies based on the corporate
governance list utilized is
between 59 and 100%. Of these companies, four companies were
from the
manufacturing sector Nestle Nigeria Plc, First Aluminium, Paints
and Coatings MFG
Nigeria Plc and Eterna plc; two from the financial sector NEM
Insurance and Oasis
Insurance and one in the oil and gas sector - Japaul Oil and
Maritime Service have the
lowest corporate governance quotient ranging from 59% to 65%.
Companies with
disclosure scores 71% and 88% provided detailed information
about names of the board
of directors, managers team, number of board meetings and
detailed information about
dividend payout to shareholders; they also had detailed
corporate reporting framework,
as well as met the 60:40 percent ratio for board member
composition. These companies
were 25 in number comprising of company from all the sectors -
For corporate
governance scores above 88% we observe that these companies
provided detailed
information to include report on organizational hierarchy, risks
and estimates in financial
statement preparation and they had a separate section for
reporting of corporate
46%
12%
42% Financial
Oil and Gas
Manufacturing
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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
CGV
S/N SECTOR/FIRMS Total
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
(Nigeria)
71%
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.
Plc
65%
11 NEM Insurance 59% 28 Unilever Nigeria 88%
12 Oasis Insurance 59% 29 Eterna Plc 65%
13 Consolidated Hallmark
Insurance
76% 30 Japaul oil and Maritime
Service
65%
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
Directorship in
the Sector
Number of
firms in
Sectors
Minimum Maximum Mean
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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Table 5: Average Size of Board of Directors according to Sector
for 2010
S/N Sector Total Number of Directorship
in the Sector
Number of
firms in
Sector in
2010
Minimum Maximum Mean
1 Financial 186 15 6 20 12.4
2 Oil and Gas 39 4 5 15 9.75
3 Manufacturing 127 14 9 10 9.07
Total 352 33 10.6 Source: Authors Calculation based on content
Analysis
Table 6: Average Size of Board of Directors According to Sector
for 2011
S/N Sector Total Number of Directorship
in the Sector
Number of
firms in
Sector in
2011
Minimum Maximum Mean
1 Financial 185 15 6 19 12.3
3 Oil and Gas 39 4 5 15 9.75
4 Manufacturing 134 14 9 10 9.57
Total 358 33 10.85 Source: Authors Calculation based on content
Analysis
Table 4 and 5 points out that board size of the selected firms
ranges from 5 to 20
persons; the number of directors have remained constant over
time for most of the firms;
the average size of the board also remained constant revolving
around an average of 10
for the years and a peak of 20 in 2010 (United Bank for Africa).
While the overall board
size was fairly constant over time, there are differences across
sectors. As shown in
tables, average size of board varied across the different
sectors ranging from a minimum
of 5 in the Oil and gas sector to a peak of 20 amongst firms in
the financial sector (Table
4).These features corresponded to the provision of the Security
and Exchange
Commissions Code of Corporate Governance (2003) which stipulates
that board size
should range between 5 to 15 persons.
4.3 Corporate Governance and Firm Financial Performance
To determine whether corporate governance is associated with
better-performing
firms was investigated using a comparative framework between the
corporate
governance quotients by all the firms and the parameters for
firm financial performance.
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Table 7: Corporate Governance Performance Index from Highest to
Lowest
SECTOR/FIRMS CGV Critical
Accounting Ratio
2010
CGV
(%)
Critical
Accounting Ratio
2011
(%) EPS ROE
(%)
ROA
%
EPS ROE
(%)
ROA
%
First Bank 100 9k 1.25 0.22 100 (78k) loss loss
Continental
Reinsurance
94 12k 10.59 6.55 94 12k 10.31 6.01
Diamond Bank 88 63k 6.34 1.48 88 88K 9.60 1.02
Access Bank 88 102K 9.81 1.45 88 140k 12.29 1.58
Guarantee Trust Bank 88 136k 18.35 3.37 88 1698k 21.22 3.08
ECO Bank Nigeria 88 12k 2.18 0.35 88 (8k) Loss Loss
First City Monument
Bank
88 49k 5.89 1.47 88 (61k) Loss loss
Sterling Bank 88 33k 19.31 1.82 88 51k 16.33 1.33
United Bank for
Africa
88 3k 0.37 0.04 88 (32k) Loss loss
Unilever Nigeria 88 111k 50.16 29.45 88 145k 56.82 33.77
Mansard Insurance 82 6k 5 3.29 82 9k 7.22 3.89
Cornerstone Insurance 82 5k 6.66 3.80 82 2k 2.70 1.45
Oando Nigeria Plc 82 829k 15.63 4.44 82 162k 3.78 0.86
Total Nigeria Plc 82 1123k 60.89 9.96 82 1601k 38.08 6.50
Royal Exchange 76 6k 3.27 2.09 76 0.31k 7.07 4.10
Consolidated
Hallmark Insurance
76 4k 5.04 3.86 76 5k 6.03 4.55
Dangote Cement Plc 76 680k 49.80 26.80 76 812k 42.56 24.42
Lafarge Wapco Plc 76 163k 10 7 76 283k 16 8
Con Oil 76 402k 18.28 16.06 76 425k 17.53 15.53
Nigerian Breweries 71 401k 60.45 26.52 71 503K 48.72 17.57
PZ Cussons 71 168k 14.43 9.47 71 164k 13.83 8.27
Dangote Flour Mills 71 54K 10.03 3.88 71 14k 2.52 0.82
National Salt
Company (Nigeria)
71 62k 33.26 20.95 71 81k 37.20 21.44
Honey Wells Flour
Mills
71 14k 8.70 3.92 71 31k 16.47 8.55
Guinness Nigeria Plc 71 931k 40.17 17.52 71 1216k 44.50
19.44
Beta Glass Plc 71 295K 15 9.23 71 309K 13.84 8.63
Nestle Nigeria 65 1908k 84.78 20.88 65 2121K 70.69 21.58
First Aluminium 65 (15k) Loss Loss 65 (16k) Loss Loss
Paints & Coatings
MFG Nig. Plc
65 0.13k 11.80 6.76 65 0.16k 10.49 7.24
Eterna Plc 65 55k 20.76 7.79 65 93k 15.63 8.23
Japaul oil and
Maritime Service
65 13k 3.67 3.17 65 16k 4.35 4.31
NEM Insurance 59 20k 14.75 11.86 59 24k 20.08 16.14
Oasis Insurance 59 1k 2.45 2.17 59 2k 2.99 2.59
Source: Authors Calculation based on Content Analysis
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Fig 4: Bar chart showing Corporate Governance Quotient and
Return on Equity for 33 Firms
Source: Authors Interpolation with E-Views
Fig 5: Bar chart showing Corporate Governance Quotient and
Return on Assets for 33 Firms
Source: Authors Interpolation with E-Views
4.4 Discussion
The evidence from the figures (4 and 5) clearly shows there was
no significant
difference in the performance of the two categories of firms
(those with high
performance quotient and those that had low (CGV). Specifically,
evidence provided in
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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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corporate governance indicators, timing and means of corporate
governance disclosures
and best practices for compliance with corporate governance.
For the descriptive analysis done using means, tables, graphs
and percentages the
empirical findings reveal that on average a relatively moderate
board size of 11 is
noticed among the listed firms in Nigeria. This is in line with
the SEC code for best
practice that a board size of 5 to 15 is appropriate (SEC 2003).
Furthermore, the
composition of the board which is the proportion of outside
directors in a board had a
mean of 48%. This also indicated that on average 48% of the
board members are non-
executive directors compared to 52 executive members which
violates the SEC (2003)
code of corporate governance where it is stated that the number
of non-executive
directors should exceed that of executive directors.
Through interpolations made with content analysis obtained from
the annual reports
of the firms for corporate governance parameters and firm
financial parameters our
results showed that firms with lower corporate governance
quotients did not perform
differently from firms with high corporate governance quotients.
That is, there was no
significant difference between the performances of firms with
high corporate governance
scores compared to those with low corporate governance score.
This shows that other
factors such as technology, capital output, sales volume and a
host of others are
responsible for profitability than corporate governance.
Conclusively, these results
showed that financial profitability of Nigeria firms cannot be
ascribed to their corporate
governance quotients.
5.1 Recommendations
The result of this study showed that most firms in Nigeria do
not report their
financial information online and most that do however do not
have reporting framework
for corporate governance up to 50% and thus were excluded from
the study. Based on
these findings we proffer the following recommendations:
1. Deliberate steps should be taken in mandatory compliance with
SEC code of best
practice for all sectors in the 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 for 2014-15.
2. To eliminate the issue of corruption and forgery of published
financial statement.
The regulatory authorities should set up their investigative
team and auditors to re-
evaluate accounts submitted to different bodies concerned with
companies
operations.
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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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