ABSTRACT
This research study was undertaken with the objective to establish the
effect of board gender on financial performance of listed companies in Nigeria.
The study covered the period 2013 to 2017. Board gender was measured by board
size, gender diversity and board independence; while financial performance was
measured by the return to assets ratio. The study used a descriptive research
design. The population of the study comprised all the forty two listed companies
in Nigeria over the period of study. The study was therefore a census study.
The research study collected secondary data from the annual reports published
by the said firms as well as their financial statements. The study achieved a
response rate of 59.52% as only twenty five companies had complete data set
sought. Data was obtained and organized and presented in form of tables. Data
analysis was then undertaken using descriptive statistics, correlation and
regression analyses, and conclusions drawn. The researcher finds that overall
board gender has a positive effect on financial performance of listed companies
in Nigeria. Board size and board independence have positive effect on return on
assets (the proxy for financial performance), while gender diversity has a
negative effect. The researcher concludes therefore that companies management
and owners should properly constitute their boards, as this affects financial
performance. The researcher recommends further research on the gender diversity
variable.
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study
Corporate governance has in the past few
months attracted more attention from academics and regulators around the world,
especially with the recent corporate scandals; firms have had to redesign and
implement effective corporate governance systems, including board genders
(Al-Shammari & Al-Saidi, 2013). With appropriate board reorganizations in
place, focus shifts to their effectiveness in positively driving firm
performance (Samad & Zulkafli, 2009).
Agency theory (Jensen & Meckling, 1976)
supposes that agents (managers) are engaged by principals to run firms on
behalf of the owners, known as principals and in the owners’/principals’ best
interests. In practice the interests of these two groups might diverge thus the
need for apt corporate governance mechanisms. Board gender is one of the
corporate governance mechanisms put in place to safeguard and to assist
maximize shareholder wealth. The companying
sector is a vital sector built on stakeholder confidence and trust; corporate
governance practices in the companying industry are of paramount importance
(Al-Shammari & Al-Saidi, 2013).
1.1.1 Board Gender
Board gender is a subset of the corporate
governance mechanisms put in place by a firm; it relates to the manner in which
a company’s affairs are and or shall be directed and controlled (Bender &
Ward, 2009). Board gender refers to the board size, the combination of
executive and non-executive directors, and other characteristics, which
includes gender diversity (Ongore, et al., 2017). Al-Shammari &Al-Saidi
(2013) identify board gender as being characterized by presence of nonexecutive
directors in the board, family directors, role duality and board size.
According to prudential guidelines, companies
in Nigeria should have at least five directors in their individual boards of
directors. However, the exact number of directors varies with different companies
according to size, scope and complexity of operations and ownership structure (CBN,
2016). The onus lies with a company’s
owners and management to determine the effective gender of its board of
directors; this gender is reflected in terms of board size, diversity (age,
professional and educational backgrounds, nationality and so on), and
demographics. There should also be at least three fifths nonexecutive directors
and at least one third independent directors represented in the boards. However, a strict observance to the need for
independence could result a board comprising persons with no interaction with a
firm and who understand very little of it (Bender & Ward, 2009).
A properly constituted board is thus of
importance as a company’s goals and objectives shall not only be achieved
effectively and efficiently but also the company’s image shall be enhanced thus
attracting stakeholder confidence and goodwill, a key operational factor in the
companying industry (Al-Shammari & Al-Saidi, 2013). Besides, poor corporate
governance structures (of which board gender is a part) affects a company’s
reputational risk adversely.
1.1.2 Financial Performance
Financial performance makes reference to the
extent of achievement of a firm’s goals, objectives and targets over a given
time period expressed in monetary terms. Return on assets as well as return on
equity ratios can assist gauge financial performance. Through the income
statement, a firm’s financial performance over a given period of time can be
ascertained through calculation and interpretation of the said ratios (Ross,
Westerfield & Jordan, 2013). Financial performance of a company shows how
well a company is doing with respect to various ratios (Mishkin, 2004).
Mishkin (2004) identifies that there are
three good measures of company financial performance: (ROA) return on assets,
(ROE) return on equity, and (NIM) net interest margin. Return on assets is a
ratio of a company’s net income to total assets; this ratio adjusts for total
assets. Return on equity is of key importance to funds owners and is a ratio of
net income to total shareholders’ funds (capital). Net interest margin is a
ratio between the difference between total interest income and interest
expense, and assets. Enhanced and improving financial performance is important
to firms, companies included, (Pandey, 2009). It assists a firm to compete in
the market easily, maintain and even grow market share, as well as provide
consistent returns in terms of regular dividends and capital gains to the
investors.
1.1.3 Relationship between Board Gender and Financial Performance
Board gender is a
subset of corporate governance in firms, companies included; where corporate
governance in a particular firm improves then firm performance will also
increase (Khan & Awan, 2012). One characteristic of board gender is the
board size; theoretically, large boards are expected to depict an inverse
relationship with financial performance. Problems of poor communication and
hampered decision-making weaken the effectiveness and efficiency of larger
boards relative to smaller ones (Guest, 2009).
According to
agency theory (Jensen & Meckling, 1976), boards of directors should be
structured to safeguard the principals (owners’) best interests by limiting
agency problems (where firm managers might pursue self-advancing goals through
board resolutions). Thus board gender influences financial performance
positively; only positive net present value projects are vouched for in board
decisions. However the stakeholder theory (Freeman, 1984) posits that boards
are often composed of stakeholders; each stakeholder has some interest to
safeguard through the board of directors, where these interests are not aligned
the effect on financial performance could be negative.
1.2 Research Problem
According to the agency theory (Jensen &
Meckling, 1976), there is present ownership dispersion especially in large
organizations, listed companies included. The owners then have to appoint
managers (agents) to run and manage organizations as per the owners’ outlined
goals and expectations. However in practice, the agents may opt overtly or
inadvertently not to pursue the owners’ best interests. The owners therefore
constitute the boards accordingly and with a view to attain organizational
goals effectively and efficiently. Attainment of these goals is reflected by
financial performance. Stakeholder theory (Freeman, 1984) advances that the
composed boards are representations of various stakes in the firm by different
interested parties; boards should thus be composed to reflect and safeguard
these parties interests.
In Nigeria, listed companies are closely
regulated and supervised by the central company of Nigeria (CBN, 2016);
corporate governance issues related to board gender are clearly spelt out under
the companying Act and prudential guidelines but the onus of determining the
appropriate board gender is on individual companies. Two companies (Imperial company
and Chase company) have experienced financial difficulties in the recent past;
their failures have been traced to weak corporate governance mechanisms (CBN,
2016).
The effect of board gender has been studied
in the past by local and foreign scholars.
A study by Khan & Awan (2012) found that
firms with independent board members show greater financial performance. The
effect of size of the board on firm performance is negative but not
significant; increase in board size in turn causes a decrease in firm
performance which is measured by return on assets (Al-Matari, et al., 2012).
Larger boards inversely affect economic performance of firms but have a
positive effect on market reach and output, while female board members do not
improve economic performance but positively affects market reach (Gohar &
Batool, 2017).
Board members who are independent do not
have any significant effect on financial performance. However, gender diversity
has significant positive effect on financial performance (Ongore, et al., 2017).
There’s a weak positive relationship between board diversity and financial
performance (Aosa, Machuki, & Letting, 2012). Ngugi (2012) also concluded
that there is very minimal relationship between board diversity and financial
performance. Board size has an inverse relationship with financial performance,
while presence of outside directors do not affect positively firm performance
(Ongore, et al., 2017). There’s negative relationship between
gender diversity and a firm’s financial performance (Muriuki, 2012).
The empirical
studies indicates lack of unanimity as to the effects of a board’s gender on a
firm’s financial performance. Khan & Awan (2012) find that firms with
independent board members show greater financial performance; while Ongore et
al., (2017) find independent board members have insignificant effect. Gender
diversity has positive effect on the financial performance (Ongore et al., 2017);
there is a negative relationship between gender diversity and firm’s financial
performance (Muriuki, 2012; Gohar & Batool, 2017).
Therefore, there is need for further
research on the research study area. The research study attempted to answer the
question: What’s the effect of gender of board of directors on the financial
performance of listed companies in Nigeria?
1.3 Research Objective
The research objective was to establish the
effect of gender of board of directors on financial performance of listed companies
in Nigeria. specifically the study examines:
1.
the relationship between board gender diversity and financial performance
2.
the relationship between board size and financial performance
3.
the relationship between board independence and financial performance
1.4 research questions
The
research questions for the study are;
1.
what is the relationship between board gender
diversity and financial performance
2.
what is relationship between board size and financial performance
3.
what is relationship between board independence and financial performance
1.5 significance of the Study
The researcher
believes that the research study is of benefit to a number of persons in the Nigerian
economy and similar emerging economies. Potential and existing directors in listed
companies in Nigeria shall find the research study useful and informative; they
might become better decision makers, especially those serving in board
nominating committees. The research study would also be useful to existing and
potential investors in the companying sector; they would be in a better
position to appraise investment targets and or approving board gender
resolutions appropriately.
The study shall also be of value to other
researchers and scholars; they might find the research study an invaluable
reference input and source of knowledge. Policy makers such as the market
regulators and the legislature could obtain input to their policy drafts from
the research study findings thus enacting and amending companying laws aptly.
The research study adds to the existing knowledge on corporate governance in
general and board gender specifically.
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