ABSTRACT
The
objective of this study is to empirically investigate the relationship between
corporate governance (measured by Board Size, Ownership Concentration and CEO
Duality) and profitability (measured by Return on Asset and Return on Equity)
of selected Nigerian manufacturing companies.
The
study adopted survey research design. Random sampling was used to select 10
companies out of a total population of 45 manufacturing companies listed on the
Nigerian Stock Exchange, for a time period of 2006 to 2015. Secondary data
(financial and non-financial) were collected from the annual reports and
accounts of the selected listed manufacturing companies. Pooled OLS regression,
Fixed Effect and Random Effect analysis and descriptive statistics were used in
analyzing the data. F-stat was used to test the hypothesis.
The
results of the study show that Board size had a positive relationship but not
significant with performance of the sampled manufacturing companies. Also, it
was found that CEO duality had a negative but significant relationship with the
performance of the sampled manufacturing companies, while Ownership
concentration had a significant positive relationship with performance of the
sampled manufacturing companies.
In conclusion, the study revealed that the
performance indicator (ROA) and (ROE) related with each component of the Corporate
Governance Index in a peculiar manner.
It is therefore suggested that reform efforts should be directed towards
improving the corporate governance of listed Nigerian manufacturing companies,
especially emphasis should be devoted to ownership concentration.
CHAPTER ONE
INTRODUCTION
1.1 Background
to the Study
The issue of corporate governance
has brought about research interests with respect to principal-agent
relationship currently existing in publicly quoted companies. This is in
corroboration with Claessens and Fan (2002) who opined that corporate
governance has received much attention in recent years due to failure of some
firms in Asia.
Corporate governance reform has emerged
as a critical business issue, thrust on the world stage by a number of high
profile corporate failures (Strandberg, 2005). The famous corporate accounting
scandals of Enron Corporation, World Com, Tyco, and Parmalat have led to
contemporary discussion on the best mechanisms for protecting stakeholder’s
interest and ensuring shareholders wealth maximization. Also, in Nigeria the
emphasis on the need for corporate governance reform sprung up with the
incidence of fraudulent financial reporting as reported in the case of Cadbury
Nigeria Plc.In Nigeria, the growing incidence of corporate fraud has meant that
investors’ confidence in the capital market has declined due to the current down
turn in the market which is been blamed on the fraud at the Nigerian Stock
Exchange (NSE) and investors in Cadbury (Nig)plc also lost heavily as the share
price of the company took a downward turn. Organizations have monitoring
mechanisms aimed at ensuring good corporate governance and minimization of
corporate fraud. The primary objective of corporate governance is to try to
align managerial incentives with that of stakeholders so that managers work in
the best interest of the stakeholders (Nworji, Adebayo, & David,
2011).
In the area of monitoring, the non-executive
members of the board of Cadbury were passive. The audit committee was
ineffective while the internal auditor was compromised. Collusion among some members
of top management ensured internal control override. In the case of the NSE,
conflict of interest did not allow the non-executive directors to exercise
their oversight function effectively as top management were behind the cases of
asset misappropriations and reclassification of accounts, the internal control
system could not work.The Nigeria stock exchange had no internal audit unit and
audit committee although under the current Nigerian Law it was not mandatory for
it to have one. The Nigeria stock exchange and Cadbury Nig Plc external auditors
did not give an unqualified result and the auditors were indicted by SEC for
negligence and lack of professional skepticism while the fees paid to the Auditor
in the case of the Nigerian Stock Exchange was described as excessive.(Osundina,
Olayinka & Chukwuma, 2016)
In both cases, members of the public,
employees and shareholders of the organization lost their investments. Costly
litigation has also resulted for both firms. Perhaps for the first time in
Nigeria, an audit firm had been indicted and warned. The firms have been
audited for many years by the same firm. The performance of some Nigerian
auditors has led to the Central bank of Nigeria imposing selective ban onauditors
providing non-audit services to its bank audit clients. It has also led to
calls for mandatory rotation of auditors in all Public limited companies.On
Cadbury ( Nig) Plc scandal, one said” What kind of organizational structure was
in place in Cadbury(Nig.)Plc that would allow two persons to mindlessly, as
reported, affect the health of the company?” Another queried the relevance of a
board that still pleads excuses for its negligence for presiding over a
staggering fraud to the tune of fifteen billion Naira (Solanke, 2007).
Abor and Biekpe (2005)
intricately define corporate governance as the process and structure used to
enhance business prosperity and corporate accountability with the ultimate
objective of realizing long-term shareholder value, whilst taking into account
the interest of other stakeholders.
Kyereboah (2007) submits that corporate governance is represented by the
structures and processes lay down by a corporate entity to minimize the extent
of agency problems as a result of separation between ownership and control.
Simply put, corporate governance in an organizational context is the totality
of the control, monitoring and directing mechanism utilized by strategic
management in the best interests of its stakeholders.
The concept of performance supports
the effective and efficient use of financial resources of the company to
achieve overall objectives which include both shareholders wealth maximization
and profit maximization objectives. Performance is a quality of any company or
firm which can be achieved by valuable results. For example, a firm having high
return on assets (ROA) is said to be performing well and high ROA is not a sign
of good performance: there are some other variables to be considered such as
sales, profit and expenses which will be highlight in this study. Performance
can be analyzed by various methods, such as parametric (Stochastic Frontier
Approach) and non-parametric (such as Data Envelopment Approach). The focus of
this study is on accounting ratio, the non-parametric method. Many studies have
focused on this aspect(Ertugrul & Hegde, 2013).
Financial ratio is helpful and easy tool to
identify weakness and strength (performance) of any company by looking at their
financial statements. Through this, the study can identify the ratios across
time for example the 10-year period which have been taken for this study and
this study can compare the ratios to other companies in different time periods.
Beside its advantages, the disadvantage is that performance analysis cannot be
done only by financial ratios which are based on traditional accounting data as
they can no longer meet information needs.
Performance of any organization is
directly related to efficiency. In other words, performance will be higher, if
it achieves desired output with minimum consumption of input and time. There
are numerous studies available which have been done on performance evaluation
and efficiency analysis to support and guide the business organizations to
achieve their objectives. Performance can be measured using long term market
performance measures and other performance measures that are
non-market-oriented measures or short term measures (Zubaidah, Nurmala, &
Kamaruzaman, 2009). The measure of firm performance employed in this study is
from a non-market oriented perspective which is most common and requires the
use of accounting ratios which are the profitability and investor ratios. This
study intends to contribute to the few researches on the Nigerian environment
as most of the researches on firm performance and corporate governance which
resulted in mixed outcomes were conducted in the United States of America, the
United Kingdom, Pakistan and Malaysia (Ertugrul & Hegde, 2013; Gisper,Jong,
kabir & Renneboog, 2012; Javid & Iqbal, 2009; Zubaidah et al 2009). It
would also provide credible findings to support deliberations on this topical
issue.
1.2 Statement
of the Problem
Corporate governance is a nonfinancial factor that affects the
performance of any company, hence prior literature support increasing
disclosure of nonfinancial information in the reports of every organization
(listed or not listed).
PricewaterhouseCoopers (2002) found that most top managers and
executives in multinational companies believe that non-financial performance
measures outweigh financial performance measures in terms of creating and
measuring long-term shareholder value. Coram, Mock and Monroe (2006) opined
that non-financial performance indicators can offer key insight into future
performance, and at the same time serve as a proxy for identifying well-managed
companies. This is to an extent a reasonable assertion because corporate
governance indicators can help see how well an organization is being managed
and determined by the future performance of such organization.
Kajola (2008) asserts that
financial scandals around the world and the collapse of major corporate
institutions in the USA, South East Asia, Europe and Nigeria have shaken
investors’ faith in the capital markets and the efficacy of existing corporate
governance practices in promoting transparency and accountability. The loss of
confidence by investors in the capital market is therefore an indicator of poor
corporate governance practice in quoted companies. The shares of the listed
companies on the Nigerian stock exchange are gradually declining to a state of
less investment and shareholders have lost interest in trading on the stock
exchange because of the crash in share prices just as in the Cadbury Nigeria
Plc. case when it overstated its earnings and its shares which dealt a heavy
blow on the Nigerian Stock Exchange Market (Oyebode, 2009).
In a nutshell, weak corporate governance largely contribute to systemic failures,
corporate scandals and failures resulting from fraud and other forms of malfeasance,
this on the long run will affect negatively the financial performance of any
company. As a result of corporate governance failure, many companies around the
world, even those assumed as too big to fail, have experienced crises and
scandals that led to their end. Due to all this failure the study seeks to
examine the relationship between corporate governance and also check which
variable affect performance or profitability of manufacturing firms in Nigeria.
1.3 Objective
of the Study
The main objective of this study in a broad
sense is to measure the relationship between firm performance and corporate
governance mechanisms. The specific objectives are to:
1. examine the extent of
relationship between board size and firm performance;
2. examine the significance of CEO
Duality on firm performance and
3. examine the extent of
relationship between ownership concentration and firm performance
1.4 Research
Questions
The study tends to provide answers to the
following questions:
1. What is the relationship between
board size and firm performance?
2. To what extent does CEO duality
affect performance?
3. To what extent does concentration
of ownership affect firm performance?
1.5 Hypotheses
The following null hypotheses would
be tested in this study.
H01: Board size has no
significant relationship with firm performance
H02: CEO duality does not
significantly affect firm performance
H03: Ownership concentration does not significantly impact
on firm performance positively
1.6 Justification for the Study
The corporate environment of the
Nigerian economy has experienced different mix of management practices and
failure of some high profiled firms. Cadbury Nigeria Plc and the Nigeria
Security and Exchange Commission. The high levels of corporate failure
encountered which are largely due to poor management practices have not been
fully eradicated. The efficiency of the performance measures has shown varying
trends over the years. The most revealing of all is the level of mismanagement
in Cadbury Nigeria Plc, Dunlop, unilever brothers and that of the Security and
Exchange Commission which lead to the loss of investment by public investors in
the Nigerian economy, Putting all these into perspective, there is the need to
properly analyze the role of corporate governance on firms profit till date. Specifically
how their effect robs-off on current performance level in the manufacturing
firms in Nigeria. This thus forms the rationale for this research work.
1.7 Scope of the Study
The study covered a 10years periods
(2006 – 2015) of selected manufacturing companies listed on the NSE of which
ten (10) firms was selected using their Annual Reports and Accounts. The focus
on manufacturing companies was partly because most studies have studied banking
sector due to the financial crisis in the past. In another part, available
statistics shows that manufacturing sectors ownership structure exhibit a
degree of concentration. The period of 2006 to 2015 gave room for larger
observation for the panel analysis. In all total observation equals 100.
1.8 Significance of the Study
The importance of this study lies in
its ability to fill an identified gap and contribute to existing researches in
the subject area.
The previous empirical studies
conducted on the Nigerian environment do not cover information drawn from the
most recent periods. The studies provide evidence from the period of 1996 to 2006
(Kajola, 2008; Sanda, et al., 2005), whereas this study provides evidence from
2006 to 2015. Most importantly, this study advances on kajola (2008) which hitherto
is not the most recent study in this area on the Nigerian Stock Exchange. In
addition to being more recent in terms of coverage, several measures of
corporate governance as well as profitability measures not considered by the
most recently available works on Nigeria. Whereas, this study makes use of a
smaller sample size of ten (10) companies and examines the relationship between
two performance measures (Return on Equity and Return on Assets) and three corporate
governance variables. Apart from bridging the existing literature gap, another
significance of the study is the bid to resolve the information asymmetry
problem between managers and shareholders which is known as the agency problem.
This study would be beneficial to
the following categories:
Top executives: This includes the CEO, Chairman and members of the board.
The study would assist them in managing the agency problem which would help
widen their perspective of effective corporate governance that results in
improved firm performance.
Shareholders/Investors: This study would assist existing shareholders and potential
investors to make meaningful investment decision as regards their investments
and performance of the companies in which they are stakeholders.
Regulators: This study would assist the regulators in developing better
corporate governance regulations that will be more encompassing and contribute
effectively to enhancing firm performance and resolving agency conflict.
1.9 Operational Definition of Terms
Accounting scandal: an event of an accounting nature that causes public
outrage or censure such as the understatement of profit, overstatement of
assets.
Agency:
fiduciary relationship between two parties in which one (the “agent”) is obligated
to the other (the “principal”).
Audit Committee: It is a body formed by a company's board of directors to
oversee audit operations and circumstances. Besides evaluating external audit
reports, the Committee may evaluate internal audit reports as well.
Board of Directors: A board of directors is a body of elected or appointed
members who jointly oversee the activities of a company or organization. The
body sometimes has a different name, such as board of trustees, board of
governors, board of managers, or executive board.
Corporate Governance: Corporate governance is the set of processes, customs,
policies, laws, and institutions affecting the way a company is directed,
administered or controlled.
Financial Reporting: the presentation of financial information about an entity
to potential users of such information. The term usually refers to reporting to
users outside of the entity.
Insolvency: the situation where entities cannot raise enough cash to
meet its obligations, or to pay its debt as they become due for payment.
Return on Assets (ROA): ROA gives an idea as to how efficient management is at
using its assets to generate earnings. It is displayed as a percentage and
calculated as
Profit after Tax/ Total Assets.
Return on Equity: Return on equity measures a corporation's profitability by
revealing how much profit a company generates
With the money shareholders have
invested. ROE is expressed as a percentage and calculated as:
Profit after tax /Shareholder's
Equity.
Stakeholders: persons with interest in an organization such as its owner,
employees and creditors.
Shareholder: an individual or group who holds one or more shares in an
organization, and in whose name the share certificate is issued
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