CORPORATE GOVERNANCE AND FIRM PERFORMANCE: EMPIRICAL EVIDENCE FROM SELECTED LISTED COMPANIES IN NIGERIA

CORPORATE GOVERNANCE AND FIRM PERFORMANCE: EMPIRICAL EVIDENCE FROM SELECTED LISTED COMPANIES IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Corporate governance has become a popular case of concern over the years in both developing and developed countries. It is widely viewed that corporate governance determines firm performance and protects the interest of shareholders which led to an increasing global attention.

Corporate governance reforms have emerged as a critical business issue thrust on the world stage by a number of high profile corporate failures (strandberg 2012). The prominent corporate accounting scandal of Eron Corporation, World com, Tyco and parmalat have led to contemporary discussion on the best mechanism for protecting shareholders wealth maximization.

Also, in Nigeria the emphasis on the need for corporate governance spring up with the incidence of fraudulent financial reporting as reported in the case of Cadbury Nigeria plc. and the recent crisis in the banking industry.

Abor and Biekpe (2005) intricately defined corporate governance as the process and structure used to enhance business prosperity and corporate accountability with the ultimate objective of realizing long term shareholders value, whilst taking into account the interest of other stakeholders. Kyereboah Coleman (2007) argues that corporate is represented by structures and processes lay down by a corporate firm to maximize the extent of agency problem as a result of separation between ownership and control.

Simply put, corporate governance in an organizational context is totality of the control, monitoring and directing mechanism utilized by strategic management in the best interest of its shareholders.

Firm performance is a concept that supports the effective and efficient use of financial resources to achieve overall company objectives which include both shareholders wealth maximization and profit maximization objectives. It can be measured using long market performance measure and other performance measures that are non-market oriented measures or short term measures (Zubaidah ,et al 2009).

The measures of firm performance employed in this study are 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 in the Nigeria 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, Malaysia, and Parkinstan (Ertugru & Hegik, 2009; Zubaidah, Nurmala & Kamaruzuman, 2009). It would also provide credible findings to support deliberations on this subject matter.

1.2     STATEMENT OF THE PROBLEM 

The problem areas that spurred the interest in researching this topic are significantly;

1. Lack of confidence by investors in the capital market as a result of poor corporate governance practices amongst listed firms.
2. Lack of solvency amongst large companies as a result of financial improprieties by the board due to dependent audit committee
3. The unending agency problem i.e. managers’ interest differs from that of the shareholders.

1.3 OBJECTIVES OF THE STUDY

The objective of this study in a broad sense is to measure the relationship between firm performance and corporate governance mechanism. The specific objectives of this study are as follows;

1. To examine the relationship between board size and firm performance.
2. To ascertain the relationship between independence of the audit committee and firm performance.
3. To appraise whether or not the combination of the CEO and chairman of the board significantly enhances firm performance.

1.4 RESEARCH QUESTION

This study provides answers to the under listed questions;

1. What is the relationship between board size and firm performance?
2. What is the relationship between independence of the audit committee and firm performance?
3. What is the relationship between duality of CEO and firm performance?

1.5 STATEMENT OF HYPOTHESIS

Ho1: there is no significant relationship between board size and firm performance.

Ho2: there is no significant relationship between independence of the audit committee and firm performance.

Ho3: there is no significant relationship between CEO duality and firm performance.

1.6     SIGNIFICANCE OF THE STUDY

The indispensability of this study lies in its ability to fill the identified gap and contribute to existing researches in this subject matter;

The previous empirical studies conducted on the Nigeria environment do not cover information elicited from the most recent periods. The studies provided evidence from the period of 2010 t0 2015(Kajola, 2008, Sanda, Mikailu & Garba 2005). Whereas this study provides evidence from 2012 to 2016.

Most importantly, this study advances on Kajola (2008) which is the most recent study in this area on the Nigeria stock exchange known to the researcher. (Kajola 2008) encountered some limitations borne from examining the relationship between only two performance measures –return on equity and profit margin on the corporate governance variables on three (3) Listed on the Nigeria stock exchange .whereas, this study makes use of higher sample size of five manufacturing companies to examine the relationship between two performance measures (return on asset and return on equity) and three corporate governance variables.

This study is beneficial to the following categories of people;

1. TOP EXECUTIVES: this includes the CEOs, chairman and members of the board. it would aid them in managing the issues arising from agency relationship .it would also broaden their perspective on the aspects of corporate governance that need to be enhanced that will result in improved performance.
2. SHAREHOLDERS/ INVESTORS: it would assist existing shareholders and potential investors to make appropriate judgments as regards to their investments and performance of the company in which they are stakeholder.
3. FUTURE RESEARCHERS: They will be able to apply this research to carry out further studies in the same area or related area by serving as a theoretical base for the research to be carried out.
4. REGULATORS: it would assist the regulators in promulgating better corporate governance regulations that will be more encompassing and contribute effectively to enhancing firm performance and resolving agency conflict

1.7 SCOPE OF THE STUDY

This study examines the relationship between corporate governance on firm performance.  The independent variable of the topic is corporate governance while the dependent is performance of the firm. Board size, audit committee and CEO Duality are used are proxies for the independent variables while return on asset and return on equity is used for the firm performance. The focus of this study is to employ multiple linear regression methodology to provide evidence on the relationship between firm performance measures and corporate governance in Nigeria. The study observes the most recent financial periods of some manufacturing companies listed on the Nigeria stock exchange .the information is gotten from annual reports and accounts for a period of five (5) years from 2012-2017

1.8 DEFINITION OF TERMS

1.    ACCOUNTING SCANDAL: an event of an accounting nature that causes public outrage or censure such as the understatement of profit, overstatement of assets etc.
2. 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.
3. BEARISH: A stock market situation characterized by falling stock market prices
4. CORPORATE GOVERNANCE: corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a company is directed, administered and controlled.
5. AGENCY: A fiduciary relationship between two parties in one (the agent) is obligated to the other (the principal).
6. 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.
7.  BULLISH: A stock market situation characterized by using stock market prices.
8. INSOLVENCY: the situation where entities cannot raise enough cash to meet its obligations or to pay debts as they become due for payment.
9. PROFIT MARGIN: it is a measure of operating efficiency and pricing strategy; the ratio is usually computed using net profit before ordinary extraordinary items and taxes i.e. net sales less cost of goods sold and selling, general and administrative expenses. It is expressed as a percentage and calculated as net profit divided by sales.
10. RETURN ON ASSET (ROA): Return on asset 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 divided by total assets.
11. RETURN ON EQUITY (ROE): return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. It is expressed as a percentage and calculated as profit after tax divided by shareholders equity.
12. STAKEHOLDERS: persons with interest in an organization such as its owners, employees and creditors.
13. SHAREHOLDERS: 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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