DETERMINANTS OF CORPORATE GOVERNANCE STRUCTURE IN NIGERIA FIRMS

DETERMINANTS OF CORPORATE GOVERNANCE STRUCTURE IN NIGERIA FIRMS

ABSTRACT

This study examines the determinant of corporate governance structure in Nigeria firms. Specifically the study seeks to determine the effect of Board Composition on the performance of Nigeria firms, examine the relationship between board size and on the performance of Nigeria firms. This research work was designed using descriptive research design to the relationship between the determinant of corporate governance structure and firm performance.  The regression analysis was used for data presentation and analysis using the Statistical Package for Social Science (SPSS). The findings of the study line with tested hypothesis shows that board composition has no effect on financial performance of Nigeria firms  and that there is no significant relationship between board size and financial performance of Nigeria firms. In line with the findings of the study, the research recommends that board members should adhere strictly to firms corporate governance guidelines, portfolio selection and good management (stocks, bonds, treasury bills, mutual funds, etc.) that maximizes the investor’s utility should be put in place.

CHAPTER ONE

INTRODUCTION

1. Background of the Study

Corporate governance is the system by which an organisation is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different stakeholders such as the board, managers or shareholders, and spells out the rules and procedures for decision-making in corporate affairs. Good corporate governance requires an effective system of mutual checks and balances among the top corporate bodies (Swiss Re, 2013).

Corporate Governance is the process by which companies are directed, controlled and held to account (Standard, 2003). This shows that corporate governance encompasses the authority, accountability, stewardship, leadership, direction and control exercised in managing organizations. The concept of corporate governance originated in the 19th century but began to be widely used in the 1980s (Parker, 1996; Fletcher, 1996; Vinten, 2001). Corporate Governance gained prominence in the 1980s as a result of stock market crashes experienced in different parts of the world and failure of some organizations due to poor corporate practices (Reynolds & Francis, 2017).

By definition, corporate governance is a system or an arrangement that comprises of a wide range of practices (accounting standards, rules concerning financial disclosure, executive compensation, size and composition of corporate boards) and institutions (legal, economic and social) that protect the interest of corporation’s owners. According to Laporta et al (2000) “corporate governance is to a certain extent a set of mechanism through which outside investors protect themselves against expropriation by the insiders.”

Corporate governance is of significance to the growth, expansion and stability of the economy. It enhances investors’ confidence as well as provides platform for ensuring that duty of loyalty by managers to shareholders exist and that managers will efficiently and effectively strive to maximize the firm’s wealth (Kihumba, 1999). According to the McKinsey and Company Investor Opinion Survey (2000), more than 80% of investors are willing to pay for the shares of well-governed firms than poorly governed firms of comparable financial performance. Previous studies have shown that having effective corporate governance in place does not always translate into high firm profitability. Suffice it to say that, a firm may demonstrate good corporate governance, but still has low profitability level. The implication is that there may be other determinants of corporate governance structure which could influence profitability of firms. It is against this background that this study seek to examine the determinants of corporate governance structure in Nigeria firms.

1.2     Statement of the Problem

In recent years, the subject of corporate governance has generated much debate. The main interventions in corporate governance matters have been a reaction to crisis situations, seeking to restore trust and confidence in the markets. In the United Kingdom, the Cadbury code (1992) was the response to a number of corporate and financial scandals that occurred in the late 1980s, such as the Guinness scandal. In Continental Europe, the OECD Principles issued in 1999 were a reaction to the Asian financial crisis in 1997 and 1998. The accounting fraud in major companies like Enron and Worldcom, the access to privileged information and the episodes of tax evasion, have increased the debate on this issue. The aforementioned cases have raised serious questions about the adequacy of the existing solutions to a wide range of problems, such as strengthening the credibility of financial information and the efficiency of the supervisory systems of listed companies. Although, many studies such as (Wen et al. 2012; Anderson & Reeb 2013; Abor & Bikpie 2015; Abor 2017; Hussainey & Al-Nodel 2019) have been conducted to investigate the relationship between corporate governance and performance of Nigeria firms, but none have categorically discuss the determinant of corporate governance structure in Nigeria firms.

Therefore it is have become important to carrying analysis on the efficiency of board composition and board size on the financial performance of an organization.

1.3     Objectives of the Study

The broad objective of this study will be to examine the determinant of corporate governance structure in Nigeria firms.

The specific objectives of this study will include:

1. To determine the effect of Board Composition on the performance of Nigeria firms.
2. Examine the relationship between board size and on the performance of Nigeria firms.

1.4     Research Questions

1. What is the effect of Board Composition on the performance of Nigeria firms?
2. What is the relationship between board size and performance of Nigeria firms?

1.5     Research Hypotheses

H₀₁: Board Composition has no effect on the performance of Nigeria firms

H₀₂: There is no significant relationship between board size and performance of Nigeria firms.

1.6     Significance of the Study

The findings of this study will be of benefit to the following categories of people;

1. Top Executives: this includes the CEOs, chairman and members of the board. It will aid them in managing the issues arising from agency relationship. It will 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 will 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: The study will enable academics and scholars to bridge the gap on the relationship between of corporate governance practices and stock market performance in Nigeria. It will also be useful to future researchers as it will form part of the empirical literature on corporate governance practices.
4. Regulators: It will 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 will focus on the examination of the determinants of corporate governance structure in Nigeria firms. The study will be limited to companies listed on the Nigerian Stock Exchange between 2010 – 2019.

1. 8 Definition of Terms
2. Corporate Governance: corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a company is directed, administered and controlled.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. Stakeholders: persons with interest in an organization such as its owners, employees and creditors.
9.  Shareholders: An individual or group who holds one or more shares in an organization and in whose name the share certificate is issued