THE EFFECTS OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE OF SELECTED NIGERIA COMPANIES

THE EFFECTS OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE OF SELECTED NIGERIA COMPANIES

ABSTRACT

This study examines the effects of corporate governance on financial performance of selected Nigeria companies. Specifically seek to determine the effect of Board Composition on the financial performance, examine the relationship between board size and the financial performance and ascertain the impact of independence of directors on the financial performance selected Nigerian companies. The adopted descriptive research design to evaluate the effect of corporate governance on financial performance of selected Nigeria companies. The study used regression analysis which is carried out with the use of Statistical Package for Social Science (SPSS) for data analysis. The finding of the study revealed that board composition has no effect on financial performance of selected Nigeria companies and that there is no significant relationship between board size and financial performance of selected Nigeria companies. Finally, the study recommends that much focus should be placed on management efficiency at improving liquidity for the firm and emphasizing on expanding the scope of the business operation by involving in exports of the firms products.

CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

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. Laporta et al (2000) opined that corporate governance is to a certain extent a set of mechanism through which outside investors protect themselves against expropriation by the insiders.

Good corporate governance is widely believed to be an important factor in improving value of a firm in every economy of the world, though the relationship between some corporate governance mechanism and firm financial performance differs in emerging economies like Nigeria and other developed economies of the world (Urhoghide and Omolaye, 2017).

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, 2018). 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.

In the achievement of the business objectives, corporate governance is a major factor and it is concerned with the relationships that exist among firms’ management, board of directors, shareholders and other stakeholders. Osundina, Olayinka and Chukwuma (2016) emphasized that corporate governance is a non-financial factor that affects the performance of companies and increases accessibility of external finance that brings sustainable economic growth. Weak corporate governance may manifest in form of non-accountability and transparency to stakeholders, bribery scandals, violation of the rights of the minority shareholders, official recklessness among the managers and directors, weak internal control system, insider abuses and fraudulent practices (Olumuyiwa & Babalola, 2012). Also, non – distinction between ownership and control of organization has been identified to be a major reason for weak corporate governance. The corporate governance structures specifies the distributions of rights and  responsibilities among different stakeholders in a corporation, like the board, managers, shareholders and others, and spell out the rules and procedures for making decisions on corporate affairs. This is in conformity with the view of Uche (2004) and Akinsulwe (2006).

The priority of any organization is to effectively, efficiently and ethically manage the company for profitable long term growth and perpetual existence; the policies and practices of management must also align with the interest of shareholders and other stakeholders. Thus, the development of good corporate governance is essential in order to protect corporate stakeholders and maintain factors for control and prevention of collapse and long lasting economic depression (Osundina, Olayinka and Chukwuma, 2016). It is against this background that this study seeks to examine the effect of corporate governance on financial performance of selected Nigeria companies.

1.2     Statement of the Problem

Investors are faced with the challenges or problems of making decision in terms of determining when to invest, whether to invest or not. Investors are not interested in the beautification of the firm or its products rather they are very much interested in the financial performance of the firm, because no investor would invest in a non-going concern firm, and the financial performance can be ascertain through the financial information provided by the firm. Corporate governance have enable the separation of owners from management due to the fact that the ownership of most larger companies is widely spread, while the day to day control of the business rest in the hand of a few managers who usually own a relatively small proportion of the total share issued. Many notable scholarly articles written on the topic of coporate governance and have established the relationship between corporate governance and financial porperformance (Abor, 2007). Corporate governance and disclosure practice (Aboagye-Otchere, Bedi and Ossei Kawkye, 2012). Also Kyereboah-Kyeeboah-Coleman and Biekpe, (2006) studied corporate governance and financial performance of an organization. Myers, (1974) argues that there is a significant interaction between corporate financing and investment decisions while the study Abor, (2007) addresses corporate governance and financial performance. from the studies above, few studies exists the effect of corporate governance on financial performance of Nigeria quoted firms. The literary gap, therefore necessitate the need to examine the effect of corporate governance on financial performance of selected Nigeria companies.

1.3     Objective of the Study

The main objective of this research work is to examine the effect of corporate governance on financial performance of selected Nigerian companies. To achieve this; the following specific objectives will be pursued:

1. To determine the effect of Board Composition on the financial performance selected Nigerian companies.
2. Examine the relationship between board size and the financial performance selected Nigerian companies.
3. Ascertain the impact of independence of directors on the financial performance selected Nigerian companies.

1.4     Research Questions

In the attempt to evaluate the impact of corporate governance on financial performance of  selected Nigeria companies, the following research questions were raised.

1. What is the effect of Board Composition on the financial performance of selected Nigerian companies?
2. What is the relationship between board size and financial performance of selected Nigerian companies?
3. What are the impacts of independence of directors on the financial performance of selected Nigerian companies?

1.5     Research Hypotheses

H₀₁: Board Composition has no effect on financial performance of selected Nigerian companies.

H₀₂: There is no significant relationship between board size and financial performance of selected Nigerian companies.

H₀₃: Board independence has no significant effect on the financial performance of selected Nigerian companies.

1.6     Significance of the Study

The finding of this research work will be useful to policy makers such as Nigerian Stock Exchange to encourage compliance to the existing guidelines by establishing if there is a relationship between corporate governance and stock market performance. Given the need to Fast Track governance reforms the significance cannot be over emphasized.

Managers, shareholders and investors can use this research work to construct corporate governance index and use same to forecast stock market liquidity of companies listed in NSE. The study will enable the investors know which stocks are likely to be perform better thus able to help to determine which stocks to acquire and which to dispose. The research work 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.

1.7     Scope of the Study

The scope of the study is limited to 5 listed Manufacturing companies on Nigeria Stock Exchange between 2015 to 2019. These companies include Nestle Nigeria plc, Dangote flour mills Nigeria plc, flour mills of Nigeria plc, Guinness Nigeria plc and Cadbury Nigeria plc.

1.8     Limitation of the Study

Time is the major constraint in this research work. This is due to the fact that this research is carried along with normal academic programme, making it difficult to devote time to it. Additional information need for this study is not within the reach of the researcher, especial annual reports of companies listed on the Nigeria stock exchange.