Corporate Governance Mechanisms and Financial ... - Semantic Scholar

Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA) An Online International Research Journal (ISSN: 2311-3162) 2014 Vol: 1 Issue 2

Corporate Governance Mechanisms and Financial Performance of Listed Firms in Nigeria: A Content Analysis George T. Peters, Department of Accountancy, Faculty of Management Sciences, Rivers State University of Science and Technology, Nigeria. Email: [email protected] Karibo B. Bagshaw, Department of Management, Faculty of Management Sciences, Rivers State University of Science and Technology, Nigeria. Email: [email protected]

_________________________________________________________________ Abstract The aim of this study was to examine empirically the impact of corporate governance mechanisms on firm financial performance using listed firms in Nigeria as case study for two years 2010 and 2011. The study adopted a content analytical approach to obtain data through the corporate website of the respective firms and website of the Securities and Exchange Commission. A total of 33 firms were selected for the study cutting across three sectors: manufacturing, financial and oil and gas. The result of the study showed that most of the corporate governance items were disclosed by the case study firms. The result also showed that the banking sector has the highest level of corporate governance disclosure compared to the other two sectors. The result thus indicates that the nature of control over the sector have an impact on companies’ decision to disclose online information about their corporate governance in Nigeria; and that there were no significant differences among firms with low corporate governance quotient and those with higher corporate governance in terms of their financial performance. The result also suggests an existence of variations between sectors with respect to their corporate governance reporting. Thus among others the study recommends that deliberate steps be taken in mandatory compliance with SEC code of best practice for all sectors in Nigeria. Furthermore, deliberate efforts should be made in setting up a follow-up and compliance team to make sure that all firms across Nigerian sectors do not only comply but meet up with the different expectations of the regulatory body as mandated in the code of corporate governance. ____________________________________________________________________ Keywords: Corporate Governance, Financial Performance, Nigeria, Listed Firms

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1. Introduction This study provides an analysis of the impact of corporate governance on financial performance of listed firms in Nigeria. A general proposition have surfaced and resurfaced time after time that the governance structure and control mechanisms of corporate entity significantly affect corporations‟ ability to respond positively to both internal and external factors and thus have a bearing on performance. We extend this literature by examining the corporate-governance link in Nigeria which presents a number of key characteristics for business and governance practices as it is well established that there are differences in the corporate governance practices between countries (Bollaert, Daher, Derro & Dupire-Declerk 2010). Several empirical studies have provided the nexus between corporate governance and firm performance. Bebchuk, Cohen and Ferrell (2004) postulates that “a well governed firm have higher firm performance”; Gompers, Ishii & Metrick (2003) demonstrate through their study that firms with poor corporate governance quality enjoy lower stock returns than those with a higher level of governance quality. Financial devastation of many corporations such as those of USA, South East Asia and Europe have been premised on the failure of corporate governance; high profile scandals throughput the world such as Enron and World.Com in the United States, Transmile, Megan Media and Nasioncom in Malaysia brought about the importance of good corporate governance to limelight. Each of these corporate cases was directly linked to corporate governance failures (Hussin & Othman 2012; Abdul-Qadir & Kwambo, 2012). Nigeria is not left out of this phenomenon as similar financial and accounting scandal has enshroud which include the banking sector with 26 banks liquidated in 1997 and the falsification of the company and financial statement in Cadbury Nigeria Plc. in 2006 and more recent events in 2009 post consolidation banking crises when ten banks were declared insolvent and eight (8) executive management teams of the banks removed by the Central Bank of Nigeria (CBN 2010). Also, the economic meltdown especially that of 2008 has forced the Nigerian firms to realise the need for the practice of good corporate governance. According to Ogbulu & Emini (2012), an effective corporate governance decentralizes powers and creates room for checks and balances which most times ensures that managers invest in positive net present value projects thus helping the relationship between management and shareholders to be characterized by transparency and fairness. Thus, Nigerian code of best practices was introduced by the Securities and Exchange Commission (SEC) and the Corporate Affairs Commission (CAC) in 2003. The CBN also in 2006 introduced a code on corporate governance for banks on March 1 2006 104



(effective April 3, 2006). The CBN code states that the role of the Board is to “retain full and effective control of the bank and monitor executive management”. However, as at 2006 only 40% of quoted companies at the Nigerian stock exchange had recognized code of corporate governance in place. This study will therefore fill a gap in the literature by examining the nexus between performance and corporate governance practices of firms generally and specifically the corporate governance practices of Nigerian firms. Furthermore, it will add to the general body of literature on the impact of corporate governance and performance of firms in Nigeria. It also expands the body of literature in terms of its scope by incorporating all firms in the industry and also narrowing to sectoral macro analysis. The rest of the paper is structured as follows: section 2 presents literature inculcating the conceptual framework, corporate governance mechanisms, theoretical framework and empirical review on relationship between corporate governance and firm financial performance. Section three presents the methodology. Section four focuses on data and results. Lastly, conclusions and recommendations are discussed in section five.

2. Literature Review Fig 1: Model of Corporate Governance and Firm Financial Performance Conceptual Framework of Corporate Governance Mechanisms and Firms‟ Financial Performance

Source: Researchers‟ Desk

The model above shows the path of the study which is aimed at examining the impact of corporate governance mechanisms (board composition, board size, and board committee) moderated by firm age and firm size on firm financial performance as proxied by firm‟s Return on Assets (ROA), and Return on Equity (ROE)

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2.1 Corporate Governance Corporate governance has no single accepted definition; this is often attributed to the huge differences in countries corporate governance codes (Solomon, 2010). The definition varies based on the framework and cultural situation of the country under consideration (Armstrong and Sweeney, 2002). Also, the differences in definition can be as a result of the different viewpoint from the different perspectives of the policy-maker, researcher, practitioner, or theorist (Solomon, 2010). The term “corporate governance” came into use in the 1980s to broadly describe “the general principles by which businesses and management of companies were directed and controlled” (Dor et al. 2011). O‟Donovan (2003 p. 2) see corporate governance

as “an internal system

encompassing policies, processes and people which serves the needs of shareholders and other stakeholders by directing and controlling management activities with good business savvy, objectivity and integrity”. In other words it defines the legal, ethical and moral values of a corporation in order to safeguard the interest of its stakeholders. The aim of corporate governance is to ensure that corporations are managed in the best interests of their owners and shareholders (Ahmed, Alam, Jafar & Zaman 2008). This applies specifically to listed companies where the majority of the shareholders are not in participatory everyday management positions; although, it can also apply to other forms of corporations such as companies with few principal owners and a large group of smaller shareholders, public corporations (where all citizens are stakeholders) partnerowned companies and privately owned companies where the ownership has been divided through inheritance in one or several generations (Ahmed, Alam, Jafar & Zaman 2008). Another essence of corporate governance is establishing transparency and accountability throughout the organization. This is feasible as corporate governance system is premised on a strict division of power and responsibilities between the shareholders through the annual general meeting, the board of directors, the executive management and the auditors. Fig 2 Basic Structure of a Corporate Governance System

Source: Adapted from Ahmed, Alam, Jafar & Zaman 2008

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2.2 Firm Performance Financial performance which assesses the fulfilment of a firm‟s economic goals has long being an issue of interest in managerial researches. Firm financial performance relates to the various subjective measures of how well a firm can use its given assets from primary mode of operation to generate profit. Kothari (2001) defined the value of a firm as the present value of the expected future cash flows after adjusting for risk at an appropriate rate of return. To (Eyenubo 2013) it is the success in meeting pre-defined objectives, targets and goal within a specified time target. Qureshi, (2007), put forward four different approaches in which the value of a firm has been identified in corporate finance literature. These are: the financial management approach which focus on the evaluation of cash flows and investment levels before identifying and assessing the impact of financing sources on firm value; the capital structure approach which studies the impact of capital structure changes on the value of firm and how different factors impact directly or inversely the debt and equity component of the firm capital structure; the resource based approach which explains the value of firm as an outcome of firm‟s resources; and finally, the sustainable growth approach whichis a summary of the above three approaches to firm value, taking into account the firm‟s operating performance, its investment and financing needs, the financing sources, and its financing and dividend policies for sustainable development of firm‟s resources and maximization of firm value. This study examines two key accounting measures of firms‟ financial performance which are Return on Equity and Return on Assets. 2.2.1 Return on Equity (ROE)

One accounting based measure of performance in corporate governance research is return on equity (ROE). (Baysinger & Butler 1985; Dehaene, De Vuyst & Ooghe 2001).The primary aim of an organization‟s operation is to generate profits for the benefit of the investors. Therefore, return on equity is a measure that shows investors the profit generated from the money invested by the shareholders (Epps & Cereola 2008). It measures the profitability of shareholders‟ investment and shows the net income as a percentage of shareholders‟ equity. It is calculated as: ROE

=

Annual Net Income Average stockholders‟ equity

2.2.2 Return on Assets (ROA)

One of the widely used accounting based measures of corporate governance in literature is the Return on Asset (ROA) (Finkelstein and D‟Aveni 1994; Weir and Laing 1999). It assesses the effectiveness of capital employed and provides a basis in which investors can measure the earnings generated by the firm from its investment in capital 107



assets (Epps and Cereola 2008). The return on assets (ROA) is a measure which shows the amount of earnings that have been generated from invested capital. It is an indication of the number of kobo earned on each naira worth of assets. It allows users, stakeholders and monitoring agencies to assess how well a firm‟s corporate governance mechanism is in securing and motivating efficient management of the firm (Chagbadari 2011). The ROA is the ratio of annual net income to average total assets of a business during a financial year. It is measured thus: ROA

=

Annual Net Income Average Total Assets

2.3 Corporate Governance Mechanisms Mechanisms of corporate governance relates to the tools, techniques and instruments via which accountability is ensured; it is the various medium through which stakeholders monitor and shape behaviour to align with set goals and objectives. Adekoya (2012 p. 40) defined corporate governance mechanism as “the processes and systems by which a country‟s company laws and corporate governance codes are enforced”. This study considers some Corporate Governance Mechanisms from the perspective of Board Composition, Board size and Board committees. 2.3.1 Board Composition

One important mechanism of board structure is the composition of the board, which refers to executive and non-executive director representation on the board. Both agency theory and stewardship theory apply to board composition. Boards dominated by non-executive directors are largely grounded in agency theory. In contrast, a majority executive director representation on the board is grounded in stewardship theory, which argues that managers are good stewards of the organization and work to attain higher profits and shareholder returns (Donaldson & Davis 1994). An effective board should comprise of majority of non-executive directors (Dalton et al. 1998). However, executive director‟s responsibility is the day-to-day operation of the business such as finance and marketing, etc. They bring specialised expertise and a wealth of knowledge to the company (Weir & Laing, David 2001). 2.3.2 Board Size

Board size is the number of members on the board. Identifying appropriate board size that affects its ability to function effectively has been a matter of continuing debate (Jensen 1993; Yermack, 1996; Dalton, Daily, Johnson & Ellstrand, 1999; Hermalin & Weisbach, 2003). Some scholars have been in favour of smaller boards (e.g., Lipton & Lorsch, 1992; Jensen 1993; Yermack, 1996). Lipton and Lorsch (1992) support small boards, suggesting that larger groups face problems of social loafing and free riding. As 108



board increase in size, free riding increases and reduces the efficiency of the board. On the other hand,large boards were supported on the ground that they would provide greater monitoring and advice (Pfeffer, 1972; Klein, 1998; Adam & Mehran, 2003; Anderson et al., 2004; Coles, et al., 2008). For example, Klein (1998) argues that CEO‟s need for advice will increase with complexity of the organisation. Diversified firms and those operating in multiple segments require greater need for advice (Hermalin & Weisbach, 2003; Yermack, 1996). However, Singh &Harianto (1989) found that large boards improve board performance by reducing CEO domination within board, thereby making it difficult to adopt golden parachute contracts that might not be in the shareholder‟s interest. 2.3.3 Board Committees

Board committees are also an important mechanism of the board structure providing independent professional oversight of corporate activities to protect shareholders interests (Harrison 1987). The agency theory principle of separating the monitoring and execution function is established to monitor the execution functions of audit, remuneration and nomination (Roche 2005). Corporate failures in the past focused criticism on the inadequacy of governance structures to take corrective actions by the boards of failed firms. Importance of these committees was adopted by the business world (Petra 2007). As a result the Cadbury Committee report in 1992, recommended that boards should nominate sub-committees to address the following three functions: • Audit committees to oversee the accounting procedures and external audits; • Remuneration committees to decide the pay of corporate executives; and • Nominating committees to nominate directors and officers to the board; These named committees can be just a window dressing unless they are independent, have access to information and professional advice, and contain members who are financially literate (Keong 2002). Therefore, the Cadbury committee and OECD principles recommended that these committees should be composed exclusively of independent non-executive directors to strengthen the internal control systems of firms (Davis 2002; Laing & Weir 1999). [

2.4 Theoretical Framework Corporate governance is the relationship among shareholders, board of directors and the top management in determining the direction and performance of the corporation. It includes the relationship among the many players involved (the stakeholders) and the goals for which the corporation is governed (Kim & Rasiah, 2010). According to Imam & Malik (2007) the corporate governance theoretical framework is the widest control mechanism of corporate factors to support the efficient use of 109



corporate resources. The challenge of corporate governance could help to align the interests of individuals, corporations and society through a fundamental ethical basis and it fulfils the long term strategic goal of the owners. It will certainly not be the same for all organizations, but will take into account the expectations of all the key stakeholders (Imam & Malik, 2007). So maintaining proper compliance with all the applicable legal and regulatory requirements under which the company is carrying out its activities is also achieved by good practice of corporate governance mechanisms. There are a number of theoretical perspectives which are used in explaining the impact of corporate governance mechanisms on firms‟ financial performance. The most important theories are the agency theory, stakeholders‟ theory and resource dependency theory (Maher & Andersson, 1999). 2.4.1 Agency Theory

Agency theory is a theory that has been applied to many fields in the social and management sciences: politics, economics, sociology, management, marketing, accounting and administration. The agency theory a neoclassical economic theory (Ping & Wing 2011) and is usually the starting point for any debate on the corporate governance. The theory is based on the idea of separation of ownership (principal) and management (agent). It states that “in the presence of information asymmetry the agent is likely to pursue interest that may hurt the principal (Sanda,Mikailu& Garba 2005). It is earmarked on the assumptions that: parties who enter into a contract will act to maximize their own self-interest and that all actors have the freedom to enter into a contract or to contract elsewhere. Furthermore, it is concerned with ensuring that agents act in the best interest of the principals. 2.4.2 Stakeholders’ Theory

The stakeholders‟ theory was adopted to fill the observed gap created by omission found in the agency theory which identifies shareholders as the only interest group of a corporate entity. Within the framework of the stakeholders‟ theory the problem of agency has been widened to include multiple principals (Sand, Garba & Mikailu 2011). The stakeholders‟ theory attempts to address the questions of which group of stakeholders deserve the attention of management. The stakeholders‟ theory proposes that companies have a social responsibility that requires them to consider the interest of all parties affected by their actions. The original proponent of the stakeholders‟ theory suggested a re-structuring of the theoretical perspectives that extends beyond the ownermanager-employee position and recognises the numerous interest groups. Freeman, Wicks & Parmar (2004), suggested that: “If organizations want to be effective, they will

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pay attention to all and only those relationships that can affect or be affected by the achievement of the organization‟s purpose”. 2.4.3 Resource Dependency Theory

Whilst the stakeholder theory focuses on relationships with many groups for individual benefits, resource dependency theory concentrates on the role of board directors in providing access to resources needed by the firm (Abdullah & Valentine, 2009). According to this theory the primary function of the board of directors is to provide resources to the firm. Directors are viewed as an important resource to the firm. When directors are considered as resource providers, various dimensions of director diversity clearly become important such as gender, experience, qualification and the like. According to Abdullah and Valentine, directors bring resources to the firm, such as information, skills, business expertise, access to key constituents such as suppliers, buyers, public policy makers, social groups as well as legitimacy. Boards of directors provide expertise, skills, information and potential linkage with environment for firms (Ayuso & Argandona, 2007).The resource based approach notes that the board of directors could support the management in areas where in-firm knowledge is limited or lacking. The resource dependence model suggests that the board of directors could be used as a mechanism to form links with the external environment in order to support the management in the achievement of organizational goals (Wang, 2009). The agency theory concentrated on the monitoring and controlling role of board of directors whereas the resource dependency theory focus on the advisory and counselling role of directors to a firm management. Each of the three theories is useful in considering the efficiency and effectiveness of the monitoring and control functions of corporate governance. But, many of these theoretical perspectives are intended as complements to, not substitutes for, agency theory (Habbash, 2010). Among the various theories discussed, agency theory is the most popular and has received the most attention from academics and practitioners. According to Habbash (2010), the influence of agency theory has been instrumental in the development of corporate governance standards, principles and codes. Mallin (2007) provides a comprehensive discussion of corporate governance theories and argues that the agency approach is the most appropriate because it provides a better explanation for corporate governance roles (as cited by Habash, 2010). 2.5 Empirical Review of Literature The state of corporate governance in an economy plays a dominant role in attracting and holding foreign investors, for building a robust capital market and for

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maintaining/restoring the confidence of both domestic and foreign investors (Ahmed, Alam, Jafar & Zaman 2008). In a study conducted by Mckinsey and Company and cited in Adams and Mehan (2003), 78% of the professional investors in Malaysia expressed that they are willing to pay a premium for a well-governed company. In another study carried out by Mardjono (2005) who attempted to analyze the reasons for the failure of two giant corporations Enron Inc and HIH Insurance concluded that both firms did not fail because they were in bad business, but because they violated the key principles of good corporate governance. In line with the interest of this study, this section discusses how companies‟ compliance with corporate governance principles experiences certain benefits and growth opportunities, while citing various forms of research on firm performance. Analysis of 51 corporate governance factors was carried out on 2,327 firms in the United States by Brown &Caylor (2009) based on a data set generated by Institutional Shareholder Service. Their findings indicate that corporate governance principled firms are relatively more profitable, more valuable and pay more dividends to their shareholders. This finding is in line with findings for cross sectional study conducted on German firms by Drobetz Schillhofer & Zimmermann (2004) who found a positive and significant relationship between governance practices and firm valuation. On corporate governance mechanisms it is hypothesized that a positive relationship is expected between firm performance and the proportion of independent (outside) directors sit on the board; this is premised on a conviction that “unlike inside directors outside directors are better able to challenge the CEOs to obtain results in line with set objectives (Sanda, Mikaila & Garba 2005). The code of corporate governance of countries specifies that there should be a proportion of outside directors on the board of every listed firm, for the UK a minimum of 3 independent board directors is required while in the US it is stipulated that they constitute at least two-third (⅔) of the board (Bhagat &Black 2002). Study by Erkens, Hung & Matos (2010) found that firms with more independent boards and higher institutional ownership experience worse stock returns during a crises using international sample of 196 financial firms from 30 countries. Further they found that firms with more independent boards raised more equity capital during crisis, which led to a wealth of transfer from existing shareholders to debt holders. In Nigeria, corporate governance has also received maximum attention as its effects of continuance of a firm have been recognised. This recognition has seen actions such as the setting up of the Peterside Commission on corporate governance in public corporations by the Securities and Exchange Commission (SEC) and the setting up of the sub-committee on corporate governance for banks and other financial institutions by the 112



Bankers‟ Committee. Study by Kojola (2008) for 20 firms in Nigeria showed that a positive and significant relationship exist between ROE and board size, profit margin and chief executive officer‟s status, ROE board composition and audit committees and finally between profit margin (as dependent variables) and board size, board composition and audit committee as independent variables. Study on board composition in Nigeria by Okhalumeh, Ohiokha & Ohiokha (2011) who seek to examine the influence of board composition in the form of the representation of the outsider non-executive directors on the economic performance of firms in Nigeria showed that there was no significant relationship between board composition and any of the performance measure (ROE, ROCE, ROAM, EPS and DPS) using a simple regression analysis through survey for a sample of 38 listed firms in Nigeria. For leadership structure, Adenikinju & Ayorinde (2001), using Nigerian data investigated whether ownership mix and concentration has any variation in corporate performance of publicly listed firms in Nigeria. The study finds that Nigerian firms are highly concentrated and there is significant presence of foreign ownership. The study went further to find that ownership structure has no impact on corporate performance in Nigeria. A study on board size by Eyenubo (2013) for Nigeria using regression analysis for 50 firms quoted on the Nigerian Stock Exchange during the period 201-2010 showed that bigger board size had a significant negative relationship with the indicator of firm financial performance (NPAT). Finally, Uwuigbe (2013) study for fifteen (15) listed firms in manufacturing and banking sector in the Nigerian Stock Exchange showed that corporate governance mechanisms ownership structure has negative and insignificant relationship with share price. Conclusively for this study, higher number of shareholders on the board has a negative effect of share price. On the other hand corporate governance mechanisms audit committee independence was found to have a positive and significant correlation with share price. This suggest thus, the higher the number of shareholders compared to directors on the audit committee, the better the share price value of the company. Of interest to this study are findings on the impact of corporate governance on firm financial performance using descriptive content analysis; similar methodology was adopted by Mariri & Chipunza (2011) among 10 selected mining companies listed in the Johannesburg Stock Exchange using secondary data in the form of companies‟ annual reports. The study adopted a descriptive quantitative design. The study revealed interesting outcome of governance, CSR and sustainability reporting within the South

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African Mining Industry. The results showed high corporate governance reporting among the firms considered for the study which correlated with CSR performance. A critical appraisal of the literature reviewed shows that while some studies provide evidence for negative relationship between corporate governance proxy variables and firm financial performance, others found positive relationship while some found independent and mixed relationship between the two proxies. Several explanations have been adduced for these inconsistencies: use of public data, survey data (fraught with biases) which are generally restricted in scope (Kyereboah-Coleman 2007). This study attempts to close this research gap by providing more empirical evidence for the case of Nigeria.

3. Methodology This study adopts the judgemental sampling technique to select 33 firms from more than 200 listed firms on the Nigerian Stock Exchange (NSE). The selection was based only on those firms with web presence and whose annual reports for the period (2010 and 2011) under review is in the domain of the NSE. 3.1 Research Instrument In determining the level of corporate governance disclosure among the listed firms in Nigeria, the study made use of „descriptive content analysis‟ technique as a means of eliciting data from the audited annual reports of the listed firms. Over the past decades, the use of „content analysis‟ have become common among researchers especially as it relates to corporate governance performance and financial reporting (Beattie & Thomson 2007). The core questions of content analysis are “who says what, to whom, why, to what extent and with what effects?” (Fooladi & Farhadi 2011). Researchers have used content analysis of annual reports and corporate documents to derive indicators of commitment to social expectations (Cook & Deakin 1999); it involves the „codification‟ of qualitative and quantitative information into pre-defined categories in order to derive patterns in the presentation and reporting of information (Bhasin 2011). The coding process for this study involved reading through the annual reports of each of the 33 firms selected for the study and coding the information according to pre-defined categories of corporate governance indicators as shown in the table below.

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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA) An Online International Research Journal (ISSN: 2311-3162) 2014 Vol: 1 Issue 2 Table 1: Corporate Governance Compliance Checklist of Listed Firms in the Nigerian Stock Exchange

S/N 1 2 3 4 5 6 7

Financial Indicators: Financial and Operating Result Critical Accounting Ratios Critical Accounting Policies Corporate Reporting Framework (Segment Reporting) Risks and Estimates in Preparing and Presenting Financial Statements Information Regarding Future Plan Dividend

8 9 10 11 12 13 14 15 16

Corporate Governance Indicators: Size Of Board Board Composition Division Between Chairman and CEO Information About Independent Director Role and Functions of Board Changes in Board Structure Composition of the Committee Function of the Committee Audit Committee Report

17 18 19

Timing And Means Of Corporate Governance Disclosure Separate Corporate Governance Statement Annual Report through the Internet Frequency of Board Meetings

Source: Uwuigbe 2013; Samala, Dahaway, Hussainey, Stapleton 2010; SEC 2010

The content analysis is divided into two (2) basic sections covering both financial performance aspects and the corporate governance aspects. Content analysis is basically used to assess the level of compliance with corporate governance code of conduct in prior studies. The following forms of content analysis is identified: number of sentences disclosed, number of words used, pages or proportion of pages, average number of lines and Yes and No approach (Krippendorff 2003). This study however adopts the “Yes and No” approach identified by various corporate governance studies as a more reliable method in analysing annual reports of firms for governance practices because it avoid the element of subjectivity. Using these criteria, a score of 0 meant that no meaningful information was provided on the specific evaluation item while a score of 1 indicated that the report included that information to some degree. That is, if there was evidence of the criteria then a „Yes‟ rating was given for that element, otherwise „No‟; where Yes indicates 1 and No indicates 0. This criterion is used for both the financial performance and corporate governance indicators because these reporting items are fairly straightforward and unlikely to need robust illustrations from reporting companies. The content of the corporate governance section of each of the firm were analysed, the study followed the methodology by Uwuigbe (2013) who developed a disclosure 115



index using the CBN post consolidation code of best practices and guided by the OECD code and papers prepared by the UN secretariat for the 19th session of International Standards of Accounting and Reporting (ISAR) (2011) entitled “transparency and disclosure requirements for corporate governance” and the twentieth session of ISAR (2002) entitled “guidance on Good Practices in corporate governance disclosure” for the firms in this study. In order to determine the rating of corporate governance practices for each of the sample firms each of the desired corporate governance parameter was calculated to obtain a Corporate Governance Index (CGI) for that corporate governance item using the following formula:

4. Results and Discussion 4.1 Descriptive Statistics Table 1 shows the number of companies under the three different sectors finally utilized for the analysis. Fifteen (15) of these companies were from the financial sector having a total of eight (8) commercial banks and seven (7) insurance companies; 14 were from the manufacturing while 4 firms were drawn from oil and gas sector. Table 2: Classification of Sampled Firms by Sector

S/N

Sector

1 2 3

No. of Firms

Financial Oil and Gas Manufacturing Total

Percentage (%)

15 4 14 33

45.5 12.1 42.4 100

Figure 2: Distribution of Firm by Sector 16 14 12 10 8 6 4 2 0 Financial

Oil and Gas

Manufacturing

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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA) An Online International Research Journal (ISSN: 2311-3162) 2014 Vol: 1 Issue 2 Figure 3: Percentage Distribution of Firms by Sector

42%

46%

Financial Oil and Gas Manufacturing

12%

4.2 Variations between Sectors Descriptive statistics showing the corporate governance quotients for all the firms is shown in table 2 below. As earlier stated, with the help of the list of corporate governance items (under all the issues a total of 17 corporate governance indicators are arrived at), the corporate annual reports of the firms were examined, a dichotomous procedure was followed to score each of the corporate governance items. Each firm was awarded a score of “1” if it has the required number of item as depicted in the SEC (2003) and the Act (1990) corporate governance codes, otherwise “0”. The range of disclosure scores for the companies based on the corporate governance list utilized is between 59 and 100%. Of these companies, four companies were from the manufacturing sector – Nestle Nigeria Plc, First Aluminium, Paints and Coatings MFG Nigeria Plc and Eterna plc; two from the financial sector – NEM Insurance and Oasis Insurance and one in the oil and gas sector - Japaul Oil and Maritime Service have the lowest corporate governance quotient ranging from 59% to 65%. Companies with disclosure scores 71% and 88% provided detailed information about names of the board of directors, managers‟ team, number of board meetings and detailed information about dividend payout to shareholders; they also had detailed corporate reporting framework, as well as met the 60:40 percent ratio for board member composition. These companies were 25 in number comprising of company from all the sectors - For corporate governance scores above 88% we observe that these companies provided detailed information to include report on organizational hierarchy, risks and estimates in financial statement preparation and they had a separate section for reporting of corporate

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governance and only two companies from the financial sector - First Bank (100%) and Continental Insurance (94%) met this standard. Table 3: Corporate Governance Quotient of Case Study Firms

S/N

SECTOR/FIRMS

S/N

SECTOR/FIRMS

Access Bank Diamond Bank First Bank

Total CGV 88% 88% 100%

1 2 3

18 19 20

4 5 6 7 8 9 10

Guarantee Trust Bank ECO Bank Nigeria First City Monument Bank Sterling Bank United Bank for Africa Royal Exchange Mansard Insurance

88% 88% 88% 88% 88% 76% 82%

21 22 23 24 25 26 27

11 12 13

NEM Insurance Oasis Insurance Consolidated Hallmark Insurance Cornerstone Insurance Continental Reinsurance Nigerian Breweries PZ Cussons

59% 59% 76%

28 29 30

82% 94% 71% 71%

31 32 33

Nestle Nigeria Dangote Flour Mills National Salt Company (Nigeria) Honey Wells Flour Mills Guinness Nigeria Plc Beta Glass Plc Dangote Cement Plc First Aluminium Lafarge Wapco Plc Paints & Coatings MFG Nig. Plc Unilever Nigeria Eterna Plc Japaul oil and Maritime Service Oando Nigeria Plc Total Nigeria Plc Con Oil

14 15 16 17

Total CGV 71% 65% 71% 71% 71% 71% 76% 65% 76% 65% 88% 65% 65% 82% 82% 72%

Source: Authors‟ Calculation based on CGV formula

With regard to sectors, the banking sector has the highest mean (82.93) compared with the other sectors. This is due to the fact that all banks report at least one piece of information as regards corporate governance as mandated in the code of corporate governance by CBN (2006) with First Bank and Continental Insurance having the highest disclosure scores in the sector as well as among the firms. Table 4: Mean Disclosure Scores according to Sector Total Number of Number of Minimum Maximum Directorship in firms in the Sector Sectors 1 Financial 186 15 59% 100% 3 Oil and Gas 39 4 65% 72% 4 Manufacturing 127 14 65% 88% Total 352 33 Source: Authors‟ Calculation based on content Analysis S/N

Sector

Mean

82.93 71.21 75.25 10.6

The financial sector was closely followed by the oil and gas sector with an average disclosure score of 75.25% and the manufacturing sectors having a disclosure score of 71.21%. Descriptive statistics for the board size is shown in Table 4 and 5 below.

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S/N

1 2 3

Table 5: Average Size of Board of Directors according to Sector for 2010 Sector Total Number Number of Minimum Maximum of Directorship firms in in the Sector Sector in 2010


186 39 127 352

15 4 14 33

6 5 9

20 15 10

Mean

12.4 9.75 9.07 10.6

Source: Authors‟ Calculation based on content Analysis

S/N

1 3 4

Table 6: Average Size of Board of Directors According to Sector for 2011 Sector Total Number Number of Minimum Maximum of Directorship firms in in the Sector Sector in 2011


185 39 134 358

15 4 14 33

6 5 9

19 15 10

Mean

12.3 9.75 9.57 10.85

Source: Authors‟ Calculation based on content Analysis

Table 4 and 5 points out that board size of the selected firms ranges from 5 to 20 persons; the number of directors have remained constant over time for most of the firms; the average size of the board also remained constant revolving around an average of 10 for the years and a peak of 20 in 2010 (United Bank for Africa). While the overall board size was fairly constant over time, there are differences across sectors. As shown in tables, average size of board varied across the different sectors ranging from a minimum of 5 in the Oil and gas sector to a peak of 20 amongst firms in the financial sector (Table 4).These features corresponded to the provision of the Security and Exchange Commission‟s Code of Corporate Governance (2003) which stipulates that board size should range between 5 to 15 persons. 4.3 Corporate Governance and Firm Financial Performance To determine whether corporate governance is associated with better-performing firms was investigated using a comparative framework between the corporate governance quotients by all the firms and the parameters for firm financial performance.

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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA) An Online International Research Journal (ISSN: 2311-3162) 2014 Vol: 1 Issue 2 Table 7: Corporate Governance Performance Index from Highest to Lowest SECTOR/FIRMS CGV Critical CGV Critical Accounting Ratio Accounting Ratio 2010 2011 (%) (%) EPS ROE ROA EPS ROE ROA (%) % (%) % First Bank 100 9k 1.25 0.22 100 (78k) loss loss Continental 94 12k 10.59 6.55 94 12k 10.31 6.01 Reinsurance Diamond Bank 88 63k 6.34 1.48 88 88K 9.60 1.02 Access Bank 88 102K 9.81 1.45 88 140k 12.29 1.58 Guarantee Trust Bank 88 136k 18.35 3.37 88 1698k 21.22 3.08 ECO Bank Nigeria 88 12k 2.18 0.35 88 (8k) Loss Loss First City Monument 88 49k 5.89 1.47 88 (61k) Loss loss Bank Sterling Bank 88 33k 19.31 1.82 88 51k 16.33 1.33 United Bank for 88 3k 0.37 0.04 88 (32k) Loss loss Africa Unilever Nigeria 88 111k 50.16 29.45 88 145k 56.82 33.77 Mansard Insurance 82 6k 5 3.29 82 9k 7.22 3.89 Cornerstone Insurance 82 5k 6.66 3.80 82 2k 2.70 1.45 Oando Nigeria Plc 82 829k 15.63 4.44 82 162k 3.78 0.86 Total Nigeria Plc 82 1123k 60.89 9.96 82 1601k 38.08 6.50 Royal Exchange 76 6k 3.27 2.09 76 0.31k 7.07 4.10 Consolidated 76 4k 5.04 3.86 76 5k 6.03 4.55 Hallmark Insurance Dangote Cement Plc 76 680k 49.80 26.80 76 812k 42.56 24.42 Lafarge Wapco Plc 76 163k 10 7 76 283k 16 8 Con Oil 76 402k 18.28 16.06 76 425k 17.53 15.53 Nigerian Breweries 71 401k 60.45 26.52 71 503K 48.72 17.57 PZ Cussons 71 168k 14.43 9.47 71 164k 13.83 8.27 Dangote Flour Mills 71 54K 10.03 3.88 71 14k 2.52 0.82 National Salt 71 62k 33.26 20.95 71 81k 37.20 21.44 Company (Nigeria) Honey Wells Flour 71 14k 8.70 3.92 71 31k 16.47 8.55 Mills Guinness Nigeria Plc 71 931k 40.17 17.52 71 1216k 44.50 19.44 Beta Glass Plc 71 295K 15 9.23 71 309K 13.84 8.63 Nestle Nigeria 65 1908k 84.78 20.88 65 2121K 70.69 21.58 First Aluminium 65 (15k) Loss Loss 65 (16k) Loss Loss Paints & Coatings 65 0.13k 11.80 6.76 65 0.16k 10.49 7.24 MFG Nig. Plc Eterna Plc 65 55k 20.76 7.79 65 93k 15.63 8.23 Japaul oil and 65 13k 3.67 3.17 65 16k 4.35 4.31 Maritime Service NEM Insurance 59 20k 14.75 11.86 59 24k 20.08 16.14 Oasis Insurance 59 1k 2.45 2.17 59 2k 2.99 2.59 Source: Authors‟ Calculation based on Content Analysis

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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA) An Online International Research Journal (ISSN: 2311-3162) 2014 Vol: 1 Issue 2 Fig 4: Bar chart showing Corporate Governance Quotient and Return on Equity for 33 Firms

Source: Author‟s Interpolation with E-Views Fig 5: Bar chart showing Corporate Governance Quotient and Return on Assets for 33 Firms

Source: Authors‟ Interpolation with E-Views

4.4 Discussion The evidence from the figures (4 and 5) clearly shows there was no significant difference in the performance of the two categories of firms (those with high performance quotient and those that had low (CGV). Specifically, evidence provided in 121



table 4.7, figures 4 and 5 clearly shows that the banking sector which had the highest CGV recorded lowest ROE and ROA values compared to sectors in the manufacturing and oil and gas. First bank and Continental Insurance with the highest CGV of 100% and 94% respectively recorded ROE and ROA values of 1.25% and 0.22% for First bank in 2010 with a loss in 2011 and 10.59% and 6.55% for continental Insurance in 2010 while Nestle Plc with a low CGV score of 65% had the highest ROE and ROA scores at 84.78% and 20.78% respectively. More so, NEM Insurance and Oasis Insurance which had the lowest CGV score in 2010 and 2011 did better than first bank and continental Insurance with ROE and ROA values of 14.75% and 11.86% in 2010 and 20.08% and 16.14% in 2011 for NEM Insurance and 2.45% and 2.17% in 2010 for Oasis Insurance and 2.99% and 2.59% for 2011. This findings is affirmed by empirical studies for Nigeria. For instance study for Nigeria by Okhalumeh, Ohiokha & Ohiokha (2011) on the influence of board composition in the form of the representation of the outsider non-executive directors on the economic performance of firms in Nigeria showed that there was no significant relationship between board composition and any of the performance measure (ROE, ROCE, ROAM, EPS and DPS) using a simple regression analysis through survey for a sample of 38 listed firms in Nigeria. Furthermore, the study corroborates empirical findings by Eyenubo (2013) for Nigeria. Results showed that bigger board size had a significant negative relationship with the indicator of firm financial performance (NPAT) using regression analysis for 50 firms quoted on the Nigerian Stock Exchange during the period 2001-2010 as well as study by Uwuigbe (2013) for fifteen (15) listed firms in manufacturing and banking sector in the Nigerian Stock Exchange which confirmed that corporate governance mechanism ownership structure has negative and insignificant relationship with share price. The study however violates a number of findings using quantitative approaches (ANOVA and regression) which provided evidence of a high degree of correlation between corporate governance mechanisms and firm financial performance (Adams & Mehran 2003, Brown &Caylor 2009). Conclusively for this study, higher number of shareholders on the board has a negative effect of share price.

5. Conclusion and Recommendations This study investigated the relationship between corporate governance mechanism and the financial performance of listed firms in Nigeria for two years 2010 and 2011.In examining the level of corporate governance disclosure a disclosure index was developed using the SEC code of corporate governance and CBN post consolidation cost of best practices and guided by different empirical reviews; from these issues the corporate governance disclosure were classified into four broad categories; financial disclosure, 122



corporate governance indicators, timing and means of corporate governance disclosures and best practices for compliance with corporate governance. For the descriptive analysis done using means, tables, graphs and percentages the empirical findings reveal that on average a relatively moderate board size of 11 is noticed among the listed firms in Nigeria. This is in line with the SEC code for best practice that a board size of 5 to 15 is appropriate (SEC 2003). Furthermore, the composition of the board which is the proportion of outside directors in a board had a mean of 48%. This also indicated that on average 48% of the board members are nonexecutive directors compared to 52 executive members which violates the SEC (2003) code of corporate governance where it is stated that the number of non-executive directors should exceed that of executive directors. Through interpolations made with content analysis obtained from the annual reports of the firms for corporate governance parameters and firm financial parameters our results showed that firms with lower corporate governance quotients did not perform differently from firms with high corporate governance quotients. That is, there was no significant difference between the performances of firms with high corporate governance scores compared to those with low corporate governance score. This shows that other factors such as technology, capital output, sales volume and a host of others are responsible for profitability than corporate governance. Conclusively, these results showed that financial profitability of Nigeria firms cannot be ascribed to their corporate governance quotients. 5.1 Recommendations The result of this study showed that most firms in Nigeria do not report their financial information online and most that do however do not have reporting framework for corporate governance up to 50% and thus were excluded from the study. Based on these findings we proffer the following recommendations: 1. Deliberate steps should be taken in mandatory compliance with SEC code of best practice for all sectors in the Nigeria. Furthermore, deliberate efforts should be made in setting up a follow-up and compliance team to make sure that all firms across Nigerian sectors do not only comply but meet up with the different expectations of the regulatory body as mandated in the code of corporate governance for 2014-15. 2. To eliminate the issue of corruption and forgery of published financial statement. The regulatory authorities should set up their investigative team and auditors to reevaluate accounts submitted to different bodies concerned with companies operations.

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The main limitations of this study was that the study did not cover the entire 220 firms that are listed on the Nigerian stock exchange and the 33 firms selected might be a good representation of the entire population; this is however justified by the nature of the study which requires availability of information from companies corporate websites. Thus, this study suggests a need for large population especially after mandatory compliance of companies to disclose financial information from 2013.

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