01App_2012 Board Characteristics and the Financial Performance of Nigerian Quoted Firms

Board characteristics and the financialperformance of Nigerian quoted firms

Augustine Ujunwa

Abstract

Purpose – The purpose of this paper is to investigate the impact of corporate board characteristics on

the financial performance of Nigerian quoted firms. Board characteristics studied comprise board size,

board skill, board nationality, board gender, board ethnicity and CEO duality.

Design/methodology/approach – The study employed the random-effects and fixed-effects

generalised least squares (GLS) regression to test the six hypotheses formulated for the study, while

controlling for firm size and firm age.

Findings – Using panel data from 122 quoted firms in Nigeria between 1991 and 2008, it was found that

board size, CEO duality and gender diversity were negatively linked with firm performance, whereas

board nationality, board ethnicity and the number of board members with a PhD qualification were found

to impact positively on firm performance. The result of the robustness test using the same board

characteristics for 160 small firms showed that board duality was positively linked to firm performance,

while a PhD qualification was negatively linked to firm performance.

Practical implications – The study contributes to the understanding of the board-performance link by

examining both the traditional variables such as board size, CEO duality and other organisational

attributes such as ethnic diversity, foreign nationality and competence variables represented by women

and PhD holders, respectively. The results provide an insight for practitioners and policy makers on the

importance of relying on institutional specifics in the prescription of corporate governance codes.

Originality/value – The study adds value to the global corporate governance discourse in two ways:

first, the use of Nigeria, which is claimed to have one of the weakest business cultures in the world, and

secondly, using a good number of proxies that are country-specific for corporate boards.

Keywords Board characteristics, Corporate governance, Firm performance, Boards of Directors,Regression analysis

Paper type Research paper

1. Introduction

Enough evidences exist to prove that business culture in Nigeria is among the worst in the

world. There is, for instance, near lack of basic infrastructures, corporate frauds, tax evasion,

inexperience management, incessant change in government macroeconomic and fiscal

policies, communal and civil unrest, among others. Governments and host communities

have ways of meddling with the affairs of firms. In some other cases, corporate owners and

managers deliberately embark on acts that serve more of self than the overall wellbeing of

the affected firms.

A priori, weak business culture and poor corporate governance are capable of creating

incentives for the appointment of wrong and dubious people into companies’ boards (Sanda

et al., 2008). Whether or not a board composition comprising such people enhances

corporate performance has remain an issue of empirical and theoretical debates. It is widely

accepted that the composition of the corporate board could play a vital role in determining

PAGE 656 j CORPORATE GOVERNANCE j VOL. 12 NO. 5 2012, pp. 656-674, Q Emerald Group Publishing Limited, ISSN 1472-0701 DOI 10.1108/14720701211275587

Augustine Ujunwa is a

Lecturer in the Department

of Banking and Finance,

University of Nigeria,

Enugu, Nigeria.

Received: October 2011Revised: January 2012Accepted: March 2012

firm performance. Essentially, results of previous studies confirm that the presence of

suspicious individuals into a board can exacerbate governance problems facing the firm

(Hearly, 2003). Bad corporate governance is capable of negatively influencing corporate

performance and shareholders’ value (Carter et al., 2007). On the other hand, in an

environment where regulations are incapable of preventing managers and board members

from appropriating earnings for selfish gains, the selfish interests of these individuals

entrusted with corporate management and control can actually be directed at profit

maximization goals. This was the premise laid by Ponnu (2008). In his opinion, bad

corporate governance is capable of negatively influencing corporate performance and

shareholders’ value.

While theoretical positions on the above issues have been historically laid down, the

practical validity of theories is yet to be reconciled with developments in some developing

economies. The agency theory, which is the foundation of corporate governance discourse,

grossly fails to explain why firms in developing countries often arrange themselves in

pyramidal ownership which makes independent directors redundant (Ponnu, 2008). In like

manners, the stakeholder theory is premised on the impression that the corporation is a

social entity that is responsible and accountable to a broader set of actors beyond its

owners. It fails to proffer solutions on how the risk of unethical or improper management

behavior can be moderated.

Nigeria represents a good case study for exploring how a board constituted under

subjective circumstances serve or can fail to serve firm’s interests; and whether such

transmits to the overall wellbeing of shareholders. This paper sets to achieve the above goal

by examining the impact of board size, board nationality, board qualification, board duality,

board gender and board ethnicity, while controlling for firm size and firm age, on the level of

corporate profitability. The rest of the paper is structure into: review of related literature,

research methodology, the research results and conclusion.

2. Review of related literature

Concerns for the quality of corporate governance have their roots from the theorization of

problems arising from the traditional agency arrangements of firms. Jensen and Meckling

(1976), argue that:

[. . .] with the fact that many corporate managers are not owners but agents of owners, contracted

to manage the company on their behalf, since they are not direct owners but managers, and thus

have less personal wealth at stake, their natural pursuit of self-interest could result in them taking

riskier, or even dishonest, actions, which could bring harm to the firm or its owners.

Consequently, several theoretical and empirical standpoints have emerged to support and

explain the implication of agency problems on the quality of corporate decisions and the

sustainability of corporate value. Some popular views among these standpoints are

expressed by Fama (1980), and Fama and Jensen (1983) who argue that the pursuit of self

interest increases the costs of the firm, which include the cost of restructuring contracts, cost

of monitoring and controlling the behavior of the agents, and loss incurred due to

sub-optimal decisions being taken by agents. According to Eisenhardt (1989), agency

problem arrives when ‘‘(a) the desires or goals of the principal and agent conflict and (b) it is

difficult or expensive for the principal to verify what the agent is actually doing’’.

Corporate governance practices, the world over, are therefore designed to resolve some of

the problems that are associated with the separation of ownership from control. Specifically,

good corporate governance aims at protecting the overall interests of corporate

stockholders, and so offers some bolster to the level of trusts investors and financiers

have on the affected firm.

Good corporate governance manifests itself in the qualifications (in terms of profession and

experiences) of members of the board of directors and the management of the firm. As

explained by Sanda et al. (2008), sub-quality boards and management lend themselves to

bad corporate behaviors such as lack of commitment, remuneration mainly linked to the size

VOL. 12 NO. 5 2012 jCORPORATE GOVERNANCEj PAGE 657

of the firm and non-performance, and misappropriation of shareholders wealth. Essentially,

the primary duties of the board include; monitoring and controlling managers, providing

information and counsel to managers, monitoring compliance with applicable laws and

regulations, and linking the firm to the external environment (Monks and Minow, 2004). To

carry out these roles effectively, the board should consist of a team of individuals who can

combine their competencies and capabilities that collectively represent the pool of social

capital for their firm. That is contributed towards executing the governance function

(Carpenter and Westphal, 2001).

Once the board is active in the discharge of its functions and enforcement of duties, the

expected outcome is usually a better guarantee of a more formidable governance structure

(Zahra and Pearce, 1989). But the extent to which the board would be effective in carrying

out its assignment depends on other exogenous factor, which among others may be made

up of specific board characteristics like board size, board gender, CEO duality, board

educational qualification and board diversity.

A good number of recorded studies exist to demonstrate how board structure and the quality

of corporate governance can affect firm performance. One of such studies is Kiel and

Nicholson (2003), who established that the composition of the board has a positive impact

on firm performance. Adams and Ferreira (2009) investigated the impact of female board

members on the governance and performance of selected US firms and find that female

board members allocate more effort to monitoring, but the average effect on firm

performance is negative. Another study 797 Fortune 1000 firms by Carter et al. (2003) finds

that firms with at least two female board members performed better on Tobin’s Q and return

on asset when compared to firms with all men board members. Empirical studies on

CEO-duality also reveals sets of conflicting results. While Peng et al. (2007) and Sridharan

and Marsinko (1997) find that CEO duality actually promote firm performance, others find no

significant difference between firms CEO duality and those that separated these positions

(Daily and Dalton, 1997 and Dalton et al., 1998).

Empirical studies that link educational qualification of directors to financial performance of

firms is scanty. Bilimoria and Piderit (1994) examined board qualification using tenure, age,

director type education rather than educational qualification. With the inclusion of

educational qualification in the index for evaluating corporate governance (Institutional

Shareholders Service(2006), Yermack (2006) investigated share price reaction to director’s

educational qualification. His result reveals that share price reaction are sensitive to

director’s qualification, particularly in the area of accounting and finance. However, a

meta-analysis of board composition, leadership structure and firm performance carried out

by Dalton et al. (1998) covering 54 studies of board composition and 31 studies of board

leadership structure did not show any systematic relationship between board composition

and firm performance. Based on the outcomes of the work of Carter et al. (2007), a wrongly

constituted board yields to poor corporate governance, and the latter creates a big hole in

the earnings profile of the firm.

Nevertheless, such adverse effects, as revealed by the works of Andreasson (2009), can be

mitigated by the extent of legal protections available in a country. For example, as

demonstrated by Magdi and Nadereh (2000), in advance market economies, the rich and

complex governance system (of policy, laws, public institutions, self-regulations,

professional bodies, and managerial ethos) has evolve over centuries, with a fast-track

legislation that creates a legal fence and ensure compliance by all stakeholders. What then

happens where the governance structures are weakened by both the presence of regulatory

inadequacies that offers incentives to board members and managers to misbehave? To what

extent do corporate earnings suffer under this circumstance? These are part of the questions

that are addressed by this study.

3. Research data and hypotheses

Data for this study were handpicked from Nigerian Stock Exchange Factbook and annual

reports and statement of accounts of quoted firms in Nigeria. The sample size is 212 firms,

PAGE 658 jCORPORATE GOVERNANCEj VOL. 12 NO. 5 2012

but 90 firms were dropped from the observation because of cases of missing date. The final

sample comprise 122 quoted companies for the period 1991 to 2008 (see Table I for industry

classification of the selected firms). The proxies, measurements and empirical supports for

the selected variables are presented below.

3.1 Firm performance

Empirical study on the impact of board characteristics on firm requires selection of

appropriate performance measures for objective analysis. Unbiased performance

measurement is necessary for both strategic and diagnostic purposes. Though, there

have been serious controversies regarding what constitutes corporate performance. Most

studies used a variety of financial measures: Tobin’s Q, return on investment, return on

assets, sales revenue, return on equity, stock returns, earnings per share, net profit margin

and economic value added.

These measures can be categorized into two broad sets: accounting based measures and

market based measures. Utility of each of these measures has been criticized by different

authors. For the purpose of the study, the researcher adopted an accounting based

measure, viz., return on assets employed (ROAE). Return on asset employed is an indicator

of what management has accomplished with the given resources (assets). According to

agency theory, managers are likely to squander profits and misappropriate earnings,

leaving less return for shareholders. Return on asset is directly related to management’s

Table I List of selected firms

Sectoral distribution of selected firmsIndustries Number selected

Agriculture/agro-allied 6Airline services 0Aviation 1Automobile and tyre 2Banking 11Breweries 8Building materials 5Chemical and paints 6Commercial/services 0Computer and office equipment 3Conglomerates 7Construction 5Emerging markets 5Engineering technology 4Food/beverages and tobacco 11Footwear 0Healthcare 6Hotel and tourism 0Industrial/domestic products 7Information communication and telecommunicatiion 0Insurance 13Leasing 1Machinery (marketing) 1Maritime 1Media 0Mortgage companies 0Memorandum quotations 0Other financial institutions 0Packaging 7Petroleum (marketing) 7Printing and publishing 3Real estate 1Real estate investment trust 0Road transportation 0Textiles 1The foreign listings 0


ability to efficiently utilise corporate assets, which ultimately belong to shareholders. We

proxy firm performance with return on asset which is measured as profit before interest and

tax divided by total assets.

3.2 Board nationality (BON)

The potential advantages of foreign board membership in line with resource dependency

theory have received serious attention in corporate governance studies globally (Marimuthu

and Kolandaisamy, 2009; Sridharan and Marsinko, 1997; Chen et al., 2008). First, with

foreigners in the board, a large stock of qualified candidates would be available for the

board (with broader industry experience). Second, because of their different backgrounds,

foreign members can add valuable and diverse expertise which domestic members do not

possess (Chen et al., 2008). Foreign board members can also help assure foreign minority

investors that the company is managed professionally in their best interests (Oxelheim and

Randoy, 2003). Accordingly, we propose:

H1. Board nationality is positively associated with firm performance.

We use the ratio of foreigners on the board to board size as a measure of board nationality.

3.3 Board ethnicity

Empirical research presents contradictory findings on the value of diversity. Watson et al.

(1993) report that homogeneous board is better in short-term, while heterogeneous board is

better in long-term in terms of achieving corporate goals. However, Pelted et al. (1999) found

that heterogeneous board results in emotional conflict that ultimately harmed firm

performance. Whereas, extensive research has examined diversity as it relates to different

measures, to the best of the researchers knowledge, there has been no research involving

an empirical study that examine diversity along ethnic tribes. This study fills this void by

examining the ethnic diversity on the boards of quoted companies in Nigeria. Given the

peculiarity of Nigeria, we propose the following hypothesis:

H2. Ethnic diversity is negatively associated with firm performance.

We use a dummy, which takes a value of 1 if the board is made up of people from different

tribes and 0 if otherwise.

3.4 Board duality

Board duality is a corporate leadership structure that merges the position of board chair and

CEO. Fama and Jensen (1983) suggest that CEO duality may hinder board’s ability to

monitor management (promote entrenchment and weaken board monitoring effectiveness)

and thereby increase agency cost. They argued from the agency theory perspective that

separating the CEO from the board chairman will improve firm performance. However, board

duality is supported on the ground of unified leadership, and that any legislation requiring

the separation of board chair from the CEO will end up exacerbating the agency cost (Boyd,

1995; Charan, 1998). Given the weak external and internal governance laws in Nigeria, CEO

duality may promote entrenchment which is likely to adversely affect firm performance. We

propose the following hypothesis:

H3. CEO duality is negatively associated with firm performance.

The researchers examined this variable using a dummy, which takes a value of 1 if the CEO

and chairman are the same person and 0 if the CEO is separated from the board chairman.

3.5 Board gender

Boards are traditionally composed of only male members. The presence of women on the

board leads to gender diversity. It is generally accepted that female board members are

more independent because they are not part of the ‘‘old boys’’ network (Carter et al., 2003).

According to Ryan and Haslam (2005), women are more likely to be placed in positions of

leadership in circumstances of downturn. The implication is that the presence of women on


the board could be perceived by shareholders that significant change is on the way, and

making them more confident in the company’s success, which results in increase in share

price. Diversity in general is considered to improve organizational value and performance as

it provides new insights and perspectives (Fondas and Sassalos, 2000; Carter et al., 2003;

Letendre, 2004; Huse and Solberg, 2006) and provides for representation of different

stakeholders for equity and fairness. This leads to the following hypothesis:

H4. Board gender is positively related to firm performance.

The ratio of the number of women to total board size is used as measure of board gender.

3.6 Board skill

According to the resource dependence theory, a board can constitute a strategic resource

for the firm. Thus, higher level of educational qualification like PhD will function as a strategic

resource (Carpenter and Westphal, 2001). Educational qualification such as PhD will act as

a mix of competencies and capabilities that help in executing the governance function

(Carpenter and Westphal, 2001). Accordingly:

H5. The number of directors with PhD qualifications is positively associated with firm

performance.

We proxy board skill as a ratio of board members with PhD qualification to board size.

3.7 Board size

Board size is mostly used as an indication of both monitoring and advisory role (Klein, 1998).

Empirical results on optimal board size are inconclusive. Large board size has been

criticized for increasing cost and boardroom squabbles, while it is also argued that small

board size might not effectively monitor powerful managers. The size of the board is also

found to increase with firm age and firm size (Coles et al., 2008). Consequently, we propose

the following:

H6. There is positive relationship between board size and firm performance.

The total number of members in the board is used as a measure of board size (Coles et al.,

2008). We take a natural logarithm of this variable as a proxy of board size.

3.8 Firm size

Scholars have suggested that internal governance structures are substitutable and the firms

can choose appropriate governance options based on what is right for them (Booth et al.,

2002; Peasnell et al., 2003). As the complexity of the firm increases, board size may increase

due to need for advice and environment monitoring (Pfeffer, 1972; Zahra and Pearce, 1989).

Thus, board duality may be dropped as a trade-off in favour of director/insider ownership to

ensure firm performance through alignment of interests between shareholders and

directors. For this study, total asset will be used as a proxy for firm size. Firm size will be

measured by the logarithm of total assets.

3.9 Firm age

Firm age is the number of years for which a firm has been in operation, starting with the date

of incorporation. Studies have shown that firms go through financial growth cycle and their

capital structures vary with their age (Berger and Udell, 1998). New firms are expected to

have smaller earnings than old ones because they have less experience in the market, are

still building their market position, and normally have a higher costs structure. Older firms

may be reaching the end of their product life cycle. This suggests that complexity increases

with firm age. We control for firm age which log of years since incorporation.


Hp DV4

Highlight

Hp DV4

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4. Research methodology

The study examined the impact of board characteristics on firm performance using a

firm-year unit of analysis. With firm-year records, the study applied the Generalised Least

Square (GLS) Fixed-Effects and Random-Effects models to test the various hypotheses. The

preference for Generalised Least Square regression over pooled Ordinary Least Square

regression is due to the important assumptions of homoskedasticity and no serial correlation

in Pooled Ordinary Least Square (Wooldridge, 2002). Pooled Ordinary Least Square

requires the errors in each time period to be uncorrelated with the explanatory variables in

the same time period, for the estimator to be consistent and unbiased. A Generalised Least

Square regression is more suitable in that it corrects for the omitted variable bias and

presence of autocorrelation and heteroskedasticity in pooled time series data.

The fixed and random effects allow researchers to examine variations among

cross-sectional units simultaneously with variations within individual units over time (Gaur

and Gaur, 2006). It assumes that regression parameters do not change over time and do not

differ between various cross-sectional units, enhancing the reliability of the coefficient

estimates. An important assumption for choosing fixed and random-effect estimation is that

the unobserved heterogeneity should not be correlated with the independent variables

(Stock and Watson, 2007). The base model takes the following form:

Firm Financial Performance ¼ fðboard size; board duality; board gender; board skill;

board nationality; board ethnicity; firm size; firm ageÞ

5. Results

5.1 Descriptive statistics

Table II presents the descriptive analysis of the research variables. Results based on the

descriptive analysis show that the average board size of firms in Nigeria is about nine

members (mean ¼ 8:8). Considering the number of PhD holders on the boards of Nigerian

firms, the result indicates that the average number of PhD holders on the corporate boards of

firms in Nigeria is 70 percent scaled by average board size. This result shows that in every 13

board members, only one is likely to possess PhD qualification. In terms of foreign board

members, the results show that the average number of foreigners in Nigerian boards is two

per board (mean ¼ 1:56). Based on this evidence, it could be inferred that the ownership of

the selected companies influenced this result. For example, about 50 percent of the firms in

the conglomerate, petroleum, food/beverages and tobacco and construction industries are

foreign-owned.

The average number of women board members is 40 percent scaled by average board size.

This indicates that in every 22 board members, only one is a woman. This result is very

Table II Descriptive statistics of absolute values

N Minimum Maximum Mean Std. deviation

Board size 2,047 3.00 22.00 8.8002 2.72450Board skill 2,050 0.00 14.00 0.6785 1.02653Board nationality 2,050 0.00 9.00 1.5649 1.93373Board gender 2,051 0.00 4.00 0.4022 0.66301Board ethnicity 2,044 0.00 1.00 0.7867 0.40974Board duality 2,044 0.00 2.00 0.4163 0.49801Firm age 2,011 8.00 77.00 32.4237 14.13121Firm size 1,320 21632084.00 1.19E9 9.7054E6 6.99533E7PBIT 1,337 228481450.00 85998123.00 646929.2478 4.38124E6Valid N (listwise) 1,274

Source: Computed from handpicked data from the annual reports and accounts of 122 quoted companies and the NSE Factbook (SPSSComputation)


disturbing considering the growing number of women participation on corporate board of

other developing and developed economies (According to Catalyst Census, women

directorship ranges [between]...12.4 percent in USA; 8.4 percent in UK; 6.8 percent in South

Africa).

Interestingly, our results show that 79 percent of firms in the observation have ethnic diffused

boards, while about 31 percent of the boards are homogeneous in terms of ethnic diversity.

This might not be separated from the ownership structure of the affected firms. A critical

study of corporate boards in Nigerian corporate environment reveals alarming cases of

family ownership of firms. Also, interlocking directorship is a common feature of corporate

board in Nigeria.

The results show that on the average, 69 percent of the firms in our observations separate

the position of CEO from the board chair, while 41 percent of the selected firm allow one

person to function simultaneously as manager and board chairman. An interesting issue

arising from board duality is the fact that foreign-owned and large firms tend to separate

these two positions, while small or young firms with indigenous ownership structure merge

these two positions. In terms of firm age, it is found that the average age of firms in Nigeria is

approximately 33 years. The maximum age of any firm in Nigeria based on our selected

sample is 77 years while the youngest firm is eight years old.

5.2 Correlation matrix

Table III presents the correlation matrix. The correlation between firm age and return on

assets employed is weakly positive (see Table III). Though the non-significant relationship

may create the impression that these two characteristics are not important, the arising

statistics tend to prove that the age of the firm has a positive relationship with the profitability

of the firm. This confirms the earlier assertions of Berger and Udell (1998), Gregory et al.

(2005) and Boone et al. (2007) that newer firms are expected to have smaller earnings than

older ones because they have less experience in the market, are still building their market

position, and normally have a higher cost structure. The correlation result also justifies the

inclusion of firm age as one of the control variables.

The correlation between firm size and the proxies of board size, board nationality and board

ethnicity is positive and significant. This finding validates our a priori position that

governance structures are substitutable and the firms can choose appropriate governance

options based on what is right for them. For example, as the complexity of the firm increases,

board size may increase due to need for advice and environment monitoring (Zahra and

Pearce, 1989). In that case, CEO duality may be dropped as a trade-off in favour of

director/insider ownership to ensure firm performance through alignment of interests

between shareholders and directors. Obviously, these changes in the firm size are likely to

affect different characteristics of the board. Hence, the result justifies the inclusion of firm

size as one of the control variables.

Among the 36 results of inter-correlation recorded between the pairs of the explanatory

variables shows that the correlation between board size and board duality is negative and

non-significant. This result validates the theoretical standpoint of agency theory which posits

that board size has effect on CEO duality. As the board size increases, representation of

outsiders also increases (Lehn et al., 2004). This implies an increase in the board

independence along with a simultaneous decrease in CEOs influence (Hermalin and

Weisbach, 1998). Therefore, a larger board helps in effective oversight of management. To

facilitate improved monitoring role of the board to mitigate the agency costs, positions of

Chair and CEO are separated. The correlation between board size and board gender is

positive and significant. This validates our earlier findings in the descriptive statistics that

women representation on corporate board in Nigeria increase with board size. It implies that

women do no replace men on boards but get more representation as the board size

increases, indicating a corresponding increase in both board size and women on boards.

Ethnic diffused board requires representation to different segments of society and is found

to be positively and significantly associated with board size. As the firm increases in


Table

IIICorrelationmatrix

Variab

les

RO

AB

oard

size

Board

skill

Board

natio

nalit

yB

oard

gend

er

Board

eth

nic

ityB

oard

dualit

yFirm

size

Firm

ag

e

RO

AP

ears

on

corr

ela

tion

1S

ig.

(tw

o-t

aile

d)

Board

size

Pears

on

corr

ela

tion

0.0

035

1S

ig.

(tw

o-t

aile

d)

0.8

761

Board

skill

Pears

on

corr

ela

tion

20.0

167

20.0

64*

1S

ig.

(tw

o-t

aile

d)

0.4

58

0.0

03

Board

natio

nalit

yP

ears

on

corr

ela

tion

0.0

09

0.1

02*

20.0

67*

1S

ig.

(tw

o-t

aile

d)

0.6

99

0.0

00

0.0

10

Board

gend

er

Pears

on

corr

ela

tion

0.0

15

0.0

99*

0.0

54*

20.0

80*

1S

ig.

(tw

o-t

aile

d)

0.5

00

0.0

00

0.0

13

0.0

00

Board

eth

nic

ityP

ears

on

corr

ela

tion

0.0

01

0.0

57*

0.0

85*

0.0

66*

0.0

32

1S

ig.

(tw

o-t

aile

d)

0.7

91

0.0

09

0.0

00

0.0

02

0.1

48

Board

dualit

yP

ears

on

corr

ela

tion

0.0

09

20.0

03

0.0

70*

20.0

66*

0.1

10*

0.0

69*

1S

ig.

(tw

o-t

aile

d)

0.7

06

0.8

78

0.0

01

0.0

02

0.0

00

0.0

02

Firm

size

Pears

on

corr

ela

tion

0.0

41

0.1

89*

20.0

58*

0.0

67*

20.0

34

0.1

25*

0.0

04

1S

ig.

(tw

o-t

aile

d)

0.0

77

0.0

00

0.0

11

0.0

03

0.1

33

0.0

00

0.8

62

Firm

ag

eP

ears

on

corr

ela

tion

0.2

23

0.1

35*

20.1

49*

0.1

09*

0.0

44*

0.0

97*

0.0

27

0.1

26

1S

ig.

(tw

o-t

aile

d)

0.3

27

0.0

00

0.0

00

0.0

00

0.0

45

0.0

00

0.2

32

0.0

00

Note:*c

orr

ela

tion

issi

gnifi

cant

at

the

0.0

5le

vel(t

wo-t

aile

d)


complexity, the board size also increases (Boone et al., 2007). The more the representation,

the larger will be the size of the board. This result implies that ethnic diffused board is made

possible by increasing the board size. When the board size is increased by increasing

representation to outsiders, it is likely that there will be ethnic diversity of board members in

general. Such diversity is considered a strategic resource and provides a link to different

external resources.

Most of the coefficients, as observed, whether positive or negative, significant or

non-significant are weak. This indicates at first glance, that although likely cases of

multicolineraity may exist, the degree of such may be too remote to affect the results of the

regression estimates.

5.3 Random and fixed effects results

Tables IV and V present the random-effects result, Tables VI and VII present the fixed-effects

result, while Table VIII presents the Hausman Test. Results of the test in Tables IV-VIII showed

significant support for the fixed effects regression than the random effects. The p-value was

highly significant at 5 percent level. The null hypothesis of an equality of fixed and random

effects regression estimations was rejected. The result provided evidence on lack of random

effects in the model; and that the model for fixed effects regression captures both the group

and time effects.

5.4 Regression results

Tables IX and X present the regression results. The regression results were interpreted along

the six hypotheses formulated in the study. At prob . F value of 0.0000 less than 5 percent,

the GLS model is very significant, and fitted the data very well. Based on the results obtained

from the model, the following conclusions could be drawn:

Table IV Random-effects regression results

.xtreg LogPBIT_TA LogBZ BSK BN BG Bethnic Bdual LogTA Log Age, re

Random-effects GLSregression Number of obs ¼ 1,637Group variable: firm Number of groups ¼ 119R-sq: within ¼ 0.1475 obs per group: min ¼ 5

between ¼ 0.0411 avg ¼ 13.8overall ¼ 0.0751 max ¼ 19

Random effects u_i ,Gaussian waldchi2ð8Þ ¼ 250.86corrðu_i; xÞ ¼ 0 (assumed) prob . chi2 ¼ 0

Source: Author’s computation based on stata analytical software result

Table V Random-effects regression results

LogPBIT_TA Coef. Std. Err. z p . /z/ [95% Conf. Interval]

LogBZ 0.2384623 0.304502 0.78 0.434 20.3583508 0.8352753BSK 0.5822647 0.3740316 1.56 0.12 20.1508237 1.315353BN 0.3490442 0.1710686 2.04 0.041 0.0137559 0.684333BG 20.1384283 0.4880053 20.28 0.777 20.094901 0.818045Bethnic 0.0512950 0.0738874 0.69 0.488 20.0935317 0.196117Bdual 20.0539978 0.0571858 20.94 0.345 20.1660799 0.058084LogTA 20.5598655 0.0369584 215.15 0.000 20.6323026 20.48743LogAge 0.60321 0.2076635 2.90 0.004 0.1961971 1.010223_Cons 0.0662263 0.4215554 0.16 0.875 20.7600071 0.8924597sigma_u 0.8749908 0.4215554 0.16 0.875 20.7600071 0.89246sigma-e 0.9378614rho 0.4653612 (fraction of variance due to u_i)



B H1 suggested that board nationality is positively associated with firm performance. The

coefficient of board nationality is positive and very significant. This result could be

interpreted in two ways. Fist, the result shows strong support for the resource

dependency theory which poits that foreign board members offer greater financial

flexibility, which in turn provides the opportunity to cut down cost of capital by reducing

cross-border information gaps. Second, the presence of foreign board members in line

with agency theory promotes the quality of monitoring, reduces managerial entrenchment

and agency costs. The result is consistent with the findings of Oxelheim and Randoy

Table VIII Hausman test for best effects (between fixed and effects models)

.hausman fixed randomcoefficients

(b) (B) (b-B) sqrt(diag(v_b-v_B))Fixed Random Difference S.E.

LogBZ 0.18793 0.2384623 20.0505323 0.132562BSK 0.5508129 0.5822647 20.0314518 0.1247115BN 0.2561221 0.3490422 20.0929201 0.0544824BG 0.4998643 20.1384238 0.6382881 0.2037568Bethnic 0.0308879 0.051295 20.0204071 0.0184952Bdual 20.0288261 20.0539978 0.0251717 0.0115751LogTA 20.632048 20.5598655 20.0721825 0.0160242LogAge 0.876921 0.60321 0.273711 0.1417646

Notes: b ¼ consistent under Ho and Ha; obtained from xtreg; B ¼ inconsistent under Ha, efficient under Ho; obtained from xtreg; Test:Ho: difference in co-efficient not systematic; chi2ð8Þ ¼ ðb 2 BÞ’ [(V_b-v_B)^(21)] (b – b)=30.22; Prob . chi2 ¼ 0:0002Source: Author’s computation based on stata analytical software result

Table VI Fixed-effects regression results

.xtreg LogPBIT_TA LogBZ BSK BN BG Bethnic Bdual LogTA Log Age, fe

Fixed-effects (within)regression Number of obs ¼ 1,637Group variable: firm Number of groups ¼ 119R-sq: within ¼ 0.1495 obs per group: min ¼ 5


F(8,1510) 33.17corr (u_i , xb) ¼ 20.3025 prob . F ¼ 0


Table VII Fixed-effects regression results

LogPBIT_TA Coef. Std. Err. t p . /t/ [95% Conf.Interval]

LogBZ 0.1879300 0.3321057 0.57 0.572 20.4635073 0.839367BSK 0.5508129 0.3942748 1.4 0.163 20.2225714 1.324197BN 0.2561221 0.179535 1.43 0.154 20.0960422 0.602827BG 0.4998643 0.5288345 0.95 0.345 0.5374638 1.537192Bethnic 0.0308879 0.0671671 0.41 0.685 20.1185166 0.180292Bdual 20.0288261 0.0583455 20.49 0.621 20.1432729 0.085621LogTA 20.6320480 0.0402827 215.69 0.000 20.7110641 20.55303LogAge 0.8769210 0.2514385 3.49 0.001 0.3837151 1.370127_Cons 0.1145617 0.4752101 0.24 0.81 20.8175802 1.046704sigma_u 1.0097948sigma-e 0.9378614rho 0.5368830 (fraction of variance due to u_i)



(2003) and Rosenstein and Wyatt (1990), while contrasting the findings Agrawal and

Knoeber (1996). This result regression agrees with the correlation results and shows that

most foreign board members in Nigeria have a mandate to represent an owner with a

major commercial or long-lasting interest in the firm.

B H2 suggested that ethnic diversity is negatively associated with firm performance. The

coefficient of ethnic diffused board is positive, but not significantly related with the financial

performance of Nigerian firms. This result implies that ethnic diffused board is a

knowledge-based asset that creates value for shareholders by linking an organization to its

external environment, thereby promoting firm performance. This result is consistent with

the findings of Carter et al. (2003) and provides strong empirical standpoint for the

dependency theory which views ethnic diversity in corporate board as economic resource

to the organization that help firms comprehend the dynamic industry context of a country.

B H3 suggests that CEO duality is negatively associated with firm performance. The

coefficient of the proxy was negative and significant in promoting the firm financial

performance in Nigeria. This finding is consistent with the agency theory which posits that

board duality promotes CEO entrenchment by reducing board monitoring effectiveness

and impedes firm performance. This result is consistent with the findings of Chen et al.

(2008), Norman et al. (2005) and Hambrick and D’Aveni’s (1992). H4 suggests that board

gender is positively related to firm performance. The GLS regression results showed that

the coefficient of the variable was negative and very significant in predicting the financial

performance of Nigerian firms. This result is consistent with the findings Adams and

Ferreira (2009), but contradicts the findings of Carter et al. (2003), Bonn (2004) and Smith

et al., 2006). This result also contradicts the resource dependency theory. Since most

female corporate board members in Nigeria have strong ties with the owners of the firms,

and do not have any corporate background, they are likely to increase agency cost and

delay decision making process which will negatively affect performance (Terjesen et al.,

2009).

B H5 suggests that the number of directors with PhD qualifications is positively associated

with firm performance. The GLS regression results show that the coefficient of board

Table IX Generalised least square regression results

.regress LogPBIT_TA LogBZ BSK BN BG BEthnic BDual LogTA LogAgeSource SS Df MS Number of obs ¼ 1,637

Model 344.138505 8 43.0173131 F ð8; 1628Þ ¼ 25:03Residual 2797.94351 1,628 1.71863852 Prob . F ¼ 0:0000Total 3142.08201 1,636 1.92058803 R-squared ¼ 0:1095

Adj R-squared ¼ 0:1051Root MSE ¼ 1:311


Table X Generalised least square regression results

LogPBIT-TA Coef. Std Err. T P . /t/ [95% Conf Interval]

LogBZ 20.0279042 0.2472757 20.11 0.910 20.5129163 0.4571079BSK 0.8160968 0.3485299 2.34 0.019 0.1324962 1.499697BN 0.9869622 0.1603583 6.15 0.000 0.672432 1.301492BG 22.345077 0.4041441 25.80 0.000 23.137774 21.552379BEthnic 0.0848558 0.079703 1.06 0.287 20.0714754 0.241187BDual 20.1319759 0.0653462 22.02 0.044 20.2601474 20.0038043LogTA 20.3434871 0.0321004 210.70 0.000 20.4064496 20.2805247LogAge 0.2406179 0.1365177 1.76 0.078 20.0271509 0.5083866_con 20.4078838 0.31665 21.29 0.198 21.028968 0.2132005



members with PhD is positively and significantly associated with the financial

performance of firms in Nigeria. An interpretation to this result is that, board members

with PhD qualification benefit the firms through a mix of competencies and capabilities.

This result is very consistent with the resource dependency theory which views board

members with PhD qualification as strategic resources that provide strategic linkage to

different external resources.

B H6 suggests a positive relationship between board size and firm performance. The

coefficient of size is negative, but not significant. This implies that as the size of a firm’s

board increases, the less the degree of its impact on the financial performance on the

firm. This result is consistent with theory w that as board increases in size, free riding

increases and reduces the efficiency of the board in monitoring management and

providing strategic human resource for the organization.

6. Robustness tests

We selected small and young firms with concentrated ownership for our robustness test.

This approach has the appealing feature of allowing the researcher to include some of the

omitted firms, eliminate the problem of missing data and also accommodate a greater

proportion of young firms in the Nigerian corporate environment. The total number of

selected firms was 160 firms with 556 observations. Tables XI-XV show the results of the

Random-Effects, Fixed-Effects and Hausman Test model. The Hausman Test shows that the

data set is more consistent with fixed-effects than random-effects.

Tables XVI and XVII present the regression results. At prob . chi-square value of 0.000 less

than 0.05, as shown in Tables XVI and XVII, the GLS model was very significant, and fitted

the data very well. Based on the results obtained from the model, the coefficient of board

Table XII Random-effects results

LogPBIT_TA Coef. Std. Err. z p . =z= [95% Conf. Interval]


Notes: F test: that all u_i ¼ 0: Fð159;388Þ ¼ 7:94; prob . F ¼ 0:0000Source: Author’s computation based on stata analytical software result

Table XI Random-effects results

.xtreg LogPBIT_TA LogBZ BSK BN BG Bethnic Bdual LogTA Log Age, re

Fixed-effects GLS regression Number of obs ¼ 556Group variable: firm Number of groups ¼ 160R-sq: within ¼ 0.1033 obs per group: min ¼ 1


Random effects u_i , Gaussian wald chi2ð8Þ ¼ 73.76corr (u_i , x) ¼ 0 (assumed) prob . chi2 ¼ 0.0000



size was negative, but not significant. This result is consistent with our earliest findings. The

coefficient of board skill was negative, but not significant. This result is not consistent with

our earlier results, and could be explained by the dominance of young firms in the dataset.

The result implies that board members with PhD qualification do not contribute positively to

the performance of small firms.

The coefficient of board nationality was positively and significantly linked to the financial

performance of Nigerian firms. This result is consistent with our earlier findings, and shows

Table XIV Fixed effects regression results

LogPBIT_TA Coef. Std. Err. t p . /t/ [95% Conf. Interval]


Notes: F test that all u_i ¼ 0 : Fð159;388Þ ¼ 7:94; prob . F ¼ 0:0000Source: Author’s computation based on stata analytical software result

Table XV Hausman fixed and random effects results

.hausman fixed randomCoefficients

(b) (B) (b-B) sqrt(diag(v_b-v_B))fixed random Difference S.E.

LogBZ 21.531952 25599202 20.9720317 0.5371191BSK 20.7646571 20.6848669 20.0797902 0.4610195BN 0.0715891 0.6389491 20.56736 0.389337BG 0.7621494 0.0510803 0.7110691 0.6957959Bethnic 0.1017161 0.0229441 0.078772 0.1421107Bdual 0.1301871 0.0581533 0.0720338 0.1097952LogTA 20.6487987 0.5213422 20.1273665 0.0807344LogAge 3.83918 0.5129463 3.326234 1.121542

Notes: b ¼ consistent under Ho and Ha; obtained from xtreg; B ¼ inconsistent under Ha, efficient under Ho; obtained from xtreg; Test:Ho: difference in co-efficient not systematic; chi2ð8Þ ¼ ðb 2 BÞ’ [(V_b-v_B)^(-1)] ðb 2 bÞ ¼ 13:77; Prob . chi2 ¼ 0:0879Source: Author’s computation based on stata analytical software result

Table XIII Fixed effects regression results

.xtreg LogPBIT_TA LogBZ BSK BN BG Bethnic Bdual LogTA Log Age, fe

Fixed-effects (within) regression Number of obs ¼ 556Group variable: firm Number of groups ¼ 160R-sq: within ¼ 0.1033 obs per group: min ¼ 1


F(8,388) 5.59corrðu_i; xbÞ ¼ 20:6306 prob . F ¼ 0.0000



that foreign board members add value to both young and old boards. The coefficient of

ethnic diffused board was positive, but not significant. The coefficient of board duality was

also positive, but not significant in promoting the financial performance of firms. This result

implies that board duality is desirable for young firms. This is a very consistent result,

considering that board duality may be beneficial for a young firm if the board of directors is

designed to assist management. Not only will his (her) presence improve the information

flow towards the board members, but the interaction and discussion of the CEO with board

members may lead to more valuable advice and better firm performance.

7. Discussion and policy implication

This study has highlighted the importance of the different characteristics of the board of

directors and the results of which may be hard to generalize across different samples of

firms. In addition, much of the policy prescriptions enshrined in codes of good corporate

governance rely on universal notions of best practice, which often need to be adapted to the

local contexts of firms or translated across diverse national institutional settings. The study

reveals that corporate laws such as the ownership structure, the enforceability of corporate

regulations or culture tend to enable as well as constrain diverse corporate governance

mechanisms and that a better understanding of the role of boards of directors in different

institutional settings is needed before engaging in the debate of how to increase board

accountability.

An important question addressed in this study is whether all firms, regardless of their

ownership pattern and size, should be submitted to the ‘‘one-rule-fits-all’’ principle of

separation of CEO and chairman. This study reveals the need to look at skills distinct from

monitoring, since boards in Nigeria play more of advisory role than monitoring role. The

study posits that it is also important to have board members with varied skills such as higher

educational qualification, business experts, support specialists (e.g. experts on law or

Table XVII Generalised least square regression results

LogPBIT-TA Coef. Std Err. T P . /t/ [95% Conf Interval]

LogPBIT_TAL1 0.5205664 0.0364598 14.28 0.000 0.4489324 0.5922004LogBZ 20.3267499 0.351932 20.93 0.354 21.018204 0.3647047BSK 20.3411183 0.5081872 20.67 0.502 21.339574 0.657337BN 0.7088233 0.2476491 2.86 0.004 0.2222575 1.195389BG 0.1224428 0.5093185 0.24 0.810 20.8782351 1.123121BEthnic 20.165651 0.1567387 21.06 0.291 20.4736016 0.1422995BDual 0.0891072 0.1080983 0.82 0.410 20.1232777 0.3014922LogTA 20.324695 0.050711 26.40 0.000 20.4243289 20.2250612.LogAge 20.0471768 0.1815863 20.26 0.795 20.4039466 0.3095929_con 1.476517 0.4763644 3.10 0.002 20.5405853 2.412449


Table XVI Generalised least square regression results

.regress LogPBIT_TA LogBZ BSK BN BG BEthnic BDual LogTA LogAgeSource SS Df MS Number of obs ¼ 508

Model 411.380201 9 45.789112 F ð9;498Þ ¼ 42:39Residual 537.029143 498 1.07837177 Prob . F ¼ 0:0000Total 948.409344 50507 1.87062987 R-Squared ¼ 0:4338

Adj R-Squared ¼ 0:4235Root MSE ¼ 1:0384



public relations) and community advocates (e.g. members of a community-based

organization).

Furthermore, the composition and role of the board of directors can be influenced by large

shareholders. Rather than using the board to add an additional layer of monitoring, a role as

providing resource to management may be much more useful to improve firm performance

in Nigeria. Large shareholders in firms with concentrated ownership are individually

motivated to monitor management, have a lot of influence beyond the board, and access to

valuable information and alternative corporate governance mechanisms to discipline the

managers if necessary.

Furthermore, if the controlling owners are also actively involved in the management of the

company, the need to monitor by the controlling shareholder disappears. However,

shareholders in firms with dispersed ownership have, collectively, a great need to use the

board of directors to monitor the managers to resolve the alignment problem.

We argue that the desired characteristics of the outside board members depend on the

priorities set by the board of directors, but must not replace ethnic diversity. Board primarily

focusing on monitoring can benefit strongly from outsider board members who have

expertise and experience in financial reports, while boards focusing on providing resources

may benefit from having foreigners on their boards.

Additionally, corporate governance codes have strongly focused on board independence

as key element of good governance. From an agency perspective, a duality of the chairman

may substantially weaken the board’s monitoring effectiveness. However from a resource

provision perspective, a duality may be beneficial. If the board of directors is designed to

assist management, the presence of CEO on the board will be beneficial. Not only will its

presence improve the information flow towards the board members, but the interaction and

discussion of the CEO with board members may lead to more valuable advice and better

firm performance. Furthermore, the problem of duality may be far less relevant when large

shareholders provide counterbalance. An underperforming CEO, even if chairman, may

face more initiative to substitute him by board members representing majority shareholders

than board members representing minority shareholders.

8. Conclusion

Board of directors is considered to be an important governance device and boards are

increasingly being held accountable for the organizations they govern. High profile

corporate collapses, leading to major economic losses, have raised serious doubt on the

effectiveness of boards in protecting the interests of shareholders and other stakeholders.

As a consequence, much of today’s corporate governance reforms (codes and

recommendations, regulation etc.) are directed at improving corporate governance

through upgrading the board’s functioning. Despite the fact that boards of directors are

presumed to be vital for a company’s survival, there is still relatively little known about the

way boards actually operate. In most developing countries, boardrooms have been shielded

from view, which makes them difficult to study.

Corporate governance and board research have mainly been influenced by agency theory,

stewardship theory and resource dependency theory. From an agency perspective, the

board of directors is an internal control mechanism designed to address the conflicts of

interest between managers (agent) and shareholders (principal) and to bring their interests

into congruence. Stimulated by the dominance of the agency theory in corporate

governance, board effectiveness has commonly been viewed as the ability of boards to act

independently from management to protect shareholders’ interest. Structural board

characteristics (e.g. size, insider/outsider representation, CEO duality) are treated in

empirical studies as appropriate and adequate proxies for understanding board

effectiveness. However, there is little definitive and striking evidence that these structural

measures have had considerable impact on board or corporate performance.


This study aims at understanding the board characteristics of Nigerian firms, how these

characteristics interrelate, and the extent to which these identified characteristics impact on

firm performance. Our studies focus on boards of directors of quoted companies in Nigeria

using a carefully chosen qualitative research methodology. Empirical data was gathered

through the annual reports and statement of accounts of the selected companies and the

Nigerian Stock Exchange Factbook.

The study raises four major points. First, the findings highlight a gap between the monitoring

role of the board and advisory role in the Nigerian corporate environment. In particular, we

found a systematic negative association between board size and firm performance, which

suggest cases of advisory role or free rider factors in directors’ perceptions of what

constitutes a good corporate board. Second, the findings suggest that the value of

independence may be overemphasized at the cost of the broader issue of diversity. Still, the

concept of diversity is to a large extent under-exposed in board research. We also found that

information and the leadership structure of the board are two additional conditions under

which a board of directors can make an effective contribution to the strategic direction and

control of a company. Board duality, though not desirable for large and old firms is a strategic

governance structure for small and young firms in Nigeria.

Our findings suggest that the ambiguity in current research evidence can, to some extent,

be attributed to differences in institutional specifics, adopted proxies used, and econometric

tool tools used. Finally, our research contributes to other research streams, in particular the

literature on organizational demography, by examining the relevance of theory and a limited

number of constructs, frequently applied in corporate governance studies.

This study also has important implications for practitioners. For companies, the findings on

the key performance enhancing characteristics could serve the purpose of board

evaluations. In addition, this research has practical relevance for the selection process of

directors as it highlights the importance of having an appropriate mix of competences on

board. For institutional investors and rating agencies, this research highlights the danger of

limiting attention to structural board characteristics when assessing the quality of corporate

governance at a company level. It stresses the need to refine the scoring criteria and

weighting methodology of the screening devices as well as to apply a flexible approach

when evaluating boards of directors on a global scale.

This research is of particular interest to policy makers, concerned about stimulating an

appropriate corporate governance environment. The research is a modest attempt to

provide some academic evidence for current and future governance reforms. In particular,

the findings suggest that a broad and flexible (with attention also paid to the board’s

strategic role) approach should be used when designing, adapting and monitoring

corporate governance codes. In addition, the findings suggest that policy makers should

reflect on ways to balance the benefits and costs of governance reforms.

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Corresponding author

Augustine Ujunwa can be contacted at: [email protected]


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