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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

103

www.globalbizresearch.org

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

mailto:[email protected]

mailto:[email protected]


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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


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(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) partner-

owned 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


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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


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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


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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 owner-

manager-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


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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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Table 1: Corporate Governance Compliance Checklist of Listed Firms in the

Nigerian Stock Exchange

S/N Financial Indicators:

1 Financial and Operating Result

2 Critical Accounting Ratios

3 Critical Accounting Policies

4 Corporate Reporting Framework (Segment Reporting)

5 Risks and Estimates in Preparing and Presenting Financial Statements

6 Information Regarding Future Plan

7 Dividend

Corporate Governance Indicators:

8 Size Of Board

9 Board Composition

10 Division Between Chairman and CEO

11 Information About Independent Director

12 Role and Functions of Board

13 Changes in Board Structure

14 Composition of the Committee

15 Function of the Committee

16 Audit Committee Report

Timing And Means Of Corporate Governance Disclosure

17 Separate Corporate Governance Statement

18 Annual Report through the Internet

19 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


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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 No. of Firms Percentage (%)

1 Financial 15 45.5

2 Oil and Gas 4 12.1

3 Manufacturing 14 42.4

Total 33 100

Figure 2: Distribution of Firm by Sector

0

2

4

6

8

10

12

14

16

Financial Oil and Gas Manufacturing


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Figure 3: Percentage Distribution of Firms by Sector

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

46%

12%

42% Financial

Oil and Gas

Manufacturing


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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 Total

CGV

S/N SECTOR/FIRMS Total

CGV

1 Access Bank 88% 18 Nestle Nigeria 71%

2 Diamond Bank 88% 19 Dangote Flour Mills 65%

3 First Bank 100% 20 National Salt Company

(Nigeria)

71%

4 Guarantee Trust Bank 88% 21 Honey Wells Flour Mills 71%

5 ECO Bank Nigeria 88% 22 Guinness Nigeria Plc 71%

6 First City Monument Bank 88% 23 Beta Glass Plc 71%

7 Sterling Bank 88% 24 Dangote Cement Plc 76%

8 United Bank for Africa 88% 25 First Aluminium 65%

9 Royal Exchange 76% 26 Lafarge Wapco Plc 76%

10 Mansard Insurance 82% 27 Paints & Coatings MFG Nig.

Plc

65%

11 NEM Insurance 59% 28 Unilever Nigeria 88%

12 Oasis Insurance 59% 29 Eterna Plc 65%

13 Consolidated Hallmark

Insurance

76% 30 Japaul oil and Maritime

Service

65%

14 Cornerstone Insurance 82% 31 Oando Nigeria Plc 82%

15 Continental Reinsurance 94% 32 Total Nigeria Plc 82%

16 Nigerian Breweries 71% 33 Con Oil 72%

17 PZ Cussons 71% 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

S/N Sector Total Number of

Directorship in

the Sector

Number of

firms in

Sectors

Minimum Maximum Mean

1 Financial 186 15 59% 100% 82.93

3 Oil and Gas 39 4 65% 72% 71.21

4 Manufacturing 127 14 65% 88% 75.25

Total 352 33 10.6

Source: Authors‟ Calculation based on content Analysis

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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Table 5: Average Size of Board of Directors according to Sector for 2010

S/N Sector Total Number

of Directorship

in the Sector

Number of

firms in

Sector in

2010


1 Financial 186 15 6 20 12.4

2 Oil and Gas 39 4 5 15 9.75

3 Manufacturing 127 14 9 10 9.07

Total 352 33 10.6 Source: Authors‟ Calculation based on content Analysis

Table 6: Average Size of Board of Directors According to Sector for 2011

S/N Sector Total Number

of Directorship

in the Sector

Number of

firms in

Sector in

2011


1 Financial 185 15 6 19 12.3

3 Oil and Gas 39 4 5 15 9.75

4 Manufacturing 134 14 9 10 9.57

Total 358 33 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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Table 7: Corporate Governance Performance Index from Highest to Lowest

SECTOR/FIRMS CGV Critical

Accounting Ratio

2010

CGV

(%)

Critical

Accounting Ratio

2011

(%) EPS ROE

(%)

ROA

%

EPS ROE

(%)

ROA

%

First Bank 100 9k 1.25 0.22 100 (78k) loss loss

Continental

Reinsurance

94 12k 10.59 6.55 94 12k 10.31 6.01

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

Bank

88 49k 5.89 1.47 88 (61k) Loss loss

Sterling Bank 88 33k 19.31 1.82 88 51k 16.33 1.33

United Bank for

Africa

88 3k 0.37 0.04 88 (32k) Loss loss

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

Hallmark Insurance

76 4k 5.04 3.86 76 5k 6.03 4.55

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

Company (Nigeria)

71 62k 33.26 20.95 71 81k 37.20 21.44

Honey Wells Flour

Mills

71 14k 8.70 3.92 71 31k 16.47 8.55

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

MFG Nig. Plc

65 0.13k 11.80 6.76 65 0.16k 10.49 7.24

Eterna Plc 65 55k 20.76 7.79 65 93k 15.63 8.23

Japaul oil and

Maritime Service

65 13k 3.67 3.17 65 16k 4.35 4.31

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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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


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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,


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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 non-

executive 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 re-

evaluate accounts submitted to different bodies concerned with companies

operations.


2014 Vol: 1 Issue 2

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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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