The aim of this paper is to measure the relationship between corporate governance and the performance of firms in Nigeria. To achieve this objective, we use Return on equity, Net profit margin, Sales growth, Dividend yield, and Stock prices/values as the key variables that defined the performance of the firm. On the other hand, for the measure of corporate governance, we use Board Independence, Board size, audit independence, ownership, and the progressive practices of the company. The study found that there is a high relationship between the board’s size of the companies use in the study and their performances. The study concludes that the more outsiders there are on a company’s board, the better the performance in terms of return on equity.
- Background of the study
Financial outrage the world and the recent collapse of foremost corporate institution in the united states of America, south East Asia, Europe and Nigeria such as Enron corporation, world com, Arthur Anderson, lever brothers and Cadbury have shaken investors faith in the capital markets and usefulness of prevailing corporate governance practices in promoting transparency and accountability. This has brought to the front again the need for the practise of good governance. Corporate Governance has become a central issue of policy debate for more than decades now. The mechanism of corporate governance and the type of information about corporate decisions on the one hand and on the other hand, the performances of the firm and the information that the corporation should make public, constitutes major issues of discussion in the corporate governance debate. Specifically, the issue of making corporate financial reporting more transparent to the stakeholders, and the extent to which, the oversight bodies set to oversee the firms becomes functional. The practice “good corporate governance” is seen as the ultimate objective of studies in this area, which the neoclassical theory of market economy defines as the maximization of shareholders‟ value. The theoretical foundation of this understanding is the fact that, in a develop or market economy, existence of well-functioning markets in capital, labor and products ensure the allocation of scarce economic resources to their best alternative uses to achieve the most efficient performance of the economy that is possible. In contrast to this theory, Alexander and Matts, (2003) observe that, corporate managers, rather than markets, exercise allocative control. Furthermore, Oliver (1985; 1996) observe that “ Asset Specificity” made it necessary for managerial control over the allocation of resources, thus creating agency problem for those principals who have made investments in the firm. Desai and Yetman (2004), Identified two areas of agency problems that made human ability to make allocative decision imperfect; the cognitive and behavioral limitations. The cognitive limitation is hidden information, also known as bounded rationality. This prevents investors from knowing a prior whether the managers, whom they have employed as their agents, allocate resources in the most efficient manner. The behavioral limitation, also known as opportunism, is hidden action that reflects the productivity, inherent in an individualistic society of managers as agents to use their positions for resources allocation to pursue their own selfish interest and not necessarily the interest of the firm‟s principals. This makes it very crucial and important to study the existence of the influence of corporate governance on the performance of firms. What it means is that, how a good governed firm does performed differently from a bad governed one. The concept of corporate governance has attracted a good deal of public interest in recent years, because of its apparent importance on the economic health of corporations and society in general. Basically, corporate governance in the banking sector requires judicious and prudent management of resources and the preservation of resources (assets) of the corporate firm; ensuring ethical and professional standards and the pursuit of corporate objectives, it seeks to ensure customer satisfaction, high employee morale and the maintenance of market discipline, which strengthens and stabilizes the bank. The issue of corporate governance has recently been given a great deal of attention in various national and International forays. This is in recognition of the critical role of corporate governance in the success or failure of companies. Corporate governance refers to the processes and structures by which the business and affairs of an institution are directed and managed. In order to improve long-term shareholder value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders. Corporate governance is therefore about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that would Foster good corporate performance.
The strategy for addressing the challenges of corporate governance has taken various forms at both the national and International levels and have culminated in initiatives such as: the OECD Code; the Cadbury Report; the Basel Committee Guidelines on Corporate Governance; the King‟s Report of South Africa etc. It is therefore necessary to point out that the concept of corporate governance of banks and very large firms have been a priority on the policy agenda in developed market economies for over a decade. Further to that, the concept is gradually warming itself as a priority in the African continent. Indeed, it is believed that the Asian crisis and the relative poor performance of the corporate sector in Africa have made the issue of corporate governance a catchphrase in the development debate (Berglof and Performance may be defined as the reflection of the way in which the resources of a company (bank) are used in the form which enables it to achieve its objectives. According to Heremans, (2007), financial performance is the employment of financial indicators to measure the extent of objective achievement, contribution to making available financial resources and support of the firm with investment opportunities.
These are factors which play a role in shaping the financial status of a company. Most studies divide the determinants of a firm’s financial performance into two categories, namely internal and external factors. Internal determinants of profitability, which are within the control of firm’s management, can be broadly classified into two categories, i.e. financial statement variables and nonfinancial statement variables, (Linyiru, 2006). While financial statement variables relate to the decisions which directly involve items in the balance sheet and income statement; non-financial statement variables involve factors that have no direct relation to the financial statements. The examples of non-financial variables within the this category are number of branches, status of the branch (e.g. limited or full-service branch, unit branch or multiple branches), location and size of the bank, Sudin (2004). Several events are therefore responsible for the heightened interest in corporate governance especially in both developed and developing countries. The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based energy giant and WorldCom the telecom behemoth, shocked the business world with both the scale and age of their unethical and illegal operations. -Thadden, 1999).
STATEMENT OF RESEARCH PROBLEM
According to Al-fakir (2006), the relationship of the board and management should be attributed by transparency to shareholders and fairness to other stakeholders. These will in effect moderation of the agency cost as projected by Jensen and Macklin (1976).
The observed gap in this study is the collapse of most organization in Nigeria due to their poor corporate governance which led to loss of confidence in our industry.
This giving rise to the following question:
How does board composition affect the firm performance?
How does board size affect the performance of the firm?
Does audit committee affect the firm performance?
Does CEO duality affect the firm’s performance?
OBJECTIVES OF THE STUDY
Given the overall objective of examining the relationship between corporate governance mechanism. Which are: Board size. Board composition. Audit committee CEO duality and firm’s performance In relevance to this study, one of the corporate governance mechanism is used to determine the specific objective which is the examining of the audit committee and the firm’s performance. While others can be, using the board composition to influence the firm’s performance. Knowing the relationship between board size and firm’ performance.
For the purpose of handling this study, the following hypothesis is formulated.
H1: there is positive relationship between return on capital employed and board composition
H2: there is a positive relationship between board composition and return on Asset management
H3: there is a positive relationship between board composition and return on Equity.
H4: there is a significant relationship between board composition and earnings per share.
SCOPE OF STUDY
This is aimed at appraising the relationship between the corporate governance mechanism and firms performance (ROCE, ROE and EPS).
This study will focus on five (5) firms quoted in the Nigeria stock exchange and will be from 2006 to 2010.
SIGNIFICANCE OF THE STUDY
This study aims to provide additional insights into the relationship between governance mechanism and firm performance in Nigeria. Our focus is on the measurement of corporate governance, abstract from other dimension such as incentive scheme. It is hoped that the evidence would serve as important quantitative information into the cauldron of policy as well as add to the existing body of empirical literature from a developing stock exchange such as that of Nigeria. The need for a study of this kind is characterized by growing all for effective corporate governance particularly for public liability companies.
At the level of firm, it offers the promise of a fair return on capital invested through improved efficiency. It also has some implication for the on-going privatization that the government of Nigeria is currently undertaken Grass-field (2002) citing the works of other scholars, indicated that the effectiveness of privatization is greater. When corporate governance works well, moreover by helping to promote firm performance and the protection of stakeholder’s interest, corporate governance encourages investment and stock market development. Dimirgue-kunt and Levine (1996) have associated with improved micro-economic growth. Further recent evidence in the works of klappers and love (2002)suggest that the firm level corporate governance provisions matters more in countries with weak legal (regulatory) environments implying that the firm can partially compensate for ineffectivelaws and enforcement by establishing good corporate governance and providing credible investor protection.
LIMITATIONS OF THE STUDY
This study is empirical in nature and will utilise data of five non-financial firms listed on the Nigeria stock exchanges between 2006 to 2010. This present quoted from financial statement that was observed.
Through there are some shortcomings that was accredited during the phase of writing the research works and can be attributed to money and time available for the research which are constrain for the research work of retrieving relevant information.
DEFINITION OF TERMS
Manufacturing firms produce wide range products. Large manufacturers include producers of , cars, computers, and furniture.
The methods by which suppliers of finance control managers in order to ensure that their capital cannot be expropriated and that they earn a return on their investment.
Profitability is ability of a company to use its resources to generate revenues in excess of its expenses. In other words, this is a company’s capability of generating profits from its operations.
ORGANIZATION OF THE STUDY
This research work is organized in five chapters for easy understanding as follows Chapter one is concern with the introduction which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study it’s based thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion and recommendations made of the study.
This material content is developed to serve as a GUIDE for students to conduct academic research
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