Corporate Governance And Performance Of Telecommunication Companies In Nigeria

Corporate Governance And Performance Of Telecommunication Companies In Nigeria
Abstract
The telecommunication industry has experienced some drastic changes during the last decade. Its services have enhanced efficiency in other sectors by increasing output in both the service sector and productive sector of the society. The role of corporate governance in the success or failure of companies is not in doubt. Researches on the effect of corporate governance on the performance of telecommunication sector have been very scarce both locally and internationally. This study is, therefore, designed to fill this gap by investigating the influence of corporate governance mechanism on the performance of telecommunication industry in Nigeria. It examined the impact of managerial shareholding, board composition, board size, institutional shareholdings, and external audit committee on performances of telecommunication companies in Nigeria. The independent variables of the study are the five corporate governance mechanisms: managerial shareholding, board composition, board size, institutional shareholding, and external audit committee. The mean value of both the return on assets (ROA) and return on equity (ROE) was applied as the unified performance measurement and this serves as dependent variable. The study applied exploratory non-experimental research design using historical data that is not amenable to manipulation. The telecommunication companies operating in Nigeria are MTN, Airtel, GLO, Etisalat, Starcom, and Multilink. Since the active players in the industry are six companies, they all constitute the population of the study. Secondary data were used for this study. The data were retrieved from the relevant companies’ websites and from their headquarters. The method of data analysis applied is panel data methods which involve both cross-sectional and time- series data using E-view Version 8. The research models applied are pooled least squares regression model, fixed effect least squares regression model and random effect least squares regression model. The study revealed that the managerial shareholding has significant impact on the performance of the telecommunication companies in Nigeria. It also established that composition of board members had no significant impact on telecommunication companies performance in Nigeria. The study found that board size of the companies exerts significant negative influence on the financial performance of telecommunication companies in Nigeria. The study established that institutional shareholding has negative impact on the performance of telecommunication companies in Nigeria. Finally the study established that external audit committee companies had significant negative impact on the financial performance of the companies. Based on these findings the study therefore recommends that managerial shareholding should be encouraged to improve more on telecommunication companies’ performances, the board membership composition should be maintained, there should be reduction in board size to improve board performance, Institutional shareholding may be maintained at the current level and finally, the proportion of external audit committee may be above their optimal level. It is therefore recommended that the proportion of external audit committee be reduced so as to achieve the optimal level.
Chapter One
Introduction
1.1 Background to the Study
The telecommunications industry is undergoing a critical transformation, creating exciting new opportunities and new challenges for infrastructure and service providers. The established value chain is increasingly being reconstructed, with the entry of powerful new players and radical restructuring of the industry. Rapid technological developments and increasing market competitions have added new dimension to an already complex scenario. Countries and sectors equipped with the requisite telecommunication systems are rapidly moving into post-industrial, information-based economic growth. Telecommunication sector across the globe has been identified as one with generic effect on almost all other sectors of the economy. Its function, in any economy, is described as a strategic one aimed at promoting economic growth and as one that has the linkages with other sectors. For the developing world, a modern telecommunications infrastructure is not only essential for domestic economic growth, but a prerequisite for participation in increasingly competitive world markets and for attracting new investments.
Recently, the role of telecommunication infrastructure in enhancing economic growth has been a subject for discourse in the economic literature. Arguments are that the development of a modern nation to its full potential in contemporary world can never be attained without adequate telecommunications infrastructure. This implies that the development of telecommunication infrastructure will significantly boost economic growth and development. Report in the Fact sheet of U.S Embassy showed that most of the developed economies such as U.S, Japan and China, having realized this, had deregulated their telecommunication sectors to allow more investment and the results they got were not just improved telecommunication capabilities but also increased foreign investment, boom in private sector development, more employment opportunities and better education and training facilities.
In the global setting, the telecommunications industry has experienced some drastic changes during the last few years; from the fixed telephone lines, to GSM and then the interconnections. The result of these changes has led to a fall in service charges coupled with increased flexibility, functionality and the overall attractiveness of the services. Introduction of new technologies has changed the role of mobile services, leading to a significant increase in mobile penetration, which now exceed fixed line communications. The annual report of telecommunication Fact sheet shows that the telecommunications market has reached the point of saturation, companies have introduced differentiation strategies by services, which in turn have led to a broadening of the range of new products in the market. Another key characteristic of the industry is the requirement for substantial investment in equipment (exchanges), transmission facilities (wire, optical fibre lines or wireless facilities), and terminals (subscriber equipment).
This high capital investment provides an effective barrier of entry to new players in the market. Furthermore, the high level of required investment has led to a limited number of players within the market with sharp competition among them. Another specific characteristic of the telecommunications industry is also its perceived role within society. For many years it has been viewed as providing essential public services. The increased penetration of telecommunication lines has to benefit society as a whole. Telecommunications have changed from being a discretionary or even luxury service to an essential service that should meet the demands of the majority of consumers. Due to these factors, the telecommunications industry is strongly regulated by governmental authorities in order to ensure that telecommunication services are supplied in accordance with public interest.
Today in Nigeria, there have been large infrastructure investments resulting from liberalization between 1992 and 2011, which have enabled million of people to communicate and transact businesses better. Deregulation attracted new operators from within and outside the country. The new operators have injected competition and provided new employment opportunities and emergence of indigeneous telecommunication companies. This growth has equally profound impact on the job and employment market, enhance efficiency in other productive sectors and increase national output.
In terms of growth, according to Lawyers Chronicle (2014) Nigeria is ranked the largest and fastest growing ICT market in Africa and among the ten fastest telecommunications growth markets in the world. This is as a result of the robustness of its returns on investments. The impact of this on the economic growth has become impressive. The telecommunications sector now contributes significantly to the Gross Domestic Product (GDP), which was hitherto dominated by the oil sector. Also the Nigeria Telecommunications Fact Sheet released by the United States Embassy in Nigeria in October 2011, noted that “the ICT sector is the fastest and most robust sector of the Nigerian economy, contributing more than the manufacturing, banking and solid minerals sectors combined”.
Despite the important place telecommunication industry is playing in nation’s economy both in developed and developing countries corporate governance of the sector as it relates to their financial performance has been ignored by researchers. Even in the developed economies such research has been very scarce in literature. This study therefore aims at opening up such research in this fast growing industry. The critical role of corporate governance in the success or failure of companies is not in doubt.
In recognition of this the issues of corporate governance has been given the front burner status by all sectors of the economy in Nigeria. To do this, regulating bodies had been set up for all public and private sectors to regulate and monitor their corporate governances. In Nigeria, Telecommunication Commission (NCC) was set up to regulate the activities of the telecommunication sector.
In Nigeria we have few studies on corporate governance mechanisms and their impact on firm’s financial performance specifically in banking, manufacturing, stock market and other sectors; among them are the studies of Mukaila and Garba (2005), Ogechie (2006) and Ranti (2013). Even at that most of the studies have focused on a single or two aspects of governance like the role of directors on stock value, omitting other factors of interactions that may be important within the governance framework.
This study plans to use both external and internal determinant factors in corporate governance mechanism as the proxies. The external factors are the outside directors called independent members, institutional shareholders and external auditors. The internal factors are the board size and the percentage shareholding of the directors. This is by working at the cross-relationship of internal and external aspects of corporate governance structures. It also aims at using all the active firms in the sector to enable it get all the aspects of the firms. Further, in order to address the deficiencies in the various prior studies, the study will use the mean of the summation of Return on Asset and Return on Investment. This is unified measurement tool for operational efficiency as narrated by Lyndsat, (2014). It also aims at using long period of annual report data (10 years) for higher efficacy in research rather than the usual three years in prior studies. Through the study the level of the code compliance by the industry could also be revealed.
1.2 Statement of the Problem
Global events concerning high-profile corporate failures or scandals have put back on the policy agenda and intensified debate on the impact of corporate governance mechanism as a means of increasing firm performance (Sanda, Mukailu and Garba, 2005). Cases of corporate mismanagement have generated increasing attention to corporate governance. The high profile scandal involving gross abuse of power and authority in corporate organizations has led to corporate failures and large scale crimes (David and Yakubu, 2009). This study intends to conduct a research into what is obtaining in the Nigerian telecommunication sector’s corporate governance.
Business confidence usually suffers each time a corporate entity collapses. Most of the business failures in the recent past were attributed to failure in corporate governance practices, for instance, the collapse of banks and insurance companies in the early 1990’s and onwards was as a result of inadequate corporate governance practices such as insider-related credit abuses, poor risk management and internal control system failure (Ogidefa, 2005).
In view of the above, according to Ranti (2013), there has been an increase of government scrutiny of publicly owned companies of fiduciary mismanagement and ethical misconducts in corporate organizations as a result of which corporate governance is now recognized as the most important issue that organizations have to carefully plan and address. On the other hand, economic competitiveness of firms (whether private or public) are found to depend on the set of principles and practices that are put in place to assure that all stakeholders’ investments are being managed effectively with appropriate probity (Ranti, 2013). There are various governance mechanisms that are used by various companies and which reflect on the performance level of their companies. This study proposes to use wide range of types of mechanism tools to determine the impact of these various tools on the level of the financial performance of the companies.
Therefore, there have been series of studies on the effect/impact of Corporate Governance mechanism on the performances of companies both public and private. The argument of whether each of the mechanism can influence the performance of the companies is inconclusive (Gulant, 2012). For example while ASX (2003) agrees with few board size, Kiel and Nicholson (2003) argued for reasonably large size to cater for skills/experience expertise especially for market base performance. Many authors have agreed in line with each of the two versions. Each of the mechanism proxies has been subjected to this type of arguments. For example, while John and Senbet (1998), were in support of higher ratio of outside board member for firm performanc Bhagat and Black (2000) reported negative relationship.
Fabian 2014) stated that the relevance of telecommunication in the economic system and the nature of the telecommunications business make the problems involved in Corporate Governance of the industry highly specific as are the mechanisms available to deal with such problems. He added that the complexity of the telecommunication business increases the asymmetry of information and diminishes stakeholders’ capacity to monitor telecommunication manager decisions. Telecommunications are a key element in the intra- industries economic system and play a major role in the functioning of the entire economic systems. For these reasons telecommunication firms are subject to more intense regulation, which represents several challenges on the field of corporate governance than many other industries; as they are responsible for safeguarding the interconnections of the other industries. This is why there needs to be some studies on what is obtaining in corporate governance of telecommunication companies in Nigeria. There are two issues missing in the literature of corporate governance and firms’ performance in past empirical reviews. First, using telecommunication sector for case study and secondly measuring performance using financial performance tools. Specifically therefore, this study intends to fill the gap by measuring the impact of corporate governance on the financial performance of telecommunication sector.
1.3 Research Questions
Given the overall objectives of examining the relationship between corporate governance mechanisms and telecommunications firm financial performance in Nigeria, this study has five specific questions. In particular the study should answer the following questions:
- What is the relationship between the amount of Board members’ shareholding and the financial performance of telecommunication companies?
- What influence does the composition of board members have on the performance of telecommunication companies in Nigeria?
- What influence does the board size have on the financial performance of telecommunication companies in Nigeria?
- What influence does institutional shareholders have on the performance of telecommunication companies?
- What influence does the compositions of Audit committee have on the performance of telecommunication companies?
1.4 Objectives of the Study
Generally, Nigerian telecommunication companies are characterized by the development of their governance systems, which is a deregulation system that has paved way for private organisation. This research therefore, intends to highlight the structure that is, mechanism of Corporate Governance in telecommunication industries and find out the impact of the Corporate Governance mechanism and the performance of the companies. Specifically, there will be empirical studies on the effect of ownership structure of the board members, the composition of the Board of the Directors (executive against non-executive), the Board Size, influence of institutional shareholders and influence of external auditors on the financial performance of telecommunication organizations.
Giang (2010) claims that the central issue that emerges is that the relationship between players in decision making process and their structure is critical for organizational performance. Once the concept of relationships is brought into the governance-performance equation, the perception of what good governance is and what to look for to enhance performance changes.
The research therefore investigated the influence of corporate governance mechanisms on the performance of telecommunication industry in Nigeria. Basically the government has engaged in deregulation of telecommunication business in order to refocus public enterprises for improved performance, viability and overall efficiency through private ownership structure and corporate governance. Thus it is believed that the ownership structure which provides external regulatory and supervisory mechanisms as well as the internal governance characteristics of telecom firms have very important roles to play in monitoring and controlling the firms to success.
Therefore, the study sought to;
- Assess the impact of Board Directors’ amount of shareholding on the performance of telecommunication companies.
- Ascertain the influence of Board Composition on the performance of telecommunication companies in Nigeria.
- Investigate if the contribution of Board Size being used has influenced the performance of the telecommunication companies.
- Assess if institutional shareholding (amount of shares held by outside companies) has influence on the performance of the telecommunication companies.
- Examine whether composition of the Audit Committee (i.e. the number of outside members otherwise called independent members) has influence on the performance of the telecommunication companies in Nigeria.
1.5 Research Hypotheses
In line with the research objectives the null hypotheses that were tested in this study were as well divided into five as follows:
- Ho1: There is no significant relationship between the amount of Board members’ shareholding and firm performance.
- Ho2: The composition of the Board members has no significant influence on the performance of the firm.
- Ho3: The sizes of the Board of Directors have no significant influence on the performance of the organization.
- Ho4: There is no significant influence between the rate of outside companies’ shareholding and firm performance in telecommunication industry.
- Ho5: The composition of Audit committee has no significant influence on the performance of the firm.
1.6 Significance of the Study
The results vis-a-vis the recommendations of the study shall be useful to the scholars, the shareholders, potential ones, the companies, the government through NCC and the Corporate Board.
- It is hoped that the evidence from this research would serve as important qualitative information into the large convergence of policy as well as add to the existing body of empirical literature from a rapidly developing telecommunication such as that of Nigeria. Readers and scholars will benefit from this point, since this study seems to be its first type, measuring the performance of telecommunication through its corporate governance mechanism and practices. It is also expected that the proposed research will therefore add some knowledge of cooperate governance of telecommunication industry in Nigeria and stimulate other research interest among academics, scholar and students. This study would also contribute to the current debate on what should be the most viable Corporate Governance mechanisms that can sustain the telecommunication business. The finding will benefit the telecommunication companies.
- The need for a study of this kind is even more important in an environment like Nigeria’s, which is characterized by growing calls for effective corporate governance, particularly for private limited liability companies. This call is understandable in view of the importance of effective governance at both micro-economic and economy wide levels. This will be useful to the Corporate Affairs Commission when it assesses the effectiveness or otherwise of corporate governance in telecommunication industry.
- The suggestions from this thesis on better corporate governance mechanisms will assist the firms in the sector to imbibe and grow up the telecommunication business in Nigeria. This is because the firms can see which of the corporate governance mechanisms should be maintained and which ones should be adjusted.
- This study would therefore, contribute to the current debate on what should be the most viable Corporate Governance mechanisms that can sustain the telecommunication business. The finding will therefore benefit the telecommunication companies.
- Recent evidence in the work of Klapper and Love (2002) suggests that firm-level corporate governance provisions matter more in countries with weak legal or regulatory environments, like in Nigeria; implying that firm can partially compensate for ineffective laws and enforcement by establishing good Corporate Governance and providing credible investor protection. This research work can therefore serve as an evaluation of corporate Governance in telecommunication sector and be useful to the companies for taking corrective measures on faulty areas if any.
- The study when completed should be a good guide to the selected telecommunication companies that were used for performance analysis. It would provide a mirror to the companies from where they could view themselves.
- The study results would be viewed by the shareholders of the selected firms as performance rate of their firms’ corporate governance. It would also be useful as a guide to potential investors as they will be able to see the firms that are doing well in terms of their corporate governance and those that are not doing well. They can then choose to invest in the firms that are doing well.
- The reports and recommendations of this study should serve as evidences of findings and suggestions to the National Communication Commission (NCC) which could provide some guidelines as telecommunication operators’ regulatory tools.
1.7 Scope of the Study
Nigeria telecommunication system started over a century ago. It had gone through various government policies both before and after the independence. The acquisition of equipment involved a transformation process, starting from the old analogue oriented ones to the modern digital ones and the emergence of high technologies. This study will cover the latest aspect of the telecommunication development, specifically between years 2004 and 2013. The area of coverage is on the corporate governance mechanism and how it has impacted on the financial performance of telecommunication in Nigeria. The major and popular dependent variables that are always used for financial performance by researchers are the Return On Asset ( ROA), which is calculated by dividing the Profit After Tax by the Total Assets that are used for business; and Return On Investment (ROI), which is calculated by dividing Profit After Tax by the Total Value of Equity of the Company (Megginson, 1995). This thesis will use the Mean of ROA and ROE as unified dependent variable for companies’ operating efficiency. This is obtained by adding ROA and ROE and divide by 2. Efficiency ratio can help a company to determine whether the business is squeezing every dollar from operation or not (Richard, 2015).
Chapter Five
Summary of Finding, Conclusion and Recommendations
5.1 Introduction
This chapter brought out the discussion on the attainment of the objective set out for this study in chapter one. It epitomises the findings or answers to both the question and objectives vis-à-vis the predictions (hypotheses) of the study. The chapter is divided into five parts. 6.1 introduces the chapter, 6.2 summarises the findings, 6.3 empahasises the conclusion of the study. 6.4 stated the recommendations which are totally based on the findings of the study. Finally the 6.6 stated the contribution of this study to knowledge and laid out some suggestions for further study.
5.2 Summary of Findings
This study has examined the influence of five various corporate governance mechanisms on the financial performance of the active telecommunication companies between years 2004 and 2013. The proxies used for the corporate governance mechanisms are the managerial shareholding, the Board composition, the Board size, institutional shareholding and audit committee. The proxy used for financial performance was the mean value of return on asset and return on equity. The study used secondary data obtained from the companies websites and companies headquarters. Other related information were obtained from the Nigeria communication Commission (NCC). Estimated regression models were used to find out whether the various corporate governance mechanisms could have influence on financial performance of telecommunication companies. The findings of this study are that:
- Managerial shareholding (MS) has significant positive influence on financial performance of telecommunication companies in Nigeria;
- Board composition (BC) has no significant influences on the financial performance of telecommunication companies in Nigeria;
- Board size (BS) has significant negative influence on financial performance of telecommunication companies in Nigeria;
- Institutional shareholdings (IS) has significantly negative impacted on the financial performance of telecommunication companies in Nigeria; and
- The composition of audit committee (AC) has significant negative effect on financial performance of telecommunication companies in Nigeria.
5.3 Conclusion
From the finding above this study concludes that:
- Managerial shareholding (MS) has significant positive influence on financial performance of telecommunication companies in Nigeria. This mean that the higher rate of the managerial shareholdings the more would be their efforts to get their companies to financial success. If their ratio of shareholding is high this would motivate them to work vigorously for the benefit of their companies.
- The Board composition (BC) has no significant influences on the financial performance of telecommunication companies in Nigeria. This means that the composition of outsiders as board members have no impact on companies’ performances.
- That board size (BS) has significant negative influence on financial performance of telecommunication companies in Nigeria. This implies that board size has no significant impact on Telecommunication Company’s performance in Nigeria. This mean that large board size or low have no influence on telecommunication performance.
- That institutional shareholdings (IS) have significantly depressed impacted on the financial performance of telecommunication companies in Nigeria. This means that the holding of shares by a corporate entity has the tendency to reduce the performance of a company in the telecommunication sector in Nigeria.
- That Audit committee composition has negatively and significantly influenced the financial performance of telecommunication companies. It has proved that Audit committee that has high members of outsider (independent) members have higher tendency of performing lower than companies with high proportion of outside auditors.
5.4 Recommendations
- The telecommunication companies should continue to encourage their managers to buy more shares. It is found that it leads to high performance of the companies and this increases the value of the company which in turn promotes their own wealth too. It is recommended that if board members hold more equity shares the performance of the firm will increase. However, the management of the company should take into account the fact that there is a threshold of the ratio of shareholding that maximizes the firm performances. Increasing managerial shareholding must not exceed this level. The threshold varies from one industry to another, depending on certain factors. Management should not exceed this threshold.
- The composition of the Board members has no influence on companies’ performances in the telecommunication sector. This may be probably so because board members composition in the telecommunication may be optimal. This study therefore recommends that board composition in the sector be maintained.
- Since board size (BS) has significant negative influence on financial performance of telecommunication companies in Nigeria, companies in the sector are advised to reduce their board size to maximize the benefit from this service. However management of the companies needs to be aware that the optimal sizes for board members exist which they must not reduced the board size. If the reduction optimal size is lie below, it can lead the board members depressing company’s performances.
- Since institutional shareholding shareholdings have negative significant influence on firm performance firms seeking for buyers of share should not lay too much emphasis on institutions to buy their shares but should sell to any willing buyer. The reason is that the sell to institutions have no significant advantage.
- Finally, the composition of audit committee (AC) has significant negative effect on financial performance of telecommunication companies in Nigeria. This means that the presently constituted proportion of external audit to the internal audit should be reduced and this can improve performance.
5.5 Contribution to Knowledge and Suggestion for Further Studies
a) Contribution to Knowledge:
- This seems to be the first study that would use telecommunication industry as the case study for research on corporate governance mechanism and firm performance. As the fastest growing industry in Nigeria, the case of their corporate governance needs to be brought to this type of study.
- The available studies on telecommunication had been those outside Nigeria and performance measurement had been qualitative rather than the qualitative that this one adopted.
- Most past studies had used not more than 3 years in the course of measurement on number of years. We chose 10 years in this study. This is to enhance the efficacy of the study results.
- To the best of the reasercher’s knowledge there is no research on Corporate Governance and firm Performance that used the MEAN of the major performance tools (ROA & ROE). The mean of these tools as our Dependent Variable captures a unified comprehensive performance result, this could be an innovation of this study.
b) Suggested Area for Further Study
There is limitation to the coverage anybody can contain. In this wise we suggest that the following areas should be researched into:
- Measuring the effect of corporate governance in telecommunication industry on the qualitative performance using their corporate responsibility.
- Corporate governance role on performance of other sectors like education both public and private, agriculture etc.
- Research is needed on the quality of Board members. This will bring out the behavioural aspects of board members, the qualification and experience.
- Other studies on telecommunication companies using other corporate governance proxies that are not covered in this study but reported in the study literature.


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