The Effect Of Corporate Governance Policies And Practices On The Financial Performance Of Big Corporation

The Effect Of Corporate Governance Policies And Practices On The Financial Performance Of Big Corporation

Abstract

The study was carried out to examine the effect of corporate governance policies and practices on the financial performance of big corporations using Nigeria Stock Exchange as a case study. The specific objectives of the study included; to determine the effect of board size on financial performance of NSE, establish the influence of CEO duality on financial performance of NSE and to evaluate the effect of board composition on financial performance of NSE. This study adopted a correlational research design. The study target population was the NSE list. The data was sourced from the listed firms’ published annual statements and NSE bulletin for the period 2010 to 2014. The data was both quantitative and qualitative secondary data. In analyzing quantitative data, the study used descriptive statistics while qualitative data was analyzed using content analysis. In addition, multiple regressions were used to determine the significance of each independent variable in affecting the financial performance of the said firms. From the study findings, financial performance as measured using ROA constantly significantly increased over the study period. The average board size increased as follows; from four to nine over the five-year period which was a transformation of the firms from small to large board sizes. The listed firms had large board sizes which were beneficial for their corporate performance because they have diverse expertise to help make better decisions, and are harder for their powerful CEOs to dominate. The trend of CEO duality among the twelve NSE reduced over the five years. The reducing number of firms with CEO duality allowed for separation of power and functions between their chairmen of the board, a non- executive director and their CEOs their executive directors while it increased accountability. The number of non-executive directors was significantly higher than executive directors over the five-year period which ensured board independence in character, judgment and action in the management of the NSE. The regression analysis established that board composition contributes most to the financial performance of NSE.

Table of Content

• Title Page
• Certification
• Dedication
• Acknowledgement
• Table of Content
• List of Tables
• Abstract

Chapter One:

Introduction

• 1.1 Background of the Study
• 1.2 Statement of the Problem
• 1.3 Objective of the Study
• 1.4 Research Questions
• 1.5 Research Hypothesis
• 1.6 Significance of the Study
• 1.7 Scope of the Study
• 1.8 Limitation of the Study
• 1.9 Definition of Terms
• 1.10 Organisations of the Study

Chapter Two:

Review of Literature

• 2.1 Conceptual Framework
• 2.2 Theoretical Framework
• 2.3 Empirical Review

Chapter Three:

Research Methodology

• 3.1 Research Design
• 3.2 Population of the Study
• 3.3 Sample Size Determination
• 3.4 Sample Size Selection Technique and Procedure
• 3.5 Research Instrument and Administration
• 3.6 Method of Data Collection
• 3.7 Method of Data Analysis
• 3.8 Validity of the Study
• 3.9 Reliability of the Study
• 3.10 Ethical Consideration

Chapter Four:

Data Presentation and Analysis

• 4.1 Data Presentation
• 4.2 Analysis of Data
• 4.3 Answering Research Questions
• 4.4 Test of Hypotheses

Chapter Five:

Summary, Conclusion and Recommendation

• 5.1 Summary
• 5.2 Conclusion
• 5.3 Recommendation
• References
• APPENDIX
• QUESTIONNAIRE

Chapter One

Introduction

1.1 Background of the Study

The incessant scandals, crises and wreckage of organizations around the world are so alarming that the global financial market has been greatly destabilized and the growth of economies impeded. Notable organizations such as Arthur Anderson, Enron, Kmart, Adelphia Communications, and WorldCom area few of the numerous international organizations that have collapsed as a result of the heightened crises. The sustained crises have not left Nigeria out of the whole saga. It affected companies such as Intercontinental bank, Oceanic bank, Cadbury etc., thereby contributing to the downturn of the economy. With all of these, companies’ sustainability has become an issue in determining the survival and continued growth of a country (Apodore & Zainol, 2014).

The priority of any organization is to effectively, efficiently and ethically manage the company for profitable long term growth and perpetual existence; the policies and practices of management must also align with the interest of shareholders and other stakeholders. Thus, the development of good corporate governance is essential in order to protect corporate stakeholders, and maintain factors for control and prevention of collapse and long lasting economic depression.

In the achievement of the business objectives, corporate governance is a major factor and it is concerned with the relationships that exist among firms’ management, board of directors, shareholders and other stakeholders. Osundina, Olayinka and Chukwuma (2016) emphasized that corporate governance is a non-financial factor that affects the performance of companies and increases accessibility of external finance that brings sustainable economic growth. Weak corporate governance may manifest in form of non-accountability and transparency to stakeholders, bribery scandals, violation of the rights of the minority shareholders, official recklessness among the managers and directors, weak internal control system, insider abuses and fraudulent practices (Olumuyiwa & Babalola, 2012). Also, non – distinction between ownership and control of organization has been identified to be a major reason for weak corporate governance. The shareholders, who are the principals in an agency relationship delegate control to directors and managers who are the agents to enhance smooth and efficient flow of operations. In most cases, the directors/ managers act for their own self-interest without regard for shareholders’ returns on investment. This leads to conflicts between both parties; this is regarded as agency conflict which has a consequent loss. This is evident from the reasons for the collapse, in Nigeria, in 2009/ 2010, of some listed companies especially the eight (8) Universal banks which resulted in a loss of over N1.2 trillion shareholders’ funds, as reported by Famogbiele (2012). Therefore, it is necessary for the board to uphold transparency and fairness to shareholders and other stakeholders to abate agency cost which has a consequent negative effect on the corporate performance. With respect to the above, this study seek to examine the effect of corporate governance policies and practices on the financial performance of big corporations.

1.2 Statement of the Problem

It is disheartening to note that no specific study has been undertaken on the impact of corporate governance policies and practices on the financial performance of large organizations. In Nigeria, despite tight regulatory framework, Corporate Governance practices continues to weaken in organizations (Mang’unyi, 2011). According to Muriithi, (2009), many companies have been characterized by scandals. Directors have acted illegally or in bad faith towards their shareholders. For instance, the Insurance Regulatory Authority identified poor corporate governance practices in insurance companies as one of the threats to achieving its strategic plans. It is possible to attribute their collapse to corporate governance practices in the financial industry. Much needs to be done to sort out this mess otherwise we are likely to see more corporate failures and malfunctions. Though there has been renewed interest in corporate governance policies and practices, relevant data from empirical studies are still few. There are therefore limitations in the depth of our understanding of Corporate Governance issues. Consequently, the financial performance of firms in this mess might be compromised. Based on the aforementioned, this study aims at examining the effect of corporate governance policies and practices on the financial performance of big corporation.

1.3 Objectives of the Study

The general aim of this study is to examine the effect of corporate governance policies and practices on the financial performance of big corporation.

Specifically, this study will;

1. Determine the effect of board size on financial performance of big corporations.
2. Ascertain whether CEO duality has an influence on the financial performance of big corporation.
3. Evaluate the effect of board composition on financial performance of big corporation.

1.4 Research Questions

The study will be guided by the following questions;

1. What is the effect of board size on financial performance of big corporations?
2. Does CEO duality has an influence on the financial performance of big corporation?
3. What is the effect of board composition on financial performance of big corporation?

1.5 Research Hypotheses

Ho1: Board size has no significant effect on financial performance of big corporations.

Ho2: CEO duality has no influence on the financial performance of big corporations.

Ho3: Board composition has no significant effect on financial performance of big corporations.

1.6 Significance of the Study

To the management

The study findings will be useful to the management of corporations in establishing whether corporate governance practices being implemented improve their financial performance and if so to what extent. The managers of corporations that wish to implement corporate governance practices may find the study findings useful as the study findings provides insights into the best practices in corporate governance for enhancing the financial performance, thus, influencing their decision making.

To the Policy Makers

The study findings will be useful to the government agencies regulating the corporations towards formulating relevant corporate governance policies and acts that guide corporate governance implementation in Nigeria. The government agencies like Capital Markets Authority of Nigeria may gain useful information that may be useful in designing new policies in corporate governance to drive the corporation sector to the next level since the existing ones could be obsolete.

To the Scholars and Researchers

The study findings may provide valuable information to scholars and researcher in corporate governance and its effect on firm financial performance. It forms the basis of future research thus contributing to the existing body of knowledge by filling in the knowledge gap on corporate governance and its effect on the financial performance.

1.7 Scope of the Study

The study focused on the effect of corporate governance policies and practices on the financial performance of big corporations. Based on the nature this study, variables including board size, CEO duality, and board composition will be used represent corporate governance policies and practices and will further be used to determine the financial performance of the selected corporations. Data will be obtained from NSE and the annual report of the selected firms.

1.8 Limitation of the Study

Like in every human endeavour, the researchers encountered slight constraints while carrying out the study. The significant constraint was the scanty literature on the subject owing to the nature of the discourse thus the researcher incurred more financial expenses and much time was required in sourcing for the relevant materials, literature, or information and in the process of data collection.

1.9 Definition of Terms

Board independence:

This refers to board of directors’ majority of who are outsiders with limited influence on the top management of the firm to reduce conflict of interest and to provide prudent supervision (Zhang, 2011).

Board Composition:

This refers to executive and non-executive director representation on the board (Ren, Y. 2014).

Board Size:

This refers to the number of directors that make up the board of directors in a given company (Wan and Ong, 2015).

CEO duality:

This refers to the company CEO also holding the position of the chairperson in the board of directors
Corporate governance: This refers to set of laws, regulations and accepted business practices, which together govern the relationship, in a market economy, between corporate managers and entrepreneurs (corporate insiders) on one hand, and those who invest resources in corporations, on the other

Financial Performance:

This refers to process of measuring the results of a firm’s policies and operations in monetary terms over a given period of time (Pfeffer, 2012).

Ownership Structure:

This is defined by the distribution of equity with regard to votes and capital but also by the identity of the equity owners both inside and outside owners.

1.10 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows.

1. Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
2. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
3. Chapter three deals on the research design and methodology adopted in the study.
4. Chapter four concentrate on the data collection and analysis and presentation of finding.
5. Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary, Conclusions and Recommendations:

5.1 Introduction

This chapter presents the summary, discussion, conclusions and recommendations of the study on the effect of corporate governance policies and practices on the financial performance of big corporations.

5.2 Summary of the Study

The study established that ROA values constantly increased from 0.082 in 2010 to 0.18 in 2014 which was a significant increase in the firm’s financial performance. The positive financial performance of NSE companies could be attributed to the application of corporate governance practices. With regard to board size of NSE companies, the study established that the average board size was as follows; 2010 (4), 2011 (5), 2012 (6), 2013 (7) and 2014 (9) respectively. This was a 125% transformation of the firms from small (4) to large (9) board sizes over the study period of 2012 to 2016. The twelve NSE companieshave large board sizes which is critical in their management given their large firm sizes. Their large board sizes were beneficial for their corporate performance because they have diverse expertise to help make better decisions, and are harder for their powerful CEOs to dominate. This larger board enabled them inclusion of more diverse board members bring different areas of technical expertise which boosts firm financial performance by transcending challenging market forces. Therefore, the large board size for NSE companies significantly enhanced their financial performance over the last five years (2010-2014). The study further established that NSE companies enjoys diversity in its board technical expertise which formed their key foundations for introducing different perspectives into board debates but also offers better anticipation of the risks inherent in the opportunities that the firm pursue towards building a long-term and sustainable financial performance.

The study further identified that the trend of CEO duality among the twelve NSE companiesreduced over the five years with firms with CEO duality decreasing as follows; 2010 (4), 2011 (3), 2012 (2), 2013 (1) and 2014 (0). The reducing number of firms with CEO duality as a corporate governance practice allowed for separation of functions between their chairmen of the board, a non- executive director and their CEOs their executive directors. This separation of powers ensured independence of the board and management, and balance of power. Similarly, it increased accountability, clear definition of responsibilities and improved decision making which was attained through a clear distinction between the non-executive and executive roles. The chairman’s responsibilities among others included; leadership and governance of the board, ensuring board effectiveness and setting board agenda. On the other hand, the CEOs roles and responsibilities among others included; the day-to-day management of the company’s business and overseeing the implementation of corporate strategy and policies approved by the board. Therefore, reduction in CEO duality among NSE significantly contributes towards the improved financial performance over the five years between 2010 and 2014.

In terms of board composition, the study established that the average number of executive directors for the twelve NSE over the five-year period changed from 2 to 3 directors only. On the other hand, the average number of non-executive directors for the twelve NSE over the five-year period significantly increased from 2 to 5 directors. Therefore, on average, the number of non-executive directors was significantly higher than executive directors over the five-year period. The NSE had more non-executive directors than the executive directors. This high proportion of non-executive directors ensured board independence in character, judgment and action in the management of the NSE. Their boards have a majority of non-executive directors, who provide superior performance due to their independence from firm management. The NSE boards with a majority of non-executive directors offer checks and balances to protect the interests of shareholders. The higher proportion of independent non-executive directors also increased board effectiveness in monitoring managerial opportunism and consequently, increased voluntary disclosures, hence increased financial performance of the NSE. The ripple effect of majority of non-executive directors compared to the executive directors is the continuous improvement of their financial performance over the last five years (2010-2014).

From the regression analysis, the study established that the three corporate governance practices (board size, CEO duality and board composition) studied explained 68.5% (R2) of financial performance of NSE. Taking all corporate governance practices (board composition, board size and CEO duality) under review at constant zero, financial performance will be 1.039. Similarly, taking all other independent variables at zero, a unit increase in board composition will lead to a 0.861 increase in financial performance; a unit increase in board size will lead to a 0.426 increase in financial performance while a unit decrease in CEO non-duality will lead to a 0.342 increase in financial performance. This infers that board composition as a corporate governance practice contributes most to the financial performance of NSE followed by board size and CEO duality respectively. At 5% level of significance and 95% level of confidence, the significance values for the three-corporate governance practices were as follows; board composition (0.001), board size (0.030) and CEO duality (0.042). The significance values obtained indicate that the most significant corporate governance practice influencing financial performance of NSE is board composition followed by board size and CEO duality respectively.

5.3 Discussion Of Results

Effect of Board Size on Financial Performance

The study established that NSE have a large board size which was critical in their management given their large firm size. Their large board sizes were beneficial for their corporate performance because they have diverse expertise to help make better decisions, and are harder for their powerful CEOs to dominate. These larger boards enabled them inclusion of more diverse board members bringing different areas of technical expertise which boosts firm financial performance by transcending challenging market forces.

The findings are similar to Khaled, (2014) who established that larger boards are better for corporate performance because they have a range of expertise to help make better decisions, and are harder for a powerful CEO to dominate. Similarly, Eisenberg (2008) and Jensen (2013) established that a larger board is preferable, as this enables the inclusion of more diverse board members bringing different areas of expertise; however, increased board size causes increased problems of coordination and communication, undermining board effectiveness in monitoring agents. However, the findings are contrary to Porta, et al. (2010) who argue that large boards are less effective and are easier for a CEO to control. When a board gets too big, it becomes difficult to co-ordinate and process problems. Smaller boards also reduce the possibility of free riding by individual directors, and increase their decision-making processes.

Effect of CEO duality on Financial Performance

The study established that the trend of CEO duality among the twelve NSE reduced over the five years with firms with CEO duality decreasing as follows; 2010 (4), 2011 (3), 2012 (2), 2013 (1) and 2014 (0). The reducing number of firms with CEO duality as a corporate governance practice allowed for separation of functions between their chairmen of the board, a non- executive director, their CEOs and their executive directors. This separation of powers ensured independence of the board and management, and balance of power. Similarly, it increased accountability, clear definition of responsibilities and improved decision making which was attained through a clear distinction between the non- executive and executive roles. The chairman’s responsibilities among others included; leadership and governance of the board, ensuring board effectiveness and setting board agenda. On the other hand, the CEOs roles and responsibilities among others included; the day-to-day management of the company’s business and overseeing the implementation of corporate strategy and policies approved by the board. Therefore, reduction in CEO duality among NSE significantly contributes towards the improved financial performance over the five years between 2010 and 2014.

The findings agree with earlier findings by Cadbury (2012) who believes that the role of chairman should, in principle, be separate from that of the chief executive. This is because, when the two roles are combined, it represents a considerable concentration of power within the decision-making process. The findings also resonate with Suryanarayana (2015) who indicated that another advantage of the appointment of an independent chairman is that he/she brings experience in running similar businesses or handling the functions of finance, as well as the independence, objectivity and dispassionate views needed on crucial matters. A separation of the two roles seems to be a prudent and effective means of ensuring proper focus and eliminating potential errors and conflict of interest that may arise as a result of combining the roles. However, the findings are contrary to Rechner and Dalton, K. (2013) who established that CEO duality has a strong effect on a firm’s financial performance because it paces up the decision-making process and removes unnecessary bureaucracy, hence leading to stronger financial performance.

Effect of Board Composition on Financial Performance

The study further established that the average number of executive directors for the twelve NSE listed commercial and services firms over the five-year period increased from 2 to 3 directors only. On the other hand, the average number of non-executive directors for the twelve NSE over the five-year period significantly increased from 2 to 6 directors. Therefore, on average, the number of non-executive directors was significantly higher than executive directors over the five-year period. The NSE had more non-executive directors that the executive directors. This high proportion of non- executive directors ensured board independence in character, judgment and action in the management of the NSE. Their boards have a majority of non-executive directors, who provide superior performance due to their independence from firm management. The NSE boards with a majority of non-executive directors offer checks and balances to protect the interests of shareholders. The higher proportion of independent non-executive directors also increased board effectiveness in monitoring managerial opportunism and consequently, increased voluntary disclosures, hence increased financial performance of the NSE.

The findings are similar to Bhagat and Bolton (2008) who indicated that an effective board should be comprised of a majority of non-executive directors, who are believed to provide superior performance due to their independence from firm management. Similarly, Fama and Jensen (2013) argue that a higher proportion of independent non- executive directors increases board effectiveness in monitoring managerial opportunism and, consequently, increases voluntary disclosures, hence increased financial performance of the firm.

5.4 Conclusions

Effect of Board Size on Financial Performance

The study concludes that the financial performance of NSE has significantly improved over the period of five years from 2010 to 2014. This positive financial performance of NSE could be attributed to the efficient application of corporate governance practices.

The study also concludes that there was a significant transformation of the firms from small to large board sizes over the study period of year 2012 to 2016. The NSE have large board sizes which is critical in their management given their large firm sizes. Their large board sizes were beneficial for their corporate performance because they have diverse expertise to help make better decisions, and are harder for their powerful CEOs to dominate. These larger boards enabled them inclusion of more diverse board members bringing different areas of technical expertise which boosts firm financial performance by transcending challenging market forces. Therefore, the large board size for NSE significantly enhanced their financial performance over the last five years (2012-2016). The study further established that NSE enjoys diversity in its board technical expertise which formed their key foundations for introducing different perspectives into board debates but also offers better anticipation of the risks inherent in the opportunities that the firm pursue towards building a long-term and sustainable financial performance.

Effect of CEO duality on Financial Performance

The study also concludes that the trend of CEO duality among the twelve NSE reduced over the five years study period. The reducing number of firms with CEO duality as a corporate governance practice allowed for separation of functions between their chairmen of the board, non-executive directors, their CEOs and their executive directors. This separation of powers ensured independence of the board and management, and balance of power. Similarly, it increased accountability, clear definition of responsibilities and improved decision making which was attained through a clear distinction between the non-executive and executive roles. The chairman’s responsibilities among others included; leadership and governance of the board, ensuring board effectiveness and setting board agenda. On the other hand, the CEOs roles and responsibilities among others included; the day-to-day management of the company’s business and overseeing the implementation of corporate strategy and policies approved by the board. Therefore, reduction in CEO duality among NSE listed commercial and services firms significantly contributes towards the improved financial performance over the five years between 2010 and 2014.

Effect of Board Composition on Financial Performance

In terms of board composition, the study concludes that the average number of non- executive directors was significantly higher than executive directors over the five-year period. The NSE had on average more non- executive directors than the executive directors. This high proportion of non- executive directors ensured board independence in character, judgment and action in the management of the NSE. Their boards have a majority of non-executive directors, who provide superior performance due to their independence from firm management. The NSE boards with a majority of non-executive directors offer checks and balances to protect the interests of shareholders. The higher proportion of independent non-executive directors also increased board effectiveness in monitoring managerial opportunism and consequently, increased voluntary disclosures, hence increased financial performance of the NSE. The ripple effect of majority of non-executive directors compared to the executive directors is the continuous improvement of their financial performance over the last five years (2010- 2014).

It is further concluded that the three corporate governance practices (board size, CEO non-duality and board composition) significantly and positively influenced financial performance of NSE with board composition contributing the most followed by board size and CEO duality respectively. Hence, the most significant corporate governance practice influencing financial performance of NSE is board composition followed by board size and CEO duality respectively.

5.5 Recommendations

Effect of Board Size on Financial Performance

The study established that NSE have large board sizes which are critical in their management given their large firm sizes. The study recommends that the management of NSE should constantly monitor the board size to ensure there is smooth coordination within the board, that there is no free riding by individual directors, its efficiency in decision making remains optimal and that CEO dominance is not allowed which are the challenges with large board sizes.

Effect of CEO Duality on Financial Performance

The study confirmed that among the NSE, there was reducing number of firms with CEO duality to allow for separation of functions between their chairmen of the board and CEOs. The study recommends that their management should continuously review the roles of their CEOs and the chairmen of the board to ensure both remain effective in their roles due to the ever-changing market dynamics and to safeguard shareholder value.

Effect of Board Composition on Financial Performance

The study also deduced that the average number of non-executive directors was increasingly higher than executive directors over the five-year period. The study recommends that the management of NSE should seek to ensure greater diversity of non-executive board members and continuous supervision of executive board members to reduce the risk of the company through rigorous checks and balances.

5.5 Suggestions for Further Research

It was established that the three corporate governance practices (board size, CEO non- duality and board composition) studied explained 68.5% (R2) of financial performance of NSE. The study recommends that the other corporate governance practices contributing the 31.5% of financial performance of NSE should be investigated.

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