Effects Of Board Nationality And Ethnic Diversity On The Financial Performance Of Listed Firms In Nigeria

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Effects Of Board Nationality And Ethnic Diversity On The Financial Performance Of Listed Firms In Nigeria


Abstract


This study is on effects of board nationality and ethnic diversity on the financial performance of listed firms in Nigeria. The total population for the study is 100 staff of NSE and 100 staff of Dangote group of company, Lagos state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up data support officers, risk officers, administrative staffs and directors were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies


Chapter One


Introduction

1.1 Background of the Study

Board diversity in corporate governance structure is beginning to be of growing importance when it comes to the interest of shareholders and firm performance nowadays. With evidence shown from notable studies from, (Erhardt, Werbek & Shrader, 2003; Lee & Far, 2004; Bergen & Massey, 2005; Robertson & parker, 2007: Adams and Ferreira, 2007; Harris and Raviv, 2008; Ferreira, 2010). Recently, scholars like: (Marimuthu, 2011; Darmadi, 2011; Omoye, Alade, & Eriki, 2013; Cimerovaa, Dodda, & Frijnsa, 2014), and much more have also investigated board diversity and its effects to an entity. There is an accelerated focus on the study of board composition: board independence; board size and board diversity, (Carter, Simikins & Simpson, 2003; Erhardt, Werbek & Shrader, 2003; Garba & Abubakar, 2014 & Heyvon, 2014). The promotion of diversity in the board has been a frequent subject of recent in literature due to the potential benefits from having a wealth of different individual quality and experience on in a single board. Hambick & Mason, (1984), observed that management heterogeneity has a greater tendency to bring about quality decision making. Similarly, with Hambick and Mason, Other studies such as that of Wiersema & Bantel (1992); Watson, Kumar, & Michaelsen, (1993); Cox, (1993) has also spelt out the importance of corporate board diversity. The work of Adams & Ferreira, (2009) in particular highlighted the potential benefits of corporate board diversity to a firm as it brings about: Creativity, variety of views and perspectives; more resource accessibility and more connections; Public relations, legitimacy and investor relations and finally career incentives through mentoring and signaling. Carter, D’souza, Simkins, & Simpson (2007) looked into Fortune 500 board narrowing their scope by using gender and racial diversity between the year 1998-2002 and they observed that gender and racial diversity have positive effects on firms’ performance. However, various forms of diversity, such as race, sex, age, and ethnicity could result in tension, conflict, and hinder corporation and affect communication thereby reducing firm’s performance. This satisfies the definition of Ferreira, (2010) that a corporate board of a firm is viewed as the composition of separate individuals who are controlled by different bias and varying preconceived notions and are affected by social constraint & power relation. Diversity in culture is the representation of people of distinct groups of affiliation in one social system, Cox, (1993). These definitions have been reflective in the empirical work of Darmadi (2011) who investigated listed firms in Indonesia stock exchange between the diversity of the board and financial performance of the firms. In his study, he selected three elements of diversity which are gender, nationality, and age, using 169 listed firms and discovered that there was no influence of diversity on firm’s performance. Also, Cultural Heterogeneity may have also resulted in conflicts which have enhanced the performance of an organization; it is linked positively with better problem-solving options, Omoye, Alade, & Eriki (2013).


1.2 Statement of the Problem

Several countries such as Norway (since 2006, 40% of the board are female), Spain, Iceland, France, Singapore and Malaysia (30% of the board are female) have succeeded in passing a regulation for a specific quota of female in board, Adam & Ferreira, (2009); Ahern & Dittmer, (2012); Heyvon, (2014), of which many countries are yet to implement their percentage quota. Nevertheless, certain aspects of diversity (apart from gender) such as ethnic, racial, education, Industrial background seem neglected in determining board composition. The central thought should be, is there a perfect prescription as pertaining to the diversity in corporate board? Authors such as Metz & Harzing, (2009); Marimuthu & Kolandaisamy, (2009); Matlala, (2011); have laid emphasis on the importance of female directors and their positive effect on performance and earnings. The term board diversity cuts across so many variables such as age, race, gender, culture, religion, the level of education and background experience Swartz & Firer, (2005); Ferreira (2010); Kulkarni, (2012).In view against corporate failures in all over the world, countries have been taking critical steps to ensure prevention of future occurrences, and one of such measure is diversity in board of corporate firms. These steps/measures were taken to strengthen corporate governance in firms, especially those listed. One of such actions was CEO duality brought into recognition, separating the role of a chairman from that of a typical CEO. The separation of the responsibilities of CEO from Chairman of a board, executives, non-executive, and independent non-executive directors are forms of diversity. Walker, (2007) review was based on board size and Composition in FTSE 100 and UK banks and a prescribed 50% independent directors rule was proposed.


1.3 Objective of the Study

The objectives of the study are;

  1. Determine the influence of ethnic diversity on firms’ performance.
  2. Ascertain whether the presence of foreign directors affects firm’s performance.
  3. To ascertain the relationship between board nationality and ethnic diversity on the financial performance of listed forms

1.4 Research Hypotheses

Hypothesis 1
  • H0: Ethnic diversity has no significant effect on firms’ performance
  • H1: Ethnic diversity has significant effect on firms’ performance
Hypothesis 11
  • H0: The presence of foreign directors has no significant influence on firms’ performance
  • H1: The presence of foreign directors has significant influence on firms’ performance

1.5 Significance of the Study

This study firstly tries to explain the possible influence of board nationality, size and ethnic diversity on the performance of a firm. The performance of a firm is critical to its eventual health and life span. Two key contributions are made in this study. Firstly, we make contributions to the 8 culture and finance literature by providing bedrock can be used as a base in the assessment of the impact of Nationality and ethnicity within a board of a firm. Second, we contribute to the literature on board diversity (which has predominantly focused on board independence and gender diversity) by introducing cultural diversity in the form of ethnic diversity, a thus-far overlooked aspect of board diversity. Thus far, the lens through which boards of directors have been viewed is board size and proportion of independent directors (Coles et al., 2007; Dennis and Sarin, 1999; Anderson et al., 2000). Potential users of this research, such as shareholders, students, researchers, management and board of sampled firms would be able, to observe trends based on the effects of each of the independent variables (board nationality, board ethnic diversity) on the dependent variable firms’ performance. This will be able to influence the BOD and shareholders’ decisions on future director appointments in firms, of which could benefit the interest of shareholders. Lastly, this study would help improve corporate governance in firms and will help push researchers into future investigations


1.6 Scope and Limitation of the Study

The scope of the study covers effects of board nationality and ethnic diversity on the financial performance of listed firms in Nigeria. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.


1.7 Definition of Terms

Agent:

An individual put in charge of a particular venture, business, undertaking and property, to represent the owner in management, maintenance and is expected to make accounts to the owner for activities/occurrences (positive or negative) affecting such property transparently. Unlike stewards, this individual is assumed to usually make action to feed his/her personal interest rather than that of the owner. Agency theory: This theory makes the assumption of a conflicting relationship that exist between the principal and agent, where the agent has more knowledge of the business than the principal. Agency theory identifies the conflicting interest between both parties and seeks to solve them. Board: A composition of directors both executive and non-executive of firm.

Board Diversity:

The composition of board members of a firm with a different background, gender, race, culture, work experience, age, education, and skill composition.

Board Nationality:

Existence of members of board from various nations in a corporate board. This is the ratio of foreign board members to total board size. The potential advantages of foreign board membership have received serious attention in corporate governance studies globally Board size: Number of board members of a corporate board, which includes directors both executive and non-executive of the firm.


Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain effects of board nationality and ethnic diversity on the financial performance of listed firms in Nigeria

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of board nationality and ethnic diversity on the financial performance of listed firms in Nigeria


5.2 Summary

This study was on effects of board nationality and ethnic diversity on the financial performance of listed firms in Nigeria. Three objectives were raised which included: Determine the influence of ethnic diversity on firms’ performance, ascertain whether the presence of foreign directors affects firm’s performance, to ascertain the relationship between board nationality and ethnic diversity on the financial performance of listed forms. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 100 staff of NSE and 100 staff of Dangote group of company, Lagos state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up data support officers, risk officers, administrative staffs and directors were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies


5.3 Conclusion

This study examined the effect of ethnic and national diversity (board diversity) in the board of a firm in the firm’s financial performance. We made use of financial performance measures rather than general performance measure. The result showed an insignificant relationship between ethnic and financial performance, and also showed an insignificant relationship between 77 national diversity financial performances. The result derived using all the three financial measures have no significant relationship with ethnic and national diversity. These imply that both national and ethnic diversity has no effect on the firm’s performance regardless of the number of foreign directors present at a board and also regardless of the level of ethnic diversity present in a board. Hence, when there is more foreign content and when there is a more diverse and balanced representation of the major ethnic groups on the board, the firm financial performance is not influenced towards an increase or decrease.


5.4 Recommendation

Based on the results obtain from this study, we deduce that ethnic diversity and national diversity showed no significant influence on the financial performance. This result was based on the financial measurement variables that were used for the analysis and other factors that could have influenced the result as stated in the limitation to study above. The obvious implication of this study is that regardless of the presence of board diversity in terms of nationality and ethnicity, there will be no difference or change when it comes to the financial performance of a firm. In addition, this study has made recommendations based on the importance of two factors: The overall strength in the corporate governance (anchored on agency, stewardship and social identity theory, emphatic on interest of shareholders and board) of a firm and firm’s profitability-growth factor (anchored on stakeholders and resource dependency theory emphatic on resource for expansion and satisfaction of business community).


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