CORPORATE GOVERNANCE AND FIRM PERFORMANCE: AN EMPIRICAL EVIDENCE FROM SELECTED LISTED COMPANIES IN NIGERIA
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CORPORATE GOVERNANCE AND FIRM PERFORMANCE: AN EMPIRICAL EVIDENCE FROM SELECTED LISTED COMPANIES IN NIGERIA
Chapter one
INTRODUCTION 1.1 Background of the Study
The subject of corporate governance has sparked study interest in principal-agent relationship expropriation in recent years, particularly with the rise of publicly traded corporations. This is consistent with Claessens & Fan (2002), who stated that corporate governance has gained a lot of attention in recent years.
Corporate governance reform has arisen as a critical business problem, pushed to the forefront by a number of high-profile corporate failures (Strandberg, 2001).
The notable corporate accounting scandals of Enron Corporation, World Com, Tyco, and Parmalat have sparked debate over the optimal systems for preserving stakeholder interests and maximising shareholder value.
Furthermore, in Nigeria, the occurrence of fake financial reporting, as highlighted in the case of Cadbury Nigeria Plc., and the recent banking industry crisis have heightened the need for corporate governance reform.
Abor and Biekpe (2005) define corporate governance as the method and structure utilised to improve business profitability and corporate accountability, with the ultimate goal of realising long-term shareholder value while considering the interests of other stakeholders.
According to Kyereboah-Coleman (2007), corporate governance refers to the structures and processes established by a corporate body to reduce the scope of agency problems caused by the separation of ownership and control.
Simply expressed, corporate governance in an organisational setting refers to the entire set of control, monitoring, and directing mechanisms used by strategic management to serve the best interests of its stakeholders.
Firm performance is a concept that promotes the effective and efficient use of financial resources to fulfil overall corporate goals, which include both shareholder wealth maximisation and profit maximisation.
It can be quantified using long-term market performance indicators, as well as non-market-oriented or short-term measurements (Zubaidah et al, 2009).
The measure of business performance used in this study is from a non-market oriented perspective, which is most typical and necessitates the use of accounting ratios, specifically profitability and investor ratios.
This study aims to contribute to the few studies on the Nigerian environment, as the majority of studies on firm performance and corporate governance that produced mixed results were conducted in the United States of America, the United Kingdom, Pakistan, and Malaysia (Ertugrul & Hegde, 2009; Jong, Gisper, Kabir, & Renneboog, 2002; Javid & Iqbal, 2009; Zubaidah, Nurmala, & Kamaruzaman, 2009). It would also provide credible findings to aid in deliberations on this pressing problem.
1.2 Statement of the Research Problem
The problem areas that sparked interest in exploring this topic are notably the loss of investor confidence in the capital market, the persistent agency problem, and the insolvency of significant corporations as a result of financial irregularities. These difficulties are addressed more thoroughly below.
According to Kajola (2008), global financial scandals, as well as the recent collapse of major corporate institutions in the United States, South East Asia, Europe, and Nigeria, have shaken investors’ faith in capital markets and the efficacy of existing corporate governance practices in promoting transparency and accountability.
Good corporate governance is a critical step towards increasing market confidence and fostering steady, long-term foreign investment flows (Bocean & Barbu, 2007). Investors’ loss of confidence in the capital market is thus indicative of inadequate corporate governance practices in publicly traded corporations (Oyebode, 2009).
The shares of listed companies on the Nigerian stock exchange are gradually dropping from a bullish to a negative state. Shareholders have lost interest in trading on the stock exchange as a result of the share price drop, just as in the instance of Cadbury Nigeria Plc., which inflated its profitability and saw its shares plummet on the Nigerian Stock Exchange Market.
Furthermore, the presence of an agency problem, which occurs in an attempt to bridge the gap between managers’ and shareholders’ interests, has a significant impact on business performance. Sanda, Mikailu, and Garba (2005) argue that managers may take actions to enhance the size of the company and, in many cases, their salary, even if they do not necessarily increase the company’s profit, which is the primary concern of shareholders.
The insolvency of significant corporations as a result of financial irregularities has sparked debate about the impact of corporate governance on business performance (Claessens, 2003; MENA-OECD Investment Programme- Working Group 5, n.d).
Similarly, the prevalence of sharp activities by management and insider trading for the goal of scamming such companies in order to satisfy some personal interest may also contribute to bad corporate performance.
It is so anticipated that investigating the relationship between corporate governance procedures and firm performance will seek to address the issues raised.
1.3 Objectives of the Study
The overall goal of this research is to assess the relationship between company performance and corporate governance mechanisms. The study’s particular aims are as follows:
1. Determine whether there is a negative correlation between board size and firm performance.
2. Determine whether the combination of the positions of CEO and Chairman of the Board significantly improves firm performance.
3. Determine whether there is a favourable association between ownership concentration and company performance.
4. Determine whether the audit committee’s independence has a favourable effect on firm performance.
1.4 Research Questions.
The study responds to the following questions:
1. What is the correlation between board size and company performance?
2. To what extent does the combination of CEO and Chairman of the Board influence performance?
3. How does the concentration of ownership affect company performance?
4. What is the relationship between the audit committee’s independence and corporate performance?
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