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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)

An Online International Research Journal (ISSN: 2311-3162)


2014 Vol: 1 Issue 2

Corporate Governance Mechanisms and Financial Performance


of Listed Firms in Nigeria: A Content Analysis
George T. Peters,
Department of Accountancy, Faculty of Management Sciences,
Rivers State University of Science and Technology, Nigeria.
Email: peters.george@ust.edu.ng
Karibo B. Bagshaw,
Department of Management, Faculty of Management Sciences,
Rivers State University of Science and Technology, Nigeria.
Email: bagshaw.karibo@ust.edu.ng

_________________________________________________________________
Abstract
The aim of this study was to examine empirically the impact of corporate governance
mechanisms on firm financial performance using listed firms in Nigeria as case study for
two years 2010 and 2011. The study adopted a content analytical approach to obtain
data through the corporate website of the respective firms and website of the Securities
and Exchange Commission. A total of 33 firms were selected for the study cutting across
three sectors: manufacturing, financial and oil and gas. The result of the study showed
that most of the corporate governance items were disclosed by the case study firms. The
result also showed that the banking sector has the highest level of corporate governance
disclosure compared to the other two sectors. The result thus indicates that the nature of
control over the sector have an impact on companies decision to disclose online
information about their corporate governance in Nigeria; and that there were no
significant differences among firms with low corporate governance quotient and those
with higher corporate governance in terms of their financial performance. The result
also suggests an existence of variations between sectors with respect to their corporate
governance reporting. Thus among others the study recommends that deliberate steps be
taken in mandatory compliance with SEC code of best practice for all sectors in Nigeria.
Furthermore, deliberate efforts should be made in setting up a follow-up and compliance
team to make sure that all firms across Nigerian sectors do not only comply but meet up
with the different expectations of the regulatory body as mandated in the code of
corporate governance.
____________________________________________________________________
Keywords: Corporate Governance, Financial Performance, Nigeria, Listed Firms

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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)
An Online International Research Journal (ISSN: 2311-3162)
2014 Vol: 1 Issue 2

1. Introduction
This study provides an analysis of the impact of corporate governance on financial
performance of listed firms in Nigeria. A general proposition have surfaced and
resurfaced time after time that the governance structure and control mechanisms of
corporate entity significantly affect corporations ability to respond positively to both
internal and external factors and thus have a bearing on performance. We extend this
literature by examining the corporate-governance link in Nigeria which presents a
number of key characteristics for business and governance practices as it is well
established that there are differences in the corporate governance practices between
countries (Bollaert, Daher, Derro & Dupire-Declerk 2010).
Several empirical studies have provided the nexus between corporate governance
and firm performance. Bebchuk, Cohen and Ferrell (2004) postulates that a well
governed firm have higher firm performance; Gompers, Ishii & Metrick (2003)
demonstrate through their study that firms with poor corporate governance quality enjoy
lower stock returns than those with a higher level of governance quality. Financial
devastation of many corporations such as those of USA, South East Asia and Europe
have been premised on the failure of corporate governance; high profile scandals
throughput the world such as Enron and World.Com in the United States, Transmile,
Megan Media and Nasioncom in Malaysia brought about the importance of good
corporate governance to limelight. Each of these corporate cases was directly linked to
corporate governance failures (Hussin & Othman 2012; Abdul-Qadir & Kwambo, 2012).
Nigeria is not left out of this phenomenon as similar financial and accounting
scandal has enshroud which include the banking sector with 26 banks liquidated in 1997
and the falsification of the company and financial statement in Cadbury Nigeria Plc. in
2006 and more recent events in 2009 post consolidation banking crises when ten banks
were declared insolvent and eight (8) executive management teams of the banks removed
by the Central Bank of Nigeria (CBN 2010). Also, the economic meltdown especially
that of 2008 has forced the Nigerian firms to realise the need for the practice of good
corporate governance.
According to Ogbulu & Emini (2012), an effective corporate governance
decentralizes powers and creates room for checks and balances which most times ensures
that managers invest in positive net present value projects thus helping the relationship
between management and shareholders to be characterized by transparency and fairness.
Thus, Nigerian code of best practices was introduced by the Securities and Exchange
Commission (SEC) and the Corporate Affairs Commission (CAC) in 2003. The CBN
also in 2006 introduced a code on corporate governance for banks on March 1 2006
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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)
An Online International Research Journal (ISSN: 2311-3162)
2014 Vol: 1 Issue 2

(effective April 3, 2006). The CBN code states that the role of the Board is to retain full
and effective control of the bank and monitor executive management. However, as at
2006 only 40% of quoted companies at the Nigerian stock exchange had recognized code
of corporate governance in place.
This study will therefore fill a gap in the literature by examining the nexus between
performance and corporate governance practices of firms generally and specifically the
corporate governance practices of Nigerian firms. Furthermore, it will add to the general
body of literature on the impact of corporate governance and performance of firms in
Nigeria. It also expands the body of literature in terms of its scope by incorporating all
firms in the industry and also narrowing to sectoral macro analysis. The rest of the paper
is structured as follows: section 2 presents literature inculcating the conceptual
framework, corporate governance mechanisms, theoretical framework and empirical
review on relationship between corporate governance and firm financial performance.
Section three presents the methodology. Section four focuses on data and results. Lastly,
conclusions and recommendations are discussed in section five.

2. Literature Review
Fig 1: Model of Corporate Governance and Firm Financial Performance
Conceptual Framework of Corporate Governance Mechanisms and Firms Financial Performance

Source: Researchers Desk

The model above shows the path of the study which is aimed at examining the
impact of corporate governance mechanisms (board composition, board size, and board
committee) moderated by firm age and firm size on firm financial performance as
proxied by firms Return on Assets (ROA), and Return on Equity (ROE)

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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)
An Online International Research Journal (ISSN: 2311-3162)
2014 Vol: 1 Issue 2

2.1 Corporate Governance


Corporate governance has no single accepted definition; this is often attributed to the
huge differences in countries corporate governance codes (Solomon, 2010). The
definition varies based on the framework and cultural situation of the country under
consideration (Armstrong and Sweeney, 2002). Also, the differences in definition can be
as a result of the different viewpoint from the different perspectives of the policy-maker,
researcher, practitioner, or theorist (Solomon, 2010). The term corporate governance
came into use in the 1980s to broadly describe the general principles by which
businesses and management of companies were directed and controlled (Dor et al.
2011). ODonovan (2003 p. 2) see corporate governance

as an internal system

encompassing policies, processes and people which serves the needs of shareholders and
other stakeholders by directing and controlling management activities with good
business savvy, objectivity and integrity. In other words it defines the legal, ethical and
moral values of a corporation in order to safeguard the interest of its stakeholders.
The aim of corporate governance is to ensure that corporations are managed in the
best interests of their owners and shareholders (Ahmed, Alam, Jafar & Zaman 2008).
This applies specifically to listed companies where the majority of the shareholders are
not in participatory everyday management positions; although, it can also apply to other
forms of corporations such as companies with few principal owners and a large group of
smaller shareholders, public corporations (where all citizens are stakeholders) partnerowned companies and privately owned companies where the ownership has been divided
through inheritance in one or several generations (Ahmed, Alam, Jafar & Zaman 2008).
Another essence of corporate governance is establishing transparency and accountability
throughout the organization. This is feasible as corporate governance system is premised
on a strict division of power and responsibilities between the shareholders through the
annual general meeting, the board of directors, the executive management and the
auditors.
Fig 2 Basic Structure of a Corporate Governance System

Source: Adapted from Ahmed, Alam, Jafar & Zaman 2008

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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)
An Online International Research Journal (ISSN: 2311-3162)
2014 Vol: 1 Issue 2

2.2 Firm Performance


Financial performance which assesses the fulfilment of a firms economic goals has
long being an issue of interest in managerial researches. Firm financial performance
relates to the various subjective measures of how well a firm can use its given assets
from primary mode of operation to generate profit. Kothari (2001) defined the value of a
firm as the present value of the expected future cash flows after adjusting for risk at an
appropriate rate of return. To (Eyenubo 2013) it is the success in meeting pre-defined
objectives, targets and goal within a specified time target. Qureshi, (2007), put forward
four different approaches in which the value of a firm has been identified in corporate
finance literature. These are: the financial management approach which focus on the
evaluation of cash flows and investment levels before identifying and assessing the
impact of financing sources on firm value; the capital structure approach which studies
the impact of capital structure changes on the value of firm and how different factors
impact directly or inversely the debt and equity component of the firm capital structure;
the resource based approach which explains the value of firm as an outcome of firms
resources; and finally, the sustainable growth approach whichis a summary of the above
three approaches to firm value, taking into account the firms operating performance, its
investment and financing needs, the financing sources, and its financing and dividend
policies for sustainable development of firms resources and maximization of firm value.
This study examines two key accounting measures of firms financial performance which
are Return on Equity and Return on Assets.
2.2.1 Return on Equity (ROE)

One accounting based measure of performance in corporate governance research is


return on equity (ROE). (Baysinger & Butler 1985; Dehaene, De Vuyst & Ooghe
2001).The primary aim of an organizations operation is to generate profits for the
benefit of the investors. Therefore, return on equity is a measure that shows investors the
profit generated from the money invested by the shareholders (Epps & Cereola 2008). It
measures the profitability of shareholders investment and shows the net income as a
percentage of shareholders equity. It is calculated as:
ROE

Annual Net Income


Average stockholders equity

2.2.2 Return on Assets (ROA)

One of the widely used accounting based measures of corporate governance in


literature is the Return on Asset (ROA) (Finkelstein and DAveni 1994; Weir and Laing
1999). It assesses the effectiveness of capital employed and provides a basis in which
investors can measure the earnings generated by the firm from its investment in capital
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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)
An Online International Research Journal (ISSN: 2311-3162)
2014 Vol: 1 Issue 2

assets (Epps and Cereola 2008). The return on assets (ROA) is a measure which shows
the amount of earnings that have been generated from invested capital. It is an indication
of the number of kobo earned on each naira worth of assets. It allows users, stakeholders
and monitoring agencies to assess how well a firms corporate governance mechanism is
in securing and motivating efficient management of the firm (Chagbadari 2011). The
ROA is the ratio of annual net income to average total assets of a business during a
financial year. It is measured thus:
ROA

Annual Net Income


Average Total Assets

2.3 Corporate Governance Mechanisms


Mechanisms of corporate governance relates to the tools, techniques and instruments
via which accountability is ensured; it is the various medium through which stakeholders
monitor and shape behaviour to align with set goals and objectives. Adekoya (2012 p.
40) defined corporate governance mechanism as the processes and systems by which a
countrys company laws and corporate governance codes are enforced. This study
considers some Corporate Governance Mechanisms from the perspective of Board
Composition, Board size and Board committees.
2.3.1 Board Composition

One important mechanism of board structure is the composition of the board,


which refers to executive and non-executive director representation on the board. Both
agency theory and stewardship theory apply to board composition. Boards dominated
by non-executive directors are largely grounded in agency theory. In contrast, a
majority executive director representation on the board is grounded in stewardship
theory, which argues that managers are good stewards of the organization and work to
attain higher profits and shareholder returns (Donaldson & Davis 1994). An effective
board should comprise of majority of non-executive directors (Dalton et al. 1998).
However, executive directors responsibility is the day-to-day operation of the business
such as finance and marketing, etc. They bring specialised expertise and a wealth of
knowledge to the company (Weir & Laing, David 2001).
2.3.2 Board Size

Board size is the number of members on the board. Identifying appropriate board
size that affects its ability to function effectively has been a matter of continuing debate
(Jensen 1993; Yermack, 1996; Dalton, Daily, Johnson & Ellstrand, 1999; Hermalin &
Weisbach, 2003). Some scholars have been in favour of smaller boards (e.g., Lipton &
Lorsch, 1992; Jensen 1993; Yermack, 1996). Lipton and Lorsch (1992) support small
boards, suggesting that larger groups face problems of social loafing and free riding. As
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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)
An Online International Research Journal (ISSN: 2311-3162)
2014 Vol: 1 Issue 2

board increase in size, free riding increases and reduces the efficiency of the board. On
the other hand,large boards were supported on the ground that they would provide
greater monitoring and advice (Pfeffer, 1972; Klein, 1998; Adam & Mehran, 2003;
Anderson et al., 2004; Coles, et al., 2008). For example, Klein (1998) argues that CEOs
need for advice will increase with complexity of the organisation. Diversified firms and
those operating in multiple segments require greater need for advice (Hermalin &
Weisbach, 2003; Yermack, 1996). However, Singh &Harianto (1989) found that large
boards improve board performance by reducing CEO domination within board, thereby
making it difficult to adopt golden parachute contracts that might not be in the
shareholders interest.
2.3.3 Board Committees

Board committees are also an important mechanism of the board structure providing
independent professional oversight of corporate activities to protect shareholders
interests (Harrison 1987). The agency theory principle of separating the monitoring and
execution function is established to monitor the execution functions of audit,
remuneration and nomination (Roche 2005). Corporate failures in the past focused
criticism on the inadequacy of governance structures to take corrective actions by the
boards of failed firms. Importance of these committees was adopted by the business
world (Petra 2007). As a result the Cadbury Committee report in 1992, recommended
that boards should nominate sub-committees to address the following three functions:
Audit committees to oversee the accounting procedures and external audits;
Remuneration committees to decide the pay of corporate executives; and
Nominating committees to nominate directors and officers to the board;
These named committees can be just a window dressing unless they are independent,
have access to information and professional advice, and contain members who are
financially literate (Keong 2002). Therefore, the Cadbury committee and OECD
principles recommended that these committees should be composed exclusively of
independent non-executive directors to strengthen the internal control systems of firms
(Davis 2002; Laing & Weir 1999).
[

2.4 Theoretical Framework


Corporate governance is the relationship among shareholders, board of directors and
the top management in determining the direction and performance of the corporation. It
includes the relationship among the many players involved (the stakeholders) and the
goals for which the corporation is governed (Kim & Rasiah, 2010).
According to Imam & Malik (2007) the corporate governance theoretical framework
is the widest control mechanism of corporate factors to support the efficient use of
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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)
An Online International Research Journal (ISSN: 2311-3162)
2014 Vol: 1 Issue 2

corporate resources. The challenge of corporate governance could help to align the
interests of individuals, corporations and society through a fundamental ethical basis and
it fulfils the long term strategic goal of the owners. It will certainly not be the same for
all organizations, but will take into account the expectations of all the key stakeholders
(Imam & Malik, 2007). So maintaining proper compliance with all the applicable legal
and regulatory requirements under which the company is carrying out its activities is also
achieved by good practice of corporate governance mechanisms. There are a number of
theoretical perspectives which are used in explaining the impact of corporate governance
mechanisms on firms financial performance. The most important theories are the agency
theory, stakeholders theory and resource dependency theory (Maher & Andersson,
1999).
2.4.1 Agency Theory

Agency theory is a theory that has been applied to many fields in the social and
management sciences: politics, economics, sociology, management, marketing,
accounting and administration. The agency theory a neoclassical economic theory (Ping
& Wing 2011) and is usually the starting point for any debate on the corporate
governance. The theory is based on the idea of separation of ownership (principal) and
management (agent). It states that in the presence of information asymmetry the agent is
likely to pursue interest that may hurt the principal (Sanda,Mikailu& Garba 2005). It is
earmarked on the assumptions that: parties who enter into a contract will act to maximize
their own self-interest and that all actors have the freedom to enter into a contract or to
contract elsewhere. Furthermore, it is concerned with ensuring that agents act in the best
interest of the principals.
2.4.2 Stakeholders Theory

The stakeholders theory was adopted to fill the observed gap created by omission
found in the agency theory which identifies shareholders as the only interest group of a
corporate entity. Within the framework of the stakeholders theory the problem of
agency has been widened to include multiple principals (Sand, Garba & Mikailu 2011).
The stakeholders theory attempts to address the questions of which group of
stakeholders deserve the attention of management. The stakeholders theory proposes
that companies have a social responsibility that requires them to consider the interest of
all parties affected by their actions. The original proponent of the stakeholders theory
suggested a re-structuring of the theoretical perspectives that extends beyond the ownermanager-employee position and recognises the numerous interest groups. Freeman,
Wicks & Parmar (2004), suggested that: If organizations want to be effective, they will

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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)
An Online International Research Journal (ISSN: 2311-3162)
2014 Vol: 1 Issue 2

pay attention to all and only those relationships that can affect or be affected by the
achievement of the organizations purpose.
2.4.3 Resource Dependency Theory

Whilst the stakeholder theory focuses on relationships with many groups for
individual benefits, resource dependency theory concentrates on the role of board
directors in providing access to resources needed by the firm (Abdullah & Valentine,
2009). According to this theory the primary function of the board of directors is to
provide resources to the firm. Directors are viewed as an important resource to the firm.
When directors are considered as resource providers, various dimensions of director
diversity clearly become important such as gender, experience, qualification and the like.
According to Abdullah and Valentine, directors bring resources to the firm, such as
information, skills, business expertise, access to key constituents such as suppliers,
buyers, public policy makers, social groups as well as legitimacy. Boards of directors
provide expertise, skills, information and potential linkage with environment for firms
(Ayuso & Argandona, 2007).The resource based approach notes that the board of
directors could support the management in areas where in-firm knowledge is limited or
lacking. The resource dependence model suggests that the board of directors could be
used as a mechanism to form links with the external environment in order to support the
management in the achievement of organizational goals (Wang, 2009). The agency
theory concentrated on the monitoring and controlling role of board of directors whereas
the resource dependency theory focus on the advisory and counselling role of directors to
a firm management.
Each of the three theories is useful in considering the efficiency and effectiveness of
the monitoring and control functions of corporate governance. But, many of these
theoretical perspectives are intended as complements to, not substitutes for, agency
theory (Habbash, 2010). Among the various theories discussed, agency theory is the
most popular and has received the most attention from academics and practitioners.
According to Habbash (2010), the influence of agency theory has been instrumental in
the development of corporate governance standards, principles and codes. Mallin (2007)
provides a comprehensive discussion of corporate governance theories and argues that
the agency approach is the most appropriate because it provides a better explanation for
corporate governance roles (as cited by Habash, 2010).
2.5 Empirical Review of Literature
The state of corporate governance in an economy plays a dominant role in attracting
and holding foreign investors, for building a robust capital market and for

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2014 Vol: 1 Issue 2

maintaining/restoring the confidence of both domestic and foreign investors (Ahmed,


Alam, Jafar & Zaman 2008).
In a study conducted by Mckinsey and Company and cited in Adams and Mehan
(2003), 78% of the professional investors in Malaysia expressed that they are willing to
pay a premium for a well-governed company. In another study carried out by Mardjono
(2005) who attempted to analyze the reasons for the failure of two giant corporations
Enron Inc and HIH Insurance concluded that both firms did not fail because they were in
bad business, but because they violated the key principles of good corporate governance.
In line with the interest of this study, this section discusses how companies compliance
with corporate governance principles experiences certain benefits and growth
opportunities, while citing various forms of research on firm performance.
Analysis of 51 corporate governance factors was carried out on 2,327 firms in the
United States by Brown &Caylor (2009) based on a data set generated by Institutional
Shareholder Service. Their findings indicate that corporate governance principled firms
are relatively more profitable, more valuable and pay more dividends to their
shareholders. This finding is in line with findings for cross sectional study conducted on
German firms by Drobetz Schillhofer & Zimmermann (2004) who found a positive and
significant relationship between governance practices and firm valuation. On corporate
governance mechanisms it is hypothesized that a positive relationship is expected
between firm performance and the proportion of independent (outside) directors sit on
the board; this is premised on a conviction that unlike inside directors outside directors
are better able to challenge the CEOs to obtain results in line with set objectives (Sanda,
Mikaila & Garba 2005). The code of corporate governance of countries specifies that
there should be a proportion of outside directors on the board of every listed firm, for the
UK a minimum of 3 independent board directors is required while in the US it is
stipulated that they constitute at least two-third () of the board (Bhagat &Black 2002).
Study by Erkens, Hung & Matos (2010) found that firms with more independent boards
and higher institutional ownership experience worse stock returns during a crises using
international sample of 196 financial firms from 30 countries. Further they found that
firms with more independent boards raised more equity capital during crisis, which led to
a wealth of transfer from existing shareholders to debt holders.
In Nigeria, corporate governance has also received maximum attention as its effects
of continuance of a firm have been recognised. This recognition has seen actions such as
the setting up of the Peterside Commission on corporate governance in public
corporations by the Securities and Exchange Commission (SEC) and the setting up of the
sub-committee on corporate governance for banks and other financial institutions by the
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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)
An Online International Research Journal (ISSN: 2311-3162)
2014 Vol: 1 Issue 2

Bankers Committee. Study by Kojola (2008) for 20 firms in Nigeria showed that a
positive and significant relationship exist between ROE and board size, profit margin
and chief executive officers status, ROE board composition and audit committees and
finally between profit margin (as dependent variables) and board size, board composition
and audit committee as independent variables.
Study on board composition in Nigeria by Okhalumeh, Ohiokha & Ohiokha (2011)
who seek to examine the influence of board composition in the form of the
representation of the outsider non-executive directors on the economic performance of
firms in Nigeria showed that there was no significant relationship between board
composition and any of the performance measure (ROE, ROCE, ROAM, EPS and DPS)
using a simple regression analysis through survey for a sample of 38 listed firms in
Nigeria. For leadership structure, Adenikinju & Ayorinde (2001), using Nigerian data
investigated whether ownership mix and concentration has any variation in corporate
performance of publicly listed firms in Nigeria. The study finds that Nigerian firms are
highly concentrated and there is significant presence of foreign ownership. The study
went further to find that ownership structure has no impact on corporate performance in
Nigeria.
A study on board size by Eyenubo (2013) for Nigeria using regression analysis for
50 firms quoted on the Nigerian Stock Exchange during the period 201-2010 showed
that bigger board size had a significant negative relationship with the indicator of firm
financial performance (NPAT). Finally, Uwuigbe (2013) study for fifteen (15) listed
firms in manufacturing and banking sector in the Nigerian Stock Exchange showed that
corporate governance mechanisms ownership structure has negative and insignificant
relationship with share price. Conclusively for this study, higher number of shareholders
on the board has a negative effect of share price. On the other hand corporate governance
mechanisms audit committee independence was found to have a positive and significant
correlation with share price. This suggest thus, the higher the number of shareholders
compared to directors on the audit committee, the better the share price value of the
company.
Of interest to this study are findings on the impact of corporate governance on firm
financial performance using descriptive content analysis; similar methodology was
adopted by Mariri & Chipunza (2011) among 10 selected mining companies listed in the
Johannesburg Stock Exchange using secondary data in the form of companies annual
reports. The study adopted a descriptive quantitative design. The study revealed
interesting outcome of governance, CSR and sustainability reporting within the South

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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA)
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African Mining Industry. The results showed high corporate governance reporting
among the firms considered for the study which correlated with CSR performance.
A critical appraisal of the literature reviewed shows that while some studies provide
evidence for negative relationship between corporate governance proxy variables and
firm financial performance, others found positive relationship while some found
independent and mixed relationship between the two proxies. Several explanations have
been adduced for these inconsistencies: use of public data, survey data (fraught with
biases) which are generally restricted in scope (Kyereboah-Coleman 2007). This study
attempts to close this research gap by providing more empirical evidence for the case of
Nigeria.

3. Methodology
This study adopts the judgemental sampling technique to select 33 firms from more
than 200 listed firms on the Nigerian Stock Exchange (NSE). The selection was based
only on those firms with web presence and whose annual reports for the period (2010
and 2011) under review is in the domain of the NSE.
3.1 Research Instrument
In determining the level of corporate governance disclosure among the listed firms in
Nigeria, the study made use of descriptive content analysis technique as a means of
eliciting data from the audited annual reports of the listed firms. Over the past decades,
the use of content analysis have become common among researchers especially as it
relates to corporate governance performance and financial reporting (Beattie & Thomson
2007). The core questions of content analysis are who says what, to whom, why, to
what extent and with what effects? (Fooladi & Farhadi 2011). Researchers have used
content analysis of annual reports and corporate documents to derive indicators of
commitment to social expectations (Cook & Deakin 1999); it involves the codification
of qualitative and quantitative information into pre-defined categories in order to derive
patterns in the presentation and reporting of information (Bhasin 2011). The coding
process for this study involved reading through the annual reports of each of the 33 firms
selected for the study and coding the information according to pre-defined categories of
corporate governance indicators as shown in the table below.

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Table 1: Corporate Governance Compliance Checklist of Listed Firms in the
Nigerian Stock Exchange

S/N
1
2
3
4
5
6
7

Financial Indicators:
Financial and Operating Result
Critical Accounting Ratios
Critical Accounting Policies
Corporate Reporting Framework (Segment Reporting)
Risks and Estimates in Preparing and Presenting Financial Statements
Information Regarding Future Plan
Dividend

8
9
10
11
12
13
14
15
16

Corporate Governance Indicators:


Size Of Board
Board Composition
Division Between Chairman and CEO
Information About Independent Director
Role and Functions of Board
Changes in Board Structure
Composition of the Committee
Function of the Committee
Audit Committee Report

17
18
19

Timing And Means Of Corporate Governance Disclosure


Separate Corporate Governance Statement
Annual Report through the Internet
Frequency of Board Meetings

Source: Uwuigbe 2013; Samala, Dahaway, Hussainey, Stapleton 2010; SEC 2010

The content analysis is divided into two (2) basic sections covering both financial
performance aspects and the corporate governance aspects. Content analysis is basically
used to assess the level of compliance with corporate governance code of conduct in
prior studies. The following forms of content analysis is identified: number of sentences
disclosed, number of words used, pages or proportion of pages, average number of lines
and Yes and No approach (Krippendorff 2003). This study however adopts the Yes and
No approach identified by various corporate governance studies as a more reliable
method in analysing annual reports of firms for governance practices because it avoid the
element of subjectivity. Using these criteria, a score of 0 meant that no meaningful
information was provided on the specific evaluation item while a score of 1 indicated
that the report included that information to some degree. That is, if there was evidence of
the criteria then a Yes rating was given for that element, otherwise No; where Yes
indicates 1 and No indicates 0. This criterion is used for both the financial performance
and corporate governance indicators because these reporting items are fairly
straightforward and unlikely to need robust illustrations from reporting companies.
The content of the corporate governance section of each of the firm were analysed,
the study followed the methodology by Uwuigbe (2013) who developed a disclosure
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2014 Vol: 1 Issue 2

index using the CBN post consolidation code of best practices and guided by the OECD
code and papers prepared by the UN secretariat for the 19th session of International
Standards of Accounting and Reporting (ISAR) (2011) entitled transparency and
disclosure requirements for corporate governance and the twentieth session of ISAR
(2002) entitled guidance on Good Practices in corporate governance disclosure for the
firms in this study.
In order to determine the rating of corporate governance practices for each of the
sample firms each of the desired corporate governance parameter was calculated to
obtain a Corporate Governance Index (CGI) for that corporate governance item using the
following formula:

4. Results and Discussion


4.1 Descriptive Statistics
Table 1 shows the number of companies under the three different sectors finally
utilized for the analysis. Fifteen (15) of these companies were from the financial sector
having a total of eight (8) commercial banks and seven (7) insurance companies; 14 were
from the manufacturing while 4 firms were drawn from oil and gas sector.
Table 2: Classification of Sampled Firms by Sector

S/N

Sector

1
2
3

No. of Firms

Financial
Oil and Gas
Manufacturing
Total

Percentage (%)

15
4
14
33

45.5
12.1
42.4
100

Figure 2: Distribution of Firm by Sector


16
14
12
10
8
6
4
2
0
Financial

Oil and Gas

Manufacturing

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Figure 3: Percentage Distribution of Firms by Sector

42%

46%

Financial
Oil and Gas
Manufacturing

12%

4.2 Variations between Sectors


Descriptive statistics showing the corporate governance quotients for all the firms is
shown in table 2 below. As earlier stated, with the help of the list of corporate
governance items (under all the issues a total of 17 corporate governance indicators are
arrived at), the corporate annual reports of the firms were examined, a dichotomous
procedure was followed to score each of the corporate governance items. Each firm was
awarded a score of 1 if it has the required number of item as depicted in the SEC
(2003) and the Act (1990) corporate governance codes, otherwise 0. The range of
disclosure scores for the companies based on the corporate governance list utilized is
between 59 and 100%. Of these companies, four companies were from the
manufacturing sector Nestle Nigeria Plc, First Aluminium, Paints and Coatings MFG
Nigeria Plc and Eterna plc; two from the financial sector NEM Insurance and Oasis
Insurance and one in the oil and gas sector - Japaul Oil and Maritime Service have the
lowest corporate governance quotient ranging from 59% to 65%. Companies with
disclosure scores 71% and 88% provided detailed information about names of the board
of directors, managers team, number of board meetings and detailed information about
dividend payout to shareholders; they also had detailed corporate reporting framework,
as well as met the 60:40 percent ratio for board member composition. These companies
were 25 in number comprising of company from all the sectors - For corporate
governance scores above 88% we observe that these companies provided detailed
information to include report on organizational hierarchy, risks and estimates in financial
statement preparation and they had a separate section for reporting of corporate

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governance and only two companies from the financial sector - First Bank (100%) and
Continental Insurance (94%) met this standard.
Table 3: Corporate Governance Quotient of Case Study Firms

S/N

SECTOR/FIRMS

S/N

SECTOR/FIRMS

Access Bank
Diamond Bank
First Bank

Total
CGV
88%
88%
100%

1
2
3

18
19
20

4
5
6
7
8
9
10

Guarantee Trust Bank


ECO Bank Nigeria
First City Monument Bank
Sterling Bank
United Bank for Africa
Royal Exchange
Mansard Insurance

88%
88%
88%
88%
88%
76%
82%

21
22
23
24
25
26
27

11
12
13

NEM Insurance
Oasis Insurance
Consolidated Hallmark
Insurance
Cornerstone Insurance
Continental Reinsurance
Nigerian Breweries
PZ Cussons

59%
59%
76%

28
29
30

82%
94%
71%
71%

31
32
33

Nestle Nigeria
Dangote Flour Mills
National Salt Company
(Nigeria)
Honey Wells Flour Mills
Guinness Nigeria Plc
Beta Glass Plc
Dangote Cement Plc
First Aluminium
Lafarge Wapco Plc
Paints & Coatings MFG Nig.
Plc
Unilever Nigeria
Eterna Plc
Japaul oil and Maritime
Service
Oando Nigeria Plc
Total Nigeria Plc
Con Oil

14
15
16
17

Total
CGV
71%
65%
71%
71%
71%
71%
76%
65%
76%
65%
88%
65%
65%
82%
82%
72%

Source: Authors Calculation based on CGV formula

With regard to sectors, the banking sector has the highest mean (82.93) compared
with the other sectors. This is due to the fact that all banks report at least one piece of
information as regards corporate governance as mandated in the code of corporate
governance by CBN (2006) with First Bank and Continental Insurance having the
highest disclosure scores in the sector as well as among the firms.
Table 4: Mean Disclosure Scores according to Sector
Total Number of
Number of Minimum
Maximum
Directorship in
firms in
the Sector
Sectors
1
Financial
186
15
59%
100%
3
Oil and Gas
39
4
65%
72%
4
Manufacturing
127
14
65%
88%
Total
352
33
Source: Authors Calculation based on content Analysis
S/N

Sector

Mean

82.93
71.21
75.25
10.6

The financial sector was closely followed by the oil and gas sector with an average
disclosure score of 75.25% and the manufacturing sectors having a disclosure score of
71.21%. Descriptive statistics for the board size is shown in Table 4 and 5 below.

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S/N

1
2
3

Table 5: Average Size of Board of Directors according to Sector for 2010


Sector
Total Number Number of Minimum
Maximum
of Directorship
firms in
in the Sector
Sector in
2010

Financial
Oil and Gas
Manufacturing
Total

186
39
127
352

15
4
14
33

6
5
9

20
15
10

Mean

12.4
9.75
9.07
10.6

Source: Authors Calculation based on content Analysis

S/N

1
3
4

Table 6: Average Size of Board of Directors According to Sector for 2011


Sector
Total Number
Number of Minimum Maximum
of Directorship
firms in
in the Sector
Sector in
2011

Financial
Oil and Gas
Manufacturing
Total

185
39
134
358

15
4
14
33

6
5
9

19
15
10

Mean

12.3
9.75
9.57
10.85

Source: Authors Calculation based on content Analysis

Table 4 and 5 points out that board size of the selected firms ranges from 5 to 20
persons; the number of directors have remained constant over time for most of the firms;
the average size of the board also remained constant revolving around an average of 10
for the years and a peak of 20 in 2010 (United Bank for Africa). While the overall board
size was fairly constant over time, there are differences across sectors. As shown in
tables, average size of board varied across the different sectors ranging from a minimum
of 5 in the Oil and gas sector to a peak of 20 amongst firms in the financial sector (Table
4).These features corresponded to the provision of the Security and Exchange
Commissions Code of Corporate Governance (2003) which stipulates that board size
should range between 5 to 15 persons.
4.3 Corporate Governance and Firm Financial Performance
To determine whether corporate governance is associated with better-performing
firms was investigated using a comparative framework between the corporate
governance quotients by all the firms and the parameters for firm financial performance.

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Table 7: Corporate Governance Performance Index from Highest to Lowest
SECTOR/FIRMS
CGV
Critical
CGV
Critical
Accounting Ratio
Accounting Ratio
2010
2011
(%)
(%)
EPS
ROE
ROA
EPS
ROE
ROA
(%)
%
(%)
%
First Bank
100
9k
1.25
0.22
100
(78k)
loss
loss
Continental
94
12k
10.59
6.55
94
12k
10.31
6.01
Reinsurance
Diamond Bank
88
63k
6.34
1.48
88
88K
9.60
1.02
Access Bank
88
102K
9.81
1.45
88
140k
12.29
1.58
Guarantee Trust Bank
88
136k
18.35
3.37
88
1698k 21.22
3.08
ECO Bank Nigeria
88
12k
2.18
0.35
88
(8k)
Loss
Loss
First City Monument
88
49k
5.89
1.47
88
(61k)
Loss
loss
Bank
Sterling Bank
88
33k
19.31
1.82
88
51k
16.33
1.33
United Bank for
88
3k
0.37
0.04
88
(32k)
Loss
loss
Africa
Unilever Nigeria
88
111k
50.16
29.45
88
145k
56.82 33.77
Mansard Insurance
82
6k
5
3.29
82
9k
7.22
3.89
Cornerstone Insurance
82
5k
6.66
3.80
82
2k
2.70
1.45
Oando Nigeria Plc
82
829k
15.63
4.44
82
162k
3.78
0.86
Total Nigeria Plc
82
1123k
60.89
9.96
82
1601k 38.08
6.50
Royal Exchange
76
6k
3.27
2.09
76
0.31k
7.07
4.10
Consolidated
76
4k
5.04
3.86
76
5k
6.03
4.55
Hallmark Insurance
Dangote Cement Plc
76
680k
49.80
26.80
76
812k
42.56 24.42
Lafarge Wapco Plc
76
163k
10
7
76
283k
16
8
Con Oil
76
402k
18.28
16.06
76
425k
17.53 15.53
Nigerian Breweries
71
401k
60.45
26.52
71
503K
48.72 17.57
PZ Cussons
71
168k
14.43
9.47
71
164k
13.83
8.27
Dangote Flour Mills
71
54K
10.03
3.88
71
14k
2.52
0.82
National Salt
71
62k
33.26
20.95
71
81k
37.20 21.44
Company (Nigeria)
Honey Wells Flour
71
14k
8.70
3.92
71
31k
16.47
8.55
Mills
Guinness Nigeria Plc
71
931k
40.17
17.52
71
1216k 44.50 19.44
Beta Glass Plc
71
295K
15
9.23
71
309K
13.84
8.63
Nestle Nigeria
65
1908k
84.78
20.88
65
2121K 70.69 21.58
First Aluminium
65
(15k)
Loss
Loss
65
(16k)
Loss
Loss
Paints & Coatings
65
0.13k
11.80
6.76
65
0.16k
10.49
7.24
MFG Nig. Plc
Eterna Plc
65
55k
20.76
7.79
65
93k
15.63
8.23
Japaul oil and
65
13k
3.67
3.17
65
16k
4.35
4.31
Maritime Service
NEM Insurance
59
20k
14.75
11.86
59
24k
20.08 16.14
Oasis Insurance
59
1k
2.45
2.17
59
2k
2.99
2.59
Source: Authors Calculation based on Content Analysis

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Fig 4: Bar chart showing Corporate Governance Quotient and Return on Equity for 33 Firms

Source: Authors Interpolation with E-Views


Fig 5: Bar chart showing Corporate Governance Quotient and Return on Assets for 33 Firms

Source: Authors Interpolation with E-Views

4.4 Discussion
The evidence from the figures (4 and 5) clearly shows there was no significant
difference in the performance of the two categories of firms (those with high
performance quotient and those that had low (CGV). Specifically, evidence provided in
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table 4.7, figures 4 and 5 clearly shows that the banking sector which had the highest
CGV recorded lowest ROE and ROA values compared to sectors in the manufacturing
and oil and gas. First bank and Continental Insurance with the highest CGV of 100% and
94% respectively recorded ROE and ROA values of 1.25% and 0.22% for First bank in
2010 with a loss in 2011 and 10.59% and 6.55% for continental Insurance in 2010 while
Nestle Plc with a low CGV score of 65% had the highest ROE and ROA scores at
84.78% and 20.78% respectively. More so, NEM Insurance and Oasis Insurance which
had the lowest CGV score in 2010 and 2011 did better than first bank and continental
Insurance with ROE and ROA values of 14.75% and 11.86% in 2010 and 20.08% and
16.14% in 2011 for NEM Insurance and 2.45% and 2.17% in 2010 for Oasis Insurance
and 2.99% and 2.59% for 2011.
This findings is affirmed by empirical studies for Nigeria. For instance study for
Nigeria by Okhalumeh, Ohiokha & Ohiokha (2011) on the influence of board
composition in the form of the representation of the outsider non-executive directors on
the economic performance of firms in Nigeria showed that there was no significant
relationship between board composition and any of the performance measure (ROE,
ROCE, ROAM, EPS and DPS) using a simple regression analysis through survey for a
sample of 38 listed firms in Nigeria. Furthermore, the study corroborates empirical
findings by Eyenubo (2013) for Nigeria. Results showed that bigger board size had a
significant negative relationship with the indicator of firm financial performance (NPAT)
using regression analysis for 50 firms quoted on the Nigerian Stock Exchange during the
period 2001-2010 as well as study by Uwuigbe (2013) for fifteen (15) listed firms in
manufacturing and banking sector in the Nigerian Stock Exchange which confirmed that
corporate governance mechanism ownership structure has negative and insignificant
relationship with share price. The study however violates a number of findings using
quantitative approaches (ANOVA and regression) which provided evidence of a high
degree of correlation between corporate governance mechanisms and firm financial
performance (Adams & Mehran 2003, Brown &Caylor 2009). Conclusively for this
study, higher number of shareholders on the board has a negative effect of share price.

5. Conclusion and Recommendations


This study investigated the relationship between corporate governance mechanism
and the financial performance of listed firms in Nigeria for two years 2010 and 2011.In
examining the level of corporate governance disclosure a disclosure index was developed
using the SEC code of corporate governance and CBN post consolidation cost of best
practices and guided by different empirical reviews; from these issues the corporate
governance disclosure were classified into four broad categories; financial disclosure,
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corporate governance indicators, timing and means of corporate governance disclosures


and best practices for compliance with corporate governance.
For the descriptive analysis done using means, tables, graphs and percentages the
empirical findings reveal that on average a relatively moderate board size of 11 is
noticed among the listed firms in Nigeria. This is in line with the SEC code for best
practice that a board size of 5 to 15 is appropriate (SEC 2003). Furthermore, the
composition of the board which is the proportion of outside directors in a board had a
mean of 48%. This also indicated that on average 48% of the board members are nonexecutive directors compared to 52 executive members which violates the SEC (2003)
code of corporate governance where it is stated that the number of non-executive
directors should exceed that of executive directors.
Through interpolations made with content analysis obtained from the annual reports
of the firms for corporate governance parameters and firm financial parameters our
results showed that firms with lower corporate governance quotients did not perform
differently from firms with high corporate governance quotients. That is, there was no
significant difference between the performances of firms with high corporate governance
scores compared to those with low corporate governance score. This shows that other
factors such as technology, capital output, sales volume and a host of others are
responsible for profitability than corporate governance. Conclusively, these results
showed that financial profitability of Nigeria firms cannot be ascribed to their corporate
governance quotients.
5.1 Recommendations
The result of this study showed that most firms in Nigeria do not report their
financial information online and most that do however do not have reporting framework
for corporate governance up to 50% and thus were excluded from the study. Based on
these findings we proffer the following recommendations:
1. Deliberate steps should be taken in mandatory compliance with SEC code of best
practice for all sectors in the Nigeria. Furthermore, deliberate efforts should be made
in setting up a follow-up and compliance team to make sure that all firms across
Nigerian sectors do not only comply but meet up with the different expectations of
the regulatory body as mandated in the code of corporate governance for 2014-15.
2. To eliminate the issue of corruption and forgery of published financial statement.
The regulatory authorities should set up their investigative team and auditors to reevaluate accounts submitted to different bodies concerned with companies
operations.

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The main limitations of this study was that the study did not cover the entire 220
firms that are listed on the Nigerian stock exchange and the 33 firms selected might be a
good representation of the entire population; this is however justified by the nature of the
study which requires availability of information from companies corporate websites.
Thus, this study suggests a need for large population especially after mandatory
compliance of companies to disclose financial information from 2013.

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