Corporate Governance and Sustainability Reporting Practices of Listed Manufacturing Firms in Nigeria
Chapter One
Objectives of the Study
The main objective of the study is to examine the effect of sustainability reporting on performance of quoted on financial firms in Nigeria. Specifically, the study intends to:
- Determine the extent to which environmental sustainability disclosures affect the firm
- Determine the effect of social sustainability disclosures on firm
- Ascertain the effect of corporate governance sustainability disclosures on firm
- Evaluate the effect of aggregate sustainability disclosures on firm
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Conceptual Framework
Corporate Reporting
Corporate reports are primary mechanism used to impart unbiased knowledge about the organisation in an informative, structured and cost-effective manner. Investors, creditors, regulators, and other users of financial reports make business and economic decisions based on information in corporate reports. Corporate reporting is a means of communicating the accumulated corporate information about development and events that occurred during the year under consideration. Conventional corporate reporting is based on accounting information which is gathered within organisations and then prepared for presentation to external parties through disclosure in external reports. The information which is disclosed revolved around a number of statements which are related to the organization‘s financial activities and both based on accrual-based accounting information. In particular the statement of financial position show the financial position of an organisation at a particular date, and the statement of profit or loss provided informantion about financial performance. Separate information about cash movements in a period is reflected in a cash flow statement. Other information like chairman‘s report, auditors report, and audit committee report are also included.
The objective of financial statements according to IASB (1989, 2008) is to provide high-quality financial reporting information concerning economic entities, primarily financial in nature, useful for economic decision making. high quality financial reporting information is important because it will positively influence capital providers and other stakeholders in making investment, credit, and similar resource allocation decisions enhancing overall market efficiency Also NASB now FRCN (2006) stipulated in SAS 2 that: all accounting information about a business entity, quantitative or qualitative in nature that will assist their users in the assessment of the financial liquidity, profitability and viability of a reporting entity should be disclosed and presented in a logical, clear and understandable manner. The basic financial statements of companies are the statement of financial position, the statement of profit or loss, cash flow statement and footnotes (notes) accompany these financial statements. Annual report must disclose all facts that may influence users‘ judgments.
Over the years specific rules have been adopted by professional accountancy bodies and regulators on how specific transactions should be accounted for in order to maintain the credibility of financial statements and the organisation in the eyes of external readers.
However, the integrity of financial disclosure has been an issue of constant concern among regulators, financial analyst and accounting practitioners. The various corporate collapses involving Wema Bank, Finbank, Spring bank Afribank, African Petroleum Plc, Cadbury and host of other firms in Nigeria have led to increased scrutiny of deficiencies in the financial reporting process and corporate disclosure requirements of corporate organisations (Feyitimi, 2014; Uwuigbe, et al 2014; Damagum & Chima, 2013; Omoye, 2013; Adeyemi & Fagbemi, 2010) This has had a negative and cumulative impact on the perceived credibility of financial reporting.
Also traditional reporting approach consists of historical financial information and ignores to communicate necessary information about the future performance of a company for investors and other stakeholders‘ decision making. There is little doubt that such approach is generally inadequate for users to make informed decision, and not meeting the changing needs of the society. Thus gap exists between what managers provide and what users required (Crow, 2003), making the statements less useful. This implies that financial reports as currently structured is outdated and plagued with many serious problems that if not seriously addressed will simply be prepared and published to fulfill all righteousness – compliance documents. No wonder Choras (2006) opined that given the change in the external reporting environment, business practices and information technology, it is not surprise that the relevance of the traditional reporting model is being questioned.
These and other criticisms of the conventional corporate report lead to the call for introduction of a reporting model that provides a strategic picture of the company, focusing on all the issues which have a material impact on its business model. In response to above concerns, many companies have attempted to improve the information available for stakeholder decisions through supplementing their traditional financial reporting with the reporting of non-financial information to cover all the activities including impact to the environment. Sustainability reporting came to the limelight.
CHAPTER THREE
METHODOLOGY
Research Design
Research design are strategies of enquiry. The ex post facto research design was chosen to evaluate the effect of sustainability disclosures on performance of non financial companies quotedin the Nigerian Stock Exchange. The justification for the ex post facto research design is because the research is conducted by analysising past events of already existing conditions (sustainability disclosures and performance). Hence the researcher have no control and cannot manipulate these variables.
Population of the study
The target population of this study consist of all the quoted non financial companies on the Nigerian Stock Exchange from 2006 to 2015. Only Nigerian companies were chosen for the study due to the fact that sustainability reporting at this developmental stage is voluntary and is influenced by national law, accounting traditions among other national differences (Deegan & Unerman, 2006). Thus the population of the study is the one hundred and twenty (122) non- financial companies quoted on the floor of the Nigerian Stock Exchange (NSE) as at 31st December, 2015. The current delisting of some companies did not take retrospective effect on the study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
The data used in this study comprises of specific company‘s sustainability disclosures which were agrregted for the purpose of analysis and are contained in Appendix II. It is important to emphasise here that this study evaluates the effect of sustainability disclosures on firm performance taking into account environmental, social and governance sustainability attributes by employing samples from quoted non financial companies in Nigeria between the periods of 2006–2015. In this study, environmental sustainability is measured by the variables of: Environmental Compliance Policy (ENCOMPO), Environmental Sensitive Products (ENSPROD), Environmental Conservative Disclosure (ENCONSD), Environmental Donations (ENVDO) and Energy consuming Assets (ENGYCON). Also, Social Sustainability is measured with the variables of: Social Donations (SOCDON), Disclosure of Community Social Responsibility (DISOCR), Disclosure of Charitable/Philanthropic Gifts (DISCGFT), Disclosure of Human Resources and Employee Relations (HREMPR), Job Creation (JOBCR), Investment in employee (INVEMP), and Disclosure of Employee Health, Safety and Welfare (EHSWDIS). Board Size (BSIZE), Board Independence (BOIND), Board Gender Diversity (BOGD), Board Ownership/Directors Share Holding (DHOLD), Audit Committee Size (ACSIZE), Board Remuneration/Directors Cost (DCOST) and Auditors Credibility (AUDCRED) were the variables used to capture Corporate Governance Sustainability. Firm Size (FSIZE), Firm Age (FAGE) and Leverage (TLBTA) were used as Control variables. Control variables help in controlling for other potential impact variables apart from the independent variables of the study. The result of analysis were presented using both descritptive and inferential statistics.
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
Summary of Findings
The study investigates the effect of sustainability disclosures on firm performance taking into account environmental, social and governance sustainability attributes by employing samples from quoted companies in Nigeria between the periods of 2006–2015. The result from Pooled ordinary least squares multiple regression using ROA and Tobin‘s Q measures of performance showed that:
Environmental sustainability disclosures have positive but insignificant effect on accounting based performance measured by ROA of firms in By interacting each specific environmental disclosure, it was discovered that environmental compliance policy is a significant driver of performance via return on asset. Environmental sensitive products has no significant effect on return on assets. Environmental conservative disclosure has positive but insignificant effect on return on assets. Environmental donations has positive but insignificant effect on return on assets. While Energy consuming assets has significant negative effect on return on assets.
On the other hand, environmental sustainability disclosure have significant positive effect on market based performance measured by Tobin‘s q. Various specific disclosures results showed that environmental compliance policy is a significant driver of performance Tobins q Environmental sensitive products has positive but insignificant effect on Tobins q. Environmental conservative disclosure has positive but insignificant effect on Tobins q. Environmental donations has positive and significant effect on Tobins q. While Energy consuming assets has positive but insignificant effect on Tobins.
The variable social sustainability disclosure have significant positive effect on accounting performance measured here with return on assets. Specific analysis shows that social donations have significant effect on performance of quoted companies in Disclosure of community, social responsibility was found to have a negative and insignificant effect on return on assets. Disclosure of charitable gifts have positive and insignificant effect on firm performance. Disclosure of human resources and employee relations has positive but insignificant effect on firm performance in Nigeria. Job creation have a positive and significant influence on return on assets. Investment in employee have significant positive effect on return on assets. Disclosure of employee health, safety and welfare has insignificant negative effect on return on assets.
Social sustainability disclosure have negative and insignificant effect on firm value measured with Tobin‘s q. Specific analysis shows that social donations have significant positive effect on market value. Disclosure of community, social responsibility was found to have a positive but insignificant effect on firm value. Disclosure of charitable gifts have negative and insignificant effect on firm value. Disclosure of human resources and employee relations has positive but insignificant effect on firm value. Job creation have positive and significant influence on firm performance. Investment in employee have significant positive effect on return on assets. Disclosure of employee health, safety and welfare has insignificant positive effect on firm value.
It was discovered that corporate governance sustainability have significant positive effect on Specifically board size have significant positive effect on ROA. Board independence have significant negative effect on ROA. Board Gender Diversity have significant positive effect on ROA. Directors Shareholding which have a negative influence on ROA and it statistically insignificant. Audit Committee Size have a significant positive effect on ROA. Director Remuneration have a significant negative influence on ROA. Auditors Credibility have an insignificant positive influence on ROA.
Similarly, corporate governance sustainability have significant positive effect on firm value measured by Tobin‘s q. Specifically board size have significant positive effect on firm value. Board independence have significant negative effect on firm value. Board Gender Diversity have insignificant positive effect on firm value. Directors Shareholding have a negative influence on firm value and it statistically insignificant. Audit Committee Size have a significant positive effect on firm value. Director Remuneration have a insignificant negative influence on firm value. Auditors Credibility have an insignificant positive influence on firm value.
Overall sustainability disclosures have significant positive effect on ROA among sampled firms during the period of the study. Also, overall sustainability disclosures have significant positive effect on Tobin‘s q used to measure market performance of The results for control variable of Firm Size (fsize) showed an insignificant positive effect on firm accounting based performance measureof ROA. In a market performance and aggregate sustainability disclosure regression model, firm size revealed a significant negative effect on Tobin‘s q. The results with each component of sustainability disclosure was discussed in the last chapter.
Firm age showed a positive and statistically significant effect on accounting performance variable of return on assets. It also have positive but insignificant effect on Tobin‘s q. The result of interaction with each component of sustainability disclosure was discussed in chapter four.
With respect to the variable of LEVERAGE, it has a statistically significant negative effect on accounting performance variable of return on assets. Interestingly, it also have a significant negative effect on Tobin‘s q used to measure market performance. The debt level of a firm has the potential to impact financial performance due to costs of finance and risk of default.
Overall, our findings suggest that sustainability disclosures are more aligned with firm value as seen in the higher values for the Adjusted R-squared for all the market based performance models.
Conclusion
Sustainability disclosures require great deal; nevertheless evidence from this study suggests that it is one worth taking. This indicates that financial rewards of engaging in sustainability disclosures practices outweigh the costs involved in the long run. Companies which score highly on the sustainability metrics are more sustainable and therefore more attractive to long-term investors and other stakeholders. Pleasing investors through increasing transparency on aggregated environmental, social and corporate governance disclosures ultimately resulted in financial benefits for the company.
The study shows that firms in Nigeria are rapidly catching up when it comes to increases in the level of disclosure in each components of sustainability disclosures. Pooled ordinary least squares multiple regression provided support that environmental sustainability disclosures through compliance with environmental policies by firms improves bottom line. Shareholders, investors, and others value firms lowly if the firm increases investment on energy consuming assets. This indicates that firms that uses more energy do not outperform others. Firms in Nigeria whose accounting activities covers disclosure on environmental related donations experienced significant improvement in its performance of shareholders value.
Fostering greater social sustainability disclosure can have value enhancing or decreasing effect depending on whether it is related to market value of firm or return on assets. Strategic provision of social donations guarantee significant improvement in performance. Additional man power to the services of the firm through job creation significantly improve firm performance just like investment in human capacity building is value enhancing.
Corporate governance sustainability disclosures that are positively associated with firm bottom line are board size, engaging more female on the board and adequate member in the audit committee to monitor the actions of managers. However, care should be taken about the number of outside directors appointed to the board and the mode of compensating the directors as they have value decreasing effect.
The findings of this study supported the assumptions of agency theory that when imbalance in information is reduced through sustainability disclosures some agency costs will be reduced and this will translate to firms‘ bottom line. Cost of complying with sustainability disclosure is being offset by improve competitiveness and long term financial performance by helping the principal have details of all the agents‘ activities.
Also by disclosing on all the sustainability issues, firms are shifting from the conventional objective of maximizing shareholders interest only to consider also other groups that both affect and are affected by the actions of the firm. This support the propositions of stakeholders‘ theory that communicating effectively with all stakeholders of a firm, is critical to its long term success, viability and growth.
The results showed that components of a firm‘s sustainability disclosures like making social donations help a firm in gaining social legitimacy which enables them to enjoy increased patronage and revenue. This conforms with the assumptions of legitimacy theory.
Recommendations
The findings of this study have policy implications for government, managers, shareholder, accountancy regulatory bodies and other stakeholders. Major Recommendations based on empirical findings:
- Firms in Nigeria should adopt and disclose environmental friendly policies like making donation towards environmental protection and providing for alternative source of energy considering resultant carbon emissions associated with using more energy consuming assets and finitness of these natural resources. These environmental sustainability activities when implemented allows managers to achieve both social and firm purposes.
- Cosidering that no firm will survive in a collapsed society, companies operating in Nigeria should make their investment attractive by addressing such issues as investment in human capacity building, strategic provision of social financial and in-kind donations, increasing workforce through job creation since they are not only important for long term survival but will reduce their vulnerability to societal crises.
- Corporate governance and sustainability should be linked and reported together as this offer new opportunities for integrative approaches in addition to being value relevant. Diversity in the workplace particularly giving female chance to participate on the board is strategy that should be sustained by all companies in Nigeria considering that women with the risk averse nature influence firms strategies. Bearing in mind that number of outside directors appointed to the board and mode of compensation can have counter productive effect on corporate performance, shareholders are advised to be cautious in handling these
- Since a robust sustainability disclosures lift a firm above their competitors, companies should foster greater sustainability and long-term value creation by integrating sustainability metrics into their business model and strategy.
Other Recommendations based on Incidental Findings
- We also recommended that accounting rules and reporting framework be reviewed so that with uniformity in sustainability practices among firms in Nigeria greater accountability and transparency will evolve.
- The study also have some policy implications for government. Sustainability disclosures will remain sporadic among Nigeria firms without legislations, so regulatory authorities in Nigeria should take steps like South Africa and other countries that have shown unprecedented commitment in driving corporate sustainable development initiatives leading to sustainable business environment that will be beneficial to government, firms and other stakeholders. There should be stiff penalties on firms against non-compliance as that will reduce environmental degradation to a tolerable
- The study has managerial implications even for variables that showed insignificant effect like disclosure of environmental sensitive products, employee health and safety issues in place to assist workforce members. Firms should keep on reporting on these strategies, programs as they can also bring operational improvements and make the company more sustainable over the long
- Governmental and international agency in Nigeria should develop database of sustainability disclosures by firms in Nigeria like Thomson Reuters Asset4 database, Kinder, Lydenberger and Domini (KLD) database, Dow Jones Sustainability Index DJSI in developed countries, it will encourage firms and even researchers to have increased concern for sustainability.
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