The Impact of Corporate Governance Mechanism on Firm Performance in Nigeria
Chapter One
Objectives of Study
The main objective of study is to critically the impact of corporate governance mechanism on firm’s financial performance in Nigeria. Other objectives are:
- To assess the effectiveness of the processes of corporate governance in Nigeria organization.
- To examine the relationship between the ownership structure and effective adherence to governance procedures and structure.
- To ascertain the extent to which the composition of the Board of Directors impact on the firm’s financial performance.
- To highlight factors that hinder effective adherence and implementation of corporate governance procedures.
- To examine the relationship between corporate governance procedures and firm is financial performance.
- To examine the relationship between the appointment of Chief Executive Officers (CEO) and stakeholders interest.
CHAPTER TWO
LITERATURE REVIEW
Theoretical Foundation
Literature review basically identifies and examines the work done by other researchers and scholars concerning the impact of corporate governance on the banks’ financial health. This review provided a detailed knowledge of what has been done and provided a platform upon which the findings were interpreted and also to overcome the previous studies’ limitations. The following section described and discussed the different theories such as Stakeholder and Agency Theory.
Agency Theory
This philosophy argues that a relationship subsists between the principals i.e. the company’s shareholders and the agents who act as the managers and executives of the company. Meckling’s and Jensen’s proposition on agency theory mark by the whole of a red letter that the veto between ownership and ministry may show once and for all in division problems being talented in many latter organizations (Jensen & Meckling, 1976).
The dominant, who gives the press some decision-making restraint, incurs salt mine costs accruing from the departure from the norm of shareholders’ interests with those of attend managers. Meckling and Jensen represents agency costs as the finale of bonding charge, residual ceasing to exist and monitoring costs. Despite monitoring and bonding costs inquired, residual loss still occurred as a result of managers and shareholders interest not being fully aligned. Alignment of interests occurs when there is harmony between objectives of agents acting within an organization and those of the organization as a whole (Jensen & Meckling, 1976).
Incentives such as stock options, bonuses, and profit related pay can be used as a method of aligning interest of the agent with those of the principal since these are directly related to how well the result of management decision serves the shareholder decisions. Agency theory advocates for self-interest by the managers and employees that. This calls for the agents to conduct their duties while keeping the interests of the principals in mind. The agents are governed by rules made by the principals, with the maximizing of shareholders value as the main objective. Hence in this theory a more individualistic view is applied (Nambiro, 2007).
The Stakeholder Theory
This theory was developed gradually by Freeman (1984) who advocated the inclusion corporate accountability to the different types of stakeholders. In essence, stakeholder theory views the firm as an input-output model by involving the various stakeholders of a firm such as employees, suppliers, customers, dealers, governmental bodies and the larger society into the mix.
Stakeholder theory has been defined a stakeholder as a individual or group whose actions can distress the attainment of the business’s objectives or can influence the attainment of those objectives (Fernando, 2009). Stakeholder theorists argue that an organization’s managers have associations with: the suppliers, employees and business partners to whom they are responsible and affect their activities both internally and externally. These groups of relationships are of greater importance than the association between the owner and the manager as suggested by agency theory (Freeman, 1999). Inkpen and Sundaram (2004) noted that the theory addressed the wider range of stakeholders and that the firm system is composed of many stakeholders and each organization’s main aim is to generate wealth for the stakeholders.
Freeman (1984) argues that the relationship of the firm with the various groups of stakeholders affects the decision making process as this theory is focused on the type of these associations for the outcome of the firm activities. This theory is mainly interested in the nature of these associations regarding both the processes and outcomes from the firms and the firm’s stakeholders as these groups can affect pronouncement creation processes (Wanyama & Olweny, 2003).
Corporate Governance and Organizations Performance
Many studies that look at the performance of an organization would never fail to mention of corporate governance. This is due to believe that the quality corporate governance structure of an organization affects its performance. Corporate governance is perceived to influence firm financing or decisions related to capital structures which influence the firm’s performance by previous studies (Berger 1997, Lang and Friend, 1988;).
Weak practices of corporate governance lead to poor financial performance and contribute to macroeconomic crises (Claessens et al.,2002). The corporate governance concept is fundamental in the achievement of economic growth and efficiency because top level management consider it as a device for the reduction of misconduct or mismanagement in the management of an organization(Gomper et al., 2003). When good corporate practices are observed, the agency costs incurred by a firm and in efficiencies experienced due to conflict of success surrounded by managers, stakeholders and owners are reduced head of the line to righteous competitive biggest slice of the cake of a partnership during other firms herewith firms are talented to fulfill their urban responsibilities in the communities anywhere they are based (OECD, 2004)
CHAPTER THREE
RESEARCH METHODOLOGY
Research Design
Descriptive cross sectional research design was applied to solve this research problem. A descriptive study aims at finding out the what, where and how of a phenomenon (Cooper & Schindler, 2003). The appropriateness of this design allowed researcher to utilize both quantitative and qualitative data so as to establish the impact of corporate governance on Cadbury PLC, Lagos state.
Descriptive cross sectional design was utilized in gathering information, summarizing, presentation and interpretation it in order to obtain more clarification on issues. The researcher chose descriptive survey research design because his interest was primarily on the current state of affairs in the field rather than manipulating variables. Cross-sectional study methods are done once and they represent summary at a given timeframe (Cooper and Schindler, 2008).
Population of the Study
A population has been defined as individuals, groups, object or events that exhibit similar traits (Mugenda & Mugenda, 2003). The selected population target for this study was Cadbury PLC Lagos. This target population provide data that gave answers to the research questions raised by the researcher on how corporate governance influences the performance of Cadbury PLC, Lagos state.
For primary data collection purpose, the study focused particularly on senior level managers and board of directors of the firm. The researcher believes that these are the most informed on the various structures of corporate governance.
CHAPTER FOUR
DATA ANALYIS, FINDINGS AND DISCUSSIONS
Demographic Information
Gender of Respondents
The study intended to find out the extent to which different genders participate in the management of Cadbury PLC Lagos.
Figure 4.1: Distribution by Gender
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
The study’s objective was to explore the impact of corporate governance mechanism on the performance of Cadbury PLC, Lagos. In order to establish the impact of corporate governance mechanism on the performance, regression analysis using SPSS. The components of corporate governance that were considered are: board diversity, board size, number of committees and number of meetings and board independence.
The study established that smaller boards improve the performance of the firm although larger size boards are more capable in the provision of resources.. The study further established that boards of Cadbury PLC Lagos are diverse in terms of gender and that the appointment of board members considers a mix of skills required in the stewardship of the organization such as education and industry experience.
Regression findings revealed a stong association (R= 0.723) exists between corporate governance and financial performance with corporate governance accounting for 52.3% of the total variance in firms performance. Further, the study established that corporate governance components.
Conclusion
It can be concluded from the findings that a strong association exists between corporate govenance and the firm performance of the Cadbury PLC, Lagos. Corporate governance accounts for 52.3% of firm performance of the companies at the firm. It also concludes that corporate governance components (board size, board independence, board diversity, number of committees, number of meetings) have positive and strong impact on the performance of listed firms.
Policy Recommendations
The study found out that board diversity, number of committees and number of meetings affects firm performance positively. This study therefore recommends that the shareholders should promote board diversity, promote independence of audit committees and increase the frequency of the board meetings as this translate to improved firm performance. The study also established that number of non-executive (independent) directors and the affects firm performance of listed companies positively. The study therefore recommends that the shareholders of listed firms should keep the number of independent directors higher than the insiders as this allow them to make appropriate and non-partisan decisions.
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