KIU Journal of Social Sciences

KIU Journal of Social Sciences Copyright©2018

Kampala International University ISSN: 2413-9580; 4(3): 189–199

Corporate Governance and Financial Performance of Quoted Manufacturing

Companies in Nigeria

RICHARD ORE-OLUWA AKINGUNOLA, JOSHUA D. OLANIYAN

KENNY ADEDAPO SOYEMI
Olabisi Onabanjo University, Ago-Iwoye, Nigeria

Abstract. This study explored the effect of Keywords: Audit Committee, Board of
corporate governance mechanisms and Director, Corporate Governance,
financial performance of quoted Profitability, Performance
manufacturing companies in Nigeria using
50 listed manufacturing companies on the 1. Introduction
Nigerian Stock Exchange market within the
period of 5 years 2009-2013. The study used Often time the growth and development of
six key variable for corporate governance an economy is much reliant on the joint
while Return on Assets and Return on effort of the economic agents which are
Equity were used as a measurement of individuals, firms and government. For a
performance. Based on a regression Nation to improve on its GDP, the
analysis, results shows that women on board performance of firms operating in various
of directors (BWN), number of executive industries must be encouraging and
directors (NED) and number of non- advancing. However, several factors could
executive directors (NNED) have direct hinder a firm from performing as expected
relationship with ROA, and these conform and as a result contributing less to the
with a’priori expectation. However, only economic growth. In Nigeria, the role of the
number of directors (NDTS) reported a manufacturing sector in the national
negative significant impact on ROA. On the development cannot be overemphasised,
part of return on equity (ROE), only of however, several factors which include high
executive directors (NED) reported a cost of production, increased exchange rates,
positive significant impact on ROE. This increased cost of energy input, poor and
study recommended that; industry specific inadequate infrastructural facilities, have
effects should be taken into consideration been identified as some of the factors
before formulating codes of corporate affecting the performance and effectiveness
governance that determine the of firms in the manufacturing industry.
characteristics of the board structure. While the factors identified above represent
external forces affecting the performance of
a firm, it is also important to evaluate how

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the internal factors and structure of a firm to the study while section two contains
affects its performance. The system by literature review. Section three detailed the
which companies are directed and controlled methodology, analysis and discussion of
in the interests of shareholders and other results while the last section deals with
stakeholders which is also known as conclusion and policy recommendation.
corporate governance is also an important
issue that is crucial to the performance of a 2. Literature Review
firm.
Corporate governance has been
As argued in the literature, corporate conceptualised by different authors as the
governance is a mechanism used in mechanism used in governing and
monitoring those parties within a company controlling an organisation (Sanda, Mukaila
who control the resources owned by and Garba 2005; Yinusa and Babalola,
investors for the purpose of promoting 2012; Owolabi, Owolabi, and Olotun, 2013;
corporate performance and accountability. Momoh and Ukpong, 2013; Okoi, Stephen,
In addition, corporate governance also and Sani, 2014; Balasingham and Robert,
serves the purpose of increasing the level of 2015; Duncan and Kabare, 2015)
confidence and transparency in the
company’s activities for all investors. The In the Cadbury 1992 report, corporate
collapse of high profile entities such as governance is defined as the system by
Enron Corporation, Worldcom, Tyco, and which companies are directed and
Parmalat and in Nigeria, cases such as controlled. This definition actually captured
Cadbury have led to contemporary what corporate governance means, however,
discussions on the best mechanisms for it fails to highlight the key governance
protecting stakeholders’ interest and components and the actual objective of
ensuring shareholders wealth maximization. corporate governance hence, it may be
Based on the foregoing, it is important to classified as non-comprehensive definition
investigate how corporate governance of corporate governance. Organisation for
mechanism affects the performance of a Economic Co-Operation and Development
firm. The issue of corporate governance has (OECD) defined corporate governance as a
been given due recognition in the accounting key element in improving economic
literature (Stephen and Benjamin; 2013), efficiency which involves a set of
however, not many studies are industry relationships between a company’s
specific while examining the impact of management, its board, its shareholders and
corporate governance on firms’ other stakeholders. This definition actually
performance, hence this study differ from points out the essence of corporate
other studies in that it focuses on firms in governance and also highlights the parties
the manufacturing sector. Furthermore, this involved in corporate governance practices.
study will empirically explore this subject Hence, this definition is adopted for the
matter by finding the relationship between purpose of this study. The key components
some selected corporate governance of corporate governance as often discussed
mechanisms and financial performance of in the literature are: The role and
quoted manufacturing companies in Nigeria. responsibilities of the board of directors, the
composition and balance of the board of
The study is therefore divided into four directors, financial reporting, narrative
sections: section one discuss the background reporting and auditing, Directors’

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remuneration, audit committees, risk in which the principal and agent are likely to
management and internal control, have conflicting goals and then describe the
Shareholders’ right and corporate social governance mechanisms that limit the
responsibility. agents’ self-serving behaviour. This stream
has focused almost exclusively on the
2.1 Theoretical Framework principal-agent relationship existing at the
level of the firm between shareholders and
This study reviewed theories that point out managers. Jensen and Meckling (1976), who
that there is a positive reinforcing effect on fall under the positivist stream, propose
firm performance but for the purpose of this agency theory to explain, inter alia, how a
study, agency theory would be the best public corporation can exist given the
theories to justify the effect of corporate assumption that managers are self-seeking
governance on financial performance of individuals and a setting where those
manufacturing companies in Nigeria. managers do not bear the full wealth effects
of their actions and decision.
The agency theory has its roots in economic
theory (Fama, 1980) and it dominates the Therefore, agency theory appears to be the
corporate governance literature. Daily, mother theory of corporate governance from
Dalton and Canella (2003), point to two which other theories have sprung up,
factors that influence the prominence of though, it still suffers some limitations. One
agency theory. Firstly, the theory is a of the limitations is that the stewardship
conceptually simple one that reduces the attribute of agents is not taken into
corporation to two participants, managers cognizance. The theory does not also
and shareholders. Secondly, the notion of recognize the existence of other
human beings as self-interested is a stakeholders’ asides the shareholders.
generally accepted idea.
In its simplest form, agency theory explains Agency theory would be used in other to
the agency problems arising from the determine the effects numbers of meetings
separation of ownership and control. It attended by board and how large the board
“provides a useful way of explaining size which include the directors, non-
relationships where the parties interests are executives directors, the executives
at odds and can be brought more into directors, independent and non-independent
alignment through proper monitoring and a executive directors on agency costs because
well-planned compensation system” (Davis, agency theory states that the management
Schoorman and Donaldson 1997). Principal- and the owners have different interest as
agent research is concerned with a general such that companies separate the functions
theory of the principal-agent relationship, a of management from ownership would lead
theory that can be applied to any agency to conflicts. The divergence of interest
relationship e.g. employer employee between owners and management lies in
Eisenhardt (1989) or lawyer-client describes maximizing the wealth of the owner with the
such research as abstract and mathematical benefit, incentives will be received by the
and therefore less accessible to management.
organizational scholars. This stream has
greater interest in general theoretical 2.2 Review of Empirical Literature
implications than the positivist streams have
tended to focus on identifying circumstances

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The board is an important internal and ROE will have 98% negative impact
mechanism for resolving the agency due to the increases in Meeting Frequency.
problems, since it is primarily responsible So meeting frequency has significant impact
for recruiting and monitoring the executive on the firm performance of financial
management to protect the interests of the institutions. Therefore, their study reveals
shareholders. Many researches’ have studied that, increasing Meeting Frequency will
the effect of board size as a measure of the result poor financial performance, because
quality of corporate governance on firm of increases in cost of management.
performance. Though the Securities and
Exchange Commission Code of Corporate 3. Methodology
Governance in Nigeria (2003) stipulates that
the size of a board should not exceed fifteen The study therefore covers six keys
(15) persons or be less than (5) persons in governance variables which are (Numbers of
total, the question still remains on what the Directors, Numbers of Non-Executive
optimal size of a board should be. Among Directors, and Numbers of Women on
other scholars, Kashif (2008) suggest that board, Numbers of Executive Directors),
the board size be chosen with the optimal Board Size, and Numbers of Board Meeting.
combination of both inside and outside An empirical model is formulated which is
directors for the value creation of the based on the use of panel data methodology.
company. This study employs panel data analysis
which is a combination of time series and
Ning, Davidson, & Wang (2010) assert that cross sectional data analysis because it is the
when board size increases, agency problems most useful for it. This study also would
in the boardroom increase simultaneously, adopt the models of Kajola (2008) which
therefore leading to more director free- specifies the model given below:
riding problems and internal conflicts Yit= βo +βFit + eit
among directors. Drawing from this pattern (i)
of thought, agency theory encourages Where:
smaller boards because of the ease of Yit = Dependent variable (Financial
decision making and reduced tendency of Performance)
conflict of interest. βo= Constant
β1 = Coefficient of the explanatory variable
Some empirical evidence shows that (corporate governance mechanism)
meeting frequency is an important Fit = Explanatory variable in the estimation
dimension of an effective board. Danoshana model
and Ravivathani (2013) reviewed in their eit = Error term (assumed to have zero mean
study that the case of ROA with Meeting and independent across time period)
Frequency, coefficient is -0.271, test of p- Also, for the purpose of this study below are
value is 0.0001< 0.05. This result depicts the models representing each of the
that, Meeting Frequency has a significant hypothesis;
negative impact on ROA and an increasing H1: Board size does not have significant
in meeting frequency will reduce the ROA influence on the performance on
by 27% and in the case of ROE, Coefficient manufacturing firms in Nigeria.
is -0.977, test of p-value is 0.0000< 0.05. FinPerfit = βo +β1 Bsizeit+ eit
Significant negative impact relationship (ii)
exists between Meeting Frequency and ROE

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H2: Numbers of board meetings has no NDTSit:Numbers of the Directors of the

significant impact on manufacturing firm’s company in time t
financial performance in Nigeria. BWNit: Numbers of women on board of the
FinPerfit = βo+ β2 NMEETit+ eit company i (cross sectional) in time t
(iii) NEDit: Numbers of Executives Directors of
H3: Corporate governance has significant the company i (cross sectional) in time t
impact on financial performance of NNEDit: Numbers of Non-Executives
manufacturing companies in Nigeria. Directors of the company i (cross sectional)
FinPerfit = βo+ β2 NDTS it+ eit in time t
(iv) Control Variable
FinPerfit = βo+ β2 BWN it+ eit Growth (GOPPT): Is measured by the
(v) percentage change in the value of the asset.
FinPerfit = βo+ β2 NED it+ eit The Ordinary Least Square panel regression
(vi) model is the estimation techniques adopted
FinPerfit = βo+ β2 NNED it+ eit in this study. Initially equation 1 above
(vii) assumed a simplest approach by running
Therefore, the mathematical model is pooled regression. However, in order to
expressed below: account for the deficiency of over
FinPerfit = f (corporate governance simplification associated with the pooled
variables, control variables) regression, the fixed and the random effects
The regression model for the empirical ordinary least square estimation conducted.
analysis is therefore given as follows:
FinPerfit=βo+β1Bsizeit+β2NMEETit+β3NDT A prior expectation of the study explains the
Sit+β3BWNit+β3NEDit+β3NNEDit+ anticipated outcome of an occurrence. In
β4gopptit+eit(vii) this regard, it explains the anticipated
outcome of the research hypotheses. Thus, it
Where; is expected that corporate governance
Dependent Variables mechanism have positive or negative impact
FinPerfit: Two variables where used to on financial performance of manufacturing
measure performance to determine the firms in Nigeria. Board size and the numbers
strength. The variables which are captured of meetings are expected to have significant
as proxies of performance in this study impact on firm’s performance; they are
include: likely to be influence by growth of the firm
ROEit: return on equity (profit after tax/total which would enhance their performance.
equity shares in issue) for company i(cross Also, it is expected that frequency of board
sectional) in time t meeting would likely have a negative impact
ROAit: return on assets (profit after tax/ on financial performance of the firm because
total assets) for company i(cross sectional) its increases the cost since agency cost
in time t reduce the performance of firms.
Independent Variables
BSIZEit: board size (number of directors on 4. Analysis and Discussion of Result
the board) for company I (cross sectional)in
time t This section of the research study dealt with
NMEETit: Frequency of board meeting descriptive and econometric analysis of the
(numbers of meetings attended) for effects of corporate governance on financial
company i (cross sectional) in time t performance of 50 listed manufacturing

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companies on the Nigerian Stock Exchange The average value of number of meeting
market within the period of 5 years 2009- (NMEET) is 5.088. Their minimum values
2013. The time frame for the analysis is are relatively lower to their mean values.
chosen based on availability of data from The mean value of board size representing
various sources. The data sourced for the total asset (BSIZE) and growth opportunity
analysis of this study are presented and (GOPPT) are 38,547,133 and -3.37
employed to estimate the panel regression respectively.
model specified in the previous section
using the E-Views version 9.1. In addition, the standard deviation reports
the rate at which these variables deviate
The descriptive characteristics of the 50 from their individual mean values. Return
pooled-company data employed in the on asset (ROA), return on equity (ROE),
estimation of the panel static regression total asset (BSIZE), and growth opportunity
models for corporate governance and (GOPPT) have high deviate rate in varying
financial performance is shown on Table 1, magnitude from their means, as their
while Table 2 presents the correlation standard deviation values are greater than
matrix. The trend review of some of the data average values. Moreover, return on asset
is resent at the Appendix A. The summary (ROA), return on equity (ROE), growth
statistics of the pooled data for 50 selected opportunity (GOPPT) and number of
companies shown on Table 1 indicate the meeting (NMEET) were found to be
average, maximum, minimum, standard negatively skewed with a value of -4.8, -
deviation, skewness, Kurtosis, Jarque-Bera 15.5, -3.99 and -0.17 respectively, whereas,
and coefficient of variation of all the other variables reported rightward skewness.
variables between 2009 and 2013. As well, the Kurtosis identified 3.0
suggesting the normal distribution of these
The average values of return on asset (ROA) corporate governance and financial
and return on equity (ROE) are 0.0353 and - performance indicators and their
0.00462 respectively. Both financial determining variable factors. From the table,
profitability indicators have their minimum none of the variables are normally
value to be negative with -1.729 and -1.655 distributed except for number of non-
respectively, indicating the low performance executive directors (NNED) which
rate of the listed companies. On the part of approximately equal to three (3). Of all the
corporate governance, the average value of other variables, five (5) are leptokurtic in
number of directors (NDTS), number of nature while the remaining two (2) are
women on board of directors (BWN), platykurtic. More so, the Jarque-Bera
number of executive directors (NED) and statistics revealed that all the indicators are
number of non-executive directors (NNED) significant at 0.05 critical values denoting
are 9.31, 1.34, 1.94 and 7.61 respectively. that they are normally distributed.

Table 1: Descriptive Statistics for 50 selected companies on NSE Market Pooled Data
Std. Jarque-
Mean Max. Min. Skewness Kurtosis Prob. Obs.
Dev. Bera
ROA 0.0353 0.3879 -1.729 0.1987 -4.800 38.368 12759.3 0 228
ROE -0.0046 0.1228 -1.655 0.1058 -15.454 241.699 596222.4 0 247
NDTS 9.3146 17 3 2.8965 0.3332 2.6109 5.7556 0.05 232
BWN 1.3387 4 1 0.6488 1.8704 5.7340 110.92 0 124
NED 1.9361 9 1 1.3047 2.1802 9.2489 529.82 0 219
NNED 7.6087 17 3 2.8352 0.5893 3.0310 13.320 0.001 230
BSIZE 385473 6.7E+08 68934 785443 4.4825 29.469 7484.62 0 230

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GOPPT -3.3725 33.165 -100 20.6423 -3.9918 19.171 3103.35 0 229

NMEET 5.088 6 4 0.8874 -0.1724 1.2969 31.454 0 250
Source: Author’s computation (2016).

The Table 2 reveals the partial correlation between the indicators of corporate governance and
financial performance. From the two financial performance indicators (ROA&ROE) and
corporate governance indicators (NDTS, BWN, NED, NNED), the magnitudes of their various
relationships are low, where none of them (independent variables) are up to 0.6, although,
positive and negative signs vary among them. Other indicators that reported high correlation
values with financial performance was between ROE and BSIZE (0.865). The strongest
associations among the variables are fairly moderate with either a positive or negative value.
Furthermore, some degree of correlation is expected among determining indicators since they are
mostly employed to enhance financial performance. Nevertheless, the moderate to low degree of
association among the variables make them suitable for the analysis.

Table 2: Correlation Matrix

ROA ROE NDTS BWN NED NNED BSIZE GOPPT NMEET
ROA 1.000
ROE 0.559 1.000
NDTS 0.277 0.550 1.000
BWN -0.073 -0.004 0.045 1.000
NED 0.350 0.402 0.525 0.616 1.000
NNED -0.125 0.105 0.556 -0.537 -0.353 1.000
BSIZE 0.375 0.865 0.575 0.051 0.395 0.187 1.000
GOPPT 0.073 -0.020 0.101 0.046 0.169 -0.007 -0.018 1.000
NMEET 0.285 0.074 0.194 0.020 0.121 0.083 0.068 0.230 1.000

Corporate governance has significant impact on financial performance of manufacturing

company in Nigeria

The fixed effect methods were employed in estimating the panel regression models that
examined the impact of corporate governance on financial performance of 50 listed
manufacturing companies on the NSE market. The estimated coefficients between the fixed and
random effects’ models were compared using the Hausman test with the null hypothesis “random
effects are uncorrelated with the explanatory variables”.

Table 3:
Fixed Effect Results of Corporate Governance Indicators and Financial Performance of 50 Listed
Manufacturing Companies on NSE Market (Pooled Result)
Dependent Variable: Financial Performance
ROA Model ROE Model
Constant -0.02778 -0.0085
(0.03351) (0.0214)
NDTS -0.02965 -0.0048
(0.0119)** (0.0076)
BWN 0.02405 -0.00062
(0.01971) (0.0126)
NED 0.04113 0.0076
(0.01543)* (0.0099)
NNED 0.01846 -0.0056
(0.01203) (0.0027)**

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Adjusted R2 0.4345 0.3919

S.E. of Reg. 0.1662 0.1061
F-stat 2.3379* 3.1907*
Hausman Test 18.865** 15.702**
No of Obs. 250 250
Cross-Section 5 5
Source: Author’s computation (2015).

Heteroskedasticity-consistent standard corporate governance and return on asset in

errors in parenthesis; Statistical significant Nigerian manufacturing industry.
coefficients at 10%, 5% and 1% respectively On the part of return on equity (ROE), only
are denoted by ***, ** and *. All of executive directors (NED) reported a
regressions use the fixed cross-section positive significant impact on ROE with a
effects no weights standard errors and 0.08% point decrease due to a 10 units
covariance (d.f. corrected). increase. In addition, number of directors
The Hausman test result presented in Table (NDTS), women on board of directors
4.6a reveals that we do reject the null (BWN) and number of non-executive
hypotheses for all the considered models at directors (NNED) have indirect relationship
either 1%, 5%, or 10% significance levels with ROE, and these does not conform with
based on the calculated Chi-Square values. a’priori expectation. On the basis of impact
The fixed effect model was found more intensity, 10 units increase in NDTS, BWN
consistent and efficient for the purpose of and NNED deteriorates return on equity by a
this study. Also, two forms of estimated 0.05%, 0.006% and 0.06% points
panel regression models were reported for respectively. NNED was found to be
this hypothesis with respect to return on significant at 0.05 critical levels. The F-test
asset (ROA) and return on equity (ROE). shows that there is significant relationship
The fixed regression results of corporate between corporate governance and return on
governance on return on asset and return on equity in Nigerian manufacturing industry.
equity as measures of financial performance Thus, there is significant relationship
models were reported on Table 4.6a above. between corporate governance and financial
performance of Nigerian manufacturing
The estimated model for ROA indicate that industry.
women on board of directors (BWN),
number of executive directors (NED) and 4.1 Discussion
number of non-executive directors (NNED)
have direct relationship with ROA, and The study reports that a mixed outcomes
these conform with a’priori expectation. On between corporate governance indicators
the basis of impact intensity, 10 units and financial performance in Nigerian
increase in BWN, NED and NNED manufacturing companies with different
improves return on asset by a 0.24%, 0.41% indicators of boards size. Indicators such as
and 0.19% points respectively. NED was women on board of directors, number of
found to be significant at 0.05 critical levels. executive directors, and number of non-
However, only number of directors (NDTS) executive directors have positive impact on
reported a negative significant impact on ROA of manufacturing companies in
ROA with a 0.30% point increase due to a Nigeria. Also, with a’priori expectation and
10 units increase. The F-test shows that agency theory as these indicators are
there is significant relationship between expected to enhance firms’ ability to
efficiently allocate and manage their

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companies’ resources. The Nigerian discretionary accruals for short-term

manufacturing industry satisfies the profitability.
stipulated numbers of board by the
Securities and Exchange Commission Code Nevertheless, number of directors, and
of Corporate Governance in Nigeria (2003) number of women on board of directors
in terms of minimum number of 5 persons, have positive impact on ROE. The study
although with varying composition. shows that women participation as part of
However, the maximum numbers stated at board member has greater impact on
15 persons were not followed as some financial performance evidenced from both
manufacturing companies have more than ROA and ROE. Also, there is inconsistence
the stipulated value (see maximum value in in financial performance measure and
Table 4.1). The negative impact indicated by number of directors as a negative and
number of directors (NDTS) (with a positive relationship was reported with ROA
maximum number of 17 persons) on ROA and ROE respectively. The positive
supports Ning, Davidson, &Wang (2010) relationship of number of directors and ROE
assertion that “when board size increases, is consistent with Ming-Feng, et.al (2015)
agency problems in the boardroom increase postulation that “the bigger the board size,
simultaneously, therefore leading to more the more ability for the board to monitor
director free-riding problems and internal whether the managers conduct earnings
conflicts among directors”. management behaviour or not”.
The number of meeting has a negative
significant impact on ROA and ROE with a 5. Conclusion
co-efficient of -0.0056 and -0.0090
respectively. This suggests that number of Based on the discussion of findings stated in
meetings has a significant impact on the the above sub-section it was observed that
financial performance of organization, there is a mixed outcome in terms of
which is in line with the findings of relationship between corporate governance
Danoshana et.al (2013). and financial performance as different
indicators used as proxy them. Irrespective
In respect to ROE, the study shows that the of these differences, women participation as
number of non-executive directors and board members has significant impact on
number of executive directors have negative manufacturing performance. This study
impact on ROE. Although, number of supports the agency theory that corporate
executive directors reported inconsistent governance enhances firms’ ability to
sign but it is considered to have a negative efficiently allocate and manage their
impact on ROE. It also follows the argument companies’ resources; and the number of
raised by Ning, et.al (2010) that the higher meeting has an indirect impact on financial
the board size, the problem of agency in the performance, suggesting that the lower the
boardroom increase simultaneously since number of meetings, the better the financial
decision tends to be delayed. This revealed performance of manufacturing industry. The
that the findings negate the assertion of study also revealed that number of board
Ming-Feng and Shiow-Ying (2015) that meetings enhance financial profitability. The
institution with high shareholding proportion bigger the size of the total assets of a
or great shareholding concentration gives manufacturing industry the better it grows
managers incentives to manipulate and attract a good performance.

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6. Recommendations on firm performance: A study on

financial institutions in Sri Lanka;
Over the reviewed period under study, Merit Research Journal of
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performance are greatly improved upon in & Donaldson, L. (1997). Toward a
the manufacturing industry; the following Stewardship Theory of
policy options are recommended: Management. The Academy of
Management Review, 22(1), 20-47.
Firstly, industry specific effects should be Donaldson, L., & Davis, J. (1991).
taken into consideration before formulating Stewardship or agency theory: CEO
codes of corporate governance that governance and Shareholder returns.
determine the characteristics of the board Australian Journal of Management.
structure. The Securities and Exchange Duncan W. and Kabare K. (2015). The
Commission should take into cognizance influence of Corporate Governance
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corporate governance. Manufacturing Firms in Kenya: A
Theoretical Model. International
Secondly, the Corporate Governance Journal of Academic Research in
Committee of companies should endeavour Business and Social Sciences April
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Fama, E. F., 1980. Agency Problems and the
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investigated because it is apparent that there Political Economy, 88, 288-307
are scenarios were profits keep reducing till Jensen, M., and Meckling, W. (1976).
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