CORPORATE GOVERNANCE STRUCTURE AND FINANCIAL PERFORMANCE OF QUOTED COMPANIES IN NIGERIA

CORPORATE GOVERNANCE STRUCTURE AND FINANCIAL PERFORMANCE OF QUOTED COMPANIES IN NIGERIA

The aim of this study is to examine the corporate governance structure and financial performance of quoted companies in Rivers states.

RELATED  MATERIAL

CHAPTER ONE

INTRODUCTION

Background of the study

The subject of corporate governance has received considerable intellectual and theoretical attention in the literature. Financial performance has an undeviating connection with corporate governance.  Corporate governance is all about running an organization in a way that guarantees that its owners as stakeholders are receiving a fair return on their investment. It is the process of a virtuous circle that links the shareholders to the board, to the management, to the staff, to the customer and to the community at large. Interest in corporate governance has grown tremendously, registering innumerable developments. These key developments include how organizations are directed and controlled, the ownership and financing structure, aligning organization’s strategies with environmental forces and stakeholder engagement (Shleifer & Vishny, 1997; Dewji & Miller, 2013; Capital Markets Authority (CMA), 2015). Despite these advancements, organizations are still faced with challenges such as the separation of ownership and control (Jensen & Meckling, 1976; Shapiro, 2005). This separation leads to the emergence of governance issues were the three main corporation’s stakeholders interplay. These are shareholders, directors, and management, creating the structure of corporate governance. Thus, corporate governance is a key driving force in a firm’s performance. Corporate governance has been perceived by various dimensions. Dewji & Miller (2013) classified corporate governance components into internal and external aspects. Internal factors are under the firm’s control and include board composition, management remuneration structure, ownership concentration, and debt level, while external components include the market for corporate control, labor market, and the regulatory framework.

The economic success of an organization is not only dependent on efficiency, innovation and quality management but also on compliance of corporate governance principles. Implementation of corporate governance standards improved the financial performance of the company as well as positively impact the internal efficiency of the firms (Tadedde, 2004). Governance has acquired a higher level of status and importance in management and the organization’s body. The need for greater integrity, transparency, and availability of information are centered on stakeholders in a measure equal to the financial performance of an organization.

The idea of corporate governance is mostly common to banks and multinational firms. Corporate governance has been an item of great importance on the policy agenda in most developed countries for many years are now. Further to this, the idea of corporate yes steadily gaining huge recognition in the African continent. Several recent activities have led to increased in all nations. The case of having effective governance policies gained universal recognition from a period of absolute ambiguity after a series of high profile collapsed led to significant interest. Gompers P, Ishi JL, Metrick A (2003) supported that corporate governance is very important for company’s profitability, long run, and max over. The situation is also responsible to enhance the image of the company. Improvement in corporate governance has led to a significant increase in investment by foreign investors and the profitability of many companies. Firms adopting corporate governance reforms appear to have better risk-return trade-off for investors (Prasanna, 2013; Mohanty, 2003).

In normally speaking of here are two main reasons, due to which corporate governance increase in a number of investors. First, a large number of investors they think that good governance firms are less risky. Secondly, they are spreading the owner rate of return, which formulate them more valuable. Mackling and Jenson (1976) denote that well-governed firms have the most capable function with a high-class flow stream in the future. The structure of governance specifically indicates the manner in which rights and responsibilities within the organization are shared among stakeholders concerning the operations of the entity (Zvavahera & Ndolda, 2014:13). According to Miringu & Mouria ( 2011:38 ) a well good governed entity performs much better, indicating goof governance. Kyeboah & Ikekpe, (2006:610) submit that bad corporate governance leads to the collapsed of Business Organisations.

statement of the problem

The issue of corporate governance and financial performance sounds so good and is of empirical interest. From literature, theoretical and empirical evidence, there are problems associated with the relationship between corporate governance structure and financial performance. The emergence of corporate scandals, stronger demand for accountability, transparency, and performance in the global arena has placed corporate governance at the center of strategic management debate (Van del Walt et al., 2008). Countries with weak legal norms have suffered higher depletion in exchange rates and stock market decline (Johnson et al., 2000). Dharmapala and Khanna (2013) emphasize the importance of enforcement of legal reforms in developing economies that are marred by weak systems, corruption and bureaucratic influence on policy implementation.

Interest in corporate governance has increased since the turn of the century due to corporate fraud, managerial misconduct, and negligence and massive loss of shareholders wealth. There are many reasons for such an explosive interest in this subject matter but the main reason is the corporate scandal.

Due to a series of financial crises and corporate collapses in the past decade, people have lost confidence in the business sector. The much-publicized financial scandals including Eron, Paramalat and Wordcom were allegedly attributed to unethical behaviour of top management of companies especially the directors. Directors in pursuit of profitability are expected to uphold ethics. Poor corporate governance many could have a significant impact on any economy. It can lead to bank failures while in the long-run impact on the public’s trust in an economy’s banking system efficiency manage its asset and liabilities. The 2009 global economic recession called for an increasing need to promote good corporate governance across the globe. However, recent corporate scandals and business failures have spurred a lively debate on whether firms are adequately governed.

In a nutshell, weak corporate governance will largely contribute to systemic failures, corporate scandals and failures resulting from fraud and other forms of malfeasance, this, in the long run, will affect negatively the financial performance of any company. The major cause of this development has been traced to weak corporate governance (Bhimani, 2008).

What motivates me in this paper is that the majority of the available studies in Nigeria focused on corporate governance and financial statements fraud prevention, while some attend to financial performance but used board of directors, audit independence as their independent variables and Return on Equity ( ROE ) as their dependent variable. This obviously suggests that a research gap exists. This paper seeks to fill such gaps by using board size, audit committee as independent variables and return on asset, profit margin as dependent variables. Also, we will examine the component of the corporate governance structure and how each of them contributes to the financial performance of companies.

Aim and objectives of the study

The aim and objectives of the study are to examine the corporate governance structure and financial performance of quoted companies in Rivers states.

But the following are the specific objectives

1. To examine the effect of board size on return on assets of quoted companies in Rivers State.
2. To determine the influence of board size on profit margin of quoted companies in Rivers State.
3. To investigate the effect of the audit committee on return on assets in Rivers State.
4. To ascertain the influence of audit committee on profit margin of quoted companies in Rivers State.

Research questions

In line with the objectives stated, the following questions are to be addressed

1. What effect does board size have on return on asset of quoted companies in Rivers State?
2. To what extent board size influence the profit margin of quoted companies in Rivers State.
3. What effect does the audit committee have on return on asset of quoted companies in Rivers State?
4. How does the audit committee influence the profit margin of quoted companies in Rivers State?

 Research Hypothesis

In line with the objectives, research questions, the hypothesis stated in null- form is to be tested

1. HO₁: There is no significant relationship between board size and return on assets.
2. HO₂: There is no significant relationship between board size and profit margin.
3. HO₃: There is no significant relationship between the audit committee and the return on an asset.
4. HO₄: There is no significant relationship between the audit committee and the profit margin.

Significance of the study

This study hopes to resolve the problem of financial performance in Rivers state by contributing to the literature of what an effective board size, the audit committee can do to significantly improve corporate governance and financial performance.

The stakeholders through this study can determine the extent of reliance on the financial performance

The study will help employees in understanding the importance of corporate governance elements in order to improve their firm’s image this translates into an increase in financial performance.

It will also help managers and policymakers in analysis of the issues if corporate governance within their organization with the aim of improving the image of their organization this installation of discipline in the management of the firm.

The study will also benefit scholars who would wish to undertake further studies aimed at improving corporate governance structure.

Scope of the study

The Scope of this study is divided into three sections. They include:

1. Unit scope: This study shall cover a selected group of quoted companies in the Nigerian Stock Exchange. The group of quoted companies is delimited to selected manufacturing companies in Rivers State.
2. Content Scope: The analysis of this study will be based on data between the periods of 2013-2017. It shows the relationship between corporate governance structure and financial performance of quoted companies in Rivers State of Nigeria.
3. Geographical scope: The study analyzes financial performance variables sucks as Return on asset ( ROA), profit margin (PM). The central location for this research work is in Rivers State, Nigeria.

 limitation of the study

Rivers state is a big state and populous hence the coverage of all the constituencies is difficult. In addition, the empirical documented data of quoted companies are still scanty since only a few studies have been carried out in the area.

Other limitations are;

1. Measurement of the research data: The measurement of data to use is a limitation
2. Statistical tools: The statistical tools to be adopted is another limitation. The problem of knowing the appropriate tools to be used in analyzing the variables posed as a serious limitation to the study.
3. Specification of model: this study will make use of secondary data and as such, there may arise the problem of a specific model to use to run the analysis to give the accurate result as well as being able to interpret it.

Definition of terms

Corporate governance: it is a system by which companies are directed, administered and controlled. It deals with the systems, rules, and processes by which corporate activity is directed.

Board size: it is the number of members on the committee that manages the business of an organization.

Audit committee: it is a group of non-executive directors who have the responsibility to review the financial statements to ensure that they disclose all material matters affecting them (the annual accounts ).

Return on asset: it is an indicator of how profitable a company is relative to its total assets. It takes into account the company’s debt and it’s displayed as a percentage.

Profit margin: Profit margin indicates the profitability of a product, service, or business. It’s expressed as a percentage; the higher the number, the more profitable the business.

Average total asset: it is the total of all asset including noncurrent assets and current assets divided by two.

Annual net income: This is the amount after all expenses have been deducted from the gross income for the year.

Profit after tax (PAT): This is the amount realized after tax has been deducted from the profits before tax ( PBT).

Turnover: Turnover simply means the sales amount for the year.

Quoted companies: It is a company of which ordinary shared ate listed on 5he stock exchange of Nigeria and are required by the stock exchange to have its securities traded on the market for alternative investment.

 Organization of the study

This study is organized into five chapters. Chapter one highlighted the basic introduction of the research study area, the segment of the research problems, research objectives, questions, and hypotheses, significance of the study, scope of the study, limitation of the study, definition of terms frequently used in this research work.

Chapter two reviewed the relevant and related literature on the subject area of this research and discuss the theoretical framework, conceptual framework and empirical framework of the study.

Chapter three reviewed the methodology adopted in handling this research work. It includes the research design, population of the study, sampling techniques and sample size determination, data collection methods, measurements of variables and data analysis.

Chapter four includes the detailed data presentation and analysis, and the discussion of research findings.

Chapter five includes a summary of the study, draws the conclusion of the study and presents the recommendation for further study.