OWNERSHIP STRUCTURE AND FINANCIAL PERFORMANCE OF NIGERIAN FOOD AND BEVERAGE INDUSTRY

CHAPTER ONE

INTRODUCTION

1.1       Background
to the Study

       Corporate governance has received
greater attention from regulators, professionals and academics following a
series of corporate scandals that had happened in large companies around the
world. The issue of corporate governance has attracted the attention of both
business market leaders and regulatory authority around the globe, aiming to
minimize the scandals rate in companies.

      Shareholders are often considered to be
the corporate proprietors, though company directors are representatives of shareholders
that are expected to assign business resources in a way to improve
shareholders’ fortune. The commitment of several shareholders for investment in
organizations is profit not control (Kadivar, 2006).

      The concepts of corporate governance encompass
problems such as measure of management, degree of control as well as way of
relationship between the great and small shareholders. Corporate governance
spells out the delivery of rights and duties among diverse players in the
establishment; the board, managers, shareholders as well as other stakeholders.
It also stipulates the techniques for making decisions on corporate affairs. In
this fashion, it offers the framework whereby the organisation’s goals are
established and strategy for reaching those goals and monitoring performance
(Kaola, 2008).

      According to Aganga (2011), the issue of
corporate governance is comparatively fresh in Nigeria, on account of several
cases of corporate misconduct. The shift in Nigeria system of government from
military era to the democratic dispensations with a policy to catch the
attention of new and environmentally friendly foreign investments entailed the
requirement for corporate governance reform. This results in a recognized
commission to evaluate the presence, adequacy and corporate governance
relevance in Nigeria relative to global best practices as a reaction to the New
International Economic Order. Considering the importance linked to the
organization for efficient corporate governance, the Nigerian government, via
its numerous agencies, has constituted several institutional arrangements to
safeguard the investors’ valuable investment from disingenuous
management/directors of company in Nigeria (Aganga, 2011). Despite all the
efforts and mechanism put in place by government, there are cases of crises,
collapses, inefficiencies, and eventual distress among the firms in Nigeria.
This may be the consequence of management-shareholder conflict or agency
conflict especially while shareholders want long term maximization of their
compensation and power.

      Ownership structure has been identified
as one of corporate governance mechanisms that influence organizational
performance. According to Ebrahim, Abdullah and Faudziah (2013), ownership
structure is among the central mechanisms of corporate governance. Ownership
structure has been a consideration seeker to both scholars and analysts alike.
The innovative study in the theory of the organization, on modern firm was
performed by Berle and Means (1932). They focus on the disputes of great
interest between controllers and managers, claimed that with growing ownership
diffusion, the authority of the shareholders to handle management is been
curtailed.

        Karaca and Ekşi (2012) asserted that
the ownership structure – corporate performance relationship continues to be
getting important interest in economic literature. In a similar vein, Fama and
Jensen (2003) and Jensen and Meckling (1986) showed that the ownership
diffusion has a substantial impact on the genuineness of the
profit-maximizing  aim of companies, as
the separation of control allows corporate managers to put in effort to pursue
their own interests. Furthermore, Demsetz (1983) asserted that ownership
structure is an endogenous facet of governance that raises the earnings and
worth of an establishment. In addition, Fazlzadeh, Hendi and Mahboubi (2011)
also acknowledged that ownership structure performs major function on firms’
overall performance and offers policy makers with experience for improving the
system of corporate governance. In most developed nations, ownership structure
is substantially distributed. On the other hand, the emerging nations
identified by less strong legal system protecting the interest of investors,
the ownership structure are concentrated (Ehikioya, 2009).

      Performance of an organisation is often
determined by how effectively and efficiently the firm is able to achieve the
set goals which may be financial or operational. The operational performance
concerns firm’s growth and expansion in relations to sales and market value
(Hofer & Sandberg, 1987). The financial performance of the firm relates to
its motive to maximise profit both to the owners and on assets. Long, Mahanra,
and Ajagbe (2013) argued that the nature of ownership of a firm influences the
firm’s performance, in emerging economies such as Nigeria where it is contended
that ownership is less disperse and control is not fully separated from
ownership.

        The
interest in ownership studies, led to institutional shareholders or large block
holders investing in firms. It was discovered in recent times that the
percentage of institutional investment is increasing on corporate equity with
control and monitors performance. Zuobawei and Zhang (2004) considered
different kinds of ownership structures including state ownership,
organization’s investing and foreign ownership as independent variables. The
result of his survey showed that there is a negative relationship between the
structure of state ownership and firm performance. The relationship between the
structure of organization ownership and firm performance is also reported
negatively significant. Family ownership often needs a long-term perspective
within the firm, which gives many benefits: owners with longer investment
period experience less managerial short sightness of company’s performance.

            
Literature examined the significance of ownership structure on firm
performance, Cheng (2008) stated there is no significant relationship between
firm performance and ownership concentration in some European countries.
Aljifri and Moustafa (2007) in their study revealed that governmental ownership
has significant relationship with firm performance, while institutional
ownership has no significant relationship with firm performance. Therefore, the
current research targets the assessment of the ownership structure – firm
financial performance relationship.

1.2       Statement of the Problem

In Nigeria, most organizations’ crises,
inefficiencies, and eventual distress are linked to the ownership structure of
such organizations, the separation of control and sub optimal performance of
management results in conflict with owners. This is mainly the consequence of
management-shareholder conflict or agency conflict. Specifically, while
shareholders want long term maximization of their compensation and power
(larger enterprises), management often pursue other interests’ different from
the shareholders’ interest. Furthermore, the agency problem in business
organization governance arises because of considerable information asymmetry
between shareholders and managers and uncertainty about strategic decisions.
Managers have a lot more information than shareholders have about the
organization, which makes it difficult for the shareholders to determine if the
organization is being governed in their interests (Ebrahim et al, 2013).

 Studies on
agency problem revealed that managers use the information and available
organisation resources to pursue their interest rather than owners’ interest
resulting in conflict of interest and sub optimal performance. Sadiq, Muthar,
Oyebola, and Rasheed (2011) viewed the main problem as the owners’ inability to
monitor the managers/agents performance.

      The
performance of the manufacturing sector in the country compared to the other
sectors is low; Adenikinju (2005) confirmed that manufacturing contribution to
foreign exchange earnings was found to be less than one percent (1%) while
about eighty-one percent (81%) of the nation’s total foreign exchange earnings
was utilized by the sector. In terms of employment generation, about ten
percent (10%) of the population was employed compared to seventy percent (70%)
in agriculture and twenty percent (20%) in services. The dismal performance of
Nigeria’s manufacturing sector is manifested in the high level of graduate
unemployment, poverty, corruption and other types of social vices which
constitutes a threat to the nascent democracy and further investments in
Nigeria, thereby perpetuating underdevelopment.

      There have
been no consensuses on how to resolve the conflict of interest and suboptimal
performance among scholars, regulators and professionals. The lack of consensus
have led to a variety of mechanisms on how to deal with the problem of agency
(owners-management).These include promoting managerial share ownership,
encouraging ownership concentration and discouraging government ownership.

      The
government and regulatory bodies have continuously encouraged the restructuring
of ownership structure of organizations to enhance efficiency and profitability
as one way of dealing with the problem. The uncertainty surrounding the outcome
of these options may have further made organizations vulnerable to decline in
profits, due to existing uncompetitive ownership structure (Ezygwu & Itodo,
2014). The possible impact of initial public offers, conversion to public
limited company (Plc), and mergers on ownership structure and the subsequent
impact on the operating performance of companies is an issue which has not
received sufficient conclusive empirical attention in Nigeria.

      Most
researches and similar studies on ownership structure, focused on firms’
capital structure, value of shares, corporate performance and the case studies
were often on the banking, and insurance institutions of developed and
developing economies, some works are, Eric,(2011), Ezugwu & Itodo, (2014),
Chari, Chen & Domingues, (2012) examined foreign ownership and performance
in emerging market acquisition, and Adenikinju & Ayorinde, (2012), worked
on ownership structure, corporate governance and corporate performance of
Nigeria quoted companies. Few researchers examined the non financial sector,
though taking a global view at the trading and services sector, Zakaria,
Purhanudin & Palanimally, (2014).   

      Based on
this, the study tried to fill the existing gap of having limited work done on
other industry of the economy. Hence, the focus of this study was on examining
the correlation between ownership structure (dimensions) and financial
performance of Nigeria food and beverage industry listed on the Nigerian Stock
Exchange.

1.3    
Objective of the Study

The general
objective of this study is to examine the relationship between ownership
structure and financial performance with particular reference to the listed
food and beverage manufacturing companies in Nigeria. The specific objectives
are to:

1.           
determine
the relationship between managerial ownership and performance of Nigeria food
and beverage industry;

2.           
 examine the influence of institutional
ownership on performance of Nigeria food and beverage industry;

3.           
investigate
the influence  of foreign ownership
on  performance of Nigeria food and   beverage industry;

4.           
determine
the relationship between government ownership and performance of Nigeria food
and beverage industry;

5.           
 examine the influence of family ownership on
performance of Nigeria food and beverage industry.

1.4    Research Questions

           The
following research questions were the focus of this study:

1.        
 what relationship exist between managerial
ownership influence on performance of 
Nigeria food and beverage  
industry?

2.        
what
influence does institutional ownership have on performance of  Nigeria 
food and beverage industry?

3.     
how
does foreign ownership affects performance of Nigeria food and beverage
industry?

4.     
what
relationship exist between government ownership and performance of Nigeria food
and beverage industry?

5.     
to
what extent does family ownership influences 
performance of Nigeria food and beverage industry?

1.5       Hypotheses

The following null hypotheses were postulated for the
study:

Ho1:     Managerial
ownership has no significant relationship with performance of Nigeria food and
beverage industry.

Ho2      Institutional
ownership has no significant influence on performance of Nigeria food and
beverage industry.                             

Ho3:     Foreign
ownership has no significant effect on performance of Nigeria food and beverage
industry.

Ho4:     Government
ownership has no significant relationship with performance of Nigeria food and
beverage industry.

Ho5      Family
ownership has no significant influence on performance of Nigeria food and
beverage industry.

1.5.1   Rationale for Hypotheses

    Hypothesis One

The opinion of separating control from owners may
results in divergence of purpose amongst the managers and owners. This had led
to many studies on the relationship between firm’s financial performance and
managerial ownership. Literature examined that with management owing part the
shares diversity of interest would be reduced, investigation on the
relationship between managerial ownership and firms’ performance had shown
mixed findings, Gugory, Arugu & Dangogo (2014) attested that they are associated,
thus Ho1 was formulated.

Hypothesis
Two

      
Institutional ownership involvement in firms is contentious. Some
studies viewed the institutional shareholding as improving the performance of
the firm, because the huge investment would motive keeping trail of the records
to ensure earnings. Ioraver & Wilson, (2013), in their study established
that institutional ownership has influence on firm’s performance, based on this
Ho2 was stated.

Hypothesis
Three

       The third
null hypothesis is on foreign ownership and firm performance. Previous studies
explored ownership structure, corporate governance and performance reveals no
significant between diverse shareholding and performance. However, Eric, (2011)
and Ioraver & Wilson, (2013) found that foreign ownership have impact on
firms’ performance, hence Ho3 was postulated.

Hypothesis
Four

        The
relationship between government ownership and firm performance as other
ownership dimensions had been widely examined and showed mixed results. Mei,
(2013) established relationship between government ownership and performance.

Hypothesis
Five

        The
hypothesis postulated that family ownership does not have influence on firms’
performance, among literature on ownership structure, Mei, (2013), showed that
family ownership has impact on performance.

1.6       Scope
of the Study

      There are
many factors that affect the governance and performance of companies.  However, this study focuses on the impact of
the ownership structure, (managerial ownership, institutional ownership and
foreign ownership, government ownership and family ownership) while
organizational performance as dependent variable was based on the financial
performance. Performance was measured using return on assets and return on
equity in term of content. The geographical scope of this study covers all the
sixteen (16) listed food and beverage firms, listed on the Nigerian Stock
Exchange for the period of five years, 2010 to 2014.

1.7       Significance of the Study

     
The study is expected to advance knowledge on the impact of ownership
structure variables on performance of Nigeria food and beverage industry. This
area has attracted little attention of empirical researchers in Nigeria for the
obvious reason of non-availability of ownership structure data in an organized
form and also in terms of proper econometric modelling.

    
The study would contribute to the past literature on association between
ownership structure and firm performance, by adopting a more recent data set to
test the impact of institutional setting on the relationship between ownership
structure and firm performance.

    
The findings of the study are expected to equip policy makers with the
relevant information on the right ownership structure that would ensure higher
and sustainable   performance in the
industry.

The research on the ownership structure of Nigeria
food and beverage industry would enrich the growing concern of ownership
structures around the world.

1.8       Operationalization of
Variables

    
This research examined the relationship between ownership structures and
financial performance of firms. The independent variable is ownership structure
(managerial ownership, institutional ownership, foreign ownership, government
ownership and family ownership) and the dependent variable is performance, thus
is functionally expressed;

                            Y = f (X)

         
Y = performance

         
X = [x1, x2, x3, x4, x5]

              x1         –  
Managerial    ownership (MGO)

              x2         –  
Institutional   ownership  (INO)

              x3          –   
Foreign   ownership      (FRO)

              x4        
–    Government   ownership (GVO)

              x5            –   Family  
ownership   (FMO)

This is stated and structured based on the research
hypotheses;

  Hypothesis one: P = f(MGO)

  P = β0 + β1 (MGO)

  Hypothesis two: P = f(INO)

  P = α0 + α1 (INO)

  Hypothesis three: P = f(FRO)

  P = a0 + a1 (FRO)

  Hypothesis four: P = f(GVO)

  P = b0 + b1 (GVO)

  Hypothesis five: P = f(FMO)

  P = c0 + c1 (FMO)

Where:
  β1   
are regression coefficient of (MGO

   α1  
are regression coefficient of (INO)

   a1   are regression coefficient of (FRO)

   b1     are regression coefficient of
(GVO)

              
c1      are
regression coefficient of (FMO) 

     and   
βo, αo, ao, bo, and co
are constant terms

Managerial
ownership                 =          Number of shares held by
management

                                                                           
Total owners’ equity

Institutional
ownership [INO]        =      
 Number of shares held by
indigene institutions

                                                                            
Total owners’ equity

Foreign ownership
[FRO]              =         Number of shares held by non-nationals