THE EFFECT OF CORPORATE GOVERNANCE ON WEALTH PERFORMANCE OF QUOTED CEMENT COMPANIES IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Corporate governance practices are seen to have great impact to maximization of stakeholder wealth and to the growth prospects of an economy. They are practices considered as paramount to management of constraint, such as the issue of reducing risk for investors, attracting investment capital, and improving the performance of companies. However, the way in which corporate governance is organized differs from company to company and from country to another, depending on their economic, political and social situations.

Corporate Governance has been perceived differently by different people. Kajola (2008) concurred that corporate governance is making sure the business is well managed and shareholders interest is protected at all times. Organization for Economic Cooperation and Development (OECD) (1999) claimed corporate governance is broad in practice. It defines corporate governance as the system by which business corporations are directed and controlled. It further states that the corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as, the board, managers, shareholders and other stakeholders; and thus spells out the rules and procedures for making decisions on corporate affairs. It also provides the structure through which the company’s objectives are set and the means of attaining those objectives and monitoring performance (Akinsulire, 2006).

Corporate governance is a mechanism that is employed to reduce the agency cost that arises as a result of the conflict of interest that exists between managers and shareholders. The conflict emanates, almost naturally, because the seperation of ownership from control of the modern day business places the managers at a privileged position that gives them the latitude to take decisions that could either converge with or entrench the value maximization objective of the firm. Thus, managers can use their control over the firm to achieve personal objectives at the expense of stakeholders. In this regard, Kang and Kim (2011) note that management could influence reported earnings by making accounting choices or by making operating decisions discretionally. One of such discretionery decisions to manipulate reported earnings is imbedded in the accrual-based accounting.

Financial scandals around the world and the recent collapse of major corporate institutions in the Nigeria such as Oceanic Bank, Intercontinental Bank and Cadbury have shaken the faith of investors in thecapital marketsand the efficacy of existing corporate governance practices in promoting transparency and accountability. This has brought to the fore the need for the practice of good corporate governance. Corporate performance is an important concept that relates to the way and manner in which financial resources available to an organization are judiciously used to achieve the overall corporate objective of an organization, which in-turn, keeps the organization in business and creates a greater prospect for future opportunities.

There have been debates regarding the issue of corporate governance in Nigeria, involving both local and international stakeholders in the business realm. It has been addressed as one of the major factors that have led to a reduction in capital flows and subsequent slow down the rate of economic growth in the country. However, since the adoption of corporate governance code of conducts, there has been a steady trend towards implementing good governance structures both in public and private sectors.

The introduction of corporate governance practices in Nigeria is aimed at providing a mechanism to improve the confidence and trust of investor in the management and promote economic development of the country. However, efficiency of the corporate governance structures and practices on corporations operating in the highly volatile environment of Nigeria has not been empirically investigated (Nworji, Olagunju and Adeyanju, 2011).

Good corporate performance keeps the organization in business and creates a greater prospect for future opportunities. In the present changing economic environment, the corporate sector must brace up to the challenges of globalization where firms that cannot adapt to modern business culture may not survive. It is therefore important for firms to find out the best corporate practices in other parts of the world and how they can integrate these into their business culture to enhance their performance.

The mechanisms can be divided into five: striking a balance between outside and inside directors; promoting insider (i.e., managers and directors) shareholding; keeping the size of the board reasonably low; encouraging ownership concentration; and encouraging the firm to have a reasonable amount of leverage in the expectation that creditors might take on a monitoring role in the firm in order to protect their debt holdings.

1.2       Statement of the Problem

Corporate governance mechanisms such as CEO duality, directors shareholdings, board size, board composition, quality audit committee, executive compensation, quality audit committee, executive compensation and board independence have been found to relate to measures of firms’ performance (Bedard, Chtourou, and Courteau 2004; Tehranian, Cornett, Marens and Saunders 2006; Xie, Davidson and Dadalt, 2001; Zhou and Chen, 2004). Due to the growing concerns and need to align practices in Nigeria to international best practices, the Peterside’s Code of corporate governance in Nigeria was released in 2003 for public companies. But, despite the introduction of the codes of best governance practices in Nigeria in 2003 and its continuous modifications, the result that it has achieved can be said to be minimal as there are fresh cases of governance malpractices that threaten the survival of quite a number of firms in different sectors of the economy (Hassan and Ahmed, 2012).

Corporate governance is considered to involve a set of complex indicators, which face substantial measurement error due to the complex nature of the interaction between governance variables (such as board size, board composition, Managerial shareholding etc) and firm performance indicators (return on assets, return on equity, Earnings per share etc) (Babatunde and Olaniran, 2009). Nevertheless, previous empirical studies have provided the nexus between corporate governance and firm performance, (Sanda, Mikailu and Garba; 2005; Kajola, 2008, Roger 2008, Hassan 2011, Lenee and Obiyo 2011, Agrawal and Knoeber 2012). However, despite the volume of the empirical work, there has been no consensus on the impact of corporate governance on firm performance generally. Consequently, this lack of consensus has produced a variety of ideas (or mechanisms) on how corporate governance influence firm performance.

In addition, despite the renewed interest in issues of corporate governance in the African continent, relevant empirical studies are many in Nigeria (which include the studies of Oyejide and Soibo, 2001; Adenikinju and Ayorinde, 2001 and Sanda et al., 2005) Kajola, 2008; Tahir 2010; Owuigbe 2011 and Hassan 2011). However, none of these focused specifically on the Nigerian manufacturing industries like cement industries; hence this study intends to reduce the knowledge gap.

Also, to date, little effort has been put by researchers to examine the influence of governance structures on corporate performance when performance is adjusted to take into account the wealth maximizing of cement industries. Closest to this work are that of Cornett et al. (2008) and Zhu and Tian (2009). Cornett et al. (2008) find that adjusting for impact of earnings management substantially improves the relevance (importance) of governance variables and significantly declines the importance of incentive-based compensation for firm performance. However, Zhu and Tian (2009) find that the coefficient of CEO compensation significantly falls when firm performance is adjusted to exclude discretionery accruals. Their findings also reveal that board composition is more effective towards improving firm performance when actual performance is considered. The few studies that exist in this area of research are products of developed countries that have different regulatory frameworks and governance mechanisms with that of Nigeria. Also, these studies document inconclusive evidences, which calls for an investigation into the Nigerian scenario.

1.3 Objectives of the Study

The main objective of this study is to investigate the effects of corporate governance on the wealth performance of quoted cement companies in Nigeria. The specific objectives are to:

i) assess the effect of (Board Size, Board Composition, Composition of Audit Committee, Managerial Shareholding and Institutional Shareholding) on the Dividend per Share of quoted cement companies in Nigeria;

ii) examine the effect of ( Board Size , Board Composition , Composition of Audit

Committee, Managerial Shareholding and Institutional Shareholding) on the Return On

Capital Employed of the companies and;

iii) evaluate the effect of (Board Size, Board Composition, Composition of Audit Committee, Managerial Shareholding and Institutional Shareholding) on the Net Asset per Share of quoted cement companies in Nigeria.

1.4 Research Hypotheses

In line with the objective of the study, the following hypotheses have been in null form;

H01: Corporate governance has no significant effect on the Dividend per Share of quoted cement companies in Nigeria.

H02: Corporate governance has no significant effect on the Return on Capital Employed of quoted cement companies in Nigeria.

H03: Corporate governance has no significant effect on the Net Asset per Shares of quoted cement companies in Nigeria.

1.5 Scope of the Study

The scope of this study shall comprise of all listed cement firms in Nigeria as at December, 2009. The sector was selected as population because of the important of the sector to economy development of the nation especially in the area of job creation in the recent time. The period to be covered by this study is 7 years (i.e. 2009 to 2015). A seven-year period is considered because the Securities and Exchange Commission (SEC) code of corporate governance was readily available in Nigeria this time period. The code has been the document that provides the benchmark for the period. The components of Corporate Governance considered are: board composition, board size, institutional shareholding, managerial shareholding and composition of audit committee. However, other aspects of corporate governance not mentioned are outside the scope of this study because of non-availability of data. Whereas financial performance will be measured by ROCE, DPS and NAPS as these can easily be extracted from the firms’ financial statements.

1.6       Significance of the Study

The results of this study will enrich the literature in several ways. First, the study will show whether or not corporate governance mechanisms are significant financial performance determinants in the Nigerian cement industry. Second, it will provide empirical support for agency theory, because it will show whether or not a relationship exists between financial performance and governance mechanisms, consistent with the prediction of agency theory.

In addition to the above, it is hoped that shareholders and regulatory authorities, such as Securities and Exchange Commission, and the Nigerian Stock Exchange, would find the outcome of the study beneficial as it will give them clues, as to the existence, nature and extent of the effect of Corporate Governance on financial performance of the listed firms in the cement industry in Nigeria. This will help them in their various policy formulation and implementation. Board of Directors would find the study useful as this would help them to appreciate the need to use Corporate Governance as a tool for enhancing the corporate decision- making activities. It is therefore hoped that this research will stimulate further empirical studies on corporate governance and firm financial performance in Nigeria.