Effect of Corporate Governance on Firm Financial Performance in Nigeria A Study of Non Financial Performance Companies Registered with Nigerian Stock Exchange NSEs

Effect of Corporate Governance on Firm Financial Performance in Nigeria A Study of Non Financial Performance Companies Registered with Nigerian Stock Exchange NSEs



One feature of Modern Corporation is the separation of ownership from management. Hitherto, the typical business is owned and managed by the same individual or group of persons. Thus a firm was characterized by its numerous owners having no management function, and managers with no equity interest in the firm. Under the new dispensation, however, professional managers who are considered more competent than the owner manager are hired to run and manage the affairs of the company (Wikipedia, 2007). Thus it was important that an appropriate framework be put in place that would guarantee transparency, accountability and fairness in the management of companies (Howard, 2000)

Corporate governance is therefore about ensuring that various mechanisms are in place to guarantee that the goals pursued by managers do not different from that of the owners of the company. Tricker, who conceived the term “corporate governance” back in 1984, made the very clear distinction between management and control in taking the position that: “if management is about running business, governance is about seeing that is run properly”

Corporate governance is concerned with ways in which all parties interested in the well-being of the firm (the stakeholders) attempt to ensure that managers and other insiders take measures or adopt mechanisms that safeguard the interests of the stakeholders. Such measures are necessitated by the separation of ownership from management, an increasingly vital feature of the modern firm.

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 spells out the rules and procedures for making decisions on corporate affairs. Therefore, by doing this it also provides the structure through which the company’s objectives are set and the means of attaining those objectives and monitoring performance. This definition is in line with the submissions of, Wolfensohn (1999) Uche (2004) and Akinsulire (2006).

The board of directors is central to the corporate governance mechanism in market economies. The board is one of the most important and possibly beneficial internal mechanisms of corporate control (Manne, 1965; Alchian and Demetz, 1972; Bonnierand Bruner, 1989). The importance of internal control mechanisms has arguably increased following legal and regulatory developments that curtailed activity in the external market for corporate control (Jensen, 1991; Denis and Denis, 1995). The board is viewed as a primary means for shareholders to exercise control over top management, along with external markets for corporate control and institutional and concentrated shareholding.

A change in the composition of a firm’s board can take the form of a new appointment or some form of removal from the board: new appointment, resignation, retirement or death. Each of these changes may or may not be considered significant by the market. Change can also take the form of an increase or decrease in the proportion of outside directors to inside directors.

Effective corporate governance therefore reduces the “control rights” shareholders and creditors confer on managers which increases the probability that managers invest in positive net present value projects.  Thus, the relationship between the board and management, according to Al-Faki (2006), should be characterized by transparency to shareholders, and fairness to other Stakeholders. This will in effect mitigate the agency cost as predicted by Jensen and Meckling (1976) and boost corporate performance.

Furthermore, 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, it keeps the organization in business and creates a greater prospect for future opportunities.

Moreover, the financial scandals around the world and the recent collapse of major corporate institutions in the USA, South East, Europe and Nigeria such as Adelphia, Enron, World Com, Commerce Bank and recently XL Holidays, Pollybeck, Xerox, Cadbury, BCCI communication. Most public Nigerian corporations, such as NITEL, NNSL, NEPA, and NRC were either dead or simply drain pipes of public resources to mention but a few which have all been attributed to poor corporate governance was caused by greed, lax oversight of company board members and incompetent national body at noting the issues on time.

A review of the status of corporate governance in Nigeria from the sectorial perspectives- public, financial and real sectors reveals the absence of strong commitment to the tenets of good corporate governance. In view of the importance attached to the institution of effective corporate governance, the Federal Government of Nigeria, through her various agencies came up with various institutional arrangements to protect the investors of their hard earned investment from unscrupulous management and directors of listed firms in Nigeria. These institutional arrangements, produced the “Code of corporate governance best practices” issued in November 2003.

The code proposes that the business of a firm should be managed under the direction of a board of directors at which they delegate to the CEO and other management staff on the day to day management of the affairs of the firm. The best practices of the code also recommend that the board sees to the appointment of a qualified person as the CEO and other management staff. The directors, with their wealth of experience, are expected to provide leadership and direct the affairs of the business with high sense of integrity, commitment to the firm, its business plans and long-term shareholder value. In addition, the board provides other oversight functions. Thus there are other mechanisms of corporate governance which includes; the audit committee, shareholders rights and privileges.

The emergence of mega banks in the post consolidation era prompted the Central Bank of Nigeria to issue a new code of corporate governance which became operative in 2006. In the same vein, the Nigerian Securities and Exchange Commission (SEC), published the revised Code of Corporate Governance in September, 2009 after consultations with other regulatory bodies. The new code was issued to address the weaknesses of the 2003 code and to improve the mechanism for its enforceability.

Internationally, organisations such as UN and OECD have been advocating for levels of corporate behaviour. In UK, corporate governance is dealt with in a “combined code” report which is a combination of series of reports developed by independent committees such as the Cadbury report (1992), Greenbury report (1995), Hampel report (1998), Turnbull report (2002-2003). In USA, the Sarbanes-Oxley Act (2000), have been developed so as to reduce or avoid high scandals in corporations.

According to IFAC report (2008), “companies are mirrors of the societies in which they operate and they influence each other”, therefore all stakeholders responsible for promoting sound corporate governance such as the board, the management , audit committee and regulators are all challenged and compelled to ensure that sound corporate governance exist (Williams 2001).


It is has been noted that the recent global events concerning high-profile corporate failures and fraud scandals in the national as well as international scene have put back on the policy agenda and intensified debate on the efficacy of sound corporate governance mechanisms as a means of increasing firms’ financial performance and their sustainability.

The issue of structure of the board of directors as a corporate governance mechanism has received considerable attention in recent years from academics, market participants, and regulators. It continues to receive attention because boards of directors have been largely criticized for the decline in shareholders’ wealth. They have been in the spotlight for fraud cases that had resulted in the failure of major corporations in the national and international scene.

Another recent issue in the corporate governance scene is the rapid change in the period from 1999 to 2006  were  hundreds of firms converted from dual CEO leadership structure to non-dual structure, while a much smaller number of firms converted in the opposite direction. This recent trend is partly due to several high-profile cases where powerful dual CEOs were found to abuse their tremendous power at the expenses of the company and shareholders.

There have also been debates on the issue of gross negligence on the part of auditors and audit committee members in discharging their duties properly. Thus, the high incident of poor corporate performances recorded in Nigeria shows audit committee members who are required to check the activities of board have failed to effectively discharge their checkmating functions. Its activities remains obscure as little or nothing is heard about the committee’s impact on sensitive corporate governance issues, particularly those that border on their regular statutory functions.

These high corporate fraud scandals and poor corporate management by directors and managers, as well as the inability of the audit committee to carry out their checkmating and monitoring roles have raised doubts  on the performance and sustainability of most Nigerian companies and brought to the fore the need for good corporate governance.


The main purpose of this study is to ascertain the effect of corporate governance on financial performance of companies. More specifically, this study is designed to;

  1. To evaluate the extent to which the board size of a company affects its Return on Equity.
  2. To ascertain the impact of Board composition structure on Profit margin and Return on Equity.
  3. To evaluate the relevance of the audit committee on Profit margin and Return on Equity.
  4. To ascertain the significance of CEO non-duality on Profit margin.


The study attempts to find answers to the following specific questions:

  1. To what extent does Board size affect Return on Equity? Does the number of Outside directors significantly boost corporate Profit margin and Return on Equity?
  2. Is there any contributory impact of the audit committee on Profit margin and Return on Equity?
  3. To what extent does CEO duality boost or impede corporate Profit margin?


In this investigation, the following hypothesis will be tested.

  1. H0: There is a negative relationship between Board size and Return on Equity.
  2. H0: There is no significant impact between Board composition on Profit margin and Return on Equity.
  3. H0: There is no significant impact of Audit committee on Profit margin and Return on Equity.
  4. H0: There is no significant impact of CEO duality on Profit margin 


This study extends and contributes to the body of research using Nigerian data to investigate the likely impact of sound corporate governance on firms’ financial performance in Nigeria. The findings would be useful to;

Stakeholders in the Nigerian Stock Exchange (NSE) as it provide evidence on the relationship between board structure and firm’s financial performance.

Board of Directors and management will take a clue from this research work to review how strategic and the effective roles they play at improving firm’s performance and the dire need of eschewing sound corporate governance cultures in organisations they find themselves in.

Auditors and Audit committee members will become more enlightened of the need to uphold high professional and ethical standards expected of them in boosting corporate performance and thus contributing towards the sustainability of Nigerian companies in whole.

It will also provide information to regulatory Authorities on the expected roles they play in instilling sound corporate discipline and also the positive impacts sanctions and penalties given to corporate miscreants’ aid in enhancing sound corporate performance.

Finally, this work will be beneficial to future researchers and academicians who want to broaden their knowledge horizon in this area of study.


Corporate governance and firm financial performance; a case study of Non-financial companies registered with NSE”, in view of the wide nature of this topic, the researcher limits the study to the factors or effects of sound corporate governance on the performance of non-financial companies, which are the composition of board size, the number of outside directors, CEO duality and impact of existence of audit committee in corporations. The study covers a period of five years (2010 – 2014). Viable and relevant primary information were also sought from top and senior public and private individuals in Nigeria specifically in Port-Harcourt, Lagos and Abuja to support the researcher’s findings.



During the course of the research work, the researcher encountered the following limitations.

The researcher experienced initially poor-cooperation from NSE officials. But however, with constant visitations and patience, I was able to get the necessary materials needed to facilitate the successful completion of the work.

Also, this research work was not only tactful but time consuming as in most times, huge amount of time was required in pursuit of relevant data for the study.

Funds were also required to visit relevant places and make necessary travels in search of relevant materials which were limited. But with the support of guardians, the researcher has been able to make such relevant visits so as to produce a good research work.


GOVERNANCE: The act, process, or power of governing. It relates to decisions that define expectations, grant power, or verify performance.

CORPORATION: A Company or group of people authorized to act as a single entity (legally a person) and recognized as such in law.

FINANCIAL PERFORMANCE– Business results relating to company’s financial health, such as revenues, expenses, and profits.

OECD- ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT: An International economic organization of 34 countries founded in 1961 to stimulate economic progress and world trade i.e. assists governments to tackle the economic, social and governance challenges of their globalized economics.

SEC- SECURITIES AND EXCHANGE COMMISSION: The regulatory authority governing the Nigeria stock exchange market having surveillance over the exchange to forestall breaches of market rules and to deter unfair manipulation and trading.

NSE- NIGERIAN STOCK EXCHANGE: A markets which provides a platform by which registered companies trade their securities’- shares, stocks, bonds etc.

CAMA- COMPANY AND ALLIED MATTERS ACT (1990):  A law which provides for the formation of corporate entities and also sets a time and structure for corporate governance. It provides that every corporate entity must have a memorandum and Articles of Association which is the constitution.

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