CORPORATE GOVERNANCE AND PROFITABILITY OF MANUFACTURING COMPANIES IN NIGERIA

The primary aim of this study is to assess how corporate governance practices influence the profitability of manufacturing companies in Nigeria during a five-year period from 2018 to 2022. The study focuses on ten selected companies and examines three corporate governance mechanisms, namely Board Size (BS), Board Independence (BI), and Board Diversity (BD), as independent variables. The impact of these variables on profitability, measured by Return on Asset (ROA), is analyzed as the dependent variable. The research design employed for this study is ex-post facto. The researchers collected secondary data from the financial statements (Comprehensive income statement and Statement of financial position) of the selected companies listed on the Nigerian Stock Exchange (NSE). Descriptive statistics, Pearson correlation, and regressions were used for data analysis. The results indicate that Board Size does not significantly affect the financial performance of listed consumer goods firms in Nigeria. Board Independence has a negative and significant impact on the profitability of manufacturing companies in Nigeria, while Board Diversity, particularly the inclusion of women directors, has a positive and significant effect on profitability. Based on these findings, the researchers suggest that increasing the size of the board would lead to a significant improvement in the profitability of manufacturing companies in Nigeria. This would enable the inclusion of more skills, expertise, and experience necessary for enhancing firm performance. Furthermore, manufacturing companies should aim to have a higher number of independent directors in their organizations, given their significant role in improving performance. Lastly, firms should establish a research team to stay updated on the role of gender diversity characteristics, which can further enhance the impact observed in the study's findings

Keywords: Corporate governance, profitability, manufacturing companies

Background to the study

Statement of Problem

Objectives of the Study

Research Questions

Statement of Hypotheses

Scope of the Study

Conceptual Review

Concept of Corporate Governance

Corporate Governance Characteristics

Concept of Profitability

Theoretical Review 

Agency Theory

Empirical Review

Methodology

Models Specification 

Results and Discussion

Conclusion 

Recommendations

References

Various factors can influence the financial stability of an organization, including opportunistic decisions made by managers to serve their personal interests (Zona, 2018). The emergence of corporations in financial markets has led to a separation of tasks and responsibilities between agents and principals within a firm. This non-traditional management structure has created a disconnect between shareholders' expectations and managers' exploitative behaviors aimed at maximizing personal benefits, rather than making decisions that benefit shareholders (Man & Wong, 2013). As a result, managers may manipulate a firm's performance, earnings, or other financial elements to secure their positions on the board. Shareholders, in turn, incur various costs known as "agency costs" in their efforts to minimize the negative consequences of these poor decisions from the principals' perspective. One approach to mitigate these conflicts of interest is the adoption of Corporate Governance (CG) mechanisms, which can enhance the ability of the board of directors to address these issues. The board of directors is considered a trustworthy representative that safeguards a firm's resources from being misused for managers' personal gain, including bonuses and undisclosed rewards (Ciftci, 2019; Khalil & Ozkan, 2016). Therefore, the implementation of a robust CG structure with a genuine intention to facilitate effective monitoring processes is crucial for improving firms' performance, ensuring market stability, and satisfying shareholders. For instance, appointing independent directors to the board encourages other directors to override misleading or opportunistic decisions that could negatively impact financial performance (Chen & Zhang, 2014).

The alignment of interests between independent board members and the expectations of agents is crucial, as the former have no direct benefits from participating in opportunistic decisions that may affect performance. Additionally, the inclusion of members with prior political connections can enhance a firm's financial position by establishing ties with the local environment, facilitating access to loans, and preventing managers from exploiting resources for personal gain (Gul & Zhang, 2016; Khwaja & Mian, 2005; Osazuwa et al., 2016). Effective corporate governance practices play a vital role in achieving sound financial performance and are essential for the proper functioning of manufacturing companies in any country. Poor corporate governance can result in ineffective boards, leading to firm failures, unemployment, fraudulent activities, and questionable dealings that can have negative impacts on the economy (Ogbechie & Koufopoulos, 2010). The role of board leadership as a corporate governance mechanism has sparked debate and garnered significant attention from academics, market participants, professionals, and regulators. Conflicting views exist regarding what constitutes performance measurement, and empirical evidence on the matter remains inconclusive. 

Due to corporate governance failures, numerous companies worldwide, including those considered too big to fail, have faced crises and scandals that ultimately led to their downfall. Prominent examples include Enron, WorldCom, Arthur Anderson, and Adelphia. Nigeria has also witnessed its share of scandals and failures, such as Oceanic Bank, Intercontinental Bank, Cadbury, and Lever Brothers (now Unilever), as highlighted by Stephen and Benjamin (2013). The prevalence of poor governance and the increasing threat of financial crises have brought corporate governance structures into sharper focus, demanding greater attention. The financial crisis of 1997 in East Asian countries further emphasized the urgent need for progress in corporate governance as a necessary response. According to Lefort and Urzua (2008), boards of directors play a central role in a company's internal governance. In addition to providing strategic direction, they serve a crucial monitoring function in addressing agency problems within the firm. Consequently, numerous studies have focused on identifying the optimal structure and composition of boards and examining their impact on firm financial performance. Furthermore, boards in companies with high ownership concentration tend to be primarily composed of directors representing the owner manager's interests, which may hinder their ability to effectively address specific agency problems (Lefort & Urzua, 2008). Despite gradual changes in the regulatory framework for corporate governance in Nigeria, full compliance with corporate governance principles has not yet been achieved. Based on these observations, this study aims to investigate the relationship between corporate governance and profitability in Nigerian manufacturing companies. 

The main objective of this study is to examine impact of corporate governance on the profitability of manufacturing companies in Nigeria. The specific objectives of this study are to:

This study tends to provide answers to the following research questions:

To achieve this the objective of this study, the following Hypotheses will be tested: 

This study examined the relationship between corporate governance and profitability of manufacturing companies in Nigerian. The study focused on 10 listed manufacturing companies in Nigeria namely, Guinness Nigeria Plc, Dangote Flour Mills, Nascon allied Nigeria Plc, Dangote Sugar Plc, Cadbury Nigeria Plc, Northern Nigeria Flour Mills Plc, Nigerian Breweries Plc, Flour Mills Nigeria Plc, Nestle Nigeria Plc and Seven Up Bottling Company Plc. The study examines the activities of these companies over five year’s period from 2018 to 2022.