ABSTRACT
This work examines the effect of the corporate Governance Attributes on earnings of quoted consumer goods of manufacturing companies in Nigeria. Specifically the study set out to achieve the following objective: to examine the effect of the board size on earnings per share (EPS) of consumer goods manufacturing companies in Nigeria; to investigate the effect of the board independence on Earnings per share (EPS) of consumer goods manufacturing companies in Nigeria; to determine the effect of the Audit Committee Size on earnings per share (EPS) of consumer goods manufacturing companies in Nigeria and to examine the effect of the frequency of board meetings on earnings per share (EPS) of consumer goods manufacturing companies in Nigeria. Data for the study were extracted from the annual reports of the selected quoted manufacturing firms. The Hypotheses were subjected to statistical test using the Hausman Test and Panel Technique of the multiple regression analyses methods. A significant outcome of the study is that corporate Governance attributes have positive and significant relationship with the earnings of quoted consumer goods manufacturing companies in Nigeria. Specifically, Board meetings, Board independence, Board size all have positive relationship with earnings per share of the quoted consumer goods manufacturing companies. However, the relationship of Board independence, though it was positive, it was also insignificant. Furthermore, the size of the audit committee had negative and insignificant relationship with earnings of the quoted consumer goods manufacturing firms. A major implication of these findings is that compliance with code of corporate governance as issued by regulatory authorities will support enhanced the Earnings of Manufacturing companies in Nigeria. Accordingly, the study recommends among other things that Quoted Manufacturing companies in Nigeria should be encouraged to comply with code of corporate governance since it enhances their Earnings. Conclusively, the study has shown that the right application of corporate governance attributes in Nigeria will be of immense benefit to all corporate stakeholders.
TABLE OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of Contents vi
List of Tables x
Abstract xi
CHAPTER 1: INTRODUCTION 1
1.1 Background to the Study 1
1.2 Statement of the
Problem. 3
1.3 Objectives
of the Study 4
1.4.
Research Questions 5
1.5 Research
Hypotheses 5
1.6 Significance of the Study 5
1.7 Scope of the Study 7
1.8 Limitations of the Study 7
1.9 Operational Definition of Terms 8
CHAPTER 2: REVIEW
OF RELATED LITERATURE 9
2.1 Conceptual
Framework 9
2.1.1
Concept of corporate governance 11
2.1.2 History of corporate governance in Nigeria 11
2.1.3 Code of corporate governance for public
companies
(manufacturing companies) in Nigeria 13
2.1.3.1 Application of the codes 14
2.1.3.2 Responsibilities
of the Board of Directors 14
2.1.3.3 Duties of the board 15
2.1.3.4
Composition and structure of the board 16
2.1.3.5 Executive directors 16
2.1.3.6 Non-executive directors 17
2.1.3.7 Independence of directors 17
2.1.3.8 The audit committee 18
2.1.3.9
Code of ethics 20
2.1.4 Principles of
corporate governance 22
2.1.5 Corporate governance attributes and
earnings. 23
2.1.6 Board size and earnings of firms 25
2.1.7 Board independence and the earnings of firms 28
2.1.8 Frequency of board meetings and the earnings
of firms 30
2.1.9 Audit
committee size and earnings of firms 31
2.1.10 The concept of firm`s earnings and its measurement 32
2.2 Theoretical Framework 33
2.2.1 Agency theory 34
2.2.2
Stakeholder theory 35
2.2.3 The shareholder and stakeholders models of
governance 37
2.2.3.1 The shareholder model 39
2.2.3.2 The stakeholder model 42
2.2.4
Stewardship theory 44
2.2.5 Resources dependency theory 45
2.3 Empirical Studies 46
2.4 Summary and Gap in
Literature 58
CHAPTER 3: METHODOLOGY 60
3.1 Research Design 60
3.2 Population of the Study 60
3.3 Study Area 60
3.4 Sample Size
Determination 61
3.5 Sources of Data 61
3.6 Measures of
Operational Variables 62
3.6.1 Dependent variables 62
3.6.2 Independent variables 62
3.7 Conceptual Module 62
3.8 Model Specification 60
3.9 Apriori Expectation 63
3.10 Data Analysis Method 63
CHAPTER 4: DATA PRESENTATION AND ANALYSIS 65
4.1 Descriptive Data
Analysis 65
4.2 Panel Unit Root Test 67
4.3 Panel Co-integration
Analysis 69
4.4 Test of Hypotheses 71
4.4.1 Hypothesis I 73
4.4.2 Hypothesis II 75
4.4.3 Hypothesis III 76
4.4.4 Hypothesis IV 77
4.5 Discussion of Results 74
CHAPTER 5: SUMMARY, CONCLUSION AND RECOMMENDATIONS 82
5.1 Summary 82
5.2 Conclusions 83
5.3 Recommendations 87
5.4 Contribution to Knowledge 88
5.5 Suggestions for Further Research Work 89 References 90
Appendix 101
LIST OF TABLES
1 Results of
Descriptive Analysis 65
2 Panel Unit Root Result at Level 67
3 Panel Unit Root at First Differencing 68
4 Panel Co-integration Test Result 69
5 Hausman Test Result 73
6 Multiple
regression of corporate governance indicators on
earning per
share of selected companies 74
CHAPTER
1
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
Business firms all over the world exist to optimize profit by
producing and making their products available to consumers. In achieving this
profit maximization objective, the various activities, task, functions and
responsibilities of the component elements of the organization must be planned
and controlled. A very important feature of modern business enterprise is that
of the business entity concept whereby the owners of the business are separated
from the managers of the business. The owners of the business are the
shareholders who constitute the Board of Directors (BOD).
The planning and controlling of the operations and activities of
business firms revolve around what is referred to as corporate governance. Corporate
governance is the call to duty on the part of the BOD who makes decisions,
formulate and implement policies that guide the operations of the enterprises
to safeguard the interests of the owners through transparency and
accountability. The shareholders are the owners of the business based on their
investments and interest in the business. In earnest, the shareholders expect
satisfying yield on their investments as well as increase in their wealth
overtime. As such, two important objectives are pursued by managers of business
enterprises. These objectives include profit maximization and shareholders
wealth maximization.
Following from the above, it should be noted that the attainment of
these two objectives is contingent upon corporate governance effectiveness and
efficiency in monitoring and controlling the operations and activities of the
firm. Specifically, the corporate governance process and strategies in
monitoring and controlling firms’ operations are enshrined in the internal
control system, audit committee, risk management frame work, performance
appraisal, board membership, rewards and compensation, and replacement of board
members and management team. These including the provision of financial
incentive schemes to managers, adoption of appropriate governance structure and
implementation of policies to enforce sanctions for breaches of laid down rules
and regulations promote the attainment of the profit and shareholders wealth
maximization objectives.
To a very large extent, every step and strategy adopted in the
process of implementation and adherence to corporate governance principles and
tenets has significant implications on corporate profitability and shareholder
wealth maximization. The wealth of the shareholders comes from the profit made
by the firms. For instance, dividend paid to shareholders comes from net profit
and also the earnings accruable to the investors such as earnings per shares
are based on the profit after tax (PAT). Hence, corporate governance efforts
and strategies are geared towards cost reduction and profit maximization. When
profits are optimised earnings are consequently catalysed to increase.
However, in many business firms in Nigeria, including manufacturing
companies, profits tend to decline on yearly bases. The decline in profits
therefore exerts negative influences on earnings accruable to the shareholders.
Consequently, further investment, expansion and stability of these companies
and the sector as a whole are threatened. A good number of research findings
including Azubuike, Madugba and Okpe (2015), Golmohammadi, Ranjadoost and
Cherati (2012) and Obiyo and Lenee (2011) identified poor macroeconomic
policies and recession as the major causes of poor profit position of firms.
However, scanty and non-concrete efforts are being carried out to evaluate the
impact or implications of corporate governance on earnings capacity of
manufacturing firms in Nigeria to determine how corporate governance attributes
have contributed to the poor profits related by companies. This work is
therefore designed to assess the effects of corporate governance on the
performance of manufacturing firms in Nigeria.
1.2 STATEMENT OF THE PROBLEM
As noted in the introductory section above, the Board of Directors formulates
and implements policies to guide the operations and also provide control
machinery of the firms. These constitute
the elements of corporate governance. Recent trends and evidences of poor
corporate performance across various economic and industrial sectors in Nigeria
point to weak corporate governance in many business enterprises including
manufacturing firms in Nigeria. This has exposed the fact that most corporate
organizations only pay lip service to application and implementation of
corporate governance principles.
The increasing disregard of corporate governance principles by these
companies have been caused by increasing level of corruption in the private
sector, unhealthy competition, weak management and capitalist syndrome. Based
on these, weak corporate governance is occasioned by insider abuses, fraud
cases, bloated Board Sizes, Board crisis, inability to enforce compliance to
established rules as well as sanctions for breaches, among others.
Cases as observed here lead to distortions, instability and management
inefficiencies. These are evidenced in increasing cost of operations, declining
profitability and erosion of shareholders’ funds, among others. Consequently,
earnings are affected. This is mainly in view of the increasing cost of
operation and the difficulties of raising additional capital to fund the firms
as a result of loss of investors’ confidence in the enterprises. Furthermore,
previous empirical studies on the effect of corporate governance focused on the
profitability and were devoted to financial institutions especially banks and
other companies which were not consumer goods firms in Nigeria. These studies
also covered only three to five year periods and were also conducted using
simple or multiple regression technique. This creates a gap in literature on
corporate governance practices by consumer goods manufacturing companies in
Nigeria.
Following from the above, it therefore became pertinent to examine
the effect of corporate governance on earnings of consumer goods firms in
Nigeria with focus on how corporate governance affects earnings per share (EPS)
of quoted consumer goods manufacturing companies in Nigeria covering a ten year
period (2006-2015) using modified random effects panel multiple regression
technique.
1.3 OBJECTIVES OF THE STUDY
The main objective of the study is
to examine the effect of corporate governance attributes on earnings of quoted
consumer goods manufacturing firms in Nigeria. Specifically, the study seeks to
achieve the following objectives:
i.
To examine the effect of board
size on Earnings per share (EPS) of quoted
consumer goods manufacturing companies in Nigeria.
ii.
To investigate the effect of board
independence on Earnings per share (EPS) of quoted consumer goods manufacturing
companies in Nigeria.
iii.
To determine the effect of Audit Committee size on Earnings per share (EPS) of quoted consumer goods manufacturing companies in Nigeria.
iv. To examine the effect of frequency of board
meetings on Earnings per share (EPS) of quoted consumer goods
manufacturing companies in Nigeria.
1.4. RESEARCH QUESTIONS
The
following research questions were developed to guide this study:
i.
To what extent does board size affect Earnings
per share (EPS) of quoted consumer goods manufacturing companies in Nigeria?
ii.
To what extent does board
independence affect Earnings per Share (EPS) of quoted
consumer goods manufacturing companies in Nigeria?
iii.
To what extent does Audit
committee size affect Earnings per share (EPS) of quoted
consumer goods manufacturing firms in Nigeria?
iv.
How does frequency of board
meetings affect Earnings per share (EPS) of quoted consumer goods manufacturing
companies?
1.5
RESEARCH HYPOTHESES
To proffer useful answers to the research questions and realize the
study objectives, the following hypotheses stated in their null form were
formulated:
i.
The
effect of board size on Earnings per share (EPS) of quoted consumer goods
manufacturing companies in Nigeria is not significant.
ii.
The effect of Board
independence on Earnings per share (EPS) of quoted consumer goods manufacturing
companies in Nigeria is not significant.
iii.
The effect of Audit Committee size
on Earnings per share (EPS) of quoted consumer goods manufacturing companies in
Nigeria is not significant.
iv.
The effect of the frequency of
board meetings on Earnings per share (EPS) of quoted consumer goods
manufacturing companies in Nigeria is not significant.
1.6 SIGNIFICANCE OF THE STUDY
The findings of this study would be of immense importance to the
following groups: Management and other stakeholders of manufacturing and other corporate
companies in Nigeria, shareholders of the companies; the government; regulatory
agencies; researchers and other students.
The management: To the management of
corporate organizations in Nigeria, the findings from this study will expose
them to undertake acceptable best practices which would entrench effective and
efficient corporate governance towards the attainment of established corporate
goals and objectives. Furthermore, it will help to re-focus them towards
accountability, transparency and commitment towards their organization.
The shareholders: To the shareholders of corporate organization, the findings from
this research study would enable them understand the need for corporate
governance best practices available and how it affects the shareholders’ wealth
maximization as measured by the profitability level and earnings per share
(EPS)
The government: The government will also benefit from this study. The existing laws
and regulations will be enhanced and modified to enhance corporate governance
practice in corporate organizations in order to deepen their survival and
growth. Obsolete laws, rules and regulations which are known to be inimical to
the conduct of effective corporate governance practice would be discarded.
The regulatory agencies: The efforts of the government will be complemented by that of
relevant regulatory agencies based on the findings of this study. Such
regulatory agencies whose activities will be further enhanced by the findings
of this study include Standard Organization of Nigeria (SON), Securities and
Exchange Commission (SEC), Consumers Protection Council (CPC) and others, who
will tap into the findings of this study to strengthen their supervisory role
over corporate organization in order to safeguard and enhance best corporate
practices.
The academic community: The study will
have significant theoretical importance for academics, as it will contribute to
the body of literature on corporate governance in government-owned
organizations, corporate governance concepts, principles and processes,
required to make informed decisions in the academic and corporate world. Also
to the students, this work will propel them for further investigations, and
assist them by providing the needed pedestal for further studies in corporate
governance application, regulations and measurement.
1.7 SCOPE OF THE STUDY
The study is focused on the effect of corporate governance on the
performance of quoted consumer goods manufacturing companies in Nigeria. This
study considered consumer goods companies in Nigeria from 2006-2015.
This study covered 23 quoted consumer goods manufacturing companies
listed on the Nigeria Stock Exchange (NSE) as at December, 2017. The study
examines the effect of corporate governance attributes on earnings per share of
manufacturing firms in Nigerian. The study focused mainly on four corporate
governance variables which include board size (BS), board independence (BI) (ratio
of number of non-executive directors to executive directors), audit committee
size (ACOM) and frequency of board
meetings (FBM) and earnings of the manufacturing companies was measure in terms
of earning per share (EPS).
1.8 LIMITATIONS OF THE
STUDY
This study faced little or no
constraints. The main limitation was insufficient data due to the
unavailability of data on corporate governance attributes and earnings per
share of the selected consumer goods companies for 2016 due to the
unavailability of their annual reports and financial statements. This limited
this study to 2015. There was also problem of insufficient funds, as this study
required lots of fund in carrying it out. However, the research was able to
reach out to friends and family for grants. Despite these limitations, the
researcher was able to complete this study successfully.
1.9 OPERATIONAL DEFINITION OF TERMS
The following terms were defined in accordance with the context in
which they were used in the study:
Earnings: This typically refers to
after tax net income of an organization. It is an important indicator of companies’
health and is the profit generated by company from which the shareholders’ are
compensated.
Corporate governance attributes: These refers to measurable variables that represent tools,
techniques and instruments through which corporate governance and
accountability is expressed and ensured in an organization.
Frequency of board
meetings: This is the total number of times the
board held meetings in a year.
Board independence: The ratio or proportion
of non-executive directors to aggregate number of directors.
Audit committee: Audit
committee represent another internal governance mechanism whose impact is to
improve the quality of the financial management of a company and hence its
performance. In addition, every public company is required under Section 359
(3) and (4) of the Companies and Allied Matters Act of 1990, to establish an
audit committee. It is the responsibility of the Board to ensure that the
committee is constituted in the manner stipulated and is able to effectively
discharge its statutory duties and responsibilities. At least one board member
of the committee should be financially literate (Dalton et al., 1999).
Board size:
Board size is defined as the numerical strength of the membership or
constitution of the board of directors in a company. It shows the full number
of directors both executive and non-executive as well as foreign and indigenous
directors on the board.
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