Vol.2 (6), pp.

102-109, November 2015

ISSN 2449-0806
International Standard Journal Number (ISJN) e-ISJN: A4372-2600
Article Number: DRJA279038834
Copyright © 2016
Author(s) retain the copyright of this article
Direct Research Journal of Social Science and Educational Studies (DRJSSES)
directresearchpublisher.org/journal/drjsses/

Research Paper

Corporate governance and financial performance

Akani, Fyneface Nmecha
Department of Accounting, Faculty of Management Sciences, University of Port Harcourt, Rivers State, Nigeria.
*Corresponding author E-mail: [email protected] .

Received 1 October 2015; Accepted 29 October, 2015

With the emergence of joint stock and public limited indicated in the outcome, the number of those that make up
companies, the performances of corporate activities have the board, that is, its size has significant links with the
become diverse and complex and also corporate financial amount or say, level of what comes in to the firm in the
scandals are on the increase. This has aroused the need for form of Returns, particularly on its Equity; in the same light
corporate governance. Corporate governance has to do there is a significant connection between the kind of
with laws, ethics, values, practices and norms that has to do freedom allowed to committees specifically the audit
with the planning, organizing and arrangement of the day committee and the Return that the firms eke out on their
to day activities of a firm. In recent times, corporate Asset. Companies, especially Public Limited companies
governance and its relationship with financial performance have been advised to measure how well it is performing in
have been made popular as researchers want to know more terms of its corporate governance, making sure to
and have indebt knowledge about these variables. Even understand if its leadership ethics and principles are being
though several researchers in this field have been called to followed properly, its board composition and how
make an indebt study on this topic, there’s no absolute independent they are, how its members especially the
conclusion. Moreover, there were several results gotten executives are being compensated, how true and open is
from previous researchers, each with a different conclusion, their report to the public, how active the stake holders are
definitely contrasting each other. The main objective of participating, and finally, if its members carry out its
carrying out this study is to ascertain the importance and activities lawfully. However, as the improvement of a firm’s
effect of corporate governance on financial performance of financial performance is very crucialin a company, it is also
firms in Nigeria, the sample was selected from banks important to note that the improvement of corporate
quoted in the Nigerian stock exchange as at 2014. The governance and its sustainable financial performance
research design utilized was quasi-experimental research should also be among the company’s priority as they are
design (survey).the sampling method used was the also important factors in a firm.
purposive sampling technique. The statistical tools used to
test the postulated hypothesis are spearman’s rank Key words: Corporate Governance, Financial Performance,
correlation and regression analysis through SPSS. As Public Limited Companies.

INTRODUCTION

Globally, with the emergence of joint stock and public professional managers to plan, organize, direct, control,
limited companies, the performances of corporate activities coordinate, investigate and evaluate the extent to which it
have become diverse and complex. This has arouse the human capital resources in the various functional unit are
need for corporate organization to hire the services of sticking to strategic objectives in the performance of their
 Direct Res. Social Sci. Edu. Studies 103

duties, Hence the need for effective corporate Furthermore, corporate governance helps to improve the
organizational governance. As stated by Shleifer and transparency of the firm or company and how open it is to
Vishney, ( 1997) in Muhammed and Suleman, (2013). If its shareholders, it helps improve the level of accountability
the corporate governance of a company is good and very of the firm which means that the confidence of a
effective, it will reduce wastage as a result of an effective shareholder lies on how well a firm’s corporate governance
and efficient decision making processes and a very operates. Corporate governance has to do with
effective operational firm. Good corporate governance performing activities that are lawful in an organization, not
has the interest of all its stakeholders at heart, both the only will it be lawful but also ethical and morally upright in
executives and non-executives. A good corporate every conduct or activities. Corporate governance have
governance boosts the confidence shareholders have in been structured in a way that resources can be utilized
the firm because with an effective corporate governance, efficiently and any staff that have been given full control of
dividend will be given to the shareholders as profit rather that resource can be able to account for them when the
than the retaining the profit by insiders of the firm (La time arises. Corporate governance is made up of three
Porta et al. 2002). most important persons; they are the management, the
As a result of the collapse of big and notable companies Board of Directors and finally, the shareholders.
such as Enron, WorldCom and Satyam in the past few Several scholars have carried out a research on this
years, the awareness as regards the issue of corporate study with the main aim of achieving the relationship that
governance increased drastically. The collapse was as a exist between corporate governance and its impact on
result of poor and bad governance which led to ethnicity, financial performance , moreover, the main aim of this
unethical business practices, and ineffective and inefficient research is to critically deduce how corporate
decision making processes. Questions have been raised governance can affect financial performances of public
as regards the efficiency and effectiveness of corporate limited companies in Nigeria. However the main
governance policies and systems because the global objective of this study is as follows:
financial crisis and economic recession which started in
2008 worsened in 2009. Moreover, it’s been discovered (1). One of the objectives is to know how the
that corporate governance work alongside value creation, independence of the board of directors can affect the
therefore, without a sensible and effective corporate financial performance of public limited companies.
governance, value creation would be poor. Simply put, a (2). To know what impact the board size has on the
corporation whose governance doesn’t follow ethical and Return on Asset (ROA) of public limited company, that
moral conducts will not succeed either financially it is if the board size to adopt should be either a large one
otherwise as the non-ethical acts will definitely scare or small one.
investors away. Solomon, (2010) in George and (3). Finally, to know the impact the audit committee has
Bagshaw, (2014) postulates that there is no definite on the Return on Equity (ROE) of public limited
definition of corporate governance, this is because there company.
exist different ways and approach different countries
have towards attaining or adopting the corporate Consequent upon this, the following questions were
governance code that best suits them. Every country raised for this study;
adopts its own definition based on its government,
economic or cultural framework, government policies, as (1).To what extent does board size impact on Return on
well as its present economic and cultural situation, Asset (ROE).
(Armstrong and Sweeney, 2002). The difference in (2).To what extent does independence of board of
definition can also arise from the different in view point, director’s impact financial performance of public limited
understanding and conclusions arising from different companies?
policy makers, law makers, researchers, practitioners or (3).To what extent does audit committee impact Return
theorists from different spheres of life (Solomon, 2010). on Equity (ROA).
The Australian Stock Exchange simply defined
corporate governance as an organization made up of
systems through which firms are controlled, directed and Research hypothesis
managed. Moreover, corporate governance has to do with
setting up of company’s objectives and goals, and what (1). There exist no significant relationship between the
strategies or policies to put in place to achieve that independence of audit committee and Return on Asset
objectives, and it also has the function of risk control and (ROA).
management, because there are several investors (2). No significant relationship exists between the size of
attached to the company, therefore the ability of the the board and Return on Equity (ROE).
company to undertake risk based investments successfully
will have a very positive impact on the company, it also This study will look at contemporary issues on the subject
has to do with how performances can be improved. matter while adding to the necessary incremental
Akani 104

contribution to existing body of literature by focusing on will definitely move the company forward and achieve
corporate governance as a means of improving financial its goals as quick as possible (Padilla, 2000). Agency
performance in public limited companies. In the light of theory can indeed be adopted to check mate the
the growing importance of financial performance to the relationship that exists between the ownership structure
survival of organization, this study will provide some and the management structure. In the event of division or
useful information to public limited companies and other misunderstanding of goals, the agency theory helps to
related organizations that may have interest in this area bring together the goals of the owners of the company
corporate governance and financial performance. and that of the management in order to achieve the
organizational objectives effectively and efficiently.

Theoretical framework
Stakeholder theory
According to Imam and Malik (2007) as cited by George
and Bagshaw, (2014) postulates that the structure of The stakeholders theory focuses on managerial decision
corporate governance is said to be the broadest and making, it further states that all stakeholders have equal
probably the best system being used for corporate affairs interests that no interest surpasses the other and that
to help the efficient utilization of resources, especially the value of the stakeholder is inseparable from the
corporate resources. Corporate governance aids the stakeholder himself. With the stakeholders theory, there
bringing together of individual, corporations and is an understanding that these stakeholders deserve and
society’s interest through a process on ethical and moral require the attention understanding and love of the
basis and this will help fulfill the goals of the owners of management at large. The stakeholders theory was
the organization. Corporate governance structure may not adopted to bridge the gap and correct the problems
be the same for all organization but its policies will be caused by the agency theory which only observed
created in such a way that the interest of all the shareholders as the only important part of a corporate
stakeholders will be the priority of the organization. The organization this was cited by George and Bagshaw,
theories to be talked about in this corporate organization (2014). More problems have been curbed out of the
study are as follows: agency theory, these problems are being discovered
because of the introduction of the stakeholders theory
(a) The agency theory and its structure, one of such problems is the problem of
(b) The stakeholder’s theory too much principal (Sanda et al., 2011). In the agency
(c) The stewardship theory theory, the managers serve the shareholders as well as
(d) Resource dependency perform the day to day running of the business, but the
(e) Business ethics theory stakeholders theory unlike the agency theory do not have
to work or perform that day to day activity but their main
duty is to maintain a positive relationship with the
Agency theory business partners, suppliers and employees. They further
explained that this type of relationship is better and more
So many fields have applied this agency theory in important than that of the agency theory that only
decision making fields such as the management sciences, explains the relationship as the owner to the manager
social sciences, political sciences, marketing, sociology, and then to the employees. Wheeler et al. ( 2003),
economics and accounting, the agency theory also forms Postulated that the aim of every organization or firm is to
the basis of every corporate governance debate. The create wealth for its stakeholder, since the stakeholders’
Agency theory has to do with the relationship that exists main objectives is to obtain benefits. Also, the
between principals and agents such as the relationship establishment of relationships with several persons or
between the shareholders and its agents, the company’s groups can affect the decision making processes of the
executives and its managers. The agency theory states organization, it is therefore advisable to establish
that shareholders who are also the principals or the relationships with group that will be beneficial and help in
owners of the company will employ the agents to perform achievement of organizations goal and objectives and the
the job or duties, that is the day to day running of the stakeholders theory shows interest in these relationship,
company. The principal assigns the management of the the processes it takes and how beneficial it is to both the
business to the managers or the directors who are also organization and stakeholders (Clark, 2004).
the agents to the shareholders, according to the agency
theory, agents are expected to act on behalf of the
shareholders or principal and make decisions that will Stewardship theory
be in the interest of the principal also. In most cases,
the agent may not likely make decisions that best fits According to Clark, (2004) stewardship theory talks
the interest of the principal but he makes decisions that about the strong relationship that exists between the
 Direct Res. Social Sci. Edu. Studies 105

manager who works so hard and strives to achieve Financial performance

organizational goals and objective and the owner or
principal who finds utmost satisfaction in the work done. An organization financial performance talks about how an
A steward has the duty of maximizing and protecting the organization can use its resources or asset efficiently to
shareholders wealth which in turn increases his benefits. generate profit. Kothari, (2001) deduced that the value of
It should therefore be understood that a good firm an organization can be regarded as its present value of its
performance will welcome investors into the company expected future cash flows after risk has been deducted at
but a bad one will never satisfy the groups who wants an acceptable or suitable income rate. Base on this
to invest in the company. study, financial performance of a firm can be measured
using the Return on asset (ROA) and the Return on
Resource dependency theory equity (ROE).

Resource dependency theory has to do with the fact Return on assets (ROA)
that the role of the director is to make available the
resources needed for the firm. The resource dependency It is through the ROA which in full is the Return on Asset
theory appreciates the fact that directors have to create a that profitability can be measured. It is regarded as one of
relationship with external environment and create a link the profitability ratios. The Return on Asset ratio
with them in order to be able to provide the needed measures how effective a firm can be in utilizing its
resources for the firm, so that the firm can in turn be able available resources or assets to attain profit. Return on
to achieve its stated organizational goals and objectives. Asset (ROA) and Return on Investment (ROI) are similar
As long as directors have been considered as a very in their usefulness and value but the former is more a
important resources of an organization, several aspects more preferable tool when measuring the effectiveness of
of a director becomes very important criteria for a firm’s operations or activities. ROA= operating profit
qualification such as the gender, experience, divided by total assets.
qualifications of the director etc.
Return on Asset (ROA) = Net income\total assets

Business ethics theory Return on equity (ROE)

Business has helped the economy in major ways. Return on equity measures how the stockholders are
Through business, jobs have been provided; products being taken care of (Ross et al., 2003). It is the amount of
and services have also been readily made available for net income returned as a percentage of shareholders
the society to enjoy. If a business collapse at this period equity. It is a ratio that provides investors insight on how
the impact will be greatly felt more than before, and efficiently a company or its management team is
recently, the stakeholders have become more managing the equity that shareholders have contributed
demanding than ever before as their demands have to the company, it measures the ability of a firm to make
become so challenging that it may likely affect profits from its shareholders investment in the company.
businesses. Only few successful businesses have It is measured as;
gained knowledge or any formal education about
businesses and it. However, business ethics is the study
of business, its activities that are being carried out in the Return on Equity (ROE) = Net income
environment, its decision making processes and if the Total equity
activities or decision making are right or wrong, it has to
do with how morally upright is the business environment,
its decisions and activities. Business ethics was EMPIRICAL REVIEW
introduced because businesses have grown stronger
than how it use to be, the power and influences Corporate governance is a very crucial factor for firm’s
businesses have now has been a major concern in the performance as well as economic growth. The popularity
society, so the need for business ethics arose as this of it is as a result of its great importance to the corporate
helps check mate attitudes and behaviors in the organization, because a good corporate governance will
business environment or world. Moreover, business have a positive impact on the firm, society and economy
ethics helps us to be able to ascertain the right or at large and then the reverse is the case. According to
wrong conducts of a particular entity in the business Magdi and Nadereh, (2002) as cited by Umoh et al.
world and gives us the ability to know the problems that (2013) postulates that corporate governance has to do
has to do with ethical issues in the firm, business ethics with making sure the firm is making the appropriate profit
also makes us knowledgeable on the traditional and it should make and therefore any investor who has
present view of ethics and morals. interest in the firm should be treated fairly and just.
Akani 106

METHODOLOGY gathered through structured research questionnaire

which will be supported by personal discussion (oral
RESEARCH DESIGN interview) with management staff. The procedure for
sourcing the information under primary data collection will
In line with the subject matter under investigation, involve visitation of the management of companies
corporate governance and its impact on financial selected for this study, administering the questionnaire to
performance in public limited companies in Nigeria, the top officials and going back on agreed date to collect the
cross-sectional research design which is part of the filled copies of the questionnaires.
quasi-experimental research design was adopted. The
reason for employing the quasi-experimental design is
because the various element of the design are not under The secondary source
the control of the researcher.
Secondary data collection will be relevantly source
Population of the study through textbooks, journals, websites, dissertation,
thesis, magazines and newspapers.
The population of the study is made up of one hundred
and eighty eight (188) public limited companies in Nigeria
as listed in the Nigeria stock exchange, 2015. But since it Validity and reliability of instrument
will be cumbersome to study the entire population of
public limited companies in Nigeria, therefore Nine (9) Test of Validity
public limited companies from three (3) different sector of
the economy operating in Port Harcourt will be chosen as Content validity is be used for this study. Validity of the
the accessible population from which the sample size will instrument employed for this study will be achieved
be selected from. through peer vetting, supervisors approval and
acceptance by knowledgeable professionals on the subject.
Sampling procedure and sample size determination
Test of reliability
Due to the size of the population, the sample size of this
study shall be determined using the purposive random The questionnaire is a good measure of reliability
sampling technique. Three (3) publicly owned quoted firm because several researchers have used this measure
each shall be selected randomly from the chosen sectors over the years to measure the same variables. Therefore
namely (Manufacturing, construction and services), the reliability of our instrument will be measured by
making a total of Nine (9) public limited companies as the cronbach Alpha, to be generated through SPSS analysis.
sample size of this study. The benchmark for selection
includes existence for over ten years, experience and
noticeable branch network within Port Harcourt. However, RESULTS AND DISCUSSION
since the health and performance can better be explained
by different top officials of Public limited companies, the Descriptive and inferential statistics will be used to
researcher then decided to choose Six (7) top officials determine the computation of our primary and secondary
comprising of Management and Accounting department analysis. Descriptive statistics that will be used in this
for the first three (3) companies and five (5) officials for research are the average and simple percentage which
the next six (6) selected public limited companies to will determine the percentage differences between the
serve as the respondents for the study since it is believe actual observed and the expected response, while the
that these people can provide the much needed inferential statistic that will be used are spearman’s Rank
information relating to the health and financial order correlation coefficient for relationship and multiple
performance of their organization. regression for evaluating the moderating effects. This
statistical tools mention will be calculated using SPSS.
Methods of data collection Model specification
The primary and secondary data are the two sources CG=f (ROA+ROE) Where
used to generate the data for this study. Corporate governance (CG) =BS+AC
i.e BS mean Board size
The primary source AC means Audit Committee
The primary source of data collection in this study will be From Table1, we can conclude that mean of the
 Direct Res. Social Sci. Edu. Studies 107

Table 1.Descriptive statistics

N Minimum Maximum Mean Std. Deviation

ROA 51 0.20 4.00 1.0655 1.15147
ROE 51 0.15 6.00 1.8220 1.94560
BODSIZE 51 9 16 11.69 1.749
AUDITCOM 51 3 7 5.04 1.264
Valid N (list wise) 51

a
Table 2. ANOVA

Model Sum of Squares Df Mean Square F Sig.

b
Regression 0.620 1 0.620 0.161 0.690
Residual 188.647 49 3.850
Total 189.267 50

a. Dependent Variable: ROE

b. Predictors: (Constant), BODSIZE
a
Table 3. ANOVA

Model Sum of Squares Df Mean Square F Sig.

b
Regression 12.125 1 12.125 10.967 0.002
Residual 54.170 49 1.106
Total 66.295 50

a. Dependent Variable: ROA

b. Predictors: (Constant), AUDITCOM
a
Table 4.Coefficients

Unstandardized Coefficients Standardized Coefficients

Model B Std. Error Beta T Sig.
Constant -0.897 0.611 - -1.469 0.148
Auditcom 0.389 0.118 0.428 3.312 0.002
a
Dependent Variable: ROA

a
Table 5.Coefficients

Unstandardized Coefficients Standardized coefficients

Model B Std. Error Beta T Sig.
Constant 2.566 1.874 - 1.369 .177
Auditcom -.064 0.159 -.057 -.401 0.002
a
Dependent variable: ROA

ROA&ROE is 1.0655 and 1.8220 respectively. This and 3). This simply means that there is a strong
means that there is a poor performance of the selected relationship between the dependent variables as ROE
firm in Nigeria under study period because minimum which is Return on Equity and ROA which is Return on
ROA&ROE is 0.20 and 0.15 respectively. The board size asset and the independent variables as Board size
shows that at least 12 board member are perfect for the (BODSIZE),and Audit committee (AUDITCOM).The result
great performance of the company. The result of the from the regression coefficient show 0.428 and -0.57
Audit committee indicates that round about 5 auditors are (Tables 4 and 5). It explains that, if Audit Committee Size
essential for good performance of a firm. With F-values of is increased by one member, that will give 43% increases
0.161 (sig.0.690) and 10.967(sig.0.002) for ROE and to the ROA. So Audit Committee Size has significantly
ROA as performance proxies respectively (Tables 1, 2 positive relationship on the firm’s, and the Board size
Akani 108

shows negative significant relationship on the ROE. This practices in order to ensure that there is a significant
implies that if the firm has a decrease in board member it positive effect on the performance of corporate
will have effects on the ROE. governance practices in the sector.
(5). Companies should endeavor to expand its
knowledge and practices of corporate governance and
Conclusion ensure that they incorporate other corporate
governance practices into their management policies
In conclusion, this study and its various aspect shows either in their internal or external business environment.
that corporate governance have a significant impact on
the financial performance of public limited companies.
The positive impact of compliance with legal and References
regulatory guidelines indicated the greater compliance
Armstrong A, Sweeney M (2002).Corporate governance disclosure:
would induce greater positive effect and ultimately result Demonstrating corporate social responsibility through social reporting,
to significant increases in return on equity. Cost-saving New Academy Review.1(2):51-69.
board composition and proactive practices would mitigate Clark T (2004).Theories of Corporate Governance:The Philosophical
Foundations of Corporate Governance. New York: Routledge
the negative effects on performance and, thus, enhance Publishing.
return on equity. Board composition that negates legal George P, Bagshaw k (2014). Corporate Governance Mechanisms and
and regulatory guide lines or adherence to guide lines at Financial Performance of Listed Firms in Nigeria: A Content Analysis.
rising management costs has more damping effect on Kothari SP (2001).Capital market research in accounting, paper
presented to JAR Rochester Conference April 2000.
performance than cost-driven proactive practice of the La Porta R, Florencio L, Shleifer A (2002).Government ownership of
firms’ boards and managements. Combined negative banks. Journal of Finance,57:265-301.
effect of cost-inducing board composition and proactive Muhammed A, Suleman A (2013). Impact of Corporate Governance on
practices crowds out the positive effect of legal/regulatory Financial Performance. Pakistan Journal of Social Sciences (PJSS)
33(2):265-280.
compliance.
Padilla A (2002). Can Agency theory justify the regulation of insider
trader? The Quarterly journal of Austrian economics; 5(1):3-38.
Ross, Westerfield and Jordan (2003). Fundamental of Corporate
Recommendations Finance sixth edition.
Sanda A, Mikailu A, Garba T (2011).Corporate governance mechanisms
and firm financial performance in Nigeria: African Economic Research
Due to the above summary, findings and conclusions, the Consortium, Research Paper,149,Kenya regal press.
following are major recommendations on how to achieve Solomon JF (2010).Corporate Governance and Accountability.
good corporate governance; Public limited companies 3rd.Australia: John Wiley & Sons Ltd.
should: Umoh GI, Harcourt W, Edwinah A (2013). Production Improvement
Function and Corporate Growth in the Nigerian Manufacturing
(1). Endeavour to use these indicators on corporate Industry.
governance; Leadership Ethics, the composition of the Wheeler D, Colbert B, Freeman, RE (2003). Focusing on value:
board and the board independence, stakeholders Reconciling corporate social responsibility, sustainability and a
engagement, transparency and reporting, executive stakeholder approach in a network world. Journal of general
management, 3:4.
compensation, and finally obedience of the law and order to
achieve a good corporate governance, corporate
governance improvement is as crucial as improving financial
performances of firms.
(2). Corporate entities should ensure that they obey all
legal and regulatory instructions as this helps improve or
ensures greater financial performance of firm, this will
lead to increase in the Return on Equity which will in turn
lead to a very significant positive impact on the firm’s
performance.
(3). Embark on cost-saving composition of board size
and structure as well as proactive strategies in order to
reverse the negative effects of no operational
performance.
(4). Companies should ensure that they seriously obey
the set rules and regulations, and also make sure they
comply with board composition and its very active
 Direct Res. Social Sci. Edu. Studies 109

APPENDIX

Realiability test

Case processing summary.

Cases N %
Valid 51 100.0
a
Excluded 0 0
Total 51 100.0
a. List wise deletion based on all variables in the procedure.

Reliability statistics

Cronbach's Alpha N of Items

0.546 4