IMPACT OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE OF

GOVERNMENT PARASTATALS IN NIGERIA: EVIDENCE FROM NNPC LTD

IBADAN

BY

FOLARIN Wuraola Blessing

MATRICULATION No.: NOU191047640

A PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS

FOR AN AWARD OF BACHELOR OF SCIENCE (B.Sc.) DEGREE IN BUSINESS

ADMINISTRATION, SUBMITTED TO THE DEPARTMENT OF BUSINESS

ADMINISTRATION, NATIONAL OPEN UNIVERSITY OF NIGERIA, IBADAN STUDY

CENTRE

FEBRUARY 2024
 DECLARATION

I, FOLARIN Wuraola Blessing hereby declare that this research work titled Impact of

Corporate Governance on Financial Performance of Government Parastatals in Nigeria:

Evidence from NNPC Ltd Ibadan is a product of my research work.

________________________ ____________________
Student’s Signature Date

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 CERTIFICATION

This is to certify that this study was carried out by FOLARIN Wuraola Blessing with the Matric

Number NOU191047640) under my supervision in the Department of Business Administration,

National Open University, Nigeria.

_____________________________ ______________________
Supervisor Date
Dr. Obisesan Francis

_____________________________ ______________________
Center Director Date

_____________________________ ______________________
Head of Department Date

_____________________________ ______________________
External Examiner Date

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 DEDICATION

This research project is dedicated to Almighty God, the supreme being and the creator of all

things whose mercies, supports, provision and guidance has made it possible for me to

complete my studies in National Open University, Ibadan study centre.

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 ACKNOWLEDGMENT

First and foremost, I am grateful to the Almighty God, for seeing me through this research work

and making me to finish in good time. He has indeed been faithful.

I sincerely appreciate my supervisor Dr Obisesan Francis for his patience and continuous

guidance throughout the course of the research work. Thanks for being of good support and a

source of encouragement. I pray that God will bless all you do sir. Finally, my gratitude also

goes to my colleagues both at the faculty and departmental level who in one way or the other

have been of help during my course of study and during the execution of this work. I pray that

God will reward you all accordingly.

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 Table of Contents

Title Page i

Declaration ii

Certification iii

Dedication iv

Acknowledgment v

Table of Contents vi

List of Tables x

CHAPTER ONE: INTRODUCTION 1

1.1 Background to the Study 1

1.2 Statement of the Problem 3

1.3 Objective of the Study 4

1.4 Research Questions 4

1.5 Research Hypotheses 5

1.6 Significance of the Study 5

1.7 Scope of the Study 6

1.8 Limitations of the Study 6

1.9 Definition of Key Terms 6

CHAPTER TWO: REVIEW OF RELATED LITERATURE 7

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2.1 Conceptual Review 7

2.1.1 Corporate Governance 7

2.1.2 Financial Performance 12

2.2 Theoretical Review 13

2.2.1 Agency Theory (Financial performance Theory) 13

2.2.3 Resource Dependence Theory 14

2.3 Empirical Review 14

2.3.1 Independence of the Board and Financial Performance 14

2.3.2 Board Members Knowledge and Financial Performance 16

2.3.3 Transparency and Financial Performance 16

2.4 Summary of Literature Review 17

CHAPTER THREE: RESEARCH METHODOLOGY 18

3.1 Research Design 18

3.2 Population of the Study 18

3.3 Sample and Sampling Techniques 18

3.4 Research Instrument and Instrumentation 19

3.5 Validity of Instrument 19

3.6 Reliability of Instrument 20

3.7 Method of Data Collection 20

3.8 Method of Data Analysis 20

CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION 22

4.1 Introduction 22

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4.2 Analysis of Demographic Data of Respondents 22

4.3 Analysis of Psychographic Data 26

4.4 Test of Hypotheses 31

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS 33

5.1 Summary of Findings 33

5.2 Conclusion 33

5.3 Recommendations 34

REFERENCES 36

APPENDIX: Questionnaire 40

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 LIST OF TABLES
Table 1: Gender of Respondents 22

Table 2: Age range of Respondents 22

Table 3: Educational Background of Respondents 24

Table 4: Marital Status 25

Table 5: Category of Respondents 25

Table 6: There is an impact of board independence on the financial

performance on parastatals in Nigeria 26

Table 7: There is a mixed association between proportions of independent

directors and firm performance 27

Table 8: Boards of directors can influence a firm's strategic decision making

and subsequently its performance 28

Table 9: There is an effect of board members knowledge on financial

performance on parastatals in Nigeria 29

Table 10: There is an effect of board transparency on financial

performance on parastatals in Nigeria 30

Table 16 Test Statistics 31

Table 17 Test Statistics 32

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 CHAPTER ONE: INTRODUCTION

1.1 Background to the Study

The division of ownership and control of corporations necessitates the use of efficient corporate

governance methods. In order to manage the company and make operational and strategic

choices in the best interests of the company and shareholders, the shareholders, the company's

owners, engage managers as their representatives. Conflicts of interest frequently arise when

agents and owners are two different people or organizations. Although managers are hired to

maximize shareholder returns and to protect the interests of all other stakeholders, they

frequently prioritize their own financial interests over those of their principals (Haji 2014, Smith,

2003). By using insider knowledge, managers of corporations could hide and use price sensitive

in format price-sensitive themselves (Appuhami & Bhuyan, 2015; Liu, Valenti, & Chen, 2016).

Corporate governance is the way in which companies are managed and controlled. In particular,

it focuses on the role of the company's board of directors and their responsibilities to

shareholders and other stakeholders. Considering a number of corporate scandals and that basic

legal requirement have proved inadequate for protecting shareholders interest, more specific

regulations have been introduced to institutionalize best practices that will enhance the integrity

of the business environment and thus facilitate trade and investment. The most current effort

from Nigeria environment being the issue of Nigeria Code of Corporate Governance 2018 by

Financial Reporting Council of Nigeria (FRCN) hereafter referred to as the Code. Companies

now adopt "apply and explain" approach which requires firms to explain how specific principles

have been applied. It is believed that the quality of corporate governance adopted and the nature

of a company's culture and behaviors are having a significant impact on performance and long

term sustainability of firms (Roy, 2016; Cleverly, Phillips, & Tilley, 2010). No wonder the Code

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emphasized that companies with the effective board and competent management that act with

integrity are better placed to achieve their goals and contribute positively to society. Board of

directors plays a central role in the management of companies and establishing the culture,

values, and ethics of the company. Their roles are usually categorized into monitoring, and

supervisory roles all geared towards aligning the interest of the board, the management with the

interest of the shareholders and other interest groups to ensure that firms succeed not only in the

present but also in the future. Thus board of directors' attributes as a sustainability issue that

hinges on enforcement and monitoring is receiving and will continue to receive considerable

attention in the literature. It has attracted a great deal of research and attention from regulators,

interest groups and academics as can be seen from the considerable growth in the empirical

literature across accounting, economics, finance, and management literature from both local and

international context.

Despite the considerable growth in research on the broad concept of corporate governance, there

is limited evidence from the Nigerian context on board of directors’ attributes and their effect on

performance using data of firms in all sectors other than financial sectors with special

consideration on board shareholding and board gender diversity which are important monitoring

attributes. Most prior studies focused on just financial sectors with little consideration on these

monitoring attributes of the board (Akinyomi & Olutoye, 2015; Obeten & Ocheni, 2014;

Danoshana & Ravivathani, 2013). Meanwhile, these attributes are essential for the effective

discharge of the responsibilities of the board. Recall that the Code of 2018 emphasised that the

board should promote diversity in its membership across a variety of attributes relevant for

promoting better decision making and effective governance. Specifically, there should be an

established measurable objective for achieving diversity both in gender and other areas. Kren and

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Kerr, (1997) also suggested that improvements in board monitoring will arise from more

independent boards, diversity in board and from increased stock ownership by directors. Hence

need to empirically analyse if these attributes taken together will affect financial performance of

NNPC LTD in Ibadan.

1.2 Statement of the Problem

Corporate governance involves focusing on the interest of directors, shareholders, employees and

other stakeholders and how these interest can be expressed, aligned and reconciled to enhance

the financial performance of the firm and to achieve long term strategic goals to satisfy its

stakeholders. The fundamental problem with Nigeria parastatals, is the inadequate structures of

governance in a corporate environment which is quite evident given the continued collapse of

companies within the state management. Most state corporations experience substandard board

representation due to problems such as inadequate monitoring and review of the performance,

less than effective board meetings, declining financial performance, embezzlement and

misappropriation of parastatals assets as well as limited or no statutory audits. In addition, the

elevated levels of corruption enable the lack of prosecution of fraud and misappropriating agents

of the state corporations.

Poor financial management and lack of good governance structures make it inevitable for the

parastatals to constantly underperform thus lagging the private sectors. Due to this, the services

of these parastatals have been substandard and unreliable leading to lack of confidence by the

citizens in them. An evaluation of governance in corporate state organizations as well as the

impact they have in the eventual performance as such, especially with bias to the different

aspects of the governance including leadership, transparency, knowledge and board

independence is critical in the solution of the outlined problem. These prompt the study that aims

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to evaluate the impact of governance and governance structures in corporate environment on the

eventual financial outcome of government parastatals in Nigeria.

1.3 Objective of the Study

The goal of this study is to elicit the impact of corporate governance on financial performance of

government parastatal in Nigeria using NNPC Ltd in Ibadan as case study. This goal will be

achieved through the pursuance of the following specific objectives:

1. To establish the impact of board independence on the financial performance of

government parastatal in Nigeria.

2. To establish the impact of board members knowledge on financial performance of

government parastatal in Nigeria.

3. To find out the impact of board transparency on financial performance on government

parastatal in Nigeria.

1.4 Research Questions

The study seeks to answer the following research questions

1. What is the impact of board independence on financial performance of government

parastatal in Nigeria?

2. What is the impact of board members knowledge on financial performance of

government parastatal in Nigeria?

3. How does board transparency impact the financial performance of government parastatal

in Nigeria?

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1.5 Research Hypotheses

In line with the research objectives, the hypotheses to be tested in this study are:

H01: There is a significant relationship between the board’s independence on the financial

performance of NNPC Ltd in Ibadan

H02: There is a significant relationship between board members knowledge on financial

performance of NNPC Ltd in Ibadan.

H03: There is a significant relationship between board transparency financial performances of

NNPC Ltd in Ibadan.

1.6 Significance of the Study

This study is undertaken to elicit the impact of corporate governance on financial performance of

government parastatal in Nigeria using NNPC Ltd in Ibadan as case study. The primary

importance of this study is that it will highlight correlation effect of corporate government,

board’s independence, board members knowledge and board transparency on financial

performance of NNPC Ltd.. This study is of great importance in the sense that it provides a basis

for the contribution of corporate governments on financial performance and formulation of a

framework for better understanding of those indicators of corporate governance. Findings from

this research will be of significant in enhancing corporate decision-making for parastatals as well

as other corporate state and privately owned organizations to further enhance the continued

growth of the economy. As a result, diverse organization board members will use the study as a

reference in developing governance structures and proper procedures that have a positive

influence on improved financial performance.

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1.7 Scope of the Study

The goal of the study is to identify some of the influences that corporate governance procedures

have on the ultimate financial performance of government parastatal in Nigeria. It concentrated

on the expertise, independence, openness, and leadership abilities of the board of NNPC workers

are the sole subject of the study.

1.8 Limitations of the Study

The study is expected to have a number of limitations. The respondents have doubts about the

researcher's quest for information, this is anticipated to hamper the study's progress, but by

including a confidentiality consent letter outlining the study's solely academic intent and the use

of the data and information gathered, as well as addressing the relationship between a

corporation's board of directors and its financial performance, this would be avoided.

1.9 Definition of Key Terms

Corporate Governance: This refers to the system by which companies are directed and

controlled.

Financial Performance: This is a subjective measure of how well a firm can use assets from its

primary mode of business and generate revenue. The term is also used as a general measure of

affirms overall financial health over a given period.

Parastatals: This refer to a company, agency or intergovernmental organization that possesses

political clout and is separate from the government but whose activities serve the state, either

directly or indirectly.

Board of Directors: These are executive committee that jointly supervise the activities of an

organization, which such as a business, non-profit organization or a government agency.

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Shareholders: These are person, company or institution that owns shares in a company’s stock.

A company shareholders are subject to capital gains (or losses) and / or dividend payments as

residual claimants on a firms profits.

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 CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1 Conceptual Review

2.1.1 Corporate Governance

The academic world has been shown to be interested in corporate governance, even before the

recent scandals. Frequently, the research are focused on one or a few dimensions of corporate

governance and examine the relationship between them and some variables that can represent the

performance of the company. However, in recent years, a growing interest is devoted to the

analysis of the effects of corporate governance on firm performance through the bservation of

multiple factors and creation of an index, in an attempt to grasp the growing complexity

(Gompers et al., 2003; Bebchuk-Cohen-Ferrell, 2004; Aboav at al., 2010). In particular,

Gompers-Ishii and Metrick (2003) developed a quality index, an indicator of protection from

hostile takeovers composed by 24 elements of governance, and showed that firms with a limited

protection of shareholders had a lower corporate valuation, measured by Tobin's Q, and low

equity returns.

Good corporate governance (GCG) in a corporate set up leads to maximize the value of the

shareholders legally, ethically and on a sustainable basis, while ensuring equity and transparency

to every stakeholder (the company’s customer, employees, investors, vendor partner, the

government of the land and community (Millstein, 2012; Murthy, 2015).corporate governance is

the key to transparent corporate disclosure and high-quality accounting practices (Abdullah,

2014). Thus it ensures the conformance of corporations with the interests of investors and

society, by creating fairness, transparency and accountability in business activities among

employees, management and the board (Kar, 2012; Shil, 2015; Oman, 2011). Prior studies

evidence association between weaknesses in governance and poor financial reporting quality,

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earnings manipulation, financial statement fraud, and weaker internal controls (Beasley, 2012;

Beasley, Carcello and Hermanso, 2014; Beasley and Frigo, 2012; Carcello and Neal 2010;

Dechow, Sloan and Sweeney, 2015; Mohammed and Ibrahim, 2011) and that when key elements

of corporate governance are not implemented, there will be negative consequences on financial

reporting quality because it plays important role in the process of improving the financial

reporting quality as well as to prevent earnings manipulation and fraud (Cohen, Wright and

Krishnamoorthy, 2014).

Beasley (2015) argued that the probability of detecting financial statement fraud in the American

firms decreases with the percentage of outside directors. Firth, Fung and Rui, (2012); Beekes,

Pope and Young, (2014); Norwani(2011) evidence that, the presence and number of independent

directors is positively associated with earnings quality. Dimitropoulos and Asteriou, (2010);

Vafeas, (2015) and Jensen, (2013) found that large board size reduces the information content of

incomes and intensifies the earnings management respectively for American, Singapore and new

Zealand firms. Similarly, the appointment of independent external auditor and audit committee

can reduce the probability of earnings manipulation (Antti and Jari, 2012; Falaschetti and

Orlando, 2010). However, theoretical and empirical studies about corporate governance have

suggested that the ownership structure can affect the financial reporting quality, (Fan and Wong,

2012; KlaiandOmri, 2011; Han, 2015).

The aim of corporate governance is to ensure that corporations are managed in the best interests

of their owners and shareholders (Ahmed, Alam, Jafar and Zaman 2012). This applies

specifically to listed companies where the majority of the shareholders are not in participatory

everyday management positions; although, it can also apply to other forms of corporations such

as companies with few principal owners and a large group of smaller shareholders, public

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corporations (where all citizens are stakeholders) partner-owned companies and privately owned

companies where the ownership has been divided through inheritance in one or several

generations (Ahmed, Alam, Jafar and Zaman 2010). Another essence of corporate governance is

establishing transparency and accountability throughout the organization. This is feasible as

corporate governance system is premised on a strict division of power and responsibilities

between the shareholders through the annual general meeting, the board of directors, the

executive management and the auditors.

Corporate governance has to do with ensuring that putting structures, processes, and mechanism

is established so that firms are directed and managed in such a way that enhances long term

shareholder value. By definition, corporate governance is a system or an arrangement that

comprises of a wide range of practices and institutions (legal, economic and social) that protect

the interest of corporation’s owners (Ofurum and Torbira 2011). There are several well

documented guidelines used in regulating firm in different parts of the world. For instance, the

Sarbanes-Oxley Act (SOX) 2002 in the USA; The UK Corporate Governance Code 2016 issued

by Financial Reporting Council Limited; Nigeria code of corporate governance 2018 issued by

Financial Reporting Council of Nigeria. The 2018 Code is an attempt towards harmonizing

various codes that existed. For the purpose of this study, the governance is measured using board

size, board independence, board gender diversity, directors' shareholding, and directors'

remuneration.

A board of directors is a panel of people who are elected to represent shareholders. Every public

company is legally required to have a board of directors. They are the governing body of a

Company. Board of directors of a company is an important organ not only responsible for the

management of a firm but also for adopting good corporate governance practices. Firms with an

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effective board and competent management that act with integrity are better placed to achieve the

goal of the business and contribute to the economy as the interest of the board and management

are made to align with the interest of the shareholders and other stakeholders. For the board of

directors to discharge their responsibilities effectively, there is a need for appropriate balance of

skills and diversity without compromising competence, independence, and integrity. These are

what is referred to as attributes which represent an important part of research on the relationship

between the boards and the company performance.

The concept of performance is important in evaluating the achievement of goals; it shows the

extent that resources of the firm are used efficiently to achieve their goals. Scholars often agree

that performance is a function of time and organizational context and as such posit that there is

no universal definition of the concept (Emeka-Nwokeji, 2018; Ekwueme, Egbunike, & Onyali,

2013). Haryono & Iskandar (2015) opined that Corporate Financial Performance is a reflection

of the financial condition of a company analyzed by the financial tools. Performance of firms is

of extreme importance to shareholders in particular as it helps to maintain a going concern and

also increase the value of the business thus study of variables that influence performance is of

great relevance both to practice and the academic world (Muller, 2014). This study measures the

link between corporate board attributes and corporate performance from accounting based

perspective using Return on Assets. Return on assets (ROA) is an accounting-based performance

measure which measures profitability and the effectiveness of companies in utilising their assets

to generate profit. Usman & Amran (2015), explained that ROA represents a company’s

profitability accruing from the total asset that the business controls. Commenting on the

justification for using ROA, Inoue & Lee (2011), opined that ROA is an accounting-based

measure that represents a firm’s efficiency of using its assets during a given fiscal year, capturing

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short-term profitability of the firm. Return on Assets is computed as Net Profit After Tax/ Total

Assets.

The theory that provided important theoretical frameworks for corporate governance (board

attributes) research and is used to explain the motivation for this study is agency theory. Agency

theory provides a number of ways to address the problems raised by the separation of ownership

and control in public limited liability companies. The underlying assumptions and their

relationship with this study are that effective and independent board is critical to a firm's ability

to reduce information asymmetry between agent and principal, the resultant agency cost

(litigation cost), while simultaneously improving overall performance.

2.1.2 Financial Performance

Financial performance which assesses the fulfillment of firms’ economic goals has long being an

issue of interest in managerial researches. Firm financial performance relates to the various

subjective measures of how well a firm can use its given assets from primary mode of operation

to generate profit. Kothari (2011) defined the value of a firm as the present value of the expected

future cash flows after adjusting for risk at an appropriate rate of return. To (Eyenubo 2013) it is

the success in meeting pre-defined objectives, targets and goal within a specified time target.

Qureshi, (2014), put forward four different approaches in which the value of a firm has been

identified in corporate finance literature. These are: the financial management approach which

focus on the evaluation of cash flows and investment levels before identifying and assessing the

impact of financing sources on firm value; the capital structure approach which studies the

impact of capital structure changes on the value of firm and how different factors impact directly

or inversely the debt and equity component of the firm capital structure; the resource based

approach which explains the value of firm as an outcome of firm’s resources; and finally, the

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sustainable growth approach which is a summary of the above three approaches to firm value,

taking into account the firm’s operating performance, its investment and financing needs, the

financing sources, and its financing and dividend policies for sustainable development of firm’s

resources and maximization of firm value.

2.2 Theoretical Review

The main theories reviewed in this section include the agency theory, stakeholder’s theory,

stewardship theory, and the resource dependence theory.

2.2.1 Agency Theory

However, for the purpose of this study, agency theory will be preferred. This agency theory can

be used to explain the impact of corporate governance characteristics (board characteristics, audit

characteristics) on firm performance. The agency theory view directors as the agent of the

shareholders and therefore there is a need for them to act in the best interest of the shareholders.

In this situation, sometimes the agent may not act in the best interest of the shareholders which

result in an agent loss situation. The agency theory stresses that, manager may sometimes pursue

opportunistic behavior which may conflict with the goal of the owners (principals) and therefore

destroy the wealth of the shareholders. Advocates of the agency approach view the manager

(director) as an economic institution that will mitigate the problems and serves as the guardian to

shareholders (Hermalin & Weisbach 2000, Fama & Jessen 2013).

This study adopts agency theory due to its relevance in resolving conflicts that may arise

between managers (agent) and shareholders (principal) of the companies. In highlighting the

importance of agency theory in corporate governance, Christopher, (2009) noted that the main

concern of corporate governance (CG) started from the separation of ownership and control in

modern public corporations. Also Iman and Malik (2012) noted that the need for corporate

13
governance arises from the potential for agency conflict. The main agency problem is between

the controlling owner-management and outside shareholders. Jenson and Meckling (2014)

described an agency relationship as “a contract under which one person (the principal) engages

another person (the agent) to perform some services on his/her (the principal’s) behalf”. Agency

relationship is also seen as a contractual process whereby owners delegate some of their

authorities and responsibilities to a team consisting of expert member(s), and they expect this

team to exercise their expertise in the best interests of the company’s operational success. Muth

and Donaldson, (2012) described agency relationship as delegation of power by the owner to the

management. Eisenhardt, (2013) discussed two major causes of agency problem, they are:

conflict of interests, and different attitudes towards risk between owner and management. In-line

with agency theory, the main problem of corporate governance is how the shareholders ensure

that self- seeking executives act in the interest of the shareholders rather than their own (Hendry,

2005). When shareholders are not able to monitor management properly, the company’s assets

might be used for the welfare of management rather than maximizing the company’s wealth

(Berle & Means, 2012). Chrisman, (2014) argued that conflict arises from information

asymmetry between owners and managers, and so there exist a gap between the two. Agency

problem of moral hazard and adverse selection, in particular, develop under information

asymmetries between agents and principals. Chrisman, (2014) also argued that one of the main

causes of this conflict is the information asymmetry between owners and managers, which

happens because of a knowledge gap about the company’s internal operations. The owners need

quality information to monitor, control and motivate the agents, however, the agents

(management) have full control of the information flow in the company.

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The separation of ownership and control makes controlling shareholders to pursue private

benefits (Albuquerue and Wang, 2008). In some occasions, shareholders may prioritize their own

welfare at the cost of other stakeholders, and they tend to influence management decision in

order to maximize short term profit. Management prefers to maximize the wealth of the firm by

earning sustainable long term profit. Consequently, conflict of interests between owners and

management emerges and can grow exponentially. For accountability purpose, management

decisions and activities need to be monitored. Good monitoring occur when owners themselves

can actively participate in the monitoring process. However, because of the high cost involved

and in some cases due to the lack of expertise and knowledge, they cannot be actively involved

in the process, though the board needs to set monitoring mechanisms because of their oversight

responsibilities to shareholders (Johnson,2011).

Peng and Heath (2014) argued that the lack of legality for formal governance mechanisms

creates a week governance environment, which can create a potentially severe agency problem.

The factors that can make agency problem worse in emerging economies are: family ownership

and control, state owned enterprises, poor legal protection of minority shareholder rights,

concentrated ownership structure and strategy and competitiveness (young, 2011). Family

owners and family member managers reduce the effectiveness of any internal and external

control mechanisms and also expose their companies to a self-control problem which affects

them negatively and also affect those around them negatively. Dharwadkar, (2000) contended

that family ownership may sometimes cause “weak governance” and “low trust” environment

that offers little protection against traditional principal-agent conflicts. However, all the countries

reformers have begun attempts to reduce the power of family-owned business groups. Since the

family members hold the major part of the shares in the family ownership, they may be

15
considered as large shareholders. The gain of large shareholders are theoretically clear (e.g.

having the interest as well as the power, to get their money back). Shleifer and Vishny, (2015)

contended that large investors represent their own interest, which need meet the interests of other

investors, employees, and managers in the firm. It has been observed that large investors usually

dominate the board and exercise undue influence on the management decisions. Large investors

may tend to maximize their wealth and overlook the wealth of others minor investors and

employees, (Shleifer & Vishny, 2014). They do that particularly when their control rights totally

exceed their cash flow rights, which do happens if there is a substantial departure from one-share

one-vote (Grossman and Hart, 2010).

Fama and Jensen (2013) contended that it is the duty of the board of directors (BoDs) to reduce

agency problem and costs arising from the separation of ownership from decision control.

Solomon, (2012) described some of the ways in which shareholders can monitor company

management and help to resolve agency conflicts. Hoitash, (2009) indicated that agency problem

can be mitigated through effective internal control over financial reporting imposed by owners.

Different studies have suggested some incentives to motivate management in minimizing the

agency problem (e.g ward, 2009) . Watts and Zimmerman (2011) explained a positive agency

theory by linking managerial incentive for voluntary financial disclosure. Dominated majority

ownership structure are likely to prevail across the corporations and are able to effectively

control principal-agent problems, and can consequently become the rule in emerging economies.

In this type of economies, dominating ownership structures are associated with the need to

resolve principal-agent problems. It is recommended that this problem can be resolved by

including an independent, external director on the board. Jackling and johl, (2009) argued for the

agency theory and agreed with the study of Nicholson and Kiel, (2014) who contended that the

16
higher proportion of outside directors in the board, the greater the corporation performance of the

firm. Ehikioya also agreed to one notion of this theory and discovered that CEO duality (same

person holding both positions of CEO and chairman) has a negative effect on a firm’s

performance. However, Jackling and Johl (2009) disagreed with the notion and found no reason

to conclude that a CEO’s duality roles have any detrimental effect of corporate performance.

2.2.2 Stewardship Theory

Donaldson and Kay (1976) argued that executives can aligns personal goals to the organizational

rather than being taken over by greed and identification. It holds that managing individuals are

driven by personal conviction and objectives to performance satisfactorily rather than greed and

personal interest. Steward theory upholds different that, to some extent, executive aims are

aligned to those of stakeholders while roles held by main decision-makers should be protected.

While Agency theory is considerably pessimistic towards human nature arguing one’s, action is

largely driven by the self-centered motives that in return have a negative consequence on the

company’s performance, steward theory refutes this views.

Proponents of stewardship theory contend that superior corporate performance will be linked to a

majority of inside directors as they naturally work to maximize profit for shareholders. Inside (or

executive) director spend their working lives in the company they govern, they understand the

business better than outside directors and so can make superior decisions (Donaldson, 2010;

Donaldson & Davis 2014). Access to information and the ability to take a long-term view are

seen as key aspects of the decision-making process. For example, studies have examined the

superior amount and quality of information possessed by inside directors (Baysinger &

Hoskisson, 2011). The inside directors know the company intimately, they have superior access

to information and are therefore able to take more informed decision. Alternatively, we would

17
expect that if there were few inside directors on board the board would not be in a position to

fully understand the company, it would only have access to information provided by

management and would lack the contextual nature to make informed decision.

Stewardship theory argues that shareholders’ interests are maximized by sharing the roles of

board chairman. However, some studies have found that agency theory and stewardship theory

are equally relevant to corporate governance issues, since agency theory argues that

shareholders’ interest require protection by separation of ownership from control. For example,

Kashif (2008), Donaldson and Davis (2011) studied the relationship between corporate

governance and a firm’s performance and found results that show that corporate governance

relevance of both agency theory and stewardship theory. The basic assumption of this theory is

that the agent has access to superior information, since the principal cannot always monitor the

agents’ behaviors and activities. It raises a concern that the agents will take advantage of this

position to maximize their self-interest at the expense of the principals (Beaver, 2012). Daris,

(1997) argued that the essential assumption underling the prescription of stewardship theory is

that the behaviors of the executives are aligned with the interests of the principal.

Comelius, (2009) defined corporate governance as the stewardship responsibility of corporate

directors to provide oversight for the goals and strategies of a company, and also to foster their

implementation. Stewardship theory is said to favour governance mechanisms that support and

empower the firm’s management and disfavor those that monitor and control it. Chitayat, (2011)

suggests that the most important factor influencing organizational performance and shareholder

returns is designing the organizational structure so that managers can take effective action. It is

known that stewardship theory adopts a contrasting view of the duality-performance debate

(Braun & Sharma, 2007). Advocates of stewardship theory argue that authoritative decision

18
making under the headship of a single individual (as both chairman and CEO) leads to an

increase in the firm’s performance (Donaldson & Davis, 1991; Jackling & Johl, 2009). The

stewardship theory proposes that managers do have similar interest to the corporation, in that the

careers of each are linked to the attainment of organizational objectives, and their reputations are

interwoven with the firm’s performance and shareholder returns (Davis, 2012).

Stewardship theory presumes that executive managers, far from being opportunistic, are honest

and that they are good stewards of the corporate assets (Muth & Donaldson, 2011; Nicholson &

Kiel, 2007). Managers are good stewards of corporations who, being motivated by their own

achievement and responsibility needs, work hard to increase shareholders’ wealth. According to

this theory, the economic performance of a firm is improved if power and authority are

concentrated in a single executive who is both CEO and chairman.

2.2.3 Stakeholder Theory

Although stakeholder theory has evolved gradually since the 1970’s (Solomon, 2012), one of the

pioneering expositions of this theory was introduced by Freeman in 1984 when he defined a

stakeholder as: “any individual or group who can affect or is affected by achievement of the

organization’s objectives”. Stakeholder theory takes account of a wider group of constituents

rather than simply focusing only on shareholders (Mallin, 2010). Thus, stakeholders can include

shareholders, employees, suppliers, customers, creditors, communities in the vicinity of the

company’s operations, and the general public. Some extreme proponents of this theory suggest

that environments and future generations can also be included as stakeholders. One commonality

characterizing all definitions of stakeholders is to acknowledge their involvement in an

“exchange” relationship (Pearch, 2012; Freeman, 2014; Hill & Jones, 2012). Stakeholder theory

highlighted that the interest of different groups, and argues for the possibility of favouring one

19
group’s interest over that of another (Jones & Wicks, 2009). It also suggests that company is a

separate organizational entity, and that it is connected to different parties in achieving a wide

range of purpose (Donaldson & Preston, 2015).

Proponents of the stakeholder theory emphasize that the corporation could not exist without the

contributions of groups like customers, employees, the community of which it is a part, and the

environment; therefore, managers should consider their decision affect these other constituents

(Stovall, 2004). McAlister, (2003) argued that this theory presumes a collaborative and relational

approach to business and its constituents. Supporters of this theory argue that the corporate

governance problem turns round the objective function of the corporation. The notion that the

firm’s goal to maximize shareholders welfare is regarded as being too narrow, rather, they

suggest that the goal of the firm should be extended to include the maximization of the welfare

of other stakeholders, such as: employees, creditors, suppliers, customers, the environment, and

the community (Freeman, 2014). Solomon, (2012) contended that a basis for stakeholder theory

is that companies are so large, and their impact on the society is so pervasive, that they should

discharge accountability to many more sectors of the society than solely their shareholders; they

should include employees, suppliers, customers, creditors, communities in the vicinity of the

company’s operations, and the general public.

According to Freeman,(2014), stakeholder theory begins with the assumption that values are

necessarily and explicitly a part of doing business. It asks managers to articulate the shared sense

of the value they create, and what brings its core stakeholders together. It also pushes managers

to be clear about how they want to do business, specifically what kinds of relationships they

want and need to create with their stakeholders to deliver on their purpose. According to

stakeholder theory the purpose of the firm is to serve and coordinate the interests of its various

20
stakeholders such as shareholders, employees, creditors, customers, suppliers, government, and

the community. According to Habbash (2010), stakeholder refers to any one whose goals have

direct or indirect connections with the firm and influenced by a firm or who exert influence on

the firms goal achievement. These include management, employees, clients, suppliers,

government, political parties and local community. According to this theory, the stakeholders in

corporate governance can create a favorable external environment which is conducive to the

realization of corporate social responsibility.

Moreover, the stakeholders in corporate governance will enable the company to consider more

about the customers, the community and social organizations and can create a stable environment

for long term development. The benefit of the stakeholder model emphasis on overcoming

problems of underinvestment associated with opportunistic behavior and in encouraging active

co-operation amongst stakeholders to ensure the long-term profitability of the business firm

(Maher & Andersson, 2011). According to Kyereboah-Coleman (2007) management receive

capital from shareholders, they depend upon employees to accomplish the objective of the

company. External stakeholders such as customers, suppliers, and the community are equally

important, and also constrained by formal and informal rules that business must respect.

According to stakeholders theory the best firms are ones with committed suppliers, customers,

and employees and management. Recently, stakeholder theory has received attention than earlier

because researchers have recognized that the activities of a corporate entity impact on the

external environment requiring accountability of the organization to a wider audience than

simply its shareholders (Kyereboah-Coleman, 2007).

21
2.2.4 Resource Dependence Theory

Whilst the stakeholder theory focuses on relationships with many groups for individual benefits,

resource dependency theory concentrates on the role of board directors in providing access to

resources needed by the firm (Abdullah and Valentine, 2009). According to this theory the

primary function of the board of directors is to provide resources to the firm. Directors are

viewed as an important resource to the firm. When directors are considered as resource

providers, various dimensions of director diversity clearly become important such as gender,

experience, qualification and the like. According to Abdullah and Valentine, directors bring

resources to the firm, such as information, skills, business expertise, access to key constituents

such as suppliers, buyers, public policy makers, social groups as well as legitimacy. Boards of

directors provide expertise, skills, information and potential linkage with environment for firms

(Ayuso & Argandona, 2007).The resource based approach notes that the board of directors could

support the management in areas where in-firm knowledge is limited or lacking. The resource

dependence model suggests that the board of directors could be used as a mechanism to form

links with the external environment in order to support the management in the achievement of

organizational goals (Wang 2009). The agency theory concentrated on the monitoring and

controlling role of board of directors whereas the resource dependency theory focus on the

advisory and counseling role of directors to a firm management. Recently, both economists and

management scholars tend to assign to boards the dual role of monitors and advisers of

management.

However, whether boards perform such functions effectively is still a controversial issue

(Ferreira, 2010). Within a corporate governance framework, the composition of corporate boards

is crucial to aligning the interest of management and shareholders, to providing information for

22
monitoring and counseling, and to ensuring effective decision-making (Marinova.2010). The

dual role of boards is recognized. However, board structure has relied heavily on agency theory

concepts, focusing on the control function of the board (Habbash, 2010). Each of the three

theories is useful in considering the efficiency and effectiveness of the monitoring and control

functions of corporate governance. But many of these theoretical perspectives are intended as

complements to, not substitutes for, agency theory (Habbash,2010). Among the various theories

discussed, agency theory is the most popular and has received the most attention from academics

and practitioners. According to Habbash (2010), the influence of agency theory has been

instrumental in the development of corporate governance standards, principles and codes. Mallin

(2010) provides a comprehensive discussion of corporate governance theories and argues that the

agency approach is the most appropriate because it provides a better explanation for corporate

governance roles (as cited by Habash, 2010).

Some researchers (for example, Cohen, 2015) have found some similarity between resource

dependency theory (RDT) and Agency theory. RDT proposes that actors lacking in essential

resources will seek to establish relationship with (i.e be dependent upon) other in order to obtain

needed resources. In fact, RDT claims that the mutual appointment of directors generates

benefits to the firm in term of higher performance. this claim was supported by the findings of

Jackling and Johl, (2009). The study found that the large the board size was then the higher was

the corporate performance. This notion has also previously been argued by Hilman and Dalziel

(2013); Dolton,(2014) and Pearce and Zahra (2012). RDT is useful in addressing the role of

directors as boundary spanners between the organization and the environment (Pfeffer &

Salancik, 2012 cited in Young & Thyll, 2014). Directors’ professional appointments (lawyers or

23
bankers, for example) enhance the organizational functioning by providing access to resource

needed by the firm.

RDT theory suggest that the external parties’ ability to command those resources which are vital

for an organization, gives those parties power over it. This means that if a foreign partner brings

a resource necessary for the company’s success, then the external partner will gain power

relative to the local partner. It also implies that a partner’s control will be focused on those

activities to which this partner brings resources. This theory therefore lead to the conclusion that

the partner‘s ability to govern a firm depends not only on the relative size of their equity

holdings, but also on the significance of the essential tangible and intangible resources which

they bring to the firm (Child, 2010). Organizational success in RDT is defined as organizations

maximizing their power (Pfeffer, 2012). Research on the bases of power within organization

began as early as Weber (2011), and has included much of the early work conducted by social

exchange theorists and political scientists. RDT characterizes the links among organizations as a

set of power relation based on exchange resources. Resources dependence asserts that the

board’s primary role is to assist management with strategy and resource acquisition (Cohen,

2007; Nicholson & Kiel, 2007). Board’s role is that of helper or partner, rather than a monitor of

the management (Beasley, 2009). In emerging economies, it is likely that local partners and local

markets are unable to provide the more sophisticated resources required by firms. This leads

them to becoming highly dependent on their foreign partners for items such as technology,

management system, training, and professional support services. Most emerging economies

suffer from the shortage of fund, expertise, and institutional channels to adequately finance their

working capital requirements, or expansion investment, Nigeria is no exception in this regards.

24
RDT implies a reasonable reliance on the foreign partner in overcoming these lacks and

shortages.

In this concept, the managing personnel include those in non-executive capacity take a vital in

organization resource provision. According to Pfeffer ans Salancik (1978), when an organization

appoints an individual into managerial position it expects the person to uphold its objectives and

goals by concerning oneself with the issues faced, present them, and try to solve them. Building

from Hillman and Dalziel (2003) perspective arguing that resources take variety of forms, which

can be of capital value to an organization, perceiving board of directors as vital resource indulges

a high performing culture and perspectives towards directors. As such, a relational resource

allows both practical and symbolic association between an organization and the executive with

potential of enhancing reputation or legitimacy of both the company and managing personnel.

Depending on the organization lifecycle, according to the theory, executive can take up different

roles. In a start-ups firms, nonexecutive directors may acts as source of expertise and skills as

well as networks of new and established markets. Whereas, in a well-established organization,

those in non-executive capacity need to provide leadership skills in addition to ready to conform

with changing needs and business environment through anticipation of risks and opportunities.

2.3 Empirical Review

2.3.1 Independence of the Board and Financial Performance

As highlighted in the Agency theory, an organization’s board of governance should be

independent from the management. This is crucial given that the board oversees monitoring and

regulating the organizations management. O ‘Regan and Oster (2005) points out that the board

are much more objective when it is independent from the management of the same organization,

this is important to ensure the maintenance of efficiency of their performance. This subsequently

25
underscores the need of an adequate amount of board members to ensure effective monitoring

and management of the respective organization. The Agency theory further argues that a

substantial increase the size of the board could significantly impact the organization due to

increased costs as well as a slugged decision-making process that impacts the normal flow of

business (O’Regan & Oster, 2005). Common board committees specified by Nor Hashimah,

Norman, Jaffar and Mohamat, (2007) should therefore mainly comprise independent non-

executive directors with a designated chairman and split Chief Executive Officer (CEO) roles to

avoid any potential conflicts. Further the Agency theory advocates for the alienation of roles and

duties of the CEO and the chair of the board. This is to also enable the monitoring and

coordination of the CEOs activities and interests. Overall this is crucial to ensure the CEO does

not put ahead their own priorities rather than the shareholders priorities.

Every director is expected to attend all board meeting such attendance is one of the criteria for

the re-nomination of a director except where there are cogent reasons that the board must notify

the shareholders of at annual general meeting (AGM) (SEC 2006). For board to effectively

perform its oversight function and monitor management performance, the board must hold a

regular meeting. Measuring the intensity and effectiveness of corporate monitoring and

discharging is the frequency of board meetings (Jensen 2013). There are mixed views about the

effect of board meetings and corporate performance. One supporting point is that the frequency

of board meetings is a measure of board activities and effectiveness of its monitoring ability

(Conger, 2009 and Vefeas 2011) frequent board meetings can result in higher qualities of

management monitoring that in turn impact positively on corporate financial performance (Ntim,

2009). Conger, (2009) suggest that the board meeting be important resource in improving the

effectiveness of the board. It helps directors to be informed and keep abreast with the

26
development with the organization (Mangena & Tauringana 2008). Regular meetings also allow

directors to sit and strategize on how to move the organization forward.

According to Lipton and Lorsch (2012) regular meetings enable directors to interact thereby

creating and strengthening cohesive bonds among them. However, the opposing view of board

meetings is that it is costly in terms of travel expenses, refreshments and sitting allowance to be

paid to directors (Vafea, 2012). Board meetings are not necessarily useful because the limited

time outside directors meet is not used for meaningful exchange of ideas among themselves and

management (Jensen 2013) instead preoccupied with routine tasks and meetings formalities. This

reduces the amount of time the board has to monitor management (Lipton and Lorsch 2012).

Empirical findings on the effect of frequent board meetings and corporate performance show

mixed results. Vafeas (2015) reports a statistical significance and negative association between

frequency board meetings and corporate performance. He also finds that operating performance

significantly improves following a year of abnormal board activity. Karamandu and Vafeas

(2005) find a positive association between frequency board meeting and management earnings

forecasts, using a sample of 157 firms in Zimbabwe from 2001-2003; Mangena and Tauringans

(2008) report a positive relationship between the frequency of board meetings and corporate

performance. Similarly in a study of the sample of 169 listed corporations from 2002-2007 in

South African, a statistical significant and positive association between the frequency of board

meeting and corporate performance exist (Ntim & Osei 2011). This implies that the board of

directors in South Africa that meet more frequently tend to generate higher financial

performance. Another study conducted on public listed companies in Malaysia using five years

data 2003 to 2007 of 328 companies, shows that the higher the number of meetings the worse the

firm performance (Amram, 2011).

27
The board size influences the monitoring ability where the larger its size, the more capable it will

be able to monitor top management (Abdullah, 2014). The board size however represents the

total number of directors serving on the board of director. The board size is basically viewed as

the main corporate governance mechanism and the primary means for shareholders to indirectly

oversee management activities (John & Senbet, 2011). Jensen (2013) and Lipton and Lorsch

(2012) also revealed that large board sizes are not as effective as smaller ones and there is a

possibility that the members discussions are not as meaningful as expected. Increase in board

size of banks corresponds to difficulties arising in coordination and processing of issues (Al-

Matari, Al-Swidi, Faudziah, & Al-Matari 2012). Shaver (2015) mirrors the same statement by

saying that larger board primarily shows issues of responsibility diffusion leading to social

loafing and urging the fractionalization of these groups and the reduction of the member’s

commitment to strategic change. Moreover, larger boards are inefficient in terms of higher

spending on the maintenance and report more difficulties in term of planning, work coordination,

decision making and having regular meetings because of the number of members. On the other

hand, smaller boards are ideally able to avoid free riding by directors and encourage efficient

decision making process. Also, the bigger the board, the more possibility that the stakeholder’s

interests are considered and the less likely that decision will be reached in favour of only a few

members (Shao, 2010). According to Pfeffer and Salancik (2008), larger boards are more able to

obtain invaluable resources including budgeting, funding and leveraging the external

environments which can lead to the improvement of the performance of the bank.

According to Yermack (2015) having a small board increases the performance of firms and

influences positively the investor’s behaviour and company value. The idea is that when board

size is too large, agency problem; like director free-riding will increase within the board.

28
Bozemen and Daniel (2005), Haniffa and Hudaib (2006), Yokishawa and Phan (2004) found that

there is a negative association between board size and firms performance on the other hand,

Adams and Mehran (2005),Rechner and Daltan (2012), Pfeffer (2012) found a positive

relationship between board size and firm’s performance.

Furthermore, the organizations should also have an audit committee that is also independent to

ensure an objective audit of the company’s overall performance and everyone’s direct

contribution. This has to do with audit composition, i.e. the number of none-executive members

serving on the audit committee. The committee must be made up of at least three (3) directors

with 2/3rd of them being none executive independent directors. The Chairman of the committee

is chosen from the independent directors approved by the board of directors. Klein (2002) points

out that whether the audit committee is independent increase progressively with the increase in

board independence and size and decreases for firms that exhibit opportunities of growth but

experience consecutive losses. According to Cohen and Hanno (2000) the independence of the

Audit committee is significant to improve management duties especially with specific concern to

risk assessment. In addition, given their status as independent directors a lack of personal

investment or interests emphasizes their objectivity when it comes to their monitoring and

control functions over the executive management (Munro & Buckby, 2008).

According to Kang and Kim (2011), Abdullah, (2014) the composition of audit committee refers

to the proportion of the nonexecutive members compared to the executive ones.The agency

theory and the resource dependence theory states that autonomy helps in reaching the right

decision without barriers and determination of errors because of the independence of reviewers.

The audit committee independence and firm performance is expected to reveal a positive

relationship. However, only few studies that investigated this relationship in developed countries

29
are Dey (2008), Khanchel (2014) and in developing countries are Abdullah (2014) Swamy,

(2011), Saibab and Ansari (2011) and they found a positive relationship. However, some studies

found a negative relationship between audit committee independence and firms performance

(Dar et al, 2011) while others found no relationship between the two (Almatari et al, 2012),

Ghabayen (2012), Khan and Javid (2011). An audit committee that is comprised of more number

of non-executive directors is deemed more independent than one that has more executive

director’s (Mohd 2011). In the same way, external audit committee members have a significant

role in ensuring corporate governance practices in the auditing process (Swamy, 2011). Moreso,

Abdullah et al (2008) firms having a majority of internal directors and lacking audit committee

are more likely to take part in committing financial fraud compared to their controlled

counterparts in a similar industry and with the same size.

The empirical result as to the relationship that exists between audit committee independence and

financial performance of firms is equivocal. Chan and li (2008) found that independence of the

audit committee (i.eto have at least 50 percent of independent directors serve on audit

committee) positively impacts the firm performance, also, Ilona, (2008) found a positive

relationship between audit committee independence and firm performance, which is measured by

return on Asset (ROA). Agency theory suggested that independence of a non-executive director

is a crucial quality that contributes to the effectiveness of audit committee monitoring function

(Fama & Jensen, 2013). However, some studies suggested that independent audit committees are

less likely to be associated with financial statement fraud (Abott, Parker, Peters &

Raghunandam, (2013). This is because independent audit committee is able to provide unbiased

assessment and judgment and able to monitor management effectively. Moreover, Erickson,

Park, Reising, Shin, (2015), asserted that independent directors can reduce agency problems.

30
Based on the argument provided by Erickson, (2015) that director independence can reduce the

agency problem, it can similarly argue that independent audit committee can also reduce the

agency problem. In other ward a positive relationship exist between audit committee

independence and firm performance. Klein, (2002) found that the inclusion of outside directors

on the board enhances corporate performance and the returns to shareholders. Similarly,

independent directors are better monitors of management than inside director (Defond & Francis,

2005). In like manner, the outside directors are seen as acting in the interest of shareholders in

that the appointment of outside director is accompanied by significantly positive excess returns

(Sanda, Garba & Mikailu, 2011).

2.3.2 Board Members Knowledge and Financial Performance

Within the current century, knowledge is the most important element of business and enhances

performance of organizations improving their competitive advantage and thus impacting their

success. Based on a study by Fairchild & Li (2005) and Ferreira (2007) knowledge is a critical

component when it comes to decision making. Good policies reflect in progressive policies and

decisions made by the board while a lack of effective knowledge is exhibited in bad policies that

eventually impact performance. Carpenter & Westphal (2001) emphasize that highly qualified

board members are valuable to an organization given the wide mix of competencies, innovations

ideas and capabilities that they can offer in the process of policy development.

2.3.3 Transparency and Financial Performance

Transparency includes one of the most vital indicators used in the evaluation of corporate

financial performance (Chiang and Chia, 2005). According to Shanikat & Abbadi (2011)

transparency and disclosure of all decisions and financial use shows the extent with which

policies formulated by the board as well as the instructions given are in line with laws relating to

31
organizations and company nature of business. Linck et al. (2008) emphasizes the major duty of

the board to be advising top management teams this is only possible in utmost transparency and

disclosure among all board members, dependent and independent. When firm specific

information is on the high and there is not enough transparency, then non- executive board

members are less effective when it comes to organization management monitoring and thus

eventually impact the organization Coles et al. (2008) Reporting of the various outcomes of

activities including governance and structural undertakings utilized within an organization,

enables all stakeholders a fair view of the company as well as well as highlighting the quality of

governance within the firm’s board. Essentially therefore, transparency and disclosure are critical

and useful in the conservation of the rights of the minority stakeholders’ as well as creditors and

outside shareholders who have no access to the firms first hand operations. Subsequently,

transparency and disclosure minimize information asymmetry within the firm and along with it

the probabilities of fraudulent activities that may impact the eventual value and performance of

an organization. Another informational advantage of good transparency includes its impact on

the investors trust and awareness which subsequently minimize the uncertainty of the ROI

subsequently minimizing company costs and expenditure and enhancing value (Hambrick and

Jackson, 2000).

2.4 Summary of Literature Review

A good number of researchers in Nigeria and in western world had shown various relationships

between the components of corporate governance (i.e. board independence, board members’

knowledge and board transparency) but their contributions on financial performance of

government parastatal are limited in African countries particularly Nigeria. Even most of the

studies conducted in some western world only relate corporate governance practice with

32
corporate investment and firm perforfmance. In addition, most of these studies were carried out

in the private organisations but there is currently no study on corporate governance in Nigeria

government prastatal. These therefore formed the basis for this research to examine the impact of

corporate governance on financial performance of government parastatals in Nigeria using

NNPC Limited Ibadan as case study.

33
 CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research Design

A survey research design was used in this study. According to Kpolovie (2010) survey research

design is majorly used for studying relationship or interrelationships that existed between

dependent variable (criterion) and independent variable as well allow variables to be measured at

the same time. This design was considered appropriate for this study because it allowed

corporate governance and financial performance to be determined at the same time. Furthermore,

this design facilitated the collection of quantitative data to be analysed quantitatively using

descriptive and inferential statistics, in line with Pettinger, Holdsworth and Gerber (2004);

Bolivar, Daponte, Rodriquez and Sanchez (2010) and Akpan, Patrick, Udoka and Okon (2013).

3.2 Population of the Study

According to the Human Resource Department of NNPC Ltd Ibadan, there are total of One

hundred and thirty four (134) workers across NNPC outlet in Ibadan metropolis. The study

population comprised all the workers of NNPC Ltd in Ibadan.

3.3 Sample and Sampling Techniques

The researcher used Taro Yamane’s formula to determine the sample size from the population.

Taro Yamane’s formula is given as;

n = N

1+N (e)2

Where N = Population of study (134)

n = Sample size (?)

e = Level of significance at 5% (0.05)

34
 1 = Constant

.: n = 134 = 134 = 134

1 + 134 (0.05)2 1+134(0.0025) 1+0.335

n = 134 = 100

1.335

The sample size therefore is 100 respondents.

3.4 Research Instrument and Instrumentation

Data for this study was collected from primary and secondary sources. The primary source of

data collected was mainly the use of a structured questionnaire which was designed to elicit

information on the relationship between corporate governance and financial performance of

parastatals in Nigeria. The secondary source of data collections were textbooks, journals and

scholarly materials.

3.5 Validity of Instrument

The validity of the research instrument is to determine whether the research instrument measured

what it was expected to measure. Therefore, the instrument of this study was subjected to face

validation. Face validation tests the appropriateness of the questionnaire items. This is because

face validation is often used to indicate whether an instrument on the face of it appears to

measures what it contains. Face validations therefore aims at determining the extent to which the

questionnaire is relevant to the objectives of the study. In subjecting the instrument for face

validation, copies of the initial draft of the questionnaire was validated by supervisor. The

supervisor is expected to critically examine the items of the instrument with specific objectives

of the study and make useful suggestions to improve the quality of the instrument. Based on his

35
recommendations the instrument was adjusted and re-adjusted before being administered for the

study.

3.6 Reliability of Instrument

The reliability of the research instrument is to check the effectiveness of the instrument before it

is finally used in the study. The reliability of the instrument was ascertained using the test-retest

method which was picked according to the available time for the research. Pilot study was

carried out among NNPC workers in outer city of Ibadan. Fifty (50) questionnaires were

administered to check for the reliability of the instruments. Data collected was presented for

analysis and Cronbach’s analysis were calculated using Statistical Package for Social Science

(SPSS) to determine the reliability coefficient of the test re-test.

3.7 Method of Data Collection

The researcher visited the respondents at NNPC Ltd within Ibadan metropolis. The consent,

support and cooperation of the participants were solicited before administering the

questionnaires. Also, enlightenment of the objectives and benefits of the study to the prospective

respondents was done verbally.

3.8 Method of Data Analysis

In this study, data collected was analysed using both descriptive statistics and inferential

statistics. Descriptive statistics of frequency distribution, percentage, mean and standard

deviation was used to analyse the demographic information and research questions. Afterward,

inferential statistics of chi-square and correlation analysis using Statistical Package of Social

Science (IBM SPSS version 21) was used to test the hypotheses. Haven gathered the data

through the administration of questionnaire, the collected data was coded, tabulated and analyzed

using SPSS statistical software according to the research question and hypothesis. In order to

36
effectively analyze the data collected for easy management and accuracy, the chi square method

was used for test of independence. Chi square is given as

X2 = ∑ (o-e)2

Where X2 = chi square

o = observed frequency

e = expected frequency

Level of confidence / degree of freedom

When employing the chi – square test, a certain level of confidence or margin of error has to be

assumed. More also, the degree of freedom in the table has to be determined in simple variable,

row and column distribution, degree of freedom is: df = (r-1) (c-1)

Where; df = degree of freedom

r = number of rows

c = number of columns.

In determining the critical chi _ square value, the value of confidence is assumed to be at 95% or

0.95. a margin of 5% or 0.05 is allowed for judgment error.

37
 CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION

4.1 Introduction

This chapter deals with the presentation and analysis of the result obtained from

questionnaires. The data gathered were presented according to the order in which they were

arranged in the research questions and simple percentage were used to analyze the

demographic information of the respondents while the chi square test was adopted to test the

research hypothesis.

4.2 Analysis of Demographic Data of Respondents

Table 1: Gender of Respondents

Frequency Percent Cumulative

Percent
Valid Male 65 65.0 65.0

Female 35 35.0 100.0

Total 100 100.0

Source: Field Survey, 2024.

Table1 above shows the gender distribution of the respondents used for this study. Out of the

total number of 100 respondents, 65respondents which represent 65.0percent of the

population are male. 35 which represent 35.0 percent of the population are female.

Table 2: Age range of Respondents

38
 Frequency Percent Cumulative
Percent
Valid 20-30years 15 15.0 15.0

31-40years 10 10.0 25.0

41-50years 25 25.0 50.0

51-60years 20 20.0 70.0

above 60years 30 30.0 100.0

Total 100 100.0

Source: Field Survey, 2024.

Table 2 above shows the age grade of the respondents used for this study. Out of the total

number of 100 respondents, 15 respondents which represent 15.0percent of the population

are between 20-30years. 10respondents which represent 10.0percent of the population are

between 31-40years. 25respondents which represent 25.0percent of the population are

between 41-50years. 20respondents which represent 20.0percent of the population are

between 51-60years. 30respondents which represent 30.0percent of the population are above

60years.

Table 3: Educational Background of Respondents

39
 Frequency Percent Cumulative
Percent
Valid FSLC 20 20.0 20.0

WASSCE/GCE/NECO 25 25.0 45.0

OND/HND/BSC 35 35.0 80.0

MSC/PGD/PHD 15 15.0 95.0

OTHERS 5 5.0 100.0

Total 100 100.0

Source: Field Survey, 2024.

Table 3 above shows the educational background of the respondents used for this study. Out

of the total number of 100 respondents, 20 respondents which represent 20.0percent of the

population are FSLC holders. 25 which represent 25.0percent of the population are

SSCE/GCE/WASSCE holders. 35 which represent 35.0percent of the population are

OND/HND/BSC holders. 15 which represent 15.0percent of the population are

MSC/PGD/PHD holders. 5 which represent 5.0percent of the population had other type of

educational qualifications.

Table 4: Marital Status

40
 Frequency Percent Cumulative
Percent
Valid Single 30 30.0 30.0

Married 55 15.0 45.0

Divorced 5 20.0 65.0

Widowed 10 15.0 80.0

Total 100 100.0

Source: Field Survey, 2024.

Table 4 above shows the marital status of the respondents used for this study. 30 which

represent 30.0percent of the population are single. 55 which represent 55.0percent of the

population are married. 5 which represent 5.0percent of the population are divorced. 10

which represent 10.0percent of the population are widowed.

Table 5: Category of Respondents

Frequency Percent Cumulative

Percent
Valid Civil servant 25 25.0 25.0

Self-employed 45 45.0 70.0

Students 30 30.0 100.0

Total 100 100.0

Source: Field Survey, 2024.

Table 5 shows the category of respondents used for the study. 25 respondents representing

25.0perrcent of the population under study are civil servants. 45 respondents representing

45.0perrcent of the population under study are self-employed. 30 respondents representing

30.0perrcent of the population under study are students.

41
4.3Analysis of Psychographic Data

Table 6: There is an impact of board independence on the financial performance on

parastatals in Nigeria

Frequency Percent Cumulative

Percent
Valid Strongly agree 30 30.0 30.0

Agree 42 42.0 72.0

Undecided 10 10.0 82.0

Disagree 10 10.0 92.0

Strongly disagree 8 8.0 100.0

Total 100 100.0

Source: Field Survey, 2024.

Table 6 shows the responses of respondents if there is an impact of board independence on

the financial performance on parastatals in Nigeria. 30 respondents representing 30.0percent

strongly agreed that there is an impact of board independence on the financial performance

on parastatals in Nigeria. 42 respondents representing 42.0percent agreed that there is an

impact of board independence on the financial performance on parastatals in Nigeria. 10

respondents representing 10.0 percent were undecided. 10 respondents representing

10.0percent disagreed that there is an impact of board independence on the financial

performance on parastatals in Nigeria. 8 respondents representing 8.0percent strongly

disagreed that there is an impact of board independence on the financial performance on

parastatals in Nigeria.

Table 7: There is a mixed association between proportions of independent directors

and firm performance

42
 Frequency Percent Cumulative
Percent
Valid Strongly agree 10 10.0 10.0

Agree 15 15.0 25.0

Undecided 5 5.0 30.0

Disagree 40 40.0 70.0

Strongly disagree 30 30.0 100.0

Total 100 100.0

Source: Field Survey, 2024.

Table 7 show the responses of respondents if there is a mixed association between

proportions of independent directors and firm performance. 10 of the respondents

representing 10.0percent strongly agree that there is a mixed association between

proportions of independent directors and firm performance. 15 of the respondents

representing 15.0percent agree that there is a mixed association between proportions of

independent directors and firm performance. 5 of them representing 5.0percent were

undecided. 40 of the respondents representing 40.0percent disagree that there is a mixed

association between proportions of independent directors and firm performance. 30 of the

respondents representing 30.0percent strongly disagree that there is a mixed association

between proportions of independent directors and firm performance.

Table 8: Boards of directors can influence a firm's strategic decision making and

subsequently its performance

43
 Frequency Percent Cumulative
Percent
Valid Strongly agree 60 60.0 60.0

Agree 25 25.0 85.0

Undecided 10 10.0 95.0

Disagree 5 5.0 100.0

Total 100 100.0

Source: Field Survey, 2024.

Table 8 show the responses of respondents if boards of directors can influence a firm's

strategic decision making and subsequently its performance. 60 of the respondents

representing 60.0percent strongly agree that boards of directors can influence a firm's

strategic decision making and subsequently its performance. 25 of the respondents

representing 25.0percent agree that boards of directors can influence a firm's strategic

decision making and subsequently its performance. 10 of them representing 10.0percent

were undecided. 5 of the respondents representing 5.0percent disagree that boards of

directors can influence a firm's strategic decision making and subsequently its performance.

Table 9: There is an effect of board members knowledge on financial performance on

parastatals in Nigeria

44
 Frequency Percent Cumulative
Percent
Valid Strongly agree 25 25.0 25.0

Agree 32 32.0 57.0

Undecided 13 13.0 70.0

Disagree 15 15.0 85.0

Strongly disagree 15 15.0 100.0

Total 100 100.0

Source: Field Survey, 2024.

Table 9 shows the responses of respondents if there is an effect of board members

knowledge on financial performance on parastatals in Nigeria. 25 of the respondents

representing 25.0percent strongly agree that there is an effect of board members knowledge

on financial performance on parastatals in Nigeria. 32 of the respondents representing

32.0percent agree that there is an effect of board members knowledge on financial

performance on parastatals in Nigeria. 13 of the respondents representing 13.0percent were

undecided. 15 of the respondents representing 15.0percent disagree that there is an effect of

board members knowledge on financial performance on parastatals in Nigeria. 15 of the

respondents representing 15.0percent strongly disagree that there is an effect of board

members knowledge on financial performance on parastatals in Nigeria.

Table 10: There is an effect of board transparency on financial performance on

parastatals in Nigeria

45
 Frequency Percent Cumulative
Percent
Valid Strongly agree 65 65.0 65.0

Agree 30 30.0 95.0

Disagree 3 3.0 98.0

Strongly disagree 2 2.0 100.0

Total 100 100.0

Source: Field Survey, 2024.

Table 10 show the responses of respondents if there is an effect of board transparency on

financial performance on parastatals in Nigeria. 65 of the respondents representing

65.0percent strongly agree that there is an effect of board transparency on financial

performance on parastatals in Nigeria. 30 of the respondents representing 30.0percent agree

that there is an effect of board transparency on financial performance on parastatals in

Nigeria. 3 respondents representing 3.0percent were undecided. 3 of the respondents

representing 3.0percent disagree that there is an effect of board transparency on financial

performance on parastatals in Nigeria. 2 of the respondents representing 2.0percent strongly

disagree that there is an effect of board transparency on financial performance on parastatals

in Nigeria.

4.4Test of Hypotheses

Hypothesis I

46
Ho: There is no significant relationship between the board’s independence on the financial

performance of Nigeria Pipeline Company.

Hi: There is a significant relationship between the board’s independence on the financial

performance of Nigeria Pipeline Company.

Level of significance: 0.05

Decision rule: reject the null hypothesis H 0 if the p value is less than the level of

significance. Accept the null hypothesis if otherwise.

Table 16 Test Statistics

There is a significant relationship between the

board’s independence on the financial

performance of Nigeria Pipeline Company

Chi-Square 105.520a

Df 3

Asymp. Sig. .000

a. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell

frequency is 25.0.

Conclusions based on decision rule: Since the p-value= 0.000 is less than the level of

significance (0.05), we reject the null hypothesis and conclude that there is a significant

relationship between the board’s independence on the financial performance of Nigeria

Pipeline Company.

Hypothesis II

47
H0: There is no significant relationship between board members knowledge on financial

performance of Nigeria Pipeline Company.

Hi: There is a significant relationship between board members knowledge on financial

performance of Nigeria Pipeline Company.

Level of significance: 0.05

Decision rule: reject the null hypothesis H 0 if the p value is less than the level of

significance. Accept the null hypothesis if otherwise.

Table 17 Test Statistics

There is a significant relationship between

board members knowledge on financial

performance of Nigeria Pipeline Company

Chi-Square 70.347a

Df 2

Asymp. Sig. .000

a. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell

frequency is 25.0.

Conclusions based on decision rule: Since the p-value= 0.000 is less than the level of

significance (0.05), we reject the null hypothesis and conclude that there is a significant

relationship between board members knowledge on financial performance of Nigeria

Pipeline Company.

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings

48
 The study examined the impact of corporate governance on financial performance of

government parastatal in Nigeria using NNPC Ltd in Ibadan as case study. This study sought

to ascertain the relationship between the board independence, board members knowledge

and financial performance on government parastatal in Nigeria. The descriptive survey

research design was adopted and population consisted of 134 workers of NNPC outlet in

Ibadan metropolis out of which 100 were sampled through random sampling techniques.

Major research instrument was a questionnaire and the response rate of the questionnaire

administered was 100%. Data generated were analysed using frequencies, percentages and

chi-square analysis. The major findings of the study are outlined thus:

1. There is a significant relationship between the board’s independence on the financial

performance of Nigeria Pipeline Company.

2. There is a significant relationship between board members knowledge on financial

performance of Nigeria Pipeline Company.

5.2 Conclusion

The study focused on the relationship between corporate and financial performance of parastatals

in Nigeria. Corporate governance attributes deemed significant for the study include board

independence, board members and board transparency. The findings of the study revealed that

the board independence, is negative but insignificantly correlated to financial performance.

Multiple directorships showed a strong and positive relationship to return on investment; thus

directors who bring in expertise and experience from other boards contribute a share of their

wealth of experience which enhances performance. This can be attributed to the law that governs

corporate governance in Nigeria. No analysis could be carried out to determine this relationship.

49
The study also found that board transparency, which is a major component of the board in

exercising control through monitoring of financial and operational activities through internal and

external audit mechanisms as well as monitoring compliance to ensure efficiency and

effectiveness of operations, showed that their exist a positive but weak relationship to financial

performance.

The study therefore concludes that good corporate governance practices are positively correlated

to the financial performance of parastatals in Nigeria. These governance attributes are good

predictor of financial performance, but should not be considered in isolation of other factors such

as industry environment, quality of leadership as well as competence and innovation of the

board.

5.3 Recommendations

Good corporate governance practice is essential to the enhancement of the firm. In order to

further improve performance in the state-owned enterprises, the government and other regulatory

agencies with oversight responsibility on these state enterprises must ensure that governance is

enhanced at every parastatal and that the board is sufficiently empowered in carrying out its

function. As the study has revealed that that multiple directorship has positive and strong

relationship to financial performance, the researcher recommends that only individuals with

proven records of experience, innovation and with the capacity to galvanize resources are

appointed to the board of the parastatals. These individuals, as determine by the resource

dependency theory can exercise requisite oversight and can create linkage with the organization

and its external environment. In addition to maintaining a small but effective board, qualification

of appointees must relate to the core activities of the business in which the parastatal is engaged

in rather than based on political lineage.

50
51
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60
 APPENDIX

QUESTIONNAIRE

ON

IMPACT OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE OF

GOVERNMENT PARASTATALS IN NIGERIA: EVIDENCE FROM NNPC LTD
IBADAN

Dear Respondent,
I am conducting a study on the above topic for a degree program. Your kind
assistance in completing the questionnaire as accurately as possible would be appreciated.
Please note that your participation in this study is voluntary and all information provided
would be treated confidentially and for research purposes only. The success of this study
depends on your participation. Thank you for your anticipated willingness to participate in
the study.

FOLARIN Wuraola Blessing

Section A: Demographic information

INSTRUCTION: Please endeavor to complete the questionnaire by ticking the correct

answer (s) from the options or supply the information where necessary.

1. Gender

a. Male [ ]

b. Female [ ]

2. Age range

a. 20-30 [ ]

b. 31-40 [ ]

61
 c. 41-50 [ ]

d. 51-60 [ ]

e. Above 60 [ ]

3. Educational qualification

a. First School Leaving Certificate [ ]

b. WASSCE/GCE/NECO [ ]

c. OND/NCE [ ]

d. HND/BSC [ ]

e. MSC/PGD/MBA/PHD [ ]

f. Others [ ]

4. Marital Status

a. Single [ ]

b. Married [ ]

c. Divorced [ ]

d. Widowed [ ]

5. Category of Respondent

a. Senior staff [ ]

b. Middle staff [ ]

c. Junior staff [ ]

62
SECTION B: Questions on the relationship between corporate governance and
financial performance of Parastatals in Nigeria
Please indicate your opinion on the extent to which you agree or disagree with the following
statements. Indicate by ticking the applicable: Strongly Agree,, Agree, Undecided, Disagree,
and Strongly Disagree

6. There is an impact of board independence on the financial performance on parastatals in

Nigeria.

a. Strongly agreed [ ]

b. Agreed [ ]

c. Undecided [ ]

d. Disagreed [ ]

e. Strongly disagreed [ ]

7. There is a mixed association between proportions of independent directors and firm

performance.

a. Strongly agreed [ ]

b. Agreed [ ]

c. Undecided [ ]

d. Disagreed [ ]

e. Strongly disagreed [ ]

63
8. Boards of directors can influence a firm's strategic decision making and subsequently its

performance.

a. Strongly agreed [ ]

b. Agreed [ ]

c. Undecided [ ]

d. Disagreed [ ]

e. Strongly disagreed [ ]

9. There is an effect of board members knowledge on financial performance on parastatals

in Nigeria.

a. Strongly agreed [ ]

b. Agreed [ ]

c. Undecided [ ]

d. Disagreed [ ]

e. Strongly disagreed [ ]

10. There is an effect of board transparency on financial performance on parastatals in

Nigeria.

a. Strongly agreed [ ]

b. Agreed [ ]

c. Undecided [ ]

64
d. Disagreed [ ]

e. Strongly disagreed [ ]

65