AN EVALUATION OF IMPACT OF BOARD OF DIRECTOR ON FINANCIAL PERFORMANCE: EVIDENCE FROM NIGERIA FIRM

AN EVALUATION OF IMPACT OF BOARD OF DIRECTOR ON FINANCIAL PERFORMANCE: EVIDENCE FROM NIGERIA FIRM

Abstract

The study evaluated impact of board of director on financial performance: evidence from Nigeria firms. To achieve this objective, the study to examine the impact of board size on the financial performance (Return on Asset) of Nigeria firms and ascertain the impact of board skill on Return on Asset (ROA) of Nigeria firms. This research work was designed using descriptive research design to the relationship between the outside board of directors and financial performance of Nigeria firms. The  regression analysis was used for data presentation and analysis using the Statistical Package for Social Science (SPSS). The finding of the study outside Board Size has no impact on financial performance of Nigeria firms and outside Board Skills has no impact on financial performance of Nigeria firms. Finally the study recommended that much focus should be placed on management efficiency at improving liquidity for the firm and emphasizing on expanding the scope of the business operation by involving in exports of the firms products. The firms operational expenses must be efficiently controlled as it decreases a firm’s liquidity and negatively impact on the company ability to investment – which is a significant determinant of investments. By aiming at optimal utilization of resources through cost decisions, operational expenses can be reduced.

CHAPTER ONE

INTRODUCTION

1.1     Background of the Study

 The importance of the board of directors to corporate developments cannot be overemphasized. The board of directors is one of the prominent corporate governance mechanisms as they are expected to monitor and protect the interests of shareholders. Board process refers to the approach taken by the directors in discharging their duties and the reflection of board’s decision making activities (Macus, 2018).

The board of directors has the power to hire and fire, even the CEO and also to act in various capacities. In theory, the board has enough power to perform its fiduciary duties. How true this can be in practice remains a rhetoric. A lot of scholars have questioned the power of the board and have termed it as mere formal authority (Aghion & Tirole, 2017). Weber (2011) highlights the boards have formal authority to overrule the decisions of executive directors; though the non-executive directors often have insufficient information to effect prompt and prudent corrective actions.

Outside director is an independent director serving on the board of directors and are regarded as a useful device in minizing an agency problem within a firm through monitoring and controlling of executive actions (Bathala & Rao 2015). According to the agency theory, due to the separation between ownership and control of the firms, there is a tendency of managers to pursue their selfish interest at the expense of the shareholders (Jensen & Meckling, 2016). Therefore, having outside board of directors serving on the board would help in monitoring and controlling the unprincipled behavior of management and also to assist in appraising the management more objectively (Abidin, Kamal, & Jusoff, 2014).

Fama (2018) argues that the composition of board structure is an important mechanism because, the presence of outsider board of directors represents a means of monitoring the actions of the executive directors and of ensuring that the executive directors are pursuing policies consistent with shareholders’ interests. Furthermore, boards of directors are one of the centerpieces of corporate governance reform. In effect, the board of directors has emerged as both a target of blame for corporate misdeeds and as the source capable of improving corporate governance (Carter, D‘Souzaa, Simkinsa & Simpsona, 2017). Much of the weight in solving the excess power within corporations has been assigned to the board of directors and, specifically, to the need for outsider board of directors to increase executive accountability.

Firm financial performance is return on asset (profit before interest and tax/Total Asset. The standard measure of the performance of a firm in market-oriented economy is what management could achieve with the total assets at their disposal (Rose and Hudgins, 2008). However, opinions vary on the profitability ratio that should be used as performance measure of management. Rose and Hudgins (2008) argue that the ultimate performance measure is how much net income remains for shareholders. This means that the best measure of performance is profit after interest and tax divided by total assets. Performance failure among Nigerian firms has resulted in loss of public confidence in the banking sector. Performance links an organization’s goal and objectives with organization decisions. Public confidence on the cooperate organizations in Nigeria depends greatly on the profitability of the firms. This explains why there is a critically need to evaluate the impact of outside board of directors on financial performance of an organization.

1.2     Statement of the Problem

Given that all corporations have boards, the question of whether outside board of director play a role cannot be answered econometrically as there is no variation in the explanatory variable as there are limited information on it. The increase reliance on outside directors as an integral element of corporate governance raises a question regarding their incentives. Outside directors rarely receive meaningful performance-oriented remuneration (Black, 2004). So what gives outside directors incentives to work hard, pay attention, and exercise judgment independent of management? One answer, often left implicit, is that legal liability is an important factor in leading outside directors to do a good job. Yet legal liability is problematic as a source of incentives. Fear of litigation may cause directors to shun risks that should be taken. Nervousness about lawsuits can also hamper the recruitment of qualified outside directors and induce some incumbent directors to resign (Korn/Ferry International, 2003). At the same time as outside directors are being touted as a cure for corporate governance problems, one hears an increasingly loud chorus of concern over directors’ liability risk. Consequently, empirical work in this area has focused on structural differences across boards that are presumed to correlate with differences in behavior. For instance, a common presumption is that outside board of directors will behave differently than inside (management) directors. One can then look at the conduct of boards (e.g., decision to dismiss the CEO when financial performance is poor) with different ratios of outside to inside directors to see whether conduct varies in a statistically significant manner across different ratios. When conduct is not directly observable (e.g., advice to the CEO about strategy), one can look at a firm’s performance to see whether board structure matters (e.g., the way accounting profits vary with the ratio of outside to inside directors). It is on this note that this study seek to evaluate the impact of outside board of directors on performance of a firm.

1.3     Objectives of the Study

This study evaluates specifically the impact of outside board of Director on financial performance of Nigeria firms.  To achieve this objective, the study strives to;

1. Examine the impact of board size on the financial performance (Return on Asset) of Nigeria firms.
2. Ascertain the impact of board skill on Return on Asset (ROA) of Nigeria firms.

1.4     Research Questions

1. What are the impacts of outside board of director size on Return on Asset (ROA) of Nigeria firms?
2. What are the impacts of outside board of director skill on Return on Asset (ROA) of Nigeria firms?

1.5     Research Hypothesis 

1. H₀₁: Outside board of director size have no significant impact on Return on Asset (ROA) of Nigeria firms.
2. H₀₂: Outside board of director skill have no significant impact on Return on Asset (ROA) of Nigeria firms.

1.6     Significance of the Study

Board characteristics and firm performance is a relatively new area of study that is currently attracting serious interest among a wide spectrum of people; governments, industry operators, directors, investors, stockholders, academia, international organization, etc. Nigeria represents a good case study for exploring how a outside board of directors constituted under subjective circumstances serve or can fail to serve firm‘s interests; and whether such transmits to the overall well being of shareholders. Specifically, the study is expected to be significant to the key stakeholders in the following ways;

a. Corporate Bodies: Outside Board of Directors or boards of directors generally are the main hub of internal governance mechanism, and their effectiveness may well depend on the board characteristics. Acquiring such evidence will enable firms gain the benefits of a strategic board. Thus, the result of this study will be beneficial to corporate bodies in constituting an effective board that will enhance corporate performance.

b. Policy Makers and Regulators: The result will be appropriate and beneficial to the regulatory authorities in knowing and evaluating the significance of outside board of directors on organizational performance thus giving a better chance to make policies and regulation that will govern corporate governance in an organization.

c. Shareholders: The board is collectively seen as a group of individuals with important responsibilities of leading and directing a firm, with the primary objective of protecting the firm‘s shareholders. The outcome of this study is expected to educate shareholders on the basic outside board of director’s characteristics that impact positively on firm performance. This is important because the shareholders, equipped with this knowledge could insist on the constitution of the board with identified characteristics that enhance board performance through their voting rights.

1.7    Scope of the Study

The scope of this study “An evaluation of the impact of outside board of directors on performance will be limited to quoted companies listed on the Nigeria Stock Exchange (NSE).