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CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE OF SELECTED

MANUFACTURING COMPANIES IN NIGERIA

Article in International Journal of Advanced Research · October 2016

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 International Journal of Advanced Academic Research | Social & Management Sciences | ISSN: 2488-9849
Vol. 2, Issue 10 (October 2016)

CORPORATE GOVERNANCE AND FINANCIAL

PERFORMANCE OF SELECTED MANUFACTURING
COMPANIES IN NIGERIA
OSUNDINA J. ADEMOLA, OLAYINKA I. MOSES & CHUKWUMA J. UCHEAGWU
Department of Accounting,
Babcock University, Ilishan-Remo,
Ogun state, Nigeria.
demkem8@gmail.com, olayinka.ifayemi@yahoo.com,

Abstract

The objective of this study is to empirically investigate the relationship between corporate
governance (measured by Board Structure index, Ownership Structure index and Audit
Committee index) and firm’s performance (measured by Return on Asset) of selected Nigerian
manufacturing companies. The study adopted ex-post facto research design. Random sampling
was used to select 30 companies out of a total population of 45 manufacturing companies listed
on the Nigerian Stock Exchange, for a time period of 2010 to 2014. Secondary data (financial
and non-financial) were collected from the annual reports and accounts of the selected listed
manufacturing companies. Multiple regression analysis and descriptive statistics were used in
analyzing the data. F-stat and t-stat were used to test the hypothesis. The results of the study
show that Board structure index had a significant positive relationship with performance (ROA)
of the sampled manufacturing companies. Also, it was found that Audit committee index had a
positive but insignificant relationship with the performance (ROA) of the sampled manufacturing
companies, while Ownership structure index had an insignificant negative relationship with
performance (ROA) of the sampled manufacturing companies. In conclusion, the study revealed
that the performance indicator (ROA) related with each component of the Corporate
Governance Index in a peculiar manner. It is therefore suggested that reform efforts should be
directed towards improving the corporate governance of listed Nigerian manufacturing
companies, especially emphasis should be devoted to the variables of Ownership Structure and
Audit Committee.

Keywords: Corporate Governance, Performance, Manufacturing companies.

1. INTRODUCTION

Corporate governance epitomizes the system of controls, processes, policies, rules and
proceedings set up by the Board and Management of a company to ensure the smooth running of
the company, maximize shareholders wealth and satisfy the interest of every stakeholder.
Corporate Governance is the set of processes, customs, policies, laws and regulations affecting
the way a corporation or company is directed, administered or controlled (Owolabi & Dada,
2011). It deals with the relationships among management, board of directors, controlling
shareholders, minority shareholders and other stakeholders. According to Cadbury Committee

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Report (1992), corporate governance is the system by which companies are directed and
controlled. In this wise, it is regarded as the framework within and by which rules, relationships,
systems and processes are controlled.
As a result of corporate governance failure, many companies around the world, even those
flaunted as too big to fail, have experienced crises and scandals that led to their end. Notable
among such company scandals and failures are Enron, WorldCom, Arthur Anderson, and
Adelphia. Also in Nigeria, we have equally had cases of scandals and failures: these were
Oceanic bank, Intercontinental bank, Cadbury, Lever Brothers (now Unilever) as opined by
Stephen & Benjamin (2013).
Corporate governance is a nonfinancial factor that affects the performance of any company,
hence prior literatures support increasing disclosure of nonfinancial information in the reports of
every organization (listed or not listed). PricewaterhouseCoopers (2002) found that most top
managers and executives in multinational companies believe that non-financial performance
measures outweigh financial performance measures in terms of creating and measuring long-
term shareholder value. Coram, Mock and Monroe (2006) opined that non-financial performance
indicators can offer key insight into future performance, and at the same time serve as a proxy
for identifying well-managed companies. This is to an extent a reasonable assertion because
corporate governance indicators can help see how well an organization is being managed and
determines how future performance of such organization will be. No wonder Narayanan, Pincus,
Kelm and Lander (2000) asserted that a wise manager will strive to reduce information
asymmetries through voluntary disclosure, more importantly nonfinancial (corporate
governance) information.
In a nutshell, weak corporate governance will largely contribute to systemic failures, corporate
scandals and failures resulting from fraud and other forms of malfeasance, this on the long run
will affect negatively the financial performance of any company. The financial crisis of 2008 that
involved marginal lending by banks created erosion of stakeholders‟ funds of banks, insurance
companies and manufacturing companies. The major cause of this development has been traced
to weak corporate governance (Bhimani, 2008.). Experts have argued that the collapse of many
big corporations is to a large degree traceable to weak corporate governance practice. Examples
to support this argument were failed companies as previously mentioned. This presupposes that
well governed companies have a premium on their price (Oyejide & Soyibo, 2001).
Therefore, the main objective of this research is to determine the relationship between corporate
governance and firms‟ performance with specific attention to Nigerian manufacturing companies
listed on the bourse of the Nigerian Stock Exchange.
This paper contributes to literature in several ways. First, it furthers our understanding of the
economic consequences of corporate governance indexes. Prior studies on corporate governance
mainly focus on few companies or on deposit money banks. This paper shows that decisions on
corporate governance measures should be based on wider coverage for better generalization of
opinion because such decisions enhance the value of shareholders. This extension provides
supportive empirical evidence of prior literature argument that corporate governance increases
firm‟s value. It is noteworthy to state that the debate on whether corporate governance should
continuously be regarded as a pervasive precept of accounting is beyond the scope of our study,
given the empirical findings in our paper, as well as the benefits of corporate governance to

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shareholders documented in prior studies, we suggest that regulators and standard setters should
fully consider the economic company specific implications of corporate governance before
making regulation changes.
The remainder of the paper is structured as follows; the second section reviews the related
literature. The third section contains the methodology and analysis of data. The fourth section
provides conclusions and recommendations.

2. REVIEW OF RELATED LITERATURE

Corporate governance is relatively not a new concept but it is fast gaining ground both in the
academic and corporate world. Corporate governance has long been an important concept in
accounting. Although the concept of corporate governance has been criticized by market
regulators, employees and standard setters empirical studies found that accounting practice has
become more conservative in the last 10 years, especially after the fall of the big firms as a result
of corporate governance negligence. This suggests that well governed companies have a
likelihood of reporting more success.
Prior researchers such as Coram, et al. (2006); and Chua, (2006) were of the opinion that sound
corporate governance practices leads firms towards the achievement of higher performance;
provide sources for capital investment by increasing the creditability of shareholders.
International financial world is facing rapid changes in terms of financial as well as economic
systems. These systems have been upsetting from years. In this era, the introduction of new
technologies in both services and product industry around the globe has created issues to govern
the global environment. All these circumstances have forced the countries to adopt a sound
system of corporate governance which enable them to survive in dynamic and open environment
of innovations (Faisal & Abdul, 2015).

Corporate governance is concerned with the defense of the investors. With the help of
governance mechanism the interest of shareholders is protected (Johnson & Greening, 1999).
Corporate governance to earlier studies was the way through which minority shareholders safely
guard their interest against the confiscation of expropriation by management and controlling
shareholders (Shleifer & Vishny, 1997). They also opined that corporate governance refers to a
complex set of mechanisms that helps to ensure the investors that they are gaining fair return on
their investment. The managers and shareholders as part of a company‟s stakeholders are
governed by laws and regulations which are offered as corporate governance which increases the
financial stability and growth of the firm through reinforcement of integrity, confidence and
efficiency. Good governance increases the corporate performance and accessibility of external
finance that brings sustainable economic growth. It creates bond among the management, Board,
stakeholders, controlling and minority shareholders. It serves a number of goals like reducing the
effect of financial crises; strengthen the rights over property, results in decreasing cost of doing
business and of capital which leads the market towards development. The firms requiring more
external finance can have advantage of adopting good corporate governance that can lessen the
cost of capital that is why they have better tendency to adopt corporate governance practice and
it will increase the believe of insiders by increasing the firm value and the likeness of
shareholders. It will put positive influence on the shareholders and will increase the access to
external finance.

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The development of Corporate Governance in Nigeria is a function of its environment; socially,

economically, politically and legally. These factors have greatly influenced the nature of
Corporate Governance in Nigeria also; businesses in Nigeria have been dominated by sole
proprietorship and partnership, usually dominated by family members and friends. In the
political history of Nigeria, the military have dominated the political landscape with its clear
characteristic nature of force and fiat and the corporate sector have been dominated in one way
or the other with government involvement at the board level. The experience at those times was
that these military appointed directors conduct the affair of the company in flagrant disregard of
corporate policy and so many anomalies prevailed at the decision-making levels.
Emanating from the nature of the environment in which Nigeria exist, it is difficult to fit its
Corporate Governance structures within a specific theoretical framework. According to Yakasai
(2001), organizational theory recognizes the organizational structure such that the board of
directors (BOD) only exists to serve the interest of the chief executive officer (CEO). In other
words, the BOD is at the beck and call of the CEO. Because of the nature of business and
ownership structure (dominated by family members and friends) the key feature of
organizational theory does not fit in.
In the same vain, the stewardship theory cannot be used to describe or qualify the corporate
governance system in Nigeria especially before the advent of democratic rule in 1999. Prior to
this period, the military system infiltrates the corporate landscape rooted in dictatorship and
arbitrariness. The stewardship theory opined that Annual General Meetings should be
opportunity for rendering accounts of decision made by directors. On the contrary, in the
Nigerian corporate system AGM‟s are a mere formality organized only for a few members who
vote in affirmative.
From the perspective of stakeholder theory, there is varied interest in the corporation much more
than the narrow perspective upheld by agency theory. These other interests include customers,
employees, lenders, government agencies and the community at large. The idea of stakeholder
theory stresses the coming together of the various concerned parties through unbiased
transactions without intimidating the long term corporate objectives. On the contrary, the Nigeria
corporate boards only serve the interests of those who put them there.
A cursory review of agency theory reveals that the Nigeria governance system is saddled with
the problem of management. Naturally agency theory posits that management is in their capacity
to serve not their personal interests rather that of the shareholders. This describes the Nigerian
situation where corporate executives take decision that maximizes the value of the firm, which is
in-line with the concept of corporate governance. Therefore this paper is inched on the agency
theory and stakeholder‟s theory; this is because it best suits the relationship that exists between
stakeholders (principals) and governance (agents).
Increase in financial performance is one of the sole motives for the existence of any business and
must be considered in any attempt to measure any business performance. Measuring
performance under the stakeholder conceptualization involves identifying the stakeholders and
defining the set of performance outcomes that measure their satisfaction (Connolly, Conlon, &
Deutsch, 1980). The stakeholder theory offers a social perspective to the objectives of the firm
and, to an extent, conflicts with the economic view of value maximization. The use of
stakeholders' satisfaction as firm performance was also adopted in previous literatures (Clarkson,

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1995; Kaplan, 1997). Besides offering a way to decide what performance is in a comprehensive
way, the use of this theory allows one to resolve the issue of differentiating between performance
antecedents and outcomes. Carneiro, Silva, Rocha, and Dib (2007) opined that performance
measures assess the satisfaction of at least one group of stakeholders. This conceptualization of
firm performance is applicable across different companies, as remarked by allowing one to
differentiate between high and low performers from the stakeholder‟s perspective.

In the present study, we examined three mechanisms of corporate governance based on global
corporate governance index; the first was board structure index. The Board of any company
acts as one of the most important governance mechanisms in aligning the interests of
managers and shareholders. Corporate governance provides the framework of rules and
practices by which a board of directors ensures accountability, fairness, and- transparency in a
company's relationship with its all stakeholders. Thus corporate governance provides the
structure through which the company set the objectives from which it can obtain monitoring
performance. It includes Board structure, shareholders control and credit monitoring, rules
and procedures for decision making. The principal characteristics of effective Corporate
governance are: openness, participation, accountability, effectiveness, coherence,
transparency, protection and enforceability of the rights of all the shareholders; and directors
capable of independently approving the corporation's strategy and major business plans and
decisions, and independently hiring management, monitoring management's performance and
integrity, and replacing management when necessary. These ideals can be accomplished with
effective board structure (Momoh & Ukpong, 2013)

Secondly, the ownership structure of a publicly held corporation is one of the internal
mechanisms of corporate governance that has been extensively studied in the developed
countries, particularly the US and UK, and has more recently been the subject of much research
in emerging economies. While the ownership and control structure of a firm is the source of
agency costs in firms and is at the root of all corporate governance problems, the literature on
ownership as a governance mechanism focuses on how the ownership structure per se, i.e., stock
ownership by different shareholders, can separately or in conjunction mitigate agency costs in a
firm (Kolawole & Tanko, 2008).

Finally in Nigeria, section 359(3 & 4) of companies and allied matter Act (1999) created the
audit committee. Specifically S.359 (3) provides that “in addition to the auditor‟s report, the
auditor shall in the case of a public company also make a report to an audit committee which
shall be established by the public company”. S.359 (4) says “the audit committee shall consist of
an equal number of directors and representations of the shareholders of the company (subject to a
maximum number of six) and shall examine the auditor‟s report and make recommendation there
on to the annual general meeting.
Jayati, Subrata, and Kaustav (2012) proposed a corporate governance index for 500 listed
companies in India corporate sector for the period of 6 years (2003 to 2008) using information on
four corporate governance mechanisms namely Board of Directors, Ownership Structure,
Information Disclosure and External Auditor. They examined the relationship between their
Corporate Governance Index and performance of the companies used in their study. They found
that there is a strong relationship between corporate governance index and performance of

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companies, they also found that better governing structures earning substantially has higher rates
of return in the market.

Faisal and Abdul (2015) considered seven different governance measures (G-Index, E-Index,
Board independence, director dollar value of ownership, Director Percentage value in ownership,
and CEO-Chairman duality). They found that better governance, as measured by the G-Index, E-
Index, stock ownership of board members, and CEO-Chairperson separation was significantly
and positively correlated with present and subsequent operating performance as measured by
ROA and Tobin‟s Q. Also, board independence was negatively correlated with the present and
subsequent operating performance.

Sanda, Mikailu and Tukur, (2005) in their study regressed measures of operating performance on
governance index and control variables such as book-to-market equity and log of market value of
equity. The coefficient of their governance index was found to be negative and significant in
various modifications thereby evidencing a significant negative relation between subsequent
operating performance and corporate governance index.

Bhagat and Black (2008) investigated the relationship between firm-level corporate governance
and firm market value for Korean companies, they found that a strong positive relationship exist
between Korean Corporate Governance Index (KCGI) and firm market value. Korean Corporate
Governance Index was also found to be strongly related with other measures of firm value
(market value of equity/ book value of equity, and market value of equity /sales) of Korea.

Brown and Caylor (2006) created „Gov-Score‟, a governance index based on 51 firms‟ specific
internal and external governance variables. They found a significantly positive correlation
between Tobin‟s Q and Gov-Score. Using regression analysis, they found the regression co-
efficient on Gov-Score to be positive and significant. They affirm that a board size of between 6
and 15 members attracts a higher return on equity and better profit margins than firms with other
sizes.

3. METHODOLOGY AND DATA ANALYSIS

Sample Selection
We collected yearly financial and non-financial (firm specific) data from the annual reports of
the selected listed manufacturing companies. The population of this study was the manufacturing
companies listed on the Nigeria Stock Exchange (NSE). There were as at the beginning of this
study (January 2016), 45 companies in the manufacturing sector, out of which 19 were in
industrial goods category and 26 in number were in consumer goods category. Random sampling
was used to select30 out of the total population of 45 manufacturing companies. The choice of
the listed companies is due to the fact that the Nigerian Stock Exchange is authorized by SEC to
provide listing services and platform for primary and secondary trading of stocks therefore any
listed companies would have met all listing condition and their corporate reports is deemed
reliable for evaluation and decision making.

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Variable Description
The Corporate Governance Index is measured on 15 proxies categorized in sub-indices namely
Board Structure index (BSI), Ownership Structure Index (OWI) and Audit Committee Index
(ACI). Each sub index is assigned equal weight. The Corporate Governance Index is the
aggregate of the average scores of the sub-indices of each manufacturing company which shows
their corporate governance practice. The simple aggregate of the scores on each of the
parameters constitutes the Un-weighted corporate Governance Index. In order to correct the
shortcoming of an un-weighted index, following Vasal (2006), equal weights have been assigned
to each of the three mechanisms thereby restricting the importance of each mechanism. The un-
weighted average of the variables‟ scores constitutes the Corporate Governance Index.
The time dimension of this study is 2010 to 2014 covering a period of five years post review of
SEC code of corporate governance 2008. Random sampling method is adopted in the selection of
companies listed on the Nigeria Stock Exchange within the manufacturing sector. The elements
of corporate governance index as a composite index consists of three major categories namely
board structure, ownership structure and audit committee. Each of these major categories is then
broken down into sub index. The proxy for performance is Return on Asset (ROA), showing
how efficiently the companies had made use of their assets. The attributes of corporate
governance sub-index are as indicated below:
Sub-Index 1 for Board Structure includes Board Size, Duality of CEO/Chairman, Board
Diversity, Number of Board Meetings and Non-Executive/Independent Directors.
Sub-Index 2 for Ownership Structure are the attributes of ownership structure which are;
Presence of Block Holders, Ownership Concentration, Managerial Ownership, Director
Ownership, Family Ownership and Institutional Ownership.
Sub-Index 3 for Audit Committee consist the elements of Audit Committee that is used to
construct the Audit Committee Index which are: Size of audit committee, percentage of
independent directors, presence of executive directors in audit committee and number of
meetings held.
In order to empirically determine the impact of corporate governance indexes on manufacturing
sector performance in Nigeria, the multiple regression model was specified. The multiple
regression equation is explicitly specified in the functional forms as follows:
ROAit = α1 + β1OWIit + β1BSIit+ β1ACIit+ µit
Our a priori expectation is that we expect all the coefficients of our explanatory variables to be
positively related to our measure of performance. (i.e. β1> 0)

Summary of Statistics
The table below provides summary of statistics for companies‟ performance, corporate
governance base on companies‟ specifics. The Table summarizes the basic statistical features of
our data under consideration including the mean, the maximum and minimum values, standard
deviation, skewness, and kurtosis for the data. This descriptive statistics provide a historical
background for the behaviour of our data. The maximum and minimum values provide

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indications of significant variations as shown by the difference between the two values for the
variables under consideration over the period of study. The skewness of Board Structure Index,
Audit Committee and Index shows positive, this indicates that (they are positively skewed
showing that the right tails are extreme) the data series indicate a symmetric or normal data
distribution as the series relatively maintains normality by being positively skewed, while Return
on Asset and Ownership Index shows a negative skewness which indicates a non-normal data
distribution. Also in relation to kurtosis, ROA and ACI are both leptokurtic indicating fat tails
than normal distribution; all the variables have a heavy tail (i.e. heavier than normal) because the
data series is above the threshold of 3. On the other hand OWI and BSI are platykurtic (i.e.
thinner than normal) this is because the data series are below the threshold of 3.

Table 1: Descriptive statistics

ROA OWI BSI ACI

Mean 0.136046 0.527778 2.975772 2.908333
Median 0.122411 0.500000 2.925000 3.000000
Maximum 0.870238 0.833333 3.916667 4.000000
Minimum -1.335378 0.166667 2.040000 2.500000
Std. Dev. 0.208786 0.211892 0.464359 0.369128
Skewness -1.730531 -0.020026 0.069727 0.836182
Kurtosis 19.63456 1.936579 2.380634 3.762200
Observation 150 150 150 150
s
Source: Researcher‟s E-Views output 2016.

Empirical Analysis
This section presents the result of the analysis of secondary data gathered from the financial
statements of the sampled firms for the period of five years spanning 2010 – 2014 with a view to
investigate the extent to which Corporate Governance based on Index method affect Firms‟
performance measure by Return on Asset. The specific objectives necessary for the achievement
of this study‟s objective is presented in the remaining parts of this paper with detailed discussion
of findings.

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Table 2: Regression estimate

Main Model
Variable Coefficient Std Error t-Stat. Prob.
C -0.278069 0.264778 -1.050200 0.2954
BSI 0.158154 0.075228 2.102336 0.0372*

ACI 0.012232 0.093126 0.131348 0.8957

OWI -0.174484 0.159601 -1.093252 0.2761

R2 0.334665
Adj. R2 0.214830
S.E of Reg 0.135945
F-Statistic 1.747621
Prob.(F-Stat) 0.049869*
Obs 150
Cross-Sections 30

Durbin Watson 1.93

Ramsey RESET Test 0.218681

(Prob of F-stat)
Ljung Box(F-stat) 0.118

Dependent Variable: ROAit *significance at 5%

Source: Researcher‟s E-Views output 2016.

Main Model & A- priori expectation

ROAit = α1 + β1OWIit + β1BSIit+ β1ACIit+ µit
ROA = -0.278069 – 0.174484OWIit+ 0.158154BSIit + 0.012232ACIit
Table 2 above showed the regression result of our main model indicating that there exists a
negative relationship between ownership structure and the financial performance (ROA) of our
selected companies and the regression result also shows there is a positive relationship between
Corporate Governance Index (BSI and ACI) and financial Performance of manufacturing
companies measured by ROA. This is indicated by the sign and size of the coefficients for OWI
which is β1 = - 0.174484 < 0. This result is not consistent with a prior expectation while BSI and
ACI have a coefficient of 0.158154 and 0.012232 respectively; these are greater than 0 which is
then in line with our a priori expectation. From table 2, the Adjusted R-squared showed that
about 21.4% variations in ROA can be attributed to the influence of all our Corporate
Governance Index while the remaining 78.6% variations in the respective dependent variable
were caused by other factors not included in this model.

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Furthermore, the coefficients showed that one unit change in Ownership Structure Index will
cause a negative 17.4% change in ROA, one unit change in BSI will cause a positive 15.8%
change in ROA while one unit change in ACI will also cause a positive 1.2% change in ROA.
Also, the F-statistic p-value showed 4.9% for CGI, meaning that the multiple regression result
are statistically significant because this (the p-value) is less than 5%, which is the level of
significance adopted for this study. This shows that the influence of Corporate Governance Index
on ROA is statistically significant. Therefore, from the above multiple regression estimates,
Corporate Governance Index has a positive and negative significant effect on ROA (i.e. negative
relationship between ownership structure and the financial performance (ROA) of our selected
companies and the regression result also shows there is a positive relationship between Corporate
Governance Index (BSI and ACI) and financial Performance of manufacturing companies
measured by ROA.). Thus, we may reject the null hypothesis.
Ramsey Reset test is a robustness formal test which helps to test the linearity of our model. A
regression criterion is that the model must be linear and from the result presented on table 2 we
do not reject the Null hypothesis which says that the model is linear. This shows that our model
for this study is correctly specified (i.e. no specification biasness in the model). What is reported
here is the probability value (significant value) of F-statistics.
Ljung Box on the other hand is an improved robustness test to confirm the result of our Durbin
Watson. They both test the presence of Serial correlation (time series data) or Auto-correlation
(panel data) in any particular variable. The result of the Durbin Watson is within the threshold of
1.8 and 2.2, this show that in our series there is no evidence of auto correlation. This result is
further confirmed by the result from Ljung Box which shows that the p-value of Q-statistics is
greater than our chosen level of significance (5%). This means that we cannot reject the Null
hypothesis for this test which says there is no evidence of significant or severe serial or auto
correlation. This is indeed a good result for our series.

Variable One Discussion of Findings

The findings of the present study show that Board structure has a positive significant effect on
performance (financial). This is consistent with a priori expectation. The result suggests that the
reputation, integrity and goodwill of those that form Board members are positive on how the
companies perform financially. The result indicates that a 1% increase in Board Structure Index
will cause an insignificant 15.8% increase in the financial performance, this shows that when one
more person is added to the board size, when board diversity exist across all ethnic group, one
more day added to the meeting days of board members, and the positions of CEO and Chairman
occupied by separate persons and higher proportion of non-executive directors on the board all of
these collectively are expected to have a 15.6% on the financial performance of our selected
companies. The implication of this result is that we do not accept the Null hypothesis which
indicates that there is significant relationship between Board Structure Index and Firms‟
performance as measured by ROA. Our result is consistent with the findings of Jayati et al.
(2012) who posit that the Board Structure of any firm is key and that it is the responsibility of the
Board to ensure credible governance systems and this can only be achieved through good and
appropriate Board Structure.
The results of this model support the fact that Board structure or composition is a vital element in
the governance of any company. It determines the quality of members of the Board in terms of

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independence, experience, expertise and gender who are able to engage in robust discussions that
are germane to the realization of vision of the company. The existence of a high proportion of
outside directors, members with versatile experience and a board that is gender sensitive will
promote best practice governance culture that will serve the interest of all stakeholders. Equally,
a board that meets regularly in accordance with the benchmark set by SEC code of corporate
governance is poised to deal with issues that require their urgent attention and are abreast with
development that impacts on the survival and sustainability of the company. Furthermore, our
finding lends credence to the work of Brown and Caylor (2010) who affirm that a board size of
between 6 and 15 members attracts a higher return on equity and better profit margins than firms
with other sizes. Empirically board structure influences the performance of firms has also been
proven by Hermalin and Weisbach (1991& 2009), and their finding were also in line with the
result of this model. Also Bhagat and Black (1999) affirm a positive relationship between the
two variables. It is noteworthy that the theoretical perception of agency theory as adopted in this
work is that inclusion of high proportion of outside and non-executive directors as members of
the board will engender quality, objective and fruitful decision making which invariably
translates to good performance for the benefit of shareholders. This study concluded that most of
the boards of manufacturing companies in Nigeria are made up of high proportion of non-
executive directors represented by shareholders.

Variable Two Discussion of Finding

The objective of this was to examine the impact of Audit Committee Index on the performance
of manufacturing companies in Nigeria. It was found that Audit Committee Index has a positive
but not significant impact on company‟s performance (especially those considered in this study).
This result is consistent with a priori expectation and in agreement with previous findings. Wild
(1994) affirmed that there is a positive relationship between performance and audit committee.
However the insignificance of the relationship may be as a result of the fact that audit
committee‟s duty is carried out on the financial activities that had already taken place. So what
they do is postmortem which may not impact on the performance reported and it‟s likely not to
affect the performance of the future financial year if proper implementations of findings are not
put in place by management. This justifies the reason for Audit Committee Index not to have a
significant effect on performance.
This study discovered that majority of the listed manufacturing companies complied with
requirements of CAMA 1990 and SEC code of corporate governance 2008 on the Audit
committee Index in terms of Size, proportion of non-executive directors, presence of financial
literate members and number of meetings held. We discovered that when Audit Committee Index
is combined with other exogenous variables it will have a significant effect. It is worth noticing
that the audit committee is an important corporate governance mechanism designed to ensure
that firms produce relevant, reliable, adequate and credible information that investors can use to
assess the performance of the company and not to improve performance (financial) itself. It is the
duty of the audit committee to ensure that external auditors receive all necessary information that
are required to carry out the audit process independently and effectively and that the job of the
external auditor is not subjected to the whims and caprices of management.

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Variable Three Discussion of Finding

The objective of this was to investigate how Ownership Structure Index would affect the
performance of manufacturing companies in Nigeria. Evidence from prior study shows
ownership structure of a company is one of the internal mechanisms of corporate governance that
has been extensively studied in the developed countries such as US and UK and has more
recently been a subject of interest in the emerging countries Jayatiet‟al (2012). It is true that
because of the Nigerian environment, nature of business and ownership structure (dominated by
family members and friends) it is very difficult for managers to sincerely be independent in
carrying out their duty. In the process of dancing to the tunes of the owners of the business things
do not always go as expected which negatively affect the performance to be recorded, which is
the justification for our result on this model and research objective.
The result of this research shows a negative relationship between Ownership Structure Index and
Performance as measured by ROA although the extent is insignificant (-3.1%). The implication
of this result is that firms with family ownership and managerial or directorship ownership with
less ownership concentration having block holders are not directed towards better performance
as indicated by the value of coefficient (R). This result is consistent with the findings of Sanda,
Mikailu and Tukur (2005) that discovered a negative relationship between performance and
director shareholding. The factors associated with this may not be associated with reducing
agency cost which assumes ownership interest (whether as directors‟ shareholding, family
ownership or institutional) to protect shareholders since they own part of the shares. However in
the work of Faisal and Abdul (2015) they found a positive relationship between Ownership
Structure Index and Performance.

4. CONCLUSION AND RECOMME NDATION

Conclusion
This study has investigated the relationship between corporate governance of manufacturing
firms and performance over a period of five years spanning 2010 – 2014 using the index
approach for the explanatory variables. The interaction of corporate governance index and firms‟
performance as measure by ROA differs. The study concludes that the different attributes of
corporate governance influence the performance indicator differently. This means that there is a
mixed relationship between the two variables.
Furthermore except for ownership structure index that exhibits a negative but insignificant
relationship with ROA (individually), but the probability of the F-stat shows that corporate
governance affects firms‟ performance (using Boards Structure Index, ownership structure index
and Audit Committee index as governance mechanisms).

Recommendations
On the basis of the findings and conclusions drawn from this study, the following
recommendations are made:
The Regulators and Boards of manufacturing firms should keep a close check on influence of
board structure index and audit committee index which have a positive influence on performance
(ROA). The relationship is positive and significant for board structure which means that firms

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Vol. 2, Issue 10 (October 2016)

board structure that consists of the appropriate size, exhibits qualities of board diversity, separate
functions of CEO and Chairman will improve performance when measure with ROA. Equally,
the existence of independent directors and non-executive directors on the Board of Firms will
boost their independence and impact positively on performance. The relationship between Audit
Committee Index and performance is positive, although insignificant. It is recommended that the
Regulators and Board of Firms re-examine the attributes of Audit committee with a view to
strengthen and raise the bar especially on qualifications, experience and industry knowledge of
committee membership.
There is an inverse relationship between Ownership Structure Index and Performance although
the extent is insignificant. It is recommended that shareholders should create a balance between
the structures of ownership, institutional shareholders, controlling power with controlling
shareholders.
There is need for SEC to continuously review the code of corporate governance in consideration
of the peculiarities of our local environment. These peculiarities include political, cultural, social
and legal framework. The legal framework as contained in CAMA 1990 is no longer in tune with
our socio-economic realities. Specifically, there is need to review section 359 (6) of CAMA 1990
which provides for the Audit Committee to be composed of 6 members with equal representation
of shareholders and executive directors. The following recommendations are made:
i. The position of the chairman should be well specified detailing the qualifications and
experience of the person to occupy the position.
ii. The number of times the committee meets is key to the effectiveness of the functions
of the committee. Meeting regularly ensures that important issues are considers ahead
of any damage. Therefore the law should specify the minimum number of times to
meet in a year.
iii. CAMA is silent on the qualifications and experience of committee members. It is
important to review this section to specify the attributes of committee membership.
This study has contributed to knowledge by extending the conceptual work of prior literatures on
the relationship between corporate governance index and firms‟ performance as measure with
ROA. Also by focusing on the impact of a pool of corporate governance variables to form an
index rather than individual variables of corporate governance measured against performance
variable.

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