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THE RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE OF PARASTATALS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

The division of ownership and control in joint stock 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 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' play 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 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 corporate performance.  

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

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