Corporate governance structure and rm performance in developing economies: evidence from Nigeria

Benjamin I. Ehikioya

Benjamin I. Ehikioya is a Research Scholar based at the School of Management, Wuhan University of Technology, Wuhan, Peoples Republic of China.

Abstract Purpose The purpose of this paper is to examine the link between corporate governance structure and rm performance in Nigeria. Design/methodology/approach The present study uses the regression model to analyze publicly available data for a sample of 107 rms quoted in the Nigerian Stock Exchange for the scal years 1998 to 2002. Findings The empirical investigations showed that ownership concentration has a positive impact on performance. Although the results revealed no evidence to support the impact of board composition on performance, there is signicant evidence to support the fact that CEO duality adversely impact rm performance. The result also suggests rm size and leverage to impact on rm performance. A new variable, identied as more than one family member on the board, is found to have an adverse effect on rm performance. Research limitations/implications The study relied much on publicly available data for a sample of 107 listed rms in Nigeria for the scal years 1998 to 2002. Thus, effort should be made to look at this study in a more elaborate viewpoint and across borders. Practical implications Good corporate governance standards are imperative to every organization and should be encouraged for the interest of the investors and other stakeholders. Originality/value Interestingly, from a developing country perspective, especially in sub-Saharan Africa, the paper is the rst of its kind and offers evidence on the impact of corporate governance structure on rm performance. The paper provides useful information that is of great value to policy makers, academics and other stakeholders. Keywords Corporate governance, Stock exchanges, Corporate ownership, Gearing, Chief executives, Nigeria Paper type Research paper

1. Introduction
Corporate governance is concerned with the processes and structures through which members interested in the overall well being of the rm take measures to protect the interests of the stakeholders. Good corporate governance is centered on the principles of accountability, transparency, fairness and responsibility in the management of the rm. The institution of corporate governance in a rm is an attempt to ensure the separation of ownership and control, and this often results in principal-agent problems (Jensen and Meckling, 1976; Byrnes et al., 2003). Agency theory explains the conict of interests between the shareholders and managers. The separation of ownership and control has been one of the most contentious issues in the nancial literature. Corporate governance structures deal with the ownership structure, such as the proportion of internal and external block holdings. It also deals with the composition of the board of directors, such as the proportion of non-executive directors, board skill and the size of the board. In addition, corporate governance mechanisms deal with the independence of the

Received: 29 May 2007 Revised: 6 August 2007 Accepted: 16 October 2007 The author would like to thank the anonymous referees for their detailed comments and suggestions, which improved the quality of the research paper. The author is indebted too to Professor Andrew Tylecote, Director of Postgraduate Taught Programmes, Management School, The University of Shefeld, and Dr O. Akinkurolere for their invaluable comments.

DOI 10.1108/14720700910964307

VOL. 9 NO. 3 2009, pp. 231-243, Q Emerald Group Publishing Limited, ISSN 1472-0701

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board, and also the possible separation of Chief Executive Ofcers (hereinafter CEO) responsibility from that of the chairperson. A well dened and functioning corporate governance system helps a rm to attract investment, raise funds, and strengthen the foundation for rm performance. Good corporate governance shields a rm from vulnerability to future nancial distress. In listed rms, the shareholders are represented by members of the board. The managers are responsible in directing the affairs of the rm. Through the board of directors, the shareholders provide incentives that allow the managers to pursue the interests of those who provide nance and of other stakeholders. Scholars of corporate governance, starting from Ross (1973) and Fama (1980), have been concerned as to how to address the principal-agent problem, which arises from the separation of ownership and control. The recent nancial turmoil in Asia in the late 1990s and high prole scandals in Enron, World Com and other related companies has again stimulated policy makers, investors, academics and other stakeholders, both in the public and private sectors, to take interest in the campaign for good corporate governance. The challenges from these recent events have necessitated the taking of various measures across the globe. These measures, such as the Sarbanes-Oxley Act of 2002, regulate the system to ensure adherence to principles of good corporate governance (Aguilera, 2005). Recently, to ensure economic growth and development, the Nigerian government instituted various economic reforms and established the Economic and Financial Crime Commission (EFCC) to intervene in the case of nancial malpractice and other forms of mismanagement both in the public and private sectors. Investors and other stakeholders have begun to realize the importance of good corporate governance practices in protecting their interests. The Nigerian government identied corporate governance as a necessity for modern economic growth and development. Empirical work on corporate governance has undergone a remarkable growth in recent times, especially in advanced countries where data are available. Various theorists of corporate governance have tried to examine the link between corporate governance and the general well being of a rm. Studies have indicated that corporate governance impacts on rm performance. For instance, McConnell and Serveas (1990) reported a signicant relationship between ownership concentration and rm value. In related work from India, Sarkar and Sarkar (2000) reported a relationship between ownership concentration and rm performance. But Demsetz and Lehn(1985) found no relationship between ownership concentration and rm performance. Previous studies have largely focused on advanced countries, although a few recent studies have related to developing countries. In this context, this study attempts to provide empirical evidence on the connection between corporate governance structure and rm performance in Nigeria. Using data from the Nigerian Stock Exchange (hereinafter NSE) and other reliable data sources over a sample of 107 listed rms, it was shown that rms with good corporate governance structure have higher performance, higher valuation and lower bankruptcy risk. On the other hand, rms with poor corporate governance structure have lower performance, lower valuation and higher bankruptcy risk. The study further revealed ownership concentration to be high among Nigerian rms. It was found that where the CEO also acted as chairperson and more than one family member had a place on the board of directors this had an adverse effect on rm performance. The paper is structured as follows: after the introduction, some related literature is reviewed in Section 2. In Section 3, the sample, data source and methodology adopted in the study are described. The results of the regression analysis are presented and discussed in Section 4, while the last section offers some concluding remarks.

2. Literature review
Corporate governance is primarily concerned with nding a solution to the principal-agent problem. The principal, being the nance provider, is seeking ways to ensure the agent (management) handle their investment in such a way as to guarantee maximum returns for them as investors and other stakeholders. Advocates of corporate governance have identied internal and external governance mechanisms that reduce the agency problem

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(Agarwal and Knoeber, 1996). The performance of these control mechanisms largely depends on the environment. The corporate governance structure such as ownership structure, board composition, board size, debt, and CEO duality have a great inuence on performance. Documentary evidence suggests that the relationship between corporate governance structure and rm performance can either be positive (Morck et al., 1989), negative (Lehman and Weigand, 2000), or none (Burkart et al., 1997; Bolton and von Thadden, 1998). Studies on corporate governance have identied two basic corporate ownership structures: concentrated and dispersed. In most developed economies, the ownership structure is highly dispersed. However, in developing countries where there is a weak legal system to protect the interests of the investors, the ownership structure is highly concentrated. According to La Porta et al. (La Porta and Vishny, 1997; La Porta et al., 1998; La Porta and Lopez, 1999), ownership concentration is a response to differing degrees of legal protection of minority shareholders across countries. A highly concentrated ownership structure tends to create more pressure on management to engage in activities that maximize investors and other stakeholders interests. The empirical literature has examined the relationship between ownership concentration and performance, and the results are mixed. Demsetz and Lehn (1985) found no relationship between rm performance and ownership concentration. However, other studies such as McConnell and Serveas (1990) found a positive relationship between ownership concentration and rm value. Also, studies in developing countries like India reported ownership concentration to have positive relationship with a rms value (Sarkar and Sarkar, 2000; Khanna and Palepu, 2000). The composition of the board may be used to ameliorate the principal-agent problem. The participation of outside directors is designed to enhance the ability of the rm to protect itself against threats from the environment and align the rms resources for greater advantage. However, research on the impact of outside directors have grown signicantly but with mixed results. While the study by Wen et al.(2002) found a negative relationship between the number of outside directors on the board and performance, Bhagat and Black (2002) found no relationship between outside directors and Tobins Q. In another related work, the proportion of outside directors was found to have a signicant positive relationship to rm performance (Brickley et al., 1994 and Weisbach, 1988). Firms with higher number of outside directors are expected to pursue activities that would bring about low nancial leverage with a high market value of equity (Baysinger and Butler, 1985). The number board of directors is assumed to have an inuence on performance. The board is vested with responsibility for managing the rm and its activities. There is no agreement over whether a large or small board does this better. Yermack (1996) suggests that the smaller the board of directors the better the rms performance. Yermack (1996) further argued that larger boards are found to be slow in decision making. The monitoring expenses and poor communication in a larger board has also been seen as a reason for the support of small board size (Lipton and Lorsch, 1992; and Jensen, 1993). However, there is another school of thought that believes that rms with larger board size have the ability to push the managers to pursue lower costs of debt and increase performance (Anderson et al., 2004). Studies by Wen et al.(2002) and Abor (2007) both reported evidence in support of a positive relationship between board size and leverage. They argued that large boards with superior monitoring ability pursue higher leverage to raise the value of the rm. Shareholders are represented by the Board of Directors, and other stakeholders usually nd ways to control the activities of the management to ensure value maximization. One such move is to compel the managers to secure debt nancing from nancial institutions. Financial institutions such as banks have the skills and other resources to control the activities of rms, thereby serving as a useful tool for minimizing the principal-agent conict. Financial institutions take a special interest in seeing that the management of rms where they have relationship take measures that will improve the performance of the rm. For example, Shleifer and Vishny (1997) citing the work of Kaplan and Minton (1994), found a higher incidence of management turnover in one of the developed countries in response to poor rm performance. Mir and Nishat (2004) found that high leverage gave an adverse

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signal about the performance of the rm, Ahuja and Majumdar (1998) found a positive relationship between the levels of debt of the rm and performance. They concluded that a higher debt is related to higher rm performance. Several studies have examined the separation of CEO and chairperson/vice chairperson position, a situation that is predominantly found in an environment with a weak legal system. It is widely argued that the principal-agent problem is more obvious in a business environment where the same person holds the positions of CEO and chairperson (vice chairperson). CEO duality has a way of inuencing the overall performance of the rm. The rationale for the separation of CEO and chairpersons position was rst suggested by Fama and Jensen (1983). Yermack (1996) reported that rms are more valuable when the CEO and chairpersons positions are held separately. A series of checks and balances are instituted in rms where there is no CEO duality and this prevents the agent from indulging in opportunistic behaviour. Firms where the position of CEO and chairperson are clearly separated are likely to employ the optimal amount of debt in their capital structure (Fosberg, 2004). The present study also showed that rms without CEO duality are likely to minimize the risk of bankruptcy and boost the chances of raising additional capital because of stakeholders condence in them.

3. Data and methodology

This study investigates the connection between corporate governance structure and rm performance in Nigeria. The investigation focused on rms listed on the Nigerian Stock Exchange because that it is one of the largest stock exchanges among the developing countries in sub-Saharan Africa. The Nigerian Stock Exchange, known as Lagos Stock Exchange until 1977, was established in 1960 and was expected, among other functions, to regulate the transactions and other activities of the Exchange. The NSE which started full-scale operation in 1961 with about 19 securities listed for trading has operated under a tense business environment, characterized with social-political instability. Since its inception, the NSE has not had any fraud, shocks, scandals or insider dealings. As of 2003 the body had grown more than 260 stocks with a total market capitalization of US$6.73 billion. Prior to the present study, a pilot survey was carried out to identify key corporate governance variables essential for corporate control in developing countries. In this process, an interview was carried out with the management of rms in the health sector. Among other things, the directors were asked to state some factors inuencing the effectiveness of their decision making. The result was quite interesting and signicant in the construction of the nal sample for this study. The sample for this study covers rms listed on the NSE as of 1998. The study is restricted to listed rms because of the assumption that listed rms adhere to the norms and standards set by regulatory bodies in the course of their business activities. Also, listed rms are expected to prepare and publish their nancial information in compliance with the accounting practice. In this study, rms within the banking service were excluded from the sample because of the way earnings before interest and taxes are considered in their nancial statements. In addition, rms with missing data for variables in the analysis for the period under consideration were dropped from the sample. Altogether, a total number of 107 rms drawn from 17 sectors of the economy as categorized by the exchange, and with 535 rm-year observations were used. Below is a list of industrial sectors used in the sample: 1. Agriculture. 2. Automobile and tyre. 3. Breweries. 4. Building materials. 5. Chemical and paints. 6. Computer and ofce equipment. 7. Conglomerates.

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8. Construction. 9. Engineering technology. 10. Food/beverages and tobacco. 11. Healthcare. 12. Industrial/domestic products. 13. Insurance. 14. Packaging. 15. Petroleum (marketing). 16. Printing and publishing. 17. Textiles. The variables of interest are measures of rm performance, corporate governance characteristics and rm specic heterogeneity. For rm performance variables, the study focused on protability due to availability of data and the choice of statistical analysis. The study employed four variables for the measurement of performance: return on assets, price earnings ratio, return on equity and Tobins Q. The analysis was based on information from annual reports over the ve year from 1998 to 2002. Data on performance were obtained from listed rms annual reports as published by the Nigerian Stock Exchange. Information on board size, board composition and number of outstanding shares were obtained from the NSE fact book. However, data on CEO duality, board skill, and number of family members on board were obtained through personal observations and interviews with the management of the rms. Directors shareholding information was obtained from the database of some accredited, Lagos-based, stock-broking rms. These rms also provided information on the proportion of shares owned by the largest shareholders for each of the rms in the sample. This information was used to compute a proxy for data on ownership concentration that was not readily available as at the time of this study. CEO tenure and CEO compensation were excluded from the variables because of the unwillingness of rms to disclose such information, which they regarded as commercially sensitive. The model used for analysis included certain rm specic variables, which are also likely to inuence the performance of the rm (Jordan et al., 1998 and Hall et al., 2004). These rm specic variables are age, size, leverage and the rms risk beta. To examine the relationship between corporate governance structure and rm performance in developing economies, a panel data regression model was adopted in the analysis. The use of panel data helps to take into account the heterogeneity of rms in relation to possible explanatory variables. A regression equation was estimated linking the two variables, after controlling for some rm specic characteristics. The panel data ordinary least square (OLS) regression model is dened by the following equation. PERFi ;t b0 b1 CONCENTi ;t b2 DSHAREi ; t b3 BSIZEi ;t b4 OUTSDi ;t b5 FDEBTi ;t b6 FSIZEi ;t b7 FAGEi ;t b8 INDUSTDi ;t b9 FBETAi ;t b10 BSKILLi ;t b11 CEODUALITYi ;t b12 BRELATi ;t m1i ;t Where PERFi,t is a measure of performance taken as ROA, ROE, PE and Tobins Q for rm i at time t and mi,t is the error term. The variables in the sample, their denition and measurement are described in Table I.

4. Results and discussion

The analysis commenced by examining the data for certain governance variables used in the empirical research. Table II presents a summary of the descriptive statistics of the dependent and independent variables. Results showed a mean (standard deviation) of 10.5 (2.89) for the board size for the entire sample. Further statistical analysis of the board size

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Table I Variable denitions and measurement

Variable ROA ROE PE Tobins Q CEODUALITY CONCENT DSHARE BSKILL Denition and measurement Return on assets, measured as the percentage of net income to total assets Return on equity, measured as a percentage of net income to common equity Price-earning ratio, measured as the ratio of price per share to earnings per share Tobins Q, measured as the market value of equity capital and the book value of rms debt divided by the book value of total assets CEO dummy, Equals 1 if CEO is also the chairperson /vice chairperson of the board, otherwise 0 Ownership concentration, measured as the proportion of shares held by the ve largest shareholders to total shares Directors shareholding. Measured as the total number of shares held by the directors of a rm divided by the number of outstanding shares Board skill, the number of board members with degree or professional qualication and who have attended an accredited program in the past three years. Board members relative on board. A dummy variable taking the value of 1 if board members have relative on the same board, otherwise 0 Board size, total number of board members Outside director is the number of outside directors on the board Firm leverage, measured as the ratio of total debt to total assets Firm size, the total assets owned by the rm. Measured as the natural logarithm of total assets We dene rms age as the number of years since its incorporation. Calculated as observation year less incorporation year Firm risk beta, measured as the standard deviation of the return on sales Industry dummies. Measured as dummy variable taking the value of 1 if the rm belongs to a particular industry, otherwise 0

BRELATIVE BSIZE OUTSD FDEBT FSIZE FAGE FBETA INDUSTD

Table II Descriptive summary statistics

Variables Board size Debt ratio Firm size Board skill Age CEO duality Relative on board Outside director Director share Ownership Firm Beta Mean 10.5511 0.29157 32.0314 9.55120 19.4015 0.08661 0.07874 2.18110 0.15350 52.3090 0.93606 Std dev 2.896929 0.211352 7.621458 2.547050 8.720765 0.282382 0.270399 1.498238 0.117028 3.355643 0.393162 Minimum 4.00000 0.00200 12.1254 3.00000 6.00000 0.00000 0.00000 0.00000 0.03270 43.4737 0.10000 Median 11.0000 0.27910 32.5624 10.0000 23.0000 0.00000 0.00000 3.00000 0.25100 52.4397 0.98000 Maximum 16.0000 0.92200 56.7936 15.0000 44.0000 1.00000 1.00000 5.00000 0.90000 63.6300 2.25000

Notes: This table provides summary statistics for the data employed in the analysis. The panel provides mean, median, minimum, standard deviations and maximum

reveals that only 19.68 percent of the rms had the recommended board size of ten, while 73.22 percent and 7.08 percent had below and above the recommended board size respectively. The mean (standard deviation) debt of the rms is recorded as 0.29 (0.21). This suggests that total debt appears to be less than half of the rms capital structure, which implies that rms in Nigeria rely heavily on equity and other sources apart from debt in business nancing. This is probably due to the challenges of securing debt or the reluctance of the shareholders and other stakeholders to compel the agent to go for debt nancing. The rm size in the sample is determined as the natural logarithm of the total assets and has a

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mean (standard deviation) of 32.03 (7.62). The board skill has an average of 9.55 (2.54). This means, an average of 9.5 of the board members have a degree or professional qualication. The age of the rm is determined by taking away the incorporation year from the observation year, and mean age of the whole sample is 19.40 (8.72). The descriptive analysis reveals that of the 107 rms in the sample, 0.08 (0.28) had the CEO also acting as chairperson of the board. It could also be observed that in some rms, some board members had a relative (0.07 (0.27)) on the board. The proportion of outside directors is 2.18 (1.49). Furthermore, Table II shows an average of 0.15 (0.12) for the director shareholding. Ownership concentration is examined as the proportion of the biggest or ten biggest shareholders shares over the total shares, and registers an average value of 52.30 (3.36). The industrial sectors sampled are reported in the previous list. To investigate the impact of corporate governance structure on rm performance, the study used a panel data OLS regression model for a sample of 107 rms quoted in the Nigerian Stock Exchange for the scal years 1998 to 2002. The analysis started by estimating the model with four corporate governance variables as identied in the literature. In the model, the corporate governance variables were estimated against four rm performance variables (ROA, ROE, PE and Tobins Q) one after the other. The results of the models are signicant at the 1 percent and 5 percent levels. As reported in Table III, the results of the estimation in Column 1 indicate a positive relationship between performance, measured as ROA and ownership concentration and board size. The table also shows that director shareholding and board composition are not signicantly related to rm performance. The PE ratio reported similar results to ROA. Using Tobins Q as a measure of rm performance, the results showed a non-signicant relationship in all the variables except outside directors. To address the issue of board effectiveness, board skill was introduced as a control variable. It is assumed that rms with board members with degrees or professional qualications and who had attended accredited programs within the previous three years would be more effective in the discharge of their duties and responsibilities. The results of the estimation based on this assumption are depicted in Table IV. The results of the four performance variables are signicant at the 1 percent and 5 percent levels. Using ROA as a measure of performance, the results showed a signicant relationship between ownership concentration and rm performance as well as board skill and performance. Also, the results indicate that board size is positively and signicantly related to rm performance. The results obtained using PE ration is similar to the one for ROA. However, director shareholding and outside directors showed no relationship with rm performance. Tobins Q is found not to be signicantly related to board size and ownership concentration. To examine the effect of board independence, a dummy variable was introduced to the model taking the value of 1 for rms where CEO also acts as chairperson, 0 otherwise. The Table III Coefcients estimate for corporate governance measure
Explanatory variables Concentration Director share Board size Outside Director R-square (%) F-ratio ROA 0.00546 (0.2991)* 2 0.201843 (2 2.2333)* 0.351106 (2.5396)* 2 0.168732 (2 0.6365)* 11.3 3.901* Dependent variables ROE PE 0.0046251 (2.9124) 2 0.109334 (2 2.4056) 2 0.002750 (2 0.9391) 0.13853 (1.0104) 11.5 3.972* 0.29281 (3.3358)* 2 0.05327 (2 0.6080) 0.13029 (0.9307) 2 0.04411 (2 0.317)** 09.1 3.055* Tobins Q 2 0.02292 (2 0.2585)* 2 0.11806 (2 1.3340)* 2 0.11287 (2 0.7982) 0.32789 (2.3357)* 07.2 2.383*

Notes: This table presents the coefcients of OLS regression of performance on various corporate governance variables. The values in parentheses are t-values and *, **, *** denote 1 percent, 5 percent and 10 percent levels of signicance respectively

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Table IV Coefcients estimate for management skill, board independence and rm specic variables
Explanatory variables Concentration Director share Board size Outside Director Board skill CEO duality Firm size Relative on Board Firm age R-square (%) F-ratio ROA 0.006910 (0.38163)* 2 0.22164 (2 2.41556)* 0.105681 (2.18640)* 2 0.146387 (2 2.2523)** 2 0.04458 (2 0.9750) 2 0.158022 (2 1.82067)* 0.008770 (1.11141)* 0.00468 (0.05183) 0.015114 (2.06245)* 17.0 2.665* Dependent variables ROE PE 0.00388 (2.50220)* 2 0.07080 (2 1.50707) 2 0.00448 (2 1.08107)* 0.003007 (0.53959) 0.003893 (0.99298)* 2 0.01681 (2 0.91310) 0.001508 (2.22903) 0.002119 (0.105789) 2 0.00166 (2 2.64196)* 21.3 3.518* 0.283000 (3.1599)* 0.00575 (0.0609) 0.037210 (0.18029)* 2 0.056558 (2 0.39406) 0.1313571 (0.765217)* 0.040375 (0.45164) 0.0872567 (0.98427)* 2 0.081713 (2 0.87758)** 2 0.129465 (2 1.37442)* 12.0 1.767* Tobins Q 2 0.00819 (2 0.17947) 2 0.101323 (2 1.05974) 0.020107 (0.16493) 0.35421 (2.43940)* 2 0.129906 (2 1.12640) 2 0.115975 (2 1.28234)** 0.006625 (0.332864) 2 0.094462 (2 1.00280)** 0.011149 (0.603221) 09.9 1.428**

Notes: This table presents the coefcients of OLS regression of performance on various corporate governance and rm specic variables. The values in parentheses are t-values and *, **, *** denote 1 percent, 5 percent and 10 percent levels of signicance respectively

results of the estimations are presented in Table IV, using each of the identied performance variables one after the other. The results demonstrated the predicted relationship and are signicant at the 1 percent and 5 percent levels. The table shows that three out of the four performance variables indicate a signicant negative relationship, suggesting the need to separate the position of the CEO and chairperson to ensure the independence of the board for optimum rm performance. Another striking observation in the result is that ownership concentration and board size are both positively related to performance in three out of the four cases. This implies that concentrated ownership combined with optimum board size tends to perform better than diffused ownership in Nigeria. Director shareholding did not indicate any signicant relationship to the four performance variables. However, when ROE was later used as a measure of performance, the results also revealed outside director and board skill to have signicant relationship with performance. The literature also reports that other rm specic characteristics exert an inuence on rm performance. To control for these rm specic characteristics, rm size was introduced as a control variable. Firm size is measured as the natural logarithm of a rms total assets. The results of our estimation are presented in Table IV and signicant at the 1 percent and 5 percent levels. Firm size showed a signicant, positive relationship with performance. Ownership concentration and board size also had a positive relationship with return on assets. On the other hand, director shareholding and outside directors are signicantly and negatively related to rm performance measured as ROA. An observation of Tobins Q indicates a signicant relationship with outside directors, but a negative relationship to director shareholding and board size. In column three, all the variables tested are signicant with performance measured as PE ratio. During the course of the pilot survey, some rms were observed to have more than one family member on the board. There were cases where the head of the family served as the chairperson while the child or wife served as the CEO or board member of the same rm. A situation where two brothers were on the board of a rm was also found. These two scenarios are common phenomena in developing countries like Nigeria. It is assumed that such activity may have an inuence on the independence of the board. To conrm this fact, a

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dummy variable that represented board members having a relative on the same board was introduced taking the value of 1 when there was a relative on the board, otherwise 0. The results are presented in Table IV. Close scrutiny of the results showed that board members having a relative on the same board is negatively related to rm performance measured as price earning ratio and Tobins Q. Column 1 revealed that director shareholding, outside directors, board skill and CEO duality are negatively related to rm performance. How corporate governance impacts on rm performance may vary from one sector of industry to another. To examine this probability, an industry dummy variable was introduced and the results of the regression model are presented in Table V. The inclusion of industry dummy variables revealed the regression to be signicant at the 1 percent and 5 percent levels. Health and insurance demonstrated a positive relationship with all the four performance variables. Also, packaging, petroleum, and agriculture showed a better performance level than construction, textile, automobile, breweries and industrial and domestic products. Furthermore, interestingly, ownership concentration exhibited a positive relationship with all the performance variables used in the analysis. This again demonstrated the importance of a concentrated ownership structure across the industry sectors in developing economies. Board skill, rm size and board size are signicantly related to price earning ratio and return on equity. Across industrial sectors, different rms may have varying degrees of appetite for debt according to their needs and surrounding environment. Firms with positive investment opportunity and which have access to secure debt nancing may have the chance to improve on their performance. Firms listed in the Exchange enjoy the privilege of being able to approach lenders for debt nancing. In the regression model, debt is included as a control variable. The results presented in Table VI are signicant at the 1 percent and 5 percent levels. The results revealed a positive signicant relationship between debt and Tobins Q. Also, when tested with return of equity and price earning ration, the results showed a signicant relationship. This result is not consistent with Mir and Nishat (2004), who found leverage to have an adverse signaling effect on performance of the rm.

5. Summary and concluding remarks

There has been growing concern over the separation of ownership and control of companies, and ways of ensuring that the agents and other insiders take measures that protect the interests of the stakeholders. The theory of corporate governance has been widely studied in the developed countries, with a few recent studies in developing nations. Specically, sub-Saharan Africa has witnessed little or no attention in the studies of corporate governance. This may have been due to lack of availability of data. Using a panel data regression model on a sample of 107 rms listed in the Nigerian Stock Exchange for the period 1998 through 2002, this study has examined the link between the structure of corporate governance and rm performance in sub-Saharan Africa as evidenced by Nigeria. The results of the investigation are quite revealing. There is signicant evidence that there is a need for equity ownership to be concentrated in the hands of individuals, corporations or institutional bodies. This will create better incentives for shareholders to undertake the monitoring process, and thus lead to superior performance. The investigation shows that when major shareholdings are acquired in a rm, control cannot easily be disputed and the resulting concentration of ownership may lower the agency costs. The regression results further suggest that rms with higher levels of ownership concentration have a higher market valuation. The results of the study have not shown any link between board composition and rm performance. The adverse effect of CEO duality on performance indicates the need for rms to separate the post of CEO and Chair in order to ensure optimal performance. The separation of the position of CEO and Chair will encourage efciency in decision-making mechanisms. It would also serve as a monitoring mechanism to ensure that the agent does not indulge in opportunistic behavior. It was also found that rms where a board member has a relative that acts on the same board tend to face challenges in instituting a coherent

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Table V Coefcients estimate on corporate governance variables, rm specic variables and industry dummy
Independent variables Concentration Director share Board size Outside Director Board skill CEO duality Firm size Relative on Board Firm age Agriculture Construction Engineering technology Breweries Conglomerates Health Food, beverage & tobacco Insurance Industrial & domestic product Printing and publishing Automobile & tyre Building materials Chemical and paint Computer & ofce equipment Packaging Petroleum Textile R-square (%) F-ratio ROA 0.03628 (2.08993)* 2 0.034294 (2 0.28269)* 0.12873 (2.6737)* 2 0.13054 (2 2.2069)** 2 0.060991 (2 1.37995) 0.025325 (0.31074) 0.004328 (0.58089)* 0.044594 (0.5439)* 0.01937 (2.8578)* 0.1772173 (2.30886) 0.098400 (1.30536) 2 0.070196 (2 0.8342)** 0.140761 (1.61663) 2 0.110045 (2 1.2714) 0.072100 (0.8466)* 2 0.175460 (2 2.3015) 0.08877 (1.1188)* 0.0683700 (0.8595)* 0.0399439 (0.4798)* 2 0.239341 (2 2.6946)** 2 0.163904 (2 1.3665)* 2 0.324724 (2 3.981)* 0.135901 (1.7462) 2 0.149171 (2 1.7877) 0.230603 (2.9112)* 2 0.106523 (2 1.3286)** 49.0 3.691* Dependent variables ROE PE 0.00274 (1.66751) 0.05024 (0.73239) 2 0.006523 (2 1.4306)** 0.006020 (1.0748)* 0.0026265 (0.627524) 2 0.011152 (2 0.58393) 0.000836 (1.18571) 0.020436 (1.0185) 2 0.001207 (2 1.8816) 2 0.020501 (2 0.7880)* 0.041798 (1.78471)* 2 0.037676 (2 1.0316) 0.008348 (0.33194)* 2 0.0015529 (2 0.06613) 0.021715 (1.08810) 2 0.0252847 (2 1.3551)* 0.022881 (1.32625) 0.021084 (1.17631) 2 0.024095 (2 0.76695) 0.003824 (0.12704)* 2 0.087510 (2 2.6890) 0.002375 (0.1008) 2 0.058552 (2 2.4215) 0.014991 (0.66219) 0.003999 (0.1860)* 0.051884 (2.0829) 41.0 2.670* 0.3060704 (3.1336)* 0.111498 (0.78459)* 0.1542444 (0.6596) 2 0.067877 (2 0.4568)* 2 0.03269 (2 0.1732) 0.0829374 (0.8687) 0.0252567 (0.26530)* 2 0.006699 (2 0.0697) 2 0.083009 (2 0.8377)** 0.101242 (1.12600) 2 0.028212 (2 0.3194)* 2 0.050045 (2 0.5077)* 2 0.011270 (2 0.1105) 2 0.042910 (2 0.4232) 0.0625192 (0.6267) 0.0561687 (0.62895)* 0.0980088 (1.0545) 0.0037125 (0.0398)* 2 0.074058 (2 0.75944)* 2 0.094882 (2 0.9119) 2 0.065281 (2 0.46461) 0.0198975 (0.2082) 2 0.044165 (2 0.4844) 0.048945 (0.5007) 0.324797 (3.5003)* 0.1909178 (2.0328)* 30.0 1.646* Tobins Q 0.01707 (0.3450)* 0.067673 (0.47368) 0.094938 (0.6917) 0.3251056 (2.1766) 2 0.18370 (2 1.45805) 2 0.083712 (2 0.8721) 2 0.01148 (2 0.54058)* 2 0.0513520 (2 0.5319) 0.009534 (0.4934)* 0.234079 (2.5895) 2 0.0623819 (2 0.7027) 2 0.123068 (2 1.24193)** 2 0.134557 (2 1.3122)* 2 0.011797 (2 0.1157) 0.0050605 (0.0504)* 0.0917003 (1.0213) 0.018904 (0.20233)* 2 0.020811 (2 0.2221) 0.269268 (2.7466) 2 0.007865 (2 0.0751)** 2 0.25975 (2 1.8389) 2 0.081827 (2 0.8520)* 0.060243 (0.6572)* 0.043373 (0.4413) 2 0.054977 (2 0.5893) 2 0.082760 (2 0.8765) 29.2 1.588**

Notes: *, **, *** denote 1 percent, 5 percent and 10 percent levels of signicance respectively; Values in parentheses are t-values

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Table VI Coefcients estimate for leverage and risk variability across the industry sectors
Independent variables Concentration Director share Board size Outside Director Board skill CEO duality Firm size Relative on Board Firm age Firm debt Firm Beta Construction Breweries Conglomerates Health Food, beverage & tobacco Insurance Printing and publishing Building materials Chemical and paint Packaging Petroleum Textile R-square (%) F-Ratio ROA 0.02089 (1.13973)* 2 0.063633 (2 0.50818)** 0.12645 (2.52358)* 2 0.15515 (2 2.47704)** 2 0.06038 (2 1.30828)** 2 0.020511 (2 0.241213) 0.002843 (0.36498)* 0.014450 (0.166418) 0.019404 (2.774553) 2 0.1939348 (2 2.27365)** 2 0.005982 (2 0.07576)* 0.075581 (0.96049) 0.082486 (0.91826) 2 0.12197 (2 1.43996) 2 0.0079108 (2 0.0986) 2 0.140435 (2 1.77214)* 0.0978914 (1.18478) 0.002891 (0.034621)* 2 0.154569 (2 1.20324)** 2 0.269081 (2 3.09769)* 2 0.12859 (2 1.50364)** 0.231731 (2.78962)* 2 0.081189 (2 0.96740)* 42.0 3.245* Dependent variables ROE PE 0.00322 (1.9038) 0.042460 (0.61523) 2 0.004386 (2 0.94841)* 0.004680 (0.80948)* 0.002293 (0.53833) 2 0.00945 (2 0.48671) 0.00096 (1.341710)* 0.024126 (1.16481)* 2 0.001379 (2 2.137478)** 0.004849 (0.18629)* 0.01267 (0.97816)* 0.0462393 (1.94044) 0.014806 (0.58547)* 2 0.016593 (2 0.74077)* 0.016823 (0.91868) 2 0.02364 (2 1.25107) 0.023104 (1.31932)* 2 0.01752 (2 0.57035) 2 0.079082 (2 2.32793) 0.011355 (0.46435) 0.017154 (0.75847) 0.014174 (0.645246)* 0.048941 (1.925711)* 36.3 2.550* 0.29502 (3.01784)* 0.105535 (0.7591)* 0.141657 (0.6142)* 2 0.072727 (2 0.48774) 2 0.014553 (2 0.0779) 0.074805 (0.79232) 0.035955 (0.38113) 0.003249 (0.03370) 2 0.09562 (2 0.98681)* 0.064992 (0.68628) 0.054045 (0.61644)* 2 0.03039 (2 0.3478) 2 0.018986 (2 0.19036) 2 0.079740 (2 0.8478) 0.03297 (0.37043) 0.070836 (0.80510)* 0.095795 (1.04426)* 2 0.101892 (2 1.09875)* 2 0.10063 (2 0.7055) 0.026713 (0.27698)* 2 0.02155 (2 0.22702) 0.358525 (3.88734) 0.191557 (2.05578) 28.5 1.787* Tobins Q 0.000269 (0.00266)* 0.09008 (0.627023) 0.03316 (0.23832)* 0.361161 (2.34393)** 2 0.14768 (2 1.15220) 2 0.080789 (2 0.82807) 2 0.00873 (2 0.40384)* 2 0.039829 (2 0.39981)* 0.013663 (0.70347)* 0.096073 (0.98172)* 0.033480 (0.36955)* 2 0.07725 (2 0.8556) 2 0.157531 (2 1.52851) 2 0.066065 (2 0.67980)* 0.032944 (0.35816) 0.10698 (1.17664) 0.01505 (0.158813) 0.222850 (2.32552)* 2 0.335725 (2 2.2778)* 2 0.09920 (2 0.99546) 0.075571 (0.77015)* 2 0.026641 (2 0.27953) 2 0.086740 (2 0.90083) 23.7 1.389*

Notes: *, **, *** denote 1 percent, 5 percent and 10 percent levels of signicance respectively; values in parentheses are t-values

system of checks and balances, thereby creating the opportunity for some members to manipulate the activities of the board. The results suggest that rms with board member having the required skill, and which encourage learning, have superior performance. Thus, there is a need for rms to have policies that ensure the consideration of potential board members skills before appointment to the board. Also, there is the need for continuous training and development for board members to ensure efcient discharge of their responsibilities. Furthermore, the results show that the size and leverage of the rm have a positive impact on rm performance. This

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suggests that larger rms with higher levels of debt ratio perform better than smaller rms. The nding on leverage is in line with previous literature. Although this study contributes to the body of literature on various dimensions, the results are not conclusive. Observations covering a period of ve years and in one country may not be representative, and the results may not be generally applicable to developing countries. The sample and choice of statistical analysis may also have shortcomings. The sample in this study was dictated by the availability of data and the choice of statistical analysis was determined by the period and industries covered. It would therefore, be desirable to extend the present study by complementing it with studies using other methods and including comparative data. The inclusion of other corporate governance and performance variables would also merit further consideration.

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Further reading
Nigerian Stock Exchange (2003), Fact Book Lagos.

Corresponding author
Benjamin I. Ehikioya can be contacted at: ehikioyaben@yahoo.com

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