Board characteristics and the nancial performance of Nigerian quoted rms

Augustine Ujunwa

Augustine Ujunwa is a Lecturer in the Department of Banking and Finance, University of Nigeria, Enugu, Nigeria.

Abstract Purpose The purpose of this paper is to investigate the impact of corporate board characteristics on the nancial performance of Nigerian quoted rms. Board characteristics studied comprise board size, board skill, board nationality, board gender, board ethnicity and CEO duality. Design/methodology/approach The study employed the random-effects and xed-effects generalised least squares (GLS) regression to test the six hypotheses formulated for the study, while controlling for rm size and rm age. Findings Using panel data from 122 quoted rms in Nigeria between 1991 and 2008, it was found that board size, CEO duality and gender diversity were negatively linked with rm performance, whereas board nationality, board ethnicity and the number of board members with a PhD qualication were found to impact positively on rm performance. The result of the robustness test using the same board characteristics for 160 small rms showed that board duality was positively linked to rm performance, while a PhD qualication was negatively linked to rm performance. Practical implications The study contributes to the understanding of the board-performance link by examining both the traditional variables such as board size, CEO duality and other organisational attributes such as ethnic diversity, foreign nationality and competence variables represented by women and PhD holders, respectively. The results provide an insight for practitioners and policy makers on the importance of relying on institutional specics in the prescription of corporate governance codes. Originality/value The study adds value to the global corporate governance discourse in two ways: rst, the use of Nigeria, which is claimed to have one of the weakest business cultures in the world, and secondly, using a good number of proxies that are country-specic for corporate boards. Keywords Board characteristics, Corporate governance, Firm performance, Boards of Directors, Regression analysis Paper type Research paper

1. Introduction
Enough evidences exist to prove that business culture in Nigeria is among the worst in the world. There is, for instance, near lack of basic infrastructures, corporate frauds, tax evasion, inexperience management, incessant change in government macroeconomic and scal policies, communal and civil unrest, among others. Governments and host communities have ways of meddling with the affairs of rms. In some other cases, corporate owners and managers deliberately embark on acts that serve more of self than the overall wellbeing of the affected rms. A priori, weak business culture and poor corporate governance are capable of creating incentives for the appointment of wrong and dubious people into companies boards (Sanda et al., 2008). Whether or not a board composition comprising such people enhances corporate performance has remain an issue of empirical and theoretical debates. It is widely accepted that the composition of the corporate board could play a vital role in determining

Received: October 2011 Revised: January 2012 Accepted: March 2012

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CORPORATE GOVERNANCE

VOL. 12 NO. 5 2012, pp. 656-674, Q Emerald Group Publishing Limited, ISSN 1472-0701

DOI 10.1108/14720701211275587

rm performance. Essentially, results of previous studies conrm that the presence of suspicious individuals into a board can exacerbate governance problems facing the rm (Hearly, 2003). Bad corporate governance is capable of negatively inuencing corporate performance and shareholders value (Carter et al., 2007). On the other hand, in an environment where regulations are incapable of preventing managers and board members from appropriating earnings for selsh gains, the selsh interests of these individuals entrusted with corporate management and control can actually be directed at prot maximization goals. This was the premise laid by Ponnu (2008). In his opinion, bad corporate governance is capable of negatively inuencing corporate performance and shareholders value. While theoretical positions on the above issues have been historically laid down, the practical validity of theories is yet to be reconciled with developments in some developing economies. The agency theory, which is the foundation of corporate governance discourse, grossly fails to explain why rms in developing countries often arrange themselves in pyramidal ownership which makes independent directors redundant (Ponnu, 2008). In like manners, the stakeholder theory is premised on the impression that the corporation is a social entity that is responsible and accountable to a broader set of actors beyond its owners. It fails to proffer solutions on how the risk of unethical or improper management behavior can be moderated. Nigeria represents a good case study for exploring how a board constituted under subjective circumstances serve or can fail to serve rms interests; and whether such transmits to the overall wellbeing of shareholders. This paper sets to achieve the above goal by examining the impact of board size, board nationality, board qualication, board duality, board gender and board ethnicity, while controlling for rm size and rm age, on the level of corporate protability. The rest of the paper is structure into: review of related literature, research methodology, the research results and conclusion.

2. Review of related literature

Concerns for the quality of corporate governance have their roots from the theorization of problems arising from the traditional agency arrangements of rms. Jensen and Meckling (1976), argue that:
[. . .] with the fact that many corporate managers are not owners but agents of owners, contracted to manage the company on their behalf, since they are not direct owners but managers, and thus have less personal wealth at stake, their natural pursuit of self-interest could result in them taking riskier, or even dishonest, actions, which could bring harm to the rm or its owners.

Consequently, several theoretical and empirical standpoints have emerged to support and explain the implication of agency problems on the quality of corporate decisions and the sustainability of corporate value. Some popular views among these standpoints are expressed by Fama (1980), and Fama and Jensen (1983) who argue that the pursuit of self interest increases the costs of the rm, which include the cost of restructuring contracts, cost of monitoring and controlling the behavior of the agents, and loss incurred due to sub-optimal decisions being taken by agents. According to Eisenhardt (1989), agency problem arrives when (a) the desires or goals of the principal and agent conict and (b) it is difcult or expensive for the principal to verify what the agent is actually doing. Corporate governance practices, the world over, are therefore designed to resolve some of the problems that are associated with the separation of ownership from control. Specically, good corporate governance aims at protecting the overall interests of corporate stockholders, and so offers some bolster to the level of trusts investors and nanciers have on the affected rm. Good corporate governance manifests itself in the qualications (in terms of profession and experiences) of members of the board of directors and the management of the rm. As explained by Sanda et al. (2008), sub-quality boards and management lend themselves to bad corporate behaviors such as lack of commitment, remuneration mainly linked to the size

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of the rm and non-performance, and misappropriation of shareholders wealth. Essentially, the primary duties of the board include; monitoring and controlling managers, providing information and counsel to managers, monitoring compliance with applicable laws and regulations, and linking the rm to the external environment (Monks and Minow, 2004). To carry out these roles effectively, the board should consist of a team of individuals who can combine their competencies and capabilities that collectively represent the pool of social capital for their rm. That is contributed towards executing the governance function (Carpenter and Westphal, 2001). Once the board is active in the discharge of its functions and enforcement of duties, the expected outcome is usually a better guarantee of a more formidable governance structure (Zahra and Pearce, 1989). But the extent to which the board would be effective in carrying out its assignment depends on other exogenous factor, which among others may be made up of specic board characteristics like board size, board gender, CEO duality, board educational qualication and board diversity. A good number of recorded studies exist to demonstrate how board structure and the quality of corporate governance can affect rm performance. One of such studies is Kiel and Nicholson (2003), who established that the composition of the board has a positive impact on rm performance. Adams and Ferreira (2009) investigated the impact of female board members on the governance and performance of selected US rms and nd that female board members allocate more effort to monitoring, but the average effect on rm performance is negative. Another study 797 Fortune 1000 rms by Carter et al. (2003) nds that rms with at least two female board members performed better on Tobins Q and return on asset when compared to rms with all men board members. Empirical studies on CEO-duality also reveals sets of conicting results. While Peng et al. (2007) and Sridharan and Marsinko (1997) nd that CEO duality actually promote rm performance, others nd no signicant difference between rms CEO duality and those that separated these positions (Daily and Dalton, 1997 and Dalton et al., 1998). Empirical studies that link educational qualication of directors to nancial performance of rms is scanty. Bilimoria and Piderit (1994) examined board qualication using tenure, age, director type education rather than educational qualication. With the inclusion of educational qualication in the index for evaluating corporate governance (Institutional Shareholders Service(2006), Yermack (2006) investigated share price reaction to directors educational qualication. His result reveals that share price reaction are sensitive to directors qualication, particularly in the area of accounting and nance. However, a meta-analysis of board composition, leadership structure and rm performance carried out by Dalton et al. (1998) covering 54 studies of board composition and 31 studies of board leadership structure did not show any systematic relationship between board composition and rm performance. Based on the outcomes of the work of Carter et al. (2007), a wrongly constituted board yields to poor corporate governance, and the latter creates a big hole in the earnings prole of the rm. Nevertheless, such adverse effects, as revealed by the works of Andreasson (2009), can be mitigated by the extent of legal protections available in a country. For example, as demonstrated by Magdi and Nadereh (2000), in advance market economies, the rich and complex governance system (of policy, laws, public institutions, self-regulations, professional bodies, and managerial ethos) has evolve over centuries, with a fast-track legislation that creates a legal fence and ensure compliance by all stakeholders. What then happens where the governance structures are weakened by both the presence of regulatory inadequacies that offers incentives to board members and managers to misbehave? To what extent do corporate earnings suffer under this circumstance? These are part of the questions that are addressed by this study.

3. Research data and hypotheses

Data for this study were handpicked from Nigerian Stock Exchange Factbook and annual reports and statement of accounts of quoted rms in Nigeria. The sample size is 212 rms,

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but 90 rms were dropped from the observation because of cases of missing date. The nal sample comprise 122 quoted companies for the period 1991 to 2008 (see Table I for industry classication of the selected rms). The proxies, measurements and empirical supports for the selected variables are presented below. 3.1 Firm performance Empirical study on the impact of board characteristics on rm requires selection of appropriate performance measures for objective analysis. Unbiased performance measurement is necessary for both strategic and diagnostic purposes. Though, there have been serious controversies regarding what constitutes corporate performance. Most studies used a variety of nancial measures: Tobins Q, return on investment, return on assets, sales revenue, return on equity, stock returns, earnings per share, net prot margin and economic value added. These measures can be categorized into two broad sets: accounting based measures and market based measures. Utility of each of these measures has been criticized by different authors. For the purpose of the study, the researcher adopted an accounting based measure, viz., return on assets employed (ROAE). Return on asset employed is an indicator of what management has accomplished with the given resources (assets). According to agency theory, managers are likely to squander prots and misappropriate earnings, leaving less return for shareholders. Return on asset is directly related to managements Table I List of selected rms
Sectoral distribution of selected rms Industries Agriculture/agro-allied Airline services Aviation Automobile and tyre Banking Breweries Building materials Chemical and paints Commercial/services Computer and ofce equipment Conglomerates Construction Emerging markets Engineering technology Food/beverages and tobacco Footwear Healthcare Hotel and tourism Industrial/domestic products Information communication and telecommunicatiion Insurance Leasing Machinery (marketing) Maritime Media Mortgage companies Memorandum quotations Other nancial institutions Packaging Petroleum (marketing) Printing and publishing Real estate Real estate investment trust Road transportation Textiles The foreign listings Number selected 6 0 1 2 11 8 5 6 0 3 7 5 5 4 11 0 6 0 7 0 13 1 1 1 0 0 0 0 7 7 3 1 0 0 1 0

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ability to efciently utilise corporate assets, which ultimately belong to shareholders. We proxy rm performance with return on asset which is measured as prot before interest and tax divided by total assets. 3.2 Board nationality (BON) The potential advantages of foreign board membership in line with resource dependency theory have received serious attention in corporate governance studies globally (Marimuthu and Kolandaisamy, 2009; Sridharan and Marsinko, 1997; Chen et al., 2008). First, with foreigners in the board, a large stock of qualied candidates would be available for the board (with broader industry experience). Second, because of their different backgrounds, foreign members can add valuable and diverse expertise which domestic members do not possess (Chen et al., 2008). Foreign board members can also help assure foreign minority investors that the company is managed professionally in their best interests (Oxelheim and Randoy, 2003). Accordingly, we propose: H1. Board nationality is positively associated with rm performance.

We use the ratio of foreigners on the board to board size as a measure of board nationality. 3.3 Board ethnicity Empirical research presents contradictory ndings on the value of diversity. Watson et al. (1993) report that homogeneous board is better in short-term, while heterogeneous board is better in long-term in terms of achieving corporate goals. However, Pelted et al. (1999) found that heterogeneous board results in emotional conict that ultimately harmed rm performance. Whereas, extensive research has examined diversity as it relates to different measures, to the best of the researchers knowledge, there has been no research involving an empirical study that examine diversity along ethnic tribes. This study lls this void by examining the ethnic diversity on the boards of quoted companies in Nigeria. Given the peculiarity of Nigeria, we propose the following hypothesis: H2. Ethnic diversity is negatively associated with rm performance.

We use a dummy, which takes a value of 1 if the board is made up of people from different tribes and 0 if otherwise. 3.4 Board duality Board duality is a corporate leadership structure that merges the position of board chair and CEO. Fama and Jensen (1983) suggest that CEO duality may hinder boards ability to monitor management (promote entrenchment and weaken board monitoring effectiveness) and thereby increase agency cost. They argued from the agency theory perspective that separating the CEO from the board chairman will improve rm performance. However, board duality is supported on the ground of unied leadership, and that any legislation requiring the separation of board chair from the CEO will end up exacerbating the agency cost (Boyd, 1995; Charan, 1998). Given the weak external and internal governance laws in Nigeria, CEO duality may promote entrenchment which is likely to adversely affect rm performance. We propose the following hypothesis: H3. CEO duality is negatively associated with rm performance.

The researchers examined this variable using a dummy, which takes a value of 1 if the CEO and chairman are the same person and 0 if the CEO is separated from the board chairman. 3.5 Board gender Boards are traditionally composed of only male members. The presence of women on the board leads to gender diversity. It is generally accepted that female board members are more independent because they are not part of the old boys network (Carter et al., 2003). According to Ryan and Haslam (2005), women are more likely to be placed in positions of leadership in circumstances of downturn. The implication is that the presence of women on

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the board could be perceived by shareholders that signicant change is on the way, and making them more condent in the companys success, which results in increase in share price. Diversity in general is considered to improve organizational value and performance as it provides new insights and perspectives (Fondas and Sassalos, 2000; Carter et al., 2003; Letendre, 2004; Huse and Solberg, 2006) and provides for representation of different stakeholders for equity and fairness. This leads to the following hypothesis: H4. Board gender is positively related to rm performance.

The ratio of the number of women to total board size is used as measure of board gender. 3.6 Board skill According to the resource dependence theory, a board can constitute a strategic resource for the rm. Thus, higher level of educational qualication like PhD will function as a strategic resource (Carpenter and Westphal, 2001). Educational qualication such as PhD will act as a mix of competencies and capabilities that help in executing the governance function (Carpenter and Westphal, 2001). Accordingly: H5. The number of directors with PhD qualications is positively associated with rm performance.

We proxy board skill as a ratio of board members with PhD qualication to board size. 3.7 Board size Board size is mostly used as an indication of both monitoring and advisory role (Klein, 1998). Empirical results on optimal board size are inconclusive. Large board size has been criticized for increasing cost and boardroom squabbles, while it is also argued that small board size might not effectively monitor powerful managers. The size of the board is also found to increase with rm age and rm size (Coles et al., 2008). Consequently, we propose the following: H6. There is positive relationship between board size and rm performance.

The total number of members in the board is used as a measure of board size (Coles et al., 2008). We take a natural logarithm of this variable as a proxy of board size. 3.8 Firm size Scholars have suggested that internal governance structures are substitutable and the rms can choose appropriate governance options based on what is right for them (Booth et al., 2002; Peasnell et al., 2003). As the complexity of the rm increases, board size may increase due to need for advice and environment monitoring (Pfeffer, 1972; Zahra and Pearce, 1989). Thus, board duality may be dropped as a trade-off in favour of director/insider ownership to ensure rm performance through alignment of interests between shareholders and directors. For this study, total asset will be used as a proxy for rm size. Firm size will be measured by the logarithm of total assets. 3.9 Firm age Firm age is the number of years for which a rm has been in operation, starting with the date of incorporation. Studies have shown that rms go through nancial growth cycle and their capital structures vary with their age (Berger and Udell, 1998). New rms are expected to have smaller earnings than old ones because they have less experience in the market, are still building their market position, and normally have a higher costs structure. Older rms may be reaching the end of their product life cycle. This suggests that complexity increases with rm age. We control for rm age which log of years since incorporation.

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4. Research methodology
The study examined the impact of board characteristics on rm performance using a rm-year unit of analysis. With rm-year records, the study applied the Generalised Least Square (GLS) Fixed-Effects and Random-Effects models to test the various hypotheses. The preference for Generalised Least Square regression over pooled Ordinary Least Square regression is due to the important assumptions of homoskedasticity and no serial correlation in Pooled Ordinary Least Square (Wooldridge, 2002). Pooled Ordinary Least Square requires the errors in each time period to be uncorrelated with the explanatory variables in the same time period, for the estimator to be consistent and unbiased. A Generalised Least Square regression is more suitable in that it corrects for the omitted variable bias and presence of autocorrelation and heteroskedasticity in pooled time series data. The xed and random effects allow researchers to examine variations among cross-sectional units simultaneously with variations within individual units over time (Gaur and Gaur, 2006). It assumes that regression parameters do not change over time and do not differ between various cross-sectional units, enhancing the reliability of the coefcient estimates. An important assumption for choosing xed and random-effect estimation is that the unobserved heterogeneity should not be correlated with the independent variables (Stock and Watson, 2007). The base model takes the following form: Firm Financial Performance fboard size; board duality; board gender; board skill; board nationality; board ethnicity; firm size; firm age

5. Results
5.1 Descriptive statistics Table II presents the descriptive analysis of the research variables. Results based on the descriptive analysis show that the average board size of rms in Nigeria is about nine members (mean 8:8). Considering the number of PhD holders on the boards of Nigerian rms, the result indicates that the average number of PhD holders on the corporate boards of rms in Nigeria is 70 percent scaled by average board size. This result shows that in every 13 board members, only one is likely to possess PhD qualication. In terms of foreign board members, the results show that the average number of foreigners in Nigerian boards is two per board (mean 1:56). Based on this evidence, it could be inferred that the ownership of the selected companies inuenced this result. For example, about 50 percent of the rms in the conglomerate, petroleum, food/beverages and tobacco and construction industries are foreign-owned. The average number of women board members is 40 percent scaled by average board size. This indicates that in every 22 board members, only one is a woman. This result is very Table II Descriptive statistics of absolute values
N Board size Board skill Board nationality Board gender Board ethnicity Board duality Firm age Firm size PBIT Valid N (listwise) 2,047 2,050 2,050 2,051 2,044 2,044 2,011 1,320 1,337 1,274 Minimum 3.00 0.00 0.00 0.00 0.00 0.00 8.00 2 1632084.00 2 28481450.00 Maximum 22.00 14.00 9.00 4.00 1.00 2.00 77.00 1.19E9 85998123.00 Mean 8.8002 0.6785 1.5649 0.4022 0.7867 0.4163 32.4237 9.7054E6 646929.2478 Std. deviation 2.72450 1.02653 1.93373 0.66301 0.40974 0.49801 14.13121 6.99533E7 4.38124E6

Source: Computed from handpicked data from the annual reports and accounts of 122 quoted companies and the NSE Factbook (SPSS Computation)

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disturbing considering the growing number of women participation on corporate board of other developing and developed economies (According to Catalyst Census, women directorship ranges [between]...12.4 percent in USA; 8.4 percent in UK; 6.8 percent in South Africa). Interestingly, our results show that 79 percent of rms in the observation have ethnic diffused boards, while about 31 percent of the boards are homogeneous in terms of ethnic diversity. This might not be separated from the ownership structure of the affected rms. A critical study of corporate boards in Nigerian corporate environment reveals alarming cases of family ownership of rms. Also, interlocking directorship is a common feature of corporate board in Nigeria. The results show that on the average, 69 percent of the rms in our observations separate the position of CEO from the board chair, while 41 percent of the selected rm allow one person to function simultaneously as manager and board chairman. An interesting issue arising from board duality is the fact that foreign-owned and large rms tend to separate these two positions, while small or young rms with indigenous ownership structure merge these two positions. In terms of rm age, it is found that the average age of rms in Nigeria is approximately 33 years. The maximum age of any rm in Nigeria based on our selected sample is 77 years while the youngest rm is eight years old. 5.2 Correlation matrix Table III presents the correlation matrix. The correlation between rm age and return on assets employed is weakly positive (see Table III). Though the non-signicant relationship may create the impression that these two characteristics are not important, the arising statistics tend to prove that the age of the rm has a positive relationship with the protability of the rm. This conrms the earlier assertions of Berger and Udell (1998), Gregory et al. (2005) and Boone et al. (2007) that newer rms are expected to have smaller earnings than older ones because they have less experience in the market, are still building their market position, and normally have a higher cost structure. The correlation result also justies the inclusion of rm age as one of the control variables. The correlation between rm size and the proxies of board size, board nationality and board ethnicity is positive and signicant. This nding validates our a priori position that governance structures are substitutable and the rms can choose appropriate governance options based on what is right for them. For example, as the complexity of the rm increases, board size may increase due to need for advice and environment monitoring (Zahra and Pearce, 1989). In that case, CEO duality may be dropped as a trade-off in favour of director/insider ownership to ensure rm performance through alignment of interests between shareholders and directors. Obviously, these changes in the rm size are likely to affect different characteristics of the board. Hence, the result justies the inclusion of rm size as one of the control variables. Among the 36 results of inter-correlation recorded between the pairs of the explanatory variables shows that the correlation between board size and board duality is negative and non-signicant. This result validates the theoretical standpoint of agency theory which posits that board size has effect on CEO duality. As the board size increases, representation of outsiders also increases (Lehn et al., 2004). This implies an increase in the board independence along with a simultaneous decrease in CEOs inuence (Hermalin and Weisbach, 1998). Therefore, a larger board helps in effective oversight of management. To facilitate improved monitoring role of the board to mitigate the agency costs, positions of Chair and CEO are separated. The correlation between board size and board gender is positive and signicant. This validates our earlier ndings in the descriptive statistics that women representation on corporate board in Nigeria increase with board size. It implies that women do no replace men on boards but get more representation as the board size increases, indicating a corresponding increase in both board size and women on boards. Ethnic diffused board requires representation to different segments of society and is found to be positively and signicantly associated with board size. As the rm increases in

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j
ROA 1 1 1 1 1 1 1 1 0.126 0.000 1 Board size Board skill Board nationality Board gender Board ethnicity Board duality Firm size Firm age 0.0035 0.8761 2 0.0167 0.458 0.009 0.699 0.015 0.500 0.001 0.791 0.009 0.706 0.041 0.077 0.223 0.327 2 0.064* 0.003 0.102* 0.000 0.099* 0.000 0.057* 0.009 2 0.003 0.878 0.189* 0.000 0.135* 0.000 2 0.067* 0.010 0.054* 0.013 0.085* 0.000 0.070* 0.001 2 0.058* 0.011 2 0.149* 0.000 2 0.080* 0.000 0.066* 0.002 2 0.066* 0.002 0.067* 0.003 0.109* 0.000 0.032 0.148 0.110* 0.000 2 0.034 0.133 0.044* 0.045 0.069* 0.002 0.125* 0.000 0.097* 0.000 0.004 0.862 0.027 0.232

Table III Correlation matrix

Variables

ROA

Board size

Board skill

Board nationality

Board gender

Board ethnicity

Board duality

Firm size

Firm age

Pearson correlation Sig. (two-tailed) Pearson correlation Sig. (two-tailed) Pearson correlation Sig. (two-tailed) Pearson correlation Sig. (two-tailed) Pearson correlation Sig. (two-tailed) Pearson correlation Sig. (two-tailed) Pearson correlation Sig. (two-tailed) Pearson correlation Sig. (two-tailed) Pearson correlation Sig. (two-tailed)

Note: *correlation is signicant at the 0.05 level (two-tailed)

complexity, the board size also increases (Boone et al., 2007). The more the representation, the larger will be the size of the board. This result implies that ethnic diffused board is made possible by increasing the board size. When the board size is increased by increasing representation to outsiders, it is likely that there will be ethnic diversity of board members in general. Such diversity is considered a strategic resource and provides a link to different external resources. Most of the coefcients, as observed, whether positive or negative, signicant or non-signicant are weak. This indicates at rst glance, that although likely cases of multicolineraity may exist, the degree of such may be too remote to affect the results of the regression estimates. 5.3 Random and xed effects results Tables IV and V present the random-effects result, Tables VI and VII present the xed-effects result, while Table VIII presents the Hausman Test. Results of the test in Tables IV-VIII showed signicant support for the xed effects regression than the random effects. The p-value was highly signicant at 5 percent level. The null hypothesis of an equality of xed and random effects regression estimations was rejected. The result provided evidence on lack of random effects in the model; and that the model for xed effects regression captures both the group and time effects. 5.4 Regression results Tables IX and X present the regression results. The regression results were interpreted along the six hypotheses formulated in the study. At prob . F value of 0.0000 less than 5 percent, the GLS model is very signicant, and tted the data very well. Based on the results obtained from the model, the following conclusions could be drawn: Table IV Random-effects regression results
.xtreg LogPBIT_TA LogBZ BSK BN BG Bethnic Bdual LogTA Log Age, re Random-effects GLS regression Group variable: rm R-sq: within between overall Random effects u_i , Gaussian corru_i; x 0

0.1475 0.0411 0.0751

Number of obs Number of groups obs per group:

min avg max

1,637 119 5 13.8 19 250.86 0

(assumed)

waldchi28 prob . chi2

Source: Authors computation based on stata analytical software result

Table V Random-effects regression results

LogPBIT_TA LogBZ BSK BN BG Bethnic Bdual LogTA LogAge _Cons sigma_u sigma-e rho Coef. 0.2384623 0.5822647 0.3490442 2 0.1384283 0.0512950 2 0.0539978 2 0.5598655 0.60321 0.0662263 0.8749908 0.9378614 0.4653612 Std. Err. 0.304502 0.3740316 0.1710686 0.4880053 0.0738874 0.0571858 0.0369584 0.2076635 0.4215554 0.4215554 z 0.78 1.56 2.04 2 0.28 0.69 2 0.94 2 15.15 2.90 0.16 0.16 p . /z/ 0.434 0.12 0.041 0.777 0.488 0.345 0.000 0.004 0.875 0.875 [95% Conf. Interval] 2 0.3583508 2 0.1508237 0.0137559 2 0.094901 2 0.0935317 2 0.1660799 2 0.6323026 0.1961971 2 0.7600071 2 0.7600071 0.8352753 1.315353 0.684333 0.818045 0.196117 0.058084 2 0.48743 1.010223 0.8924597 0.89246

(fraction of variance due to u_i)

Source: Authors computation based on stata analytical software result

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Table VI Fixed-effects regression results

.xtreg LogPBIT_TA LogBZ BSK BN BG Bethnic Bdual LogTA Log Age, fe Fixed-effects (within) regression Group variable: rm R-sq: within between overall corr (u_i , xb) 2 0.3025

0.1495 0.0303 0.0643

Number of obs Number of groups obs per group:

min avg max

F(8,1510) prob . F

1,637 119 5 13.8 19 33.17 0

Source: Authors computation based on stata analytical software result

Table VII Fixed-effects regression results

LogPBIT_TA LogBZ BSK BN BG Bethnic Bdual LogTA LogAge _Cons sigma_u sigma-e rho Coef. 0.1879300 0.5508129 0.2561221 0.4998643 0.0308879 2 0.0288261 2 0.6320480 0.8769210 0.1145617 1.0097948 0.9378614 0.5368830 Std. Err. 0.3321057 0.3942748 0.179535 0.5288345 0.0671671 0.0583455 0.0402827 0.2514385 0.4752101 t 0.57 1.4 1.43 0.95 0.41 2 0.49 2 15.69 3.49 0.24 p . /t/ 0.572 0.163 0.154 0.345 0.685 0.621 0.000 0.001 0.81 [95% Conf.Interval] 2 0.4635073 2 0.2225714 2 0.0960422 0.5374638 2 0.1185166 2 0.1432729 2 0.7110641 0.3837151 2 0.8175802 0.839367 1.324197 0.602827 1.537192 0.180292 0.085621 2 0.55303 1.370127 1.046704

(fraction of variance due to u_i)

Source: Authors computation based on stata analytical software result

Table VIII Hausman test for best effects (between xed and effects models)
.hausman xed random coefcients (b) Fixed LogBZ BSK BN BG Bethnic Bdual LogTA LogAge 0.18793 0.5508129 0.2561221 0.4998643 0.0308879 2 0.0288261 2 0.632048 0.876921 (B) Random 0.2384623 0.5822647 0.3490422 2 0.1384238 0.051295 2 0.0539978 2 0.5598655 0.60321 (b-B) Difference 2 0.0505323 2 0.0314518 2 0.0929201 0.6382881 2 0.0204071 0.0251717 2 0.0721825 0.273711 sqrt(diag(v_b-v_B)) S.E. 0.132562 0.1247115 0.0544824 0.2037568 0.0184952 0.0115751 0.0160242 0.1417646

Notes: b consistent under Ho and Ha; obtained from xtreg; B inconsistent under Ha, efcient under Ho; obtained from xtreg; Test: Ho: difference in co-efcient not systematic; chi28 b 2 B [(V_b-v_B)^(2 1)] (b b)=30.22; Prob . chi2 0:0002 Source: Authors computation based on stata analytical software result

H1 suggested that board nationality is positively associated with rm performance. The coefcient of board nationality is positive and very signicant. This result could be interpreted in two ways. Fist, the result shows strong support for the resource dependency theory which poits that foreign board members offer greater nancial exibility, which in turn provides the opportunity to cut down cost of capital by reducing cross-border information gaps. Second, the presence of foreign board members in line with agency theory promotes the quality of monitoring, reduces managerial entrenchment and agency costs. The result is consistent with the ndings of Oxelheim and Randoy

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Table IX Generalised least square regression results

.regress LogPBIT_TA LogBZ BSK BN BG BEthnic BDual LogTA LogAge Source SS Df Model Residual Total 344.138505 2797.94351 3142.08201 8 1,628 1,636 MS 43.0173131 1.71863852 1.92058803 Number of obs 1,637 F 8; 1628 25:03 Prob . F 0:0000 R-squared 0:1095 Adj R-squared 0:1051 Root MSE 1:311

Source: Authors computation based on stata analytical software result

Table X Generalised least square regression results

LogPBIT-TA LogBZ BSK BN BG BEthnic BDual LogTA LogAge _con Coef. 2 0.0279042 0.8160968 0.9869622 2 2.345077 0.0848558 2 0.1319759 2 0.3434871 0.2406179 2 0.4078838 Std Err. 0.2472757 0.3485299 0.1603583 0.4041441 0.079703 0.0653462 0.0321004 0.1365177 0.31665 T 2 0.11 2.34 6.15 2 5.80 1.06 2 2.02 2 10.70 1.76 2 1.29 P . /t/ 0.910 0.019 0.000 0.000 0.287 0.044 0.000 0.078 0.198 [95% Conf Interval] 2 0.5129163 0.1324962 0.672432 2 3.137774 2 0.0714754 2 0.2601474 2 0.4064496 2 0.0271509 2 1.028968 0.4571079 1.499697 1.301492 2 1.552379 0.241187 2 0.0038043 2 0.2805247 0.5083866 0.2132005

Source: Authors computation based on stata analytical software result

(2003) and Rosenstein and Wyatt (1990), while contrasting the ndings Agrawal and Knoeber (1996). This result regression agrees with the correlation results and shows that most foreign board members in Nigeria have a mandate to represent an owner with a major commercial or long-lasting interest in the rm.
B

H2 suggested that ethnic diversity is negatively associated with rm performance. The coefcient of ethnic diffused board is positive, but not signicantly related with the nancial performance of Nigerian rms. This result implies that ethnic diffused board is a knowledge-based asset that creates value for shareholders by linking an organization to its external environment, thereby promoting rm performance. This result is consistent with the ndings of Carter et al. (2003) and provides strong empirical standpoint for the dependency theory which views ethnic diversity in corporate board as economic resource to the organization that help rms comprehend the dynamic industry context of a country. H3 suggests that CEO duality is negatively associated with rm performance. The coefcient of the proxy was negative and signicant in promoting the rm nancial performance in Nigeria. This nding is consistent with the agency theory which posits that board duality promotes CEO entrenchment by reducing board monitoring effectiveness and impedes rm performance. This result is consistent with the ndings of Chen et al. (2008), Norman et al. (2005) and Hambrick and DAvenis (1992). H4 suggests that board gender is positively related to rm performance. The GLS regression results showed that the coefcient of the variable was negative and very signicant in predicting the nancial performance of Nigerian rms. This result is consistent with the ndings Adams and Ferreira (2009), but contradicts the ndings of Carter et al. (2003), Bonn (2004) and Smith et al., 2006). This result also contradicts the resource dependency theory. Since most female corporate board members in Nigeria have strong ties with the owners of the rms, and do not have any corporate background, they are likely to increase agency cost and delay decision making process which will negatively affect performance (Terjesen et al., 2009). H5 suggests that the number of directors with PhD qualications is positively associated with rm performance. The GLS regression results show that the coefcient of board

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members with PhD is positively and signicantly associated with the nancial performance of rms in Nigeria. An interpretation to this result is that, board members with PhD qualication benet the rms through a mix of competencies and capabilities. This result is very consistent with the resource dependency theory which views board members with PhD qualication as strategic resources that provide strategic linkage to different external resources.
B

H6 suggests a positive relationship between board size and rm performance. The coefcient of size is negative, but not signicant. This implies that as the size of a rms board increases, the less the degree of its impact on the nancial performance on the rm. This result is consistent with theory w that as board increases in size, free riding increases and reduces the efciency of the board in monitoring management and providing strategic human resource for the organization.

6. Robustness tests
We selected small and young rms with concentrated ownership for our robustness test. This approach has the appealing feature of allowing the researcher to include some of the omitted rms, eliminate the problem of missing data and also accommodate a greater proportion of young rms in the Nigerian corporate environment. The total number of selected rms was 160 rms with 556 observations. Tables XI-XV show the results of the Random-Effects, Fixed-Effects and Hausman Test model. The Hausman Test shows that the data set is more consistent with xed-effects than random-effects. Tables XVI and XVII present the regression results. At prob . chi-square value of 0.000 less than 0.05, as shown in Tables XVI and XVII, the GLS model was very signicant, and tted the data very well. Based on the results obtained from the model, the coefcient of board Table XI Random-effects results
.xtreg LogPBIT_TA LogBZ BSK BN BG Bethnic Bdual LogTA Log Age, re Fixed-effects GLS regression Group variable: rm R-sq: within between overall Random effects u_i , Gaussian corr (u_i , x) 0 (assumed) Number of obs Number of groups obs per group: min avg max wald chi28 prob . chi2 556 160 1 3.5 4 73.76 0.0000

0.1033 0.1133 0.1061

Source: Authors computation based on stata analytical software result

Table XII Random-effects results

LogPBIT_TA LogBZ BSK BN BG Bethnic Bdual LogTA LogAge _Cons sigma_u sigma-e rho Coef. 2 0.5599202 2 0.6848669 0.6389491 0.0510803 0.0229441 0.0581533 2 0.5213422 0.5129463 0.8933670 1.1443707 0.7278260 0.7119956 Std. Err. 0.539623 0.6438307 0.3831509 0.7291565 0.204678 0.1465859 0.0687217 0.3360702 0.7737543 z 2 1.07 2 1.06 1.67 0.07 0.11 0.4 2 7.59 1.53 1.15 p . =z= 0.285 0.287 0.095 0.944 0.911 0.692 0.000 0.127 0.248 [95% Conf. Interval] 2 1.586867 2 1.946752 2 1.112013 2 1.37804 2 0.3782174 2 0.2291497 2 0.6560343 2 0.1457391 2 0.6231635 0.467027 0.577016 1.389911 1.480201 0.424105 0.345456 2 0.38665 1.171632 2.409897

(fraction of variance due to u_i)

Notes: F test: that all u_i 0: F159; 388 7:94; prob . F 0:0000 Source: Authors computation based on stata analytical software result

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Table XIII Fixed effects regression results

.xtreg LogPBIT_TA LogBZ BSK BN BG Bethnic Bdual LogTA Log Age, fe Fixed-effects (within) regression Group variable: rm R-sq: within between overall corru_i; xb 20:6306 Source: Authors computation based on stata analytical software result Number of obs Number of groups obs per group: min avg max F(8,388) prob . F 556 160 1 3.5 4 5.59 0.0000

0.1033 0.1133 0.1061

Table XIV Fixed effects regression results

LogPBIT_TA LogBZ BSK BN BG Bethnic Bdual LogTA LogAge _Cons sigma_u sigma-e rho Coef. 2 1.5319520 2 0.7646571 0.0715891 0.7621494 0.1017161 0.1301871 2 0.6487087 3.8331800 2 2.1735480 1.6039298 0.7272860 0.8292470 Std. Err. 0.7503555 0.7918692 0.546249 1.00787 0.2491757 0.1831459 0.1060223 1.170811 1.624356 t 2 2.04 2 0.97 0.13 0.76 0.41 0.71 2 6.12 3.28 2 1.32 p . /t/ 0.042 0.335 0.896 0.45 0.683 0.478 0.000 0.001 0.182 [95% Conf. Interval] 2 3.007223 2 2.321549 2 1.002389 2 1.21942 2 0.3881874 2 0.2298954 2 0.8571587 1.537252 2 5.367189 2 0.05668 0.792235 1.145567 2.743719 0.59162 0.49027 2 0.44026 6.141109 1.020094

(fraction of variance due to u_i)

Notes: F test that all u_i 0 : F159; 388 7:94; prob . F 0:0000 Source: Authors computation based on stata analytical software result

Table XV Hausman xed and random effects results

.hausman xed random Coefcients (b) xed LogBZ BSK BN BG Bethnic Bdual LogTA LogAge 2 1.531952 2 0.7646571 0.0715891 0.7621494 0.1017161 0.1301871 2 0.6487987 3.83918 (B) random 2 5599202 2 0.6848669 0.6389491 0.0510803 0.0229441 0.0581533 0.5213422 0.5129463 (b-B) Difference 2 0.9720317 2 0.0797902 2 0.56736 0.7110691 0.078772 0.0720338 2 0.1273665 3.326234 sqrt(diag(v_b-v_B)) S.E. 0.5371191 0.4610195 0.389337 0.6957959 0.1421107 0.1097952 0.0807344 1.121542

Notes: b consistent under Ho and Ha; obtained from xtreg; B inconsistent under Ha, efcient under Ho; obtained from xtreg; Test: Ho: difference in co-efcient not systematic; chi28 b 2 B [(V_b-v_B)^(-1)] b 2 b 13:77; Prob . chi2 0:0879 Source: Authors computation based on stata analytical software result

size was negative, but not signicant. This result is consistent with our earliest ndings. The coefcient of board skill was negative, but not signicant. This result is not consistent with our earlier results, and could be explained by the dominance of young rms in the dataset. The result implies that board members with PhD qualication do not contribute positively to the performance of small rms. The coefcient of board nationality was positively and signicantly linked to the nancial performance of Nigerian rms. This result is consistent with our earlier ndings, and shows

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Table XVI Generalised least square regression results

.regress LogPBIT_TA LogBZ BSK BN BG BEthnic BDual LogTA LogAge Source SS Df Model Residual Total 411.380201 537.029143 948.409344 9 498 50507 MS 45.789112 1.07837177 1.87062987 Number of obs 508 F 9; 498 42:39 Prob . F 0:0000 R -Squared 0:4338 Adj R -Squared 0:4235 Root MSE 1:0384

Source: Authors computation based on stata analytical software result

Table XVII Generalised least square regression results

LogPBIT-TA LogPBIT_TAL1 LogBZ BSK BN BG BEthnic BDual LogTA LogAge _con Coef. 0.5205664 2 0.3267499 2 0.3411183 0.7088233 0.1224428 2 0.165651 0.0891072 2 0.324695 2 0.0471768 1.476517 Std Err. 0.0364598 0.351932 0.5081872 0.2476491 0.5093185 0.1567387 0.1080983 0.050711 0.1815863 0.4763644 T 14.28 2 0.93 2 0.67 2.86 0.24 2 1.06 0.82 2 6.40 2 0.26 3.10 P . /t/ 0.000 0.354 0.502 0.004 0.810 0.291 0.410 0.000 0.795 0.002 [95% Conf Interval] 0.4489324 2 1.018204 2 1.339574 0.2222575 2 0.8782351 2 0.4736016 2 0.1232777 2 0.4243289 2 0.4039466 2 0.5405853 0.5922004 0.3647047 0.657337 1.195389 1.123121 0.1422995 0.3014922 2 0.2250612. 0.3095929 2.412449

Source: Authors computation based on stata analytical software result

that foreign board members add value to both young and old boards. The coefcient of ethnic diffused board was positive, but not signicant. The coefcient of board duality was also positive, but not signicant in promoting the nancial performance of rms. This result implies that board duality is desirable for young rms. This is a very consistent result, considering that board duality may be benecial for a young rm if the board of directors is designed to assist management. Not only will his (her) presence improve the information ow towards the board members, but the interaction and discussion of the CEO with board members may lead to more valuable advice and better rm performance.

7. Discussion and policy implication

This study has highlighted the importance of the different characteristics of the board of directors and the results of which may be hard to generalize across different samples of rms. In addition, much of the policy prescriptions enshrined in codes of good corporate governance rely on universal notions of best practice, which often need to be adapted to the local contexts of rms or translated across diverse national institutional settings. The study reveals that corporate laws such as the ownership structure, the enforceability of corporate regulations or culture tend to enable as well as constrain diverse corporate governance mechanisms and that a better understanding of the role of boards of directors in different institutional settings is needed before engaging in the debate of how to increase board accountability. An important question addressed in this study is whether all rms, regardless of their ownership pattern and size, should be submitted to the one-rule-ts-all principle of separation of CEO and chairman. This study reveals the need to look at skills distinct from monitoring, since boards in Nigeria play more of advisory role than monitoring role. The study posits that it is also important to have board members with varied skills such as higher educational qualication, business experts, support specialists (e.g. experts on law or

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public relations) and community advocates (e.g. members of a community-based organization). Furthermore, the composition and role of the board of directors can be inuenced by large shareholders. Rather than using the board to add an additional layer of monitoring, a role as providing resource to management may be much more useful to improve rm performance in Nigeria. Large shareholders in rms with concentrated ownership are individually motivated to monitor management, have a lot of inuence beyond the board, and access to valuable information and alternative corporate governance mechanisms to discipline the managers if necessary. Furthermore, if the controlling owners are also actively involved in the management of the company, the need to monitor by the controlling shareholder disappears. However, shareholders in rms with dispersed ownership have, collectively, a great need to use the board of directors to monitor the managers to resolve the alignment problem. We argue that the desired characteristics of the outside board members depend on the priorities set by the board of directors, but must not replace ethnic diversity. Board primarily focusing on monitoring can benet strongly from outsider board members who have expertise and experience in nancial reports, while boards focusing on providing resources may benet from having foreigners on their boards. Additionally, corporate governance codes have strongly focused on board independence as key element of good governance. From an agency perspective, a duality of the chairman may substantially weaken the boards monitoring effectiveness. However from a resource provision perspective, a duality may be benecial. If the board of directors is designed to assist management, the presence of CEO on the board will be benecial. Not only will its presence improve the information ow towards the board members, but the interaction and discussion of the CEO with board members may lead to more valuable advice and better rm performance. Furthermore, the problem of duality may be far less relevant when large shareholders provide counterbalance. An underperforming CEO, even if chairman, may face more initiative to substitute him by board members representing majority shareholders than board members representing minority shareholders.

8. Conclusion
Board of directors is considered to be an important governance device and boards are increasingly being held accountable for the organizations they govern. High prole corporate collapses, leading to major economic losses, have raised serious doubt on the effectiveness of boards in protecting the interests of shareholders and other stakeholders. As a consequence, much of todays corporate governance reforms (codes and recommendations, regulation etc.) are directed at improving corporate governance through upgrading the boards functioning. Despite the fact that boards of directors are presumed to be vital for a companys survival, there is still relatively little known about the way boards actually operate. In most developing countries, boardrooms have been shielded from view, which makes them difcult to study. Corporate governance and board research have mainly been inuenced by agency theory, stewardship theory and resource dependency theory. From an agency perspective, the board of directors is an internal control mechanism designed to address the conicts of interest between managers (agent) and shareholders (principal) and to bring their interests into congruence. Stimulated by the dominance of the agency theory in corporate governance, board effectiveness has commonly been viewed as the ability of boards to act independently from management to protect shareholders interest. Structural board characteristics (e.g. size, insider/outsider representation, CEO duality) are treated in empirical studies as appropriate and adequate proxies for understanding board effectiveness. However, there is little denitive and striking evidence that these structural measures have had considerable impact on board or corporate performance.

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This study aims at understanding the board characteristics of Nigerian rms, how these characteristics interrelate, and the extent to which these identied characteristics impact on rm performance. Our studies focus on boards of directors of quoted companies in Nigeria using a carefully chosen qualitative research methodology. Empirical data was gathered through the annual reports and statement of accounts of the selected companies and the Nigerian Stock Exchange Factbook. The study raises four major points. First, the ndings highlight a gap between the monitoring role of the board and advisory role in the Nigerian corporate environment. In particular, we found a systematic negative association between board size and rm performance, which suggest cases of advisory role or free rider factors in directors perceptions of what constitutes a good corporate board. Second, the ndings suggest that the value of independence may be overemphasized at the cost of the broader issue of diversity. Still, the concept of diversity is to a large extent under-exposed in board research. We also found that information and the leadership structure of the board are two additional conditions under which a board of directors can make an effective contribution to the strategic direction and control of a company. Board duality, though not desirable for large and old rms is a strategic governance structure for small and young rms in Nigeria. Our ndings suggest that the ambiguity in current research evidence can, to some extent, be attributed to differences in institutional specics, adopted proxies used, and econometric tool tools used. Finally, our research contributes to other research streams, in particular the literature on organizational demography, by examining the relevance of theory and a limited number of constructs, frequently applied in corporate governance studies. This study also has important implications for practitioners. For companies, the ndings on the key performance enhancing characteristics could serve the purpose of board evaluations. In addition, this research has practical relevance for the selection process of directors as it highlights the importance of having an appropriate mix of competences on board. For institutional investors and rating agencies, this research highlights the danger of limiting attention to structural board characteristics when assessing the quality of corporate governance at a company level. It stresses the need to rene the scoring criteria and weighting methodology of the screening devices as well as to apply a exible approach when evaluating boards of directors on a global scale. This research is of particular interest to policy makers, concerned about stimulating an appropriate corporate governance environment. The research is a modest attempt to provide some academic evidence for current and future governance reforms. In particular, the ndings suggest that a broad and exible (with attention also paid to the boards strategic role) approach should be used when designing, adapting and monitoring corporate governance codes. In addition, the ndings suggest that policy makers should reect on ways to balance the benets and costs of governance reforms.

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Corresponding author
Augustine Ujunwa can be contacted at: austinesilver@yahoo.com To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints

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