CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
Financial performance is a key factor in any organization; it is a variable examined by various
stakeholders for informed decision making. Managers are interested mostly in their job security,
welfare and remuneration while shareholders are interested in payment of dividend. Similar,
government focus on the ability of the firm to pay tax and potential investors seeks to ascertain
the health, weakness and success and to also compare its past and current performance for better
decision making. The stability of job for material benefit is what made performance of the firm
of utmost importance to employee. The interest of those stakeholders requires serious effort from
managers to sustain and at the same time maximize the financial performance of the firm they
managed (Modibbo, 2017).
However, organizations such as banks, insurance, agriculture, conglomerates among others are
working hard towards achieving greater financial performance and maximizing shareholders
value of the firm by which consumer goods firms will not be an exception. The consumer goods
firms in Nigeria are among the worst hit from the economic recession that threatened most
business in Nigeria. Therefore, top executives need to understand the best composition of board
of directors that will give room for an informed decision that will maximize financial
performance. Literatures have revealed the importance of effective corporate governance
practice and efficient board of directors as essential drivers in achieving good financial
performance and at the same time maintaining public trust and confidence in every organization.
Board of directors is one of the most influential decision making body in every organization.
Their major responsibilities is making important strategic and financial decisions, such decisions
may include choosing the firm‟s top executive officers, decision on merger and acquisition and
changes in capital structure when the need arises (Ferreira, 2010). The major effective functions
of the board are mainly agreed to be four: controlling and monitoring managers, counseling
managers and providing them with relevant information, monitoring their compliance with
applicable laws and regulations and their ability to link the firm with the external environment
where it operates (Monks &Minow, 2004).
More importantly, the board of directors is expected to be independent, acting as fiduciaries to its
stakeholders. The board is expected to act on the interest of the firm they govern; they are
expected to be able to take opposing decision to management when the need arises and not to
compromise at their judgments. The after effect of the collapse of Great Corporation like
WorldCom, Enron, Tyco, Adelphia, Arthur Anderson, Lehman Brothers, Freddy Mac and Fanny
Mae in USA, Parmalat in Italy and Cadbury in Nigeria highlighted the monitoring role of board
of directors by practitioners (Campbell &Mínguez–Vera, 2008) and bring out the importance of
board diversity (Ujunwa, Okoyeuzu, &Nwakoby, 2012).
A lot of theories have supported the economic case of diversity in the board room. Board
diversity is economically born out of the belief that the composition of the board affect the
manner and ways by which board of directors carry out their responsibility and that the healthier
board will be more effective when it comes to taking action. It, was, however, argued that
diversity in the boardroom improves organizational performance due to different backgrounds.
The most common diversity in the board of directors may include gender, age, education,
experience, nationalism and ethnicity of the members in the board. The aspect of diversity that
will lead to an improved strategic decision making is yet to be proved. Studies like that of Balta
(2008), Kajola (2008) andMaharaj (2009) have investigated the effect of diversity variables on
corporate performance of organization, but there results were inconclusive. All these studies
have proved that diversification in board has a positive and significant relationship with firm
financial performance. This particular study has focus on gender diversity, inclusion of foreign
directors on the board and board independence (board gender, foreign directorship and board
composition), in order to find out their contribution to firm performance.
A lot of countries have taken one step or the other to address the issues of diversity in the board
room. Countries like Norway, Spain, France and Italy have enacted laws on the number of
women on the boards of listed companies (Schwizer, Soana, &Cucinelli, 2012). The United State
Security and Exchange Commission also mandated all listed companies to encourage diversity in
the appointment of board members (Upadhyaya&Puthenpyrackal, 2013), Women occupied 9.4%
board seats of French companies (Dang & VO, 2012). All These laws are aimed at increasing the
quality of corporate governance through the representation of women on board and thereby
increasing the performance of that firm. Women on board can increase effectiveness of board
control as they are believed to be more strict and trustworthy than their male counterparts. They
are generally financially risk-averse than men, therefore their participation in board governance
can help to avoid risky projects (Byrness et al., 1999). The selection of women into board by
most companies is based on the resource to which they can provide access (Hillman et al., 2007).
The resource they bring includes; prestige, skills, knowledge, and connection to external
resources (Dang &Vo, 2012).
However, t\he 2011 Nigerian Security and Exchange Commission(SEC) Code requires Nigerian
Corporate Boards to be composed in such a way as to ensure diversity of experience without
compromising independence, compatibility, integrity and availability of members to attend
meetings. Therefore, there was no specific allusion to gender diversity in the code (SEC, 2011).
Adegbite (2012) explains that the requirement might be deliberate as the regulators feared that
there may not be enough females, who are competent and have required experience to
consistently fill the female slot if mandated. It is very impressive to know that some progressive
Nigerian companies have started disclosing information on their gender practices (Ekwochi,
2012).
Again, Prior studies such as Zweigenhaft and Domhoff‟s(2011),Folkman and Zenger (2012),
Cook & Glass 2015 among others have argued that inclusion of women or foreign directors on
the board may improve the performance of a firm, since they may bring diverse perspective to
decision-making process in the board room. It has been argued that foreign directors may not be
effective on their services due to physical remoteness and linguistic and cultural differences.
While others are of the opinion that foreign directors may bring expertise that is not available in
the country for companies that operates or seeks to expand globally. Gianneti, Liao and Yu
(2014) opines that directors with foreign experience may improve firm performance as their
knowledge of global management practices will make them more effective at monitoring and
decision making process. Foreign directors are potentially valuable and their international
experience is a valuable firm asset. Foreign directors can advise management on the possibility
of expanding into a different market where they have information regarding the regulatory
environment, social and cultural norms, local consumer preference as well as industry structure
(Masulis, Wang &Xie, 2012).
The aspect of board diversity may be linked to a wider aspect of independent outside director.
Board is more likely to be independent when it comprises of more outside directors than inside
directors and this may help more in protecting the interest of other stakeholders (Sanda,
Garba&Mikailu 2008). It is argued that outside directors are in the best position to protect the
interest of shareholders since the insiders will not be able to efficiently monitor day to day
activities of the managers which impliedly means monitoring their own activities which is
eventually impracticable. However, literatures revealed that board composition is related to firm
performance. The Nigerian codes of best practice have also sought to strengthen the outsider
element in board room (Central Bank of Nigeria, 2006 and Report of Corporate Governance of
Public Companies in Nigeria, 2003).
Nevertheless, relevant researches have suggested that diversity in the board room increase
innovative solutions to problems, decision making and hence, firm performance. Apfelbaum et
al. (2014) opines that a heterogeneous board when asked to predict price movement for a
particular product, had answers that were 58% closer to the actual values of that product than
people who worked in a more homogenous board.
Therefore, this research investigates the impact of board diversity on financial performance,
acknowledging the impact of gender and other board diversity variables on financial
performance by exploring evidence from listed Consumer goods firms in Nigerian. This is with
the hope to provide information on certainvariables of board diversity and their impact on firms‟
performance.
1.2
Statement of Research Problem
Previous studies which including that of USA (Nishii, Gotte& Raver 2007; Carter, Simkins&
Simpson., 2003); U.K. (Haslamet al , 2010; Ruigrok&Kaczmarek, 2008); South Africa (Swartz
& Firer, 2005 and Williams, 2000); Nigeria (Olaoti, 2016; Bilkisu, 2014; Oba &Fodio, 2013)
reported a conflicting result. Hence, necessitate the need to carry out further research to justify
their stand and to annex where necessary. Besides, most studies on impact of board diversity on
firm performance in Nigeria give less attention to consumer goods sector which is at its growing
stage.
Hundreds of Norway major corporations were required to raise women quota on board to 40% in
- Stoll (2015) is of the opinion that gender quota was implemented as an exemplary
progressive policy by other countries like France, Italy, Spain, Finland and Iceland. Miller
(2014) opines that the women quota imposed by Norway on corporations have not improve the
number of women occupying executive positions neither has the gender gap decrease. Ahem
&Dittmar (2012) reveals that imposing mandatory gender quota has reduced market performance
due to appointment of less experienced board, young board members among others.
However, Germanys parliament in march 2015 pass a bill requiring large listed companies to fill
their board with 30% female non-executive directors (Torry, 2015). Great Britain required 33%
of board to be filled by female by the year 2020 (Kollewe& Hickey 2015). Great Britain suggest
that voluntary compliance with an increase on the percentage of women on board of directors
may be sufficient and even better potentially than mandatory compliance for better change at the
board level (Wood 2011).Looking at different countries passing legislation on an increase in
female representation, as well as corporate governance practices in the aftermath of corporate
scandals in the early 2000s, a question of whether strong positive relationship exists between
board diversity and financial performance that Nigeria should follow suit.
The perpetuity of any profit oriented firm is determined by its performance, Consumer goods
firms are profit oriented where performance is of utmost importance. The Nigerian consumer
goods industry has faced a lot of challenges in the last three year and there was no significant
change recorded within that period up till February 2016. The challenges emanated as a result of
factors such as depreciating naira, fall in oil price, nonpayment of workers salary some part of
the country among others. While the aggregate spending power of the economy is a major
determining factor consumer goods firms performance, the hit by macro-economic factor has
affect the consumer goods firms so badly.
Therefore, it is an indication that consumer goods companies in Nigeria need to be observed for
survival and the need for effective and efficient board that will assist management with advice on
how the wealth of shareholders can be maximized. And need for a diverse view on how to tackle
such issues such that the effect will not be that much on the firm‟s performance, hence, the need
for diversity in board room ( in terms of gender, foreign directors and outside directors).
The conduct of this study is aimed at filling areas left by researchers.This study therefore, seeks
to investigate the effect of gender, foreign director and outside directors‟ diversity in the board
room on financial performance of consumer goods firms.
1.3
Research Questions
In view of the above problem the research seek to answer the following questions
Does board gender diversity have a significant impact on the financial performance of
listed consumer goods firms in Nigeria?
Does Board composition diversity have a significant impact on the financial performance
of listed consumer goods firms in Nigeria?
Does foreign directorship have significant impact on the financial performance of listed
consumer goods firms in Nigeria?