CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
Financial performance of a firm remains one of the major route of assessing its
wellbeing and to know whether it will be able to meet financial obligation of all interested
parties it is also an indication for possible payment of dividend. Firms owe commitment to their
principal, which is maximization of wealth, and to other stakeholders who are also concerned
with the financial health of firms (Farouk, 2014). The continuous survival, growth and
expansion of firm would hardly be met without sound financial performance. Firms strive to
achieve higher performance in the face of stiff competition, globalization and technological
advancement; competition is fuelled by entry of small and young firms into the market which
threatens the market share of large existing organizations (Maness & Zietlow, 2005). Despite
these challenges, firms are expected to excel in their financial performance. However, to ensure
the continuous performance of firms, corporate governance mechanisms such as audit
committee characteristics and ownership structure must meet up with expectation.
One of the mechanisms of corporate governance is the audit committee that play vital
roles in ensuring smooth and efficient management and administration of companies. The audit
committee is equally challenged by the recent failures in corporate governance in Nigeria and
should be compelled to ensure that sound corporate governance exist. According to CAMA
1990, the audit committee is a committee of shareholders and non-executive directors charged
with the responsibility of liaising between the external auditors and the board of directors on
one hand, and between management and the external auditors on the other hand. The inclusion
of this committee in the corporate governance mechanism raises the expectations of
shareholders and the general public for enhanced corporate governance and by extension
increase performance of companies. This raised confidence is predicated on perceived
checkmating role of the audit committees in ensuring that the board of directors lives up to
their expectation in fulfilling the globally accepted pillars of corporate governance,
accountability, fairness, responsibility and transparency. But the rampant failure of corporate
governance in Nigeria as manifested in corporate failures throw strong doubt on the
effectiveness of audit committees in carrying out this role.
Audit committee may be composed of members with varied backgrounds and
occupations as well as experience in an area important to the business, such as financial
reporting, auditing, industry insight, risk management, or technology. To fulfil the committee’s
primary responsibilities, all members should be financially literate and capable of
understanding the financial reporting issues and complexities arising from the company’s
business activities. It is also a requirement that the audit committee members be composed of
outsiders who do not participate in the day-to-day running of the business. All this varieties of
experience, responsibilities and mixture is expected to have effect on the performance of the
firm. Also, the distinct characteristic of ‘divorced management from ownership’ of modern
corporations, make stewardship accounting inevitable in company administration and
management. Professional managers who are considered more competent than the owners of
the corporations and are thus hired to run and manage the affairs of the companies are expected
to guarantee transparency accountability and fairness in their duties (Howard, 2000). This is a
basic tenet of corporate governance. It is guaranteed by ensuring that various mechanisms are
put in place to ensure seamlessness in accommodating corporate goal (ownership goal) and
management goal in an enterprise. There is an ongoing debate in the literature on the impact
and merit of the separation of ownership and control. Early theorists such as Williamson (1964)
proposed that non-owner managers prefer their own interests over that of the shareholders.
Consequently, non-owner managed firms become less efficient than owner-managed firms.
The way and manner at which shares are owned in companies may have influence on the
performance of such companies.
Oil and Gas is a vital sector in every nation and economies all over the world, In
Nigeria, the Oil and Gas industry is at a developing stage with only 9 companies quoted on the
Nigerian Stock Exchange as at 31st December 2015. In most cases of corporate governance,
Oil and Gas industries is a sensitive sector where activities are said to be carefully monitored
and supervised by professionals and regulatory bodies to ensure strict adherence to ethical
codes and conduct which are not usually the case. The study of corporate governance,
ownership structure as it affects the Oil and Gas industry cuts across various phases of research.
It is to this end that this study tries to establish if corporate governance, which is audit
committee characteristics and ownership structure affect the performance of the listed Oil and
Gas companies in Nigeria.
1.2
Statement of the Problem
The corporate governance culture in Nigeria has consistently failed to be responsible
and accountable to the stakeholders and has no deep-rooted mechanism to maintain a balance
among the major players such as board of directors, shareholders and management which have
resulted in poor financial reporting quality (Bello, 2010). The challenges of corporate
governance in Nigeria stems from the culture of corruption and lack of institutional capacity to
implement the codes of conduct governing corporate governance because company executives
enjoy an atmosphere of lack of checks and balances in the system to engage in gross
misconducts since investors are not included in the governing structure (Shehu, 2012).
Audit committee appears to be bedeviled with a great deal of challenges in Nigeria most
especially in the area of implementation; though there has been good structure or laid down
rules by the Securities and Exchange Commission for public companies and that of Central
Bank of Nigeria for Banks. The non-satisfactory performance remains paradox despites the
adoption of corporate governance by public companies.
Performance of corporate bodies is of paramount value to stakeholders in general and
shareholders in particular as, on one hand it is a key source for financing the current economic
activities, thus helping to maintain a going concern and increase the value of the business, and
on the other hand it is the basis for distributing dividends, which in turn may attract investors
(and their funds). Thus, it should appear as straightforward that identifying and analyzing those
factors (determinants) that influence performance is of great relevance both to practice and
academia. Companies are governed by the boards of directors, both executive and non
executive. It is logical to suppose that the managerial abilities of the board of directors would
have a significant impact on the entity’s performance. It is however not clear-cut whether
certain audit committee characteristics regarding its composition would significantly influence
the company’s performance.
Past studies have investigated the impact of different corporate governance
characteristics on firm performance. (See Wintoki & Yang, 2007; Adams & Mehran, 2008;
Guest, 2009, Bhagat & Bolton, 2008). Works have been done to examine the relationship
between audit committee, ownership structure and financial performance across the globe but,
little has been done in Nigerian Oil and Gas industry despite the prevalent financial scandals
which have their roots in corporate governance failures. Also, the results from previous
findings are mixed and to the best of our knowledge there is no study in Nigeria that has
attempted to resolve it in listed Oil and Gas companies in Nigeria. Therefore, to what extent
does Audit committee characteristics and ownership structure influence Performance of listed
Oil and Gas companies in Nigeria and in what direction?Studies in this area in Nigeria such as Modum, Ugwoke, and Onyeanu (2014), Aanu,
Odianonsen, and Fayoke (2014), Ojulari (2012), Ehikioya (2009), Kajol & Sunday (2008),
Ojeka, Iyoha and Obigbem (2013) have either investigated audit committee characteristics or
ownership structure as standalone variables, there is no study that have combined the two
studies in a single research which may produce different result.
Ojulari (2012) suggested that future research study should be conducted on an industry
basis to see the trend from one industry to another in order to paint a meaningful comparison
about the whole picture of Audit committee characteristics and performance in Nigeria. Hence,
the decision to focus on the Oil and Gas companies.
1.3
Research Questions
The following research questions were raised based on the identified problem and gaps
in previous researches. These questions is expected to be answered at the end of the research.
How does audit committee size impacts on financial performance of listed Oil and Gas
firms in Nigeria?
How does Audit committee composition have influence on financial performance of
listed Oil and Gas firms in Nigeria?
How does Audit committee meetings play significant role in influencing financial
performance of listed Oil and Gas firms in Nigeria?
How does audit committee financial expertise have impact on financial performance of
listed Oil and Gas firms in Nigeria?
How does managerial ownership have impact on financial performance of listed Oil
and Gas firms in Nigeria?
How does institutional ownership impacts on financial performance of listed Oil and
Gas firms in Nigeria?