Governance Mechanisms and Corporate Performance in Nigeria

Abstract

Corporate governance codes are largely created as a response to corporate failures. Fundamentally, policymakers, market analysts, academics, and industry players posit that governance codes can reduce the age-long principal-agent problems that trigger substantial cases of exploration of investors, free-riding, moral hazards, inter alia. However, the Global Financial Crisis (GFC) of 2007/08 and other corporate fiascos question the efficacy of governance-performance mechanisms. Thus, a renewed effort at studying the empirical connection between these mechanisms and firm performance as well as evolve new strategies that will further strengthen them has become more critical. This study is an effort in this direction. It adopted a Generalized Method of Moment (GMM) approach based on a system of simultaneous equations on annual data of 93 Nigerian listed firms spanning 2007 through 2021. Against the agency theory hypothesis that a higher proportion of outside directors help mitigate agency-related problems, this study provides sufficient reasons to argue that it is detrimental to corporate Nigeria when Tobin’s Q is used as a proxy for firm performance. In tandem with earlier studies, the findings also provide evidence to prove that firms with larger boards with sufficient gender and foreign diversities outperform their peers, overall, during, and after the GFC. The study therefore recommends the need for firms to opt for the largest board size possible consisting of higher female and foreign directors as this will, to a larger extent, enable firms to draw from a range of expertise that will help make informed decisions; reduce agency related problems and thus maximize the wellbeing of shareholders and other stakeholders.