EMPIRICAL ANALYSIS OF THE IMPACT OF CORPORATE GOVERNANCE PRACTICES ON THE HEALTHCARE PHARMACEUTICAL INDUSTRY LISTED COMPANIES IN NIGERIA.
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EMPIRICAL ANALYSIS OF THE IMPACT OF CORPORATE
GOVERNANCE PRACTICES ON THE HEALTHCARE PHARMACEUTICAL INDUSTRY LISTED COMPANIES
IN NIGERIA.
TABLE
OF CONTENTS
PAGE
CHAPTER
ONE: INTRODUCTION
1.1 Background
of the Study 1
1.2 Statement
of the Problem 7
1.3 Purpose
8
1.4 Research Questions 9
1.5 Research
Hypothesis 10
1.6 Significant
of the Study 10
1.7 Scope
of Study 11
1.8 Definition
of Terms 12
1.9 Operational
Measure of the Study Variables 15
CHAPTER
TWO: LITERATURE REVIEW
2.1 Introduction 18
2.2 Corporate
Governance Defined 18
2.3 Members
of Corporate Governance 23
2.4 Principals
of Good Corporate Governance 25
2.5 Issues
Involving Corporate Governance Principles
include the following 28
2.6 Compensation
Arrangement for Client Executive
Officers and other Senior Executive 33
2.7 Duties
of Board of Directors 35
2.8 Dividend
Policy 39
2.9 Corporate
Performance Evaluation 55
2.10 Evaluating
of Financial Ratios 58
2.11 Empirical Studies on Financial Ratios 59
2.12 Auditor’s Independence 74
2.13 Characteristics of Good Corporate Governance 85
2.14 Mechanisms and Controls of Corporate
Governance 87
2.15 Focus on
Corporate Governance to prevent fraud 93
2.16 Corporate
Governance in Nigeria 100
CHAPTER
THREE: METHODOLOGY
3.0 Introduction 105
3.1 Area of
Stud 105
3.2 Population
of Study 105
3.3 Sampling
Framework 105
3.4 Data
Collection Instrument 106
3.5 Method
of Data Analysis 106
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND
OF THE STUDY
Li Background of the
study
It
is generally believed that poor corporate governance has been the undoing of
many corporations in both developing and developed nations. This is
particularly true of Nigeria, were corruption is endemic. An increasing number
of researchers are finding that poor corporate governance is a leading factor
in poor performance, manipulated financial reports, and unhappy stakeholders.
Corporations and regulatory bodies are now trying to analyze and correct any
existing defects in their reporting system. The interests of investors and
other stakeholders are usually protected by a three-tier security system
vis-Ã -vis reporting system regulated by public and private institutions which
subject public companies to certain disclosure standards, and their auditors to
audit, independence, ethical and quality control standards while the third is
the system of internal control, which provides reasonable assurance on the
effectiveness and efficiency of operations. The reliability of financial
reporting and compliance with applicable laws and regulations by organizations/
accountants should step away from the traditional approach of mere compliance
with rules to being the study of traits/ behaviour of corporate management,
which forensic accounting affords.
Corporate
governance is related to philosophy, politics, law, confidence and business
ethics. The actual applications of corporate governance may range from the
clarification of ownership, board composition and guidelines of independence
for the independent directors to the conducting of investors relations.
Although one may regard it as a topic simply about the protection of
shareholders value and the idea of social responsibilities of companies. The
social responsibility of a company is a matter connected with corporate
citizenship, a philosophical image of a multi-national company on the global
market; corporate governance is a new challenge. The debate is cultural
inclination rather than financial or technical capacity to meet the regulatory
requirements and the expectation from the public.
As
owners of the company, there is a good reason why shareholders demand that
their investment should be protected. On the other hand, the depending notion
of corporate social responsibilities is quite controversial. The fundamental
moral argument is that any member of a society, whether a person or a company
is supposed to have a sense of responsibility towards the society.
Corporate
governance as a practice is about complying with a set of expected behaviour
referred to as a code of corporate governance practice. The required rule may
be embedded mainly in legislation or a code of practice enforced by the stock
exchange as listing rules, or a combination of both.
No
doubt a director should be a trustworthy person but he or she should also be a
competent member of the board, the body that has the responsibility to oversee
the affairs of the company.
The
role of a corporate governance director is somewhat like an “internal monitor”.
Looking after the interest of all shareholder and other stakeholders. The jobs
is to identify the systemic infirmities of the company, for example why
independent judgment does not exist or nearly non-performing. This position
covers not only the dynamics of major internal controls, but also the external
task of social responsibility of investors’ relations.
Although
the concept “corporate governance” is novel, the practice not novel (Smith,
1776 Marshall, 1920 and Berle and Means, 1932). However, the resurgence and
rejuvenation of the glamor for accountability of managers can be traced to the
Cadbury Report 1920 and more recently the Hampel Report as far as the U.K. is
concerned. While the Cardbury Report (1992) emphasizes accountability and
stewardship, the Hampel Report balances this view of corporate governance by
stating that the single over riding objective of companies is the preservation
and greatest practical enhancement over time of the shareholders’ investment
(Hampel Report, para 1.16). this means that accountability should be balanced
with enterprise in the pursuit of corporate governance in a company. This
conforms with the views of Egbe (2011).
“The
dynamic and complexities of the Nigerian corporate environments considerably
affect the relationship between corporate governance practice and firms
financial performance in Nigeria. Consequently, appointments of boards members
and audit committee members are not free from political influence which affects
their independence respectively and results in poor financial performance.”
“Family
ownership concentration which characterizes Nigeria quoted manufacturing
companies also influences the relationship between corporate governance code
and firma financial performance. Corporate decisions/affairs are inevitably
interfered with by family members”.
Also
organizational growth affects the relationship between the corporate governance
codes and firms financial decisions. Large size and mature companies are more
likely to employ a more sophisticated financial reporting system. This creates
avenues for managers to manipulate corporate earnings/accounting numbers in an
attempt a deceive and mislead owners and investors.
A
good corporate governance system would improve performance in two ways.
Firstly, it will induce management to make decisions that would maximize the
value of the company to the shareholders. This affects firms performance and
profitability in that through laws, rules and regulations discipline is
instilled in behaviour of management thereby protecting investors and
increasing firms’ values. Secondly from the shareholders view point good
corporate governance system gives incentive to shareholders view point good
corporate governance system gives incentive to shareholders to monitor and
influence management in order to protect their significant investment. This
“action monitoring hypothesis’ reduces managerial opportunism, resulting in
lower agency conflict between managers and shareholders
Entrenching
good corporate governance in Nigeria quoted companies in a must. There have
been incidents of corporate failures, corporate frauds, and overstatement of
accounts both locally and internationally. Any failure to properly deal with
this problem may result into total loss of confidence in the capital market
with all the attendant negative consequences. In particular, the match towards
attaining international competitiveness of the Nigeria capital market would
suffer a major setback.
1.2
STATEMENT
OF THE PROBLEM
La
Porter et al (2000) observed that controlling shareholders and managers use
companies’ profits to benefit themselves rather than return the money to
outside members. The issue of corporate governance has significant effect on
performance of the organization. Where investors finance firms, there is a
risks that controlling shareholders and managers expropriate returns by
stealing profit, selling the firm’s output, assets, and additional securities
to the firm they control or own at a price below the market price, diverting
corporate opportunities from the firm, installing possibly unqualified family members
in managerial positions or over-paying executives. These practices where they
exist will tell on the performance and hence the value of the firm to
shareholders. They are evidence of weak corporate governance structure and
these are likely to negatively relate to performance. On the contrary, a strong
corporate governance structure will tell positively on the firm’s performance
and profitability.
1.3 PURPOSE
The
aim of this study is to determine the relationship between corporate governance
practices and performance of organizations. The relationship between corporate
governance and firm’s performance suggests that corporate financing decision
take by managers and their incentive to act in their interest can be influenced
by a good corporate governance structure, specific objectives include:
1. To
find out whether there is any relationship between corporate governance
practices and performance of the firm.
2. To
determine whether there is any relationship between any corporate governance
practices and the firm’s value.
3. To
ascertain the level of awareness of firm’s studied of the corporate governance
codes, conduct and laws.
4. To
determine whether the firms studied have a weak or corporate performance
practice and
5. To
ascertain the effects if they are weakness or strength on the firms.
1.4 RESEARCH
QUESTIONS
The
study examine the following questions
1. Is
there any relationship between audit committee independence and Return On
Assets (ROA).
2. Is
there any relationship between board size and Return On Equity (ROE).
3. What
is the relationship between directors shareholding ratio and Earnings Per Share
(EPS).
4. Are
firms studied aware of codes of conduct, laws and principles of corporate
governance?
5. Do
they adhere to these codes of conduct law and principles?
6. What
are the effects of weak corporate governance on these firms generally. These
questions are addressed using a selected number of quoted companies in the
healthcare pharmaceutical industry of the Nigerian economy.
1.5 RESEARCH
HYPOTHESIS
The
following research hypotheses (H0) in Null form shall be tested during our data
analysis:
H01: There is no
significant relationship between directors shareholding ratio and earnings per
share.
H02: There is no significant relationship between
audit committee independence and Return On Assets (ROA).
H03: There is no significant relationship between
Board size on Return on Equity (ROE).
1.6 SIGNIFICANCE
OF THE STUDY
This
study will bridge the gap that exists between managers and shareholders.
Prospective investors will be able to ascertain through this study the level of
corporate governance practice compliance and hence the efficiency with which
manages handle resources of owners. Furthermore, it would identify weakness in
the corporate governance practice of firms and thus compel an improvement. It
would stimulate shareholders to their corporate governance responsibility while
also motivating the manager to take the issue of corporate governance seriously.
The
overall significance of the study is that it would improve corporate governance
practices and thus the performance of the firm leading to better societal and
corporate development.
1.7 SCOPE
OF STUDY
The
study focused on healthcare pharmaceutical firms listed in the Nigeria stock
exchange. It is restricted to the 5 companies listed on the exchange the
industry.
Since
performance can be evaluated in different ways, Earnings Per Shares (EPS),
Return on Equity (ROE) and Returns on Assets (ROA) were used as indicators of
financial performance. The study is a longitudinal study and thus use annual
reports of the selected companies for years 2006-2010.
1.8 DEFINITION
OF TERMS
i. Corporate Governance: deals with the
manner in which companies are to be run meet the owners required return on
invested capital and thus contribute to economic growth and effectives and
ethical behavour in society put differently, it refers to the process and
structure by which the business and affairs of the company are directed and
managed, in order to enhance long term shareholder, value through enhancing
corporate performance and accountability, whilst taking into account the
interest of others stakeholders. Okeke (2008:14)
ii Accountability: This is the ability of
an account to be responsibility for his/her decisions or actions and expected
to explain them when called upon.
iii. Accounting: Accounting is a common term
which people use freely and have knowledge of its meaning. To some people, it
simply means how to count money to some others, it means how to check fraud
(forensic accounting) or how to know it the organization is making profit or
loss.
iv. Auditors: An auditor is a
professionally qualified accountant who has been given a license to carry out
public practice. He is an independent persons normally appointed by the owners
of a limited liability company to a professional opinion as to whether or not
those financial statements shown true and fan view of a company as at the end
of the financial year.
v. Unethics: When the ethical conduct of
individual as regards analyzing and recording of information is jeopardize that
is refused to obey or go against the ethics of the accounting profession.
vi. Ethics: Ethics generally refers to
those principles and codes of behaviour that guide the conduct of any
profession. The term usually carries along moral values.
vii. External Audit: An audit performed by
an auditor engaged in public practice leading to the expression of a professional
opinion which leads credibility to the assertion under examination.
vii. Financial Statements: These are statements or report normally
prepared and presented to external users. It comprises of two major sentiments
the income statement and the balance sheet. The income statement measures the
net income or surplus arising from the operations while the balance sheet
disclosure the financial position (that is the disposition of the assets
liabilities and capital) of the undertakings as at a particular date, usually
the last day of the accounting period.
ix. Forensic Accounting: Is the practice of
utilizing accounting, auditing and investigative skills to assist in legal.
x. Fraud: Fraud is an international
deception to cause a person to give up property or some lawful right, which
would also mean deceit, trickery or cheating. According to statement of
Internal Audit standard No. 2 of the instituted of Internal Auditors, US.A.
fraud is defined as “an array of irregularities or illegal acts characterized
by the international deception.
xi. Internal Audit: An audit performed by
an employee who examines operational evidence to determine whether prescribed
operational procedures has been followed.
xii. Internal Control: Steps taken by a
business prevent fraud-both misappropriation of assets and fraudulent financial
reporting.
xiii. Securities and Exchange Commission (SEC):
A governance agency authorized to regulate companies seeking approval to issue
securities for sale to the public.
1.9 OPERATIONAL MEASURE OF THE STUDY VARIABLES
The main variables of the study are:
Corporate Governance Practice:
The independent variable, financial performance-the dependent variable.
Board Size: Number of board members in a particular year.
Directors Shareholding (Board Holding):
Percentage of shares held by directors over total outstanding shares in a
particular year.
Audit Committee Independence: Proportion of independent directors in audit
committee in a particular year.
Financial Performance:
Financial performance used in the study is accrual based. Accrual based
financial performance solves the potential timing and matching problems
associated with the use of cash flows as a short-term performance measure.
However, the financial performance variables used in the study are earnings per
share, return on equity and return on assets.
Earnings Per Share:
The amount per each unit of equity share capital that is in issue and rank for dividend in a particular period.
Returns on Assets:
This refers to earnings before interest and tax over the firm’s total assets.
The control variables used in the study are; corporate environment, ownership
structure and corporate growth.
Corporate Environment:
Natural logarithm (addition) of total assets of a firm in a particular year.
Ownership Structure:
This refers to natural logarithm (addition) i.e. number of equity shares held
to date.
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