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CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE OF LISTED OIL AND GAS COMPANIES IN NIGERIA

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Corporate governance and financial performance: the mediating effect of corporate social responsibility

ABSTRACT

The rapidity of research papers around the world has been motivated by the goal to provide long-lasting answers to problems caused by Corporate Governance over time. Nigeria is not an exception to the numerous empirical findings that are the results of thorough research on the relationship between corporate governance and firm performance. The performance of oil and gas businesses in Nigeria is poorly studied empirically, despite the many financial scandals that plague the industry and its importance to the country’s economy. Therefore, the purpose of this study was to investigate the nature of relationships between financial performance (Return on Equity, Profit Margin, and Return on Asset) and governance mechanisms (Board Composition, Audit Committee, Board Size, and Corporate Governance Disclosure) in the Nigerian oil and gas industry. The fifteen listed Nigerian oil and gas companies’ audited financial statements were used as source of secondary data. Using SPSS, version 17, the regression analysis and other data analysis were carried out using Pearson Correlation. The study’s conclusions showed that there is a slight but positive correlation between board composition and the success of Nigerian oil and gas businesses. According to the study’s findings, there was a positive non-significant link with PM but negative non-significant relationship with Board Size, ROE, and ROA. There is evidence that the Audit Committee affects ROE and PM levels in strong, positive way, just as the level of corporate governance disclosure affects ROE. In order to increase their level of profitability, the audit committees of Nigerian oil and gas firms should focus more on strengthening their independence and the breadth of their corporate governance disclosure, according to the findings of this study, which also indicates that the board of directors and stakeholders of these companies should do the same.

CHAPTER ONE
 INTRODUCTION
1.1 Background to the Study
Over the last decade, there has been an increase in the need for effective corporate governance among corporations in numerous countries. Corporate governance has assumed significant role in driving firm value creation and improved financial performance, particularly in the face of ongoing corporate scandals that have rocked corporate entities worldwide (Korac-Kakabadse et al 2001, Shivdasani and Zenner, 2002, Rose, 2005 as cited in Lawal 2012). Government, business, and academia have all worked together to solve the mystery of how to establish openness, accountability, and good governance at all levels.

Various theoretical and empirical research have been prompted by corporate governance failings at both the local and international levels, yet the frequency of financial scandals is increasing on daily basis. With the collapse of Enron, WorldCom, Global Crossing, and Rank Xerox, corporate governance, the structure by which firms are directed and controlled (Cadbury Report, 1992), has become major problem in the United States. Parmalat in Italy, the Maxwell story in the United Kingdom, Daewoo in Korea, Leisurenet and Royal Bank in South Africa are all examples of the consequences of poor corporate governance.It is worth noting that Nigeria is not immune to this global tragedy, as different financial scandals stemming from corporate governance failures are progressively being recorded and reported on regular basis. Cadbury Nigeria Plc, Oceanic Bank Plc, Intercontinental Bank Plc, Union Bank of Nigeria, and Afribank, to name a few, are examples of corporate governance failures in Nigeria.In reaction to these business crises, countries and organizations all over the world began to implement a series of laws and recommendations known as codes of best practices. These rules are a set of norms that govern the corporate board’s behavior and structure when performing their monitoring and supervisory functions.Some of the existing codes around the world include, among others, the UK Cadbury Code (1992), the South African King Report (1994), the Organisation for Economic Co-operation and Development (OCED) Principles of Corporate Governance (2004), the Russian CG Code, (2002); the Security and Exchange Commission (SEC) code of corporate governance (2003), the US Sarbanes-Oxley Act (2002), the Central Bank of Nigeria (CBN) Code (2006), the National Insurance Commission (NAICOM) Code (2009), theThough various attempts have been made in Nigeria to combat the threat of corporate governance failure, as indicated above, they are mostly limited to listed financial institutions and other non-oil sectors, excluding insights into the behavior of quoted oil and gas companies in Nigeria.

The Nigerian petroleum industry has no doubt contributed tremendously to the overall growth of the Nigerian economy. Petroleum accounts for approximately 90% of Nigeria’s total foreign exchange earnings and about 85% of total revenue earnings with proven oil reserve of about 36 billion barrels and Gas reserve of about 185 Trillion Cubic Feet (TCF) which places Nigeria as the 10th largest oil producer in the world (World Trade Organisation’s Report,2011) . Despite various scandals in the oil and gas sector such as: The 21 Oil Subsidy Cabals, NNPC/CBN unremitted revenue scandal, the US$1.1billion Malabu Oil Scam, Capital Oil and Gas saga, African Petroleum NGN12billionscam and so on, there is no single code of corporate governance exclusively for oil and gas sector. While Agencies like: Nigeria Extractive Industries Transparency Initiative(NEITI), Nigerian Content Development and Monitoring Board (NCDMB) and the pending Petroleum Industry Bill (PIB) are government’s effort towards ensuring accountability, transparency and good governance in the oil and gas sector, the challenges of corporate governance failure resulting in alarming scandals are still prevalent. It is pertinent to investigate the relationship between corporate governance and the financial performance of listed oil and gas companies in Nigeria as the country is currently experiencing a paucity of research in this sector of the economy. This study is therefore expected to broaden existing literature and provide essential findings to assist stakeholders in the oil and gas sector in formulating and administering relevant and pragmatic policies to address corporate governance issues within the oil and gas sector of Nigeria.
1.2 Statement of the Problem
Much research has been conducted to investigate the relationship between corporate governance and firm performance around the world, but little has been conducted in Nigeria’s oil and gas business, despite the prevalence of financial scandals that have their roots in governance failures. Despite the fact that third world countries supply the majority of the world’s oil and gas, the industry is significantly more vulnerable to corruption than other types of business. Nigeria, Africa’s largest oil producer and host country for western oil companies such as Shell, Total, Mobil, and ENI, was placed 144 out of 177 in the corruption perception index (Transparency International, 2013). According to Chazan (2012), the oil and gas sector in Nigeria has the highest bribery rate.This threat has discouraged international investors who may be unwilling to play the current game in the sector, as well as continual increase in bribery and corruption, low economic growth, and consistent depletion of both national and natural resources.It is therefore critical to highlight the importance of effective corporate governance by investigating the relationship between corporate governance and financial performance of Nigerian listed oil and gas companies.
1.3 Aim and Objectives of the study
The major goal of this study is to investigate the link between corporate governance and the financial performance of Nigeria’s oil and gas sector.
 This objective was achieved by:
i.Examining the relationship between board composition and financial performance of listed oil and gas companies in Nigeria.
ii.Investigating whether there is any significant relationship between audit committee and financial performance of listed oil and gas companies in Nigeria.

 iii.Ascertaining the extent of relationship that exists between financial performance and board size of listed oil and gas companies in Nigeria.iv.

 
Establishing whether there exists any relationship between the level of corporate governance disclosure and financial performance of listed oil and gas companies in Nigeria.
 
1.4Significance of the Study
This study will:
i.Assist investors in the Nigeria oil and gas industry to make informed decisions.
ii.Serve as insight to the government in her sanitization programme in the oil and gas sector.
iii. Improve the knowledge base of oil and gas players on the need to embrace good corporate governance for business sustainability.
iv. Serve as additional information to Government Regulatory Agencies like Nigeria Extractive Industries Transparency Initiative (NEITI) and Nigerian Content Development and Monitoring Board (NCDMB).
v.Increase available information for further academic research into the Nigerian Oil and Gas.
1.5 Research Questions/Hypotheses:
This study addressed issues relating to the following pertinent questions emerging within the domain of the study problems:
 i. Is there any relationship between board composition and financial performance of listed oil and gas companies in Nigeria?
ii.To what extent does board composition affect the profitability of listed oil and gas companies in Nigeria?
iii.Is there any relationship between audit committee and financial performance of listed oil and gas companies in Nigeria?
iv.What type of relationship, if any, exists between audit committee and financial performance of listed oil and gas companies in Nigeria?
v.Does Board size have any relationship with financial performance of listed oil and gas companies in Nigeria?
vi. What is the extent of relationship, if any, that exists between board size and financial performance of oil and gas companies in Nigeria?
vii. Is there any relationship between corporate governance disclosure and financial performance of listed oil and gas companies in Nigerian?
viii.What type of relationship, if any, exists between corporate governance disclosure and financial performance of listed oil and gas companies in Nigeria?
Hypotheses:
To proffer useful answers to the research questions in order to achieve the study objectives, the following hypotheses stated in their null forms were tested and analysed
1.H0:The relationship between board composition and financial performance  of listed oil and gas companies in Nigeria is not statistically significant.
 
2.H0: There is no significant relationship between audit committee and financial performance of listed oil and gas companies in Nigeria.
3.H0: The relationship between board size and financial performance of listed oil and gas
 companies in Nigeria is not statistically significant.
4.H0: There is no relationship between corporate governance disclosure and financial performance of listed oil and gas companies in Nigeria.
1.6 Scope / Limitation of the Study:
This research centers on the relationship between corporate governance and financial performance within the context of listed oil and gas companies in Nigeria. It excludes assessment of non listed oil and gas companies. Apart from data availability, the fact that listed oil and gas companies in Nigeria are also the key players in the sector justifies the researcher’s study sample. The result of this research is based on what is obtainable in Nigeria. It is therefore probable that the opinions expressed may not represent the views of the world oil and gas sector; however, likely variations are not expected to adversely influence the findings of this research.

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