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EFFECT
OF BOARD DIVERSITY ON FINANCIAL PERFORMANCE OF LISTED CONSUMER GOODS FIRMS IN
NIGERIA
CHAPTER
ONE
INTRODUCTION
1.1
Background to the Study
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 &MÃnguez–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.
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