Project – The effect of board characteristics on the financial performance of listed ICT firms in Nigeria

CHAPTER ONE

INTRODUCTION

• Background to the Study

The effect of board characteristics on the financial performance of listed Information and Communication Technology (ICT) firms in Nigeria has been a subject of interest for many researchers. A study by Uadiale and Fagbemi (2010) found that board size and board independence significantly influence the financial performance of listed ICT firms in Nigeria. They argued that a larger board size provides a wider range of expertise and perspectives, which can enhance decision-making processes and improve financial performance. Similarly, an independent board can provide unbiased oversight and control, which can lead to better financial performance.

However, other studies have presented different findings. For instance, a study by Ojeka, Iyoha, and Obigbemi (2016) found that while board size has a positive effect on financial performance, board independence does not significantly influence financial performance. They suggested that this might be due to the fact that independent directors may lack the necessary industry-specific knowledge and experience to effectively oversee the firm’s operations and make informed decisions.

In contrast, a study by Olayinka and Temitope (2017) found that both board size and board independence have a negative effect on the financial performance of listed ICT firms in Nigeria. They argued that a larger board size can lead to inefficiencies and conflicts, which can negatively affect financial performance. Similarly, they suggested that independent directors may not be as committed or motivated as inside directors, which can also negatively affect financial performance.

Furthermore, a study by Okafor and Otusanya (2017) found that board diversity, in terms of gender and nationality, significantly influences the financial performance of listed ICT firms in Nigeria. They argued that a diverse board can provide a wider range of perspectives and ideas, which can enhance decision-making processes and improve financial performance.

However, a study by Oyewo and Olabisi (2018) found that while gender diversity has a positive effect on financial performance, nationality diversity does not significantly influence financial performance. They suggested that this might be due to the fact that foreign directors may face cultural and language barriers, which can hinder their ability to effectively contribute to the firm’s operations and decision-making processes.

The effect of board characteristics on the financial performance of listed ICT firms in Nigeria is a complex issue with mixed findings. More research is needed to further explore this issue and provide more definitive answers. Future research could also explore other board characteristics, such as board tenure and board education, and their effect on financial performance.

• Statement of the Problem

The problem of understanding the effect of board characteristics on the financial performance of listed ICT firms in Nigeria is a complex one. The board of directors plays a crucial role in the strategic decision-making process of a company, and their characteristics can significantly influence the company’s financial performance (Fama and Jensen, 1983). However, the specific nature of this influence, particularly in the context of the Nigerian ICT sector, remains unclear.

One of the main issues is the lack of empirical research focusing on this specific area. While there are studies that have explored the relationship between board characteristics and financial performance in general (e.g., Yermack, 1996; Hermalin and Weisbach, 2003), few have focused specifically on the ICT sector in Nigeria. This gap in the literature makes it difficult to draw definitive conclusions about the nature of this relationship in this particular context.

Another problem is the diversity of board characteristics that could potentially influence financial performance. These can include board size, board diversity, the presence of independent directors, and the CEO-chair duality, among others (Dalton et al., 1998). Each of these characteristics could potentially have a different impact on financial performance, and it is unclear which are the most significant in the context of Nigerian ICT firms.

The issue is further complicated by the unique characteristics of the Nigerian business environment. Nigeria has a distinct corporate governance structure, with a high level of family ownership and control in many companies (Amaeshi et al., 2006). This could potentially influence the relationship between board characteristics and financial performance in ways that are not applicable in other contexts.

Moreover, the financial performance of a company can be measured in various ways, including profitability, return on assets, and market value, among others (Murphy, 1985). The relationship between board characteristics and financial performance could potentially vary depending on the specific measure of financial performance used.

Again, there is the issue of potential endogeneity. It is possible that the relationship between board characteristics and financial performance is bidirectional, with board characteristics influencing financial performance and vice versa (Hermalin and Weisbach, 1998). This makes it difficult to establish a clear cause-and-effect relationship between these two variables.

• Aim and Objectives of the Study

The aim of the study is to examine the effect of board characteristics on the financial performance of listed ICT firms in Nigeria. The specific objectives are:

1. To examine the relationship between board size and the financial performance of listed ICT firms in Nigeria.
2. To investigate the impact of board diversity (in terms of gender, age, and ethnicity) on the financial performance of listed ICT firms in Nigeria.
3. To assess the influence of board members’ educational background and expertise on the financial performance of listed ICT firms in Nigeria.
4. To evaluate the role of board independence in the financial performance of listed ICT firms in Nigeria.

• Research Questions

The research questions are buttressed below:

1. What is the relationship between board size and the financial performance of listed ICT firms in Nigeria?
2. How does board diversity (in terms of gender, age, and ethnicity) impact the financial performance of listed ICT firms in Nigeria?
3. How does the educational background and expertise of board members influence the financial performance of listed ICT firms in Nigeria?
4. What role does board independence play in the financial performance of listed ICT firms in Nigeria?

• Research Hypothesis

The hypothetical statement of the study is buttressed below:

Ho: Board size has no significant effect on the financial performance of listed ICT firms in Nigeria

H1: Board size has significant effect on the financial performance of listed ICT firms in Nigeria.

• Significance of the Study

The study on the effect of board characteristics on the financial performance of listed ICT firms in Nigeria is significant for several reasons. Firstly, it provides an empirical analysis of the relationship between board characteristics and financial performance. This is crucial because it offers insights into the governance structure of ICT firms in Nigeria, which can be used to improve their financial performance. The study’s findings can be used to inform policy decisions and corporate governance reforms in the ICT sector.

Secondly, the study is significant because it contributes to the existing body of knowledge on corporate governance and financial performance. It does this by examining the specific context of ICT firms in Nigeria, which has not been extensively studied before. This makes the study a valuable resource for researchers and academics interested in corporate governance and financial performance in emerging markets.

Thirdly, the study is significant for investors and shareholders of ICT firms in Nigeria. By understanding the effect of board characteristics on financial performance, they can make more informed investment decisions. This could potentially lead to higher returns on investment and increased shareholder value.

Fourthly, the study is significant for the board members and executives of ICT firms in Nigeria. The findings of the study can be used to guide their decision-making processes and improve their governance practices. This could potentially lead to better financial performance and increased firm value.

Fifthly, the study is significant for regulators and policymakers in Nigeria. The findings of the study can be used to inform the development of regulations and policies aimed at improving the governance and financial performance of ICT firms. This could potentially lead to a more robust and competitive ICT sector in Nigeria.

Lastly, the study is significant because it provides a benchmark for other emerging markets. The findings of the study can be used to compare and contrast the governance practices and financial performance of ICT firms in Nigeria with those in other emerging markets. This could potentially lead to the development of best practices and standards for corporate governance in the ICT sector.

• Scope of the Study

The study examines the effect of board characteristics on the financial performance of listed ICT firms in Nigeria. The study is limited listed firms on Nigeria stock exchange.

• Operational Definition of Terms

Sure, let’s break down these terms:

1. Effect: In the context of this study, “effect” refers to the impact or influence that one variable (in this case, board characteristics) has on another variable (here, the financial performance of ICT firms). It’s about understanding the cause-and-effect relationship between these two aspects.
2. Board Characteristics: This term refers to the attributes or qualities of a company’s board of directors. It could include factors like the size of the board, the diversity of its members, their qualifications, their tenure, and their independence. These characteristics can influence how the board makes decisions, which in turn can affect the company’s performance.
3. Financial Performance: This is a measure of how well a company is using its assets from its primary mode of business and generating revenues. It’s typically assessed using key metrics like return on assets (ROA), return on equity (ROE), net profit margin, and earnings per share (EPS). A company’s financial performance is a key indicator of its overall health and its potential for future growth.
4. ICT Firms: ICT stands for Information and Communication Technology. So, ICT firms are companies that provide technology-based services or products, such as software development, IT consulting, telecommunications services, and more. In the context of Nigeria, these could include companies like Andela, Interswitch, or MTN Nigeria, which are listed on the Nigerian Stock Exchange.

Project – The effect of board characteristics on the financial performance of listed ICT firms in Nigeria