«ISSN: 2319 – 7285 G.J.C.M.P.,Vol.4(1):75-82 (January-February, 2015) CORPORATE BOARD MEETINGS AND COMPANY PERFORMANCE: EMPIRICAL EVIDENCE FROM ...»
ISSN: 2319 – 7285
G.J.C.M.P.,Vol.4(1):75-82 (January-February, 2015)
CORPORATE BOARD MEETINGS AND COMPANY PERFORMANCE: EMPIRICAL
EVIDENCE FROM NIGERIAN QUOTED COMPANIES
Edem Okon Akpan
Department of Accountancy, School of Business, Federal Polytechnic Bauchi, Nigeria
Most literatures on corporate governance concentrated much on board composition or size as a measure of involvement in monitoring management, while another dimension of board oversight such as board meetings is ignored.
This study examined the relationship between frequency of board meetings and company performance using a sample from 79 companies listed on the Nigerian Stock Exchange from 2010 to 2012. The result shows that the board meetings, directors` equity and board size are negatively significant. Audit committee meetings are positively significant while gender diversity and board age are not significant measured with ROE.
Keywords: board meetings, audit committee meetings, directors` equity, company performance.
1. Introduction In Nigeria, the issue of corporate governance and its best practice is still generating heat especially since the financial crises and the collapse banks, private and public corporations in the past decades. Companies like Leventis Plc, Nigerian Coal Corporation, Asaba Textile Industry, Kaduna Textile Industry all failed because of poor corporate governance (Modum, Ugwoke,& Oniyeanu, 2013). Since ever the collapse of the financial institutions in Nigeria, many researchers like (Sanda, Mikalu & Garba 2005; Kajola 2008; Babatuned & Olaniran, 2009; Semiu & Temitope, 2010) conducted research on corporate governance mechanisms and firm performance in the country. Other researchers examined the effectiveness of audit committee reporting in Nigeria (Okoye & Cletus, 2010; Owolabi & Ogbechia 2010;
Madawaki & Amran 2013). None of these studies explored the relationship between board meetings and company performance. Board of directors is appointed by shareholders to oversee the affairs of the company and monitor management on their behalf. For the board of directors and its sub-committees to fulfill its function of monitoring management, boards must frequently meet. Boards that frequently meet have time to set strategy and monitor management (Vafeas, 1999). They are likely to perform their duties in the best interest of the shareholders. On the other hand, frequent meetings result in waste of managerial time, increase financial burden in terms of travel expenses and sitting allowance. Routine tasks also absorb most of the meeting without adequate time left for outside directors to exercise control over the management. According to Vafeas (1999) board meeting, are not useful because outside directors have limited time for meaningful exchange of ideas among themselves. Most corporate governance literatures focused on the size and composition of the board as a measure of it involvement in company financial performance without considering the important of board meetings. Therefore, this study is to examine the relationship between board meetings, audit committee meetings, board size, gender, age, equity and company performance in Nigeria where there is limited empirical evidence. In filling this gap, this study contributes to the literature on board meetings and company performance. The remainder of this paper is structured as follows; section 2 reviews related literature during section 3 discusses data and methodology. Results and discussion are presented in section 4, and section 5 concludes.
2. Literature Review This portion discusses related literature on board characteristics and company performance. To makes it simple, it is categorized into: company performance, board of directors meetings, audit committee meetings, board size, board age, board equity and gender.
2.1 Firm Performance Companies through good system of internal governance improve its operations, and at the same time provide useful information to shareholders (Hsiang-Tsai et al., 2005). Studies have shown that good corporate governance directly affect corporate performance. It is evidenced that good corporate governance directly related to company performance. Black, Jang and Kan (2002) found that the company with a good system of corporate always reported better financial performance than those without good corporate governance. Jensen and Meckling (1976) share the same opinion that good corporate governance system result in high financial returns. On the other hand, Daily and Dalton (1994) believe that poor corporate governance may likely result in bankruptcy while good corporate governance helps to increase investor`s confidence.
The previous researchers on corporate governance use different dimension to measure company performance. For example, Klein (1998) uses return on assets (ROA) and Lo (2003) uses return on equity (ROE) as performance indicators. Although other studies have used return on equity, in this study too, return on equity (ROE) is used as performance indicator. This indicator has severally been used by many researchers to examine the effect of board characteristics and company performance. (Heravi et al., 2011; Sanda et al., 2005; Haslindar & Fazilah, 2011; Dagsson, 2011). The use of ROE allows investors to assess how effective companies manage resources to generate income for the shareholders. It is also attractive to shareholders.
ISSN: 2319 – 7285 G.J.C.M.P.,Vol.4(1):75-82 (January-February, 2015)
2.2 Board Meetings Every director is expected to attend all board meeting such attendance is one of the criteria for the re-nomination of a director except where there are cogent reasons that the board must notify the shareholders of at annual general meeting (AGM) (SEC 2006). For board to effectively perform its oversight function and monitor management performance, the board must hold a regular meeting. Measuring the intensity and effectiveness of corporate monitoring and discharging is the frequency of board meetings (Jensen 1993). There are mixed views about the effect of board meetings and corporate performance. One supporting point is that the frequency of board meetings is a measure of board activities and effectiveness of its monitoring ability (Conger et al. 1998 and Vefeas 1999) frequent board meetings can result in higher qualities of management monitoring that in turn impact positively on corporate financial performance (Ntim, 2009).
Conger et al. (1998) suggest that the board meeting be important resource in improving the effectiveness of the board. It helps directors to be informed and keep abreast with the development with the organization (Mangena & Tauringana 2008). Regular meetings also allow directors to sit and strategize on how to move the organization forward.
According to Lipton and Lorsch (1992) regular meetings enable directors to interact thereby creating and strengthening cohesive bonds among them. However, the opposing view of board meetings is that it is costly in terms of travel expenses, refreshments and sitting allowance to be paid to directors (Vafea, 1999). Board meetings are not necessarily useful because the limited time outside directors meet is not used for meaningful exchange of ideas among themselves and management (Jensen 1993) instead preoccupied with routine tasks and meetings formalities. This reduces the amount of time the board has to monitor management (Lipton & Lorsch 1992).
Empirical findings on the effect of frequent board meetings and corporate performance show mixed results. Vafeas (1999) reports a statistical significance and negative association between frequency board meetings and corporate performance. He also finds that operating performance significantly improves following a year of abnormal board activity. Karamandu and Vafeas (2005) find a positive association between frequency board meeting and management earnings forecasts, using a sample of 157 firms in Zimbabwe from 2001-2003; Mangena and Tauringans (2008) report a positive relationship between the frequency of board meetings and corporate performance. Similarly in a study of the sample of 169 listed corporations from 2002-2007 in South African, a statistical significant and positive association between the frequency of board meeting and corporate performance exist (Ntim & Osei 2011). This implies that the board of directors in South Africa that meet more frequently tend to generate higher financial performance. Another study conducted on public listed companies in Malaysia using five years data 2003 to 2007 of 328 companies, shows that the higher the number of meetings the worse the firm performance. (Amram, 2011).
2.3. Audit Committee Meetings Audit Committee is one of the subcommittees that are established by the companies with the responsibility of supplying the assurance on financial and compliance issues. Its role includes choice and monitoring of accounting principles and policies, overseeing appointment, dismissal of external auditors, monitoring internal control process, discussing risk management policies and practice with management and overseeing the performance of internal audit function.
In Nigeria, the audit committee is considered as a committee of representatives of both directors and shareholders charged with the responsibility to review the annual statements before being submitted to the board of directors. Audit committee that is active is expected to provide a monitoring mechanism that can improve the reliability and financial reporting of the company. In order to achieve this, must frequency of meetings. Advantages of meeting frequently are; it gives board time to oversee the financial reporting process, identify management risk, provides reliable information to shareholders through proper monitoring of internal control system (Anderson, Mansi, Reeeb, 2004).
Empirical evidence on the relationship between audit committee meetings and company performance are mixed.
Anderson et al. (2004) found that the frequency of audit committee meeting reduced cost of debt. Hus (2007) found a positive relationship between audit committee and firm performance. Abbott, Parker, Peters (2004) posited that the audit committee that meets frequently reduced the possibility of financial fraud while Beasley, Carcello, Hermanson, Lapides (2000) found fraudulent earnings with fewer audit meetings.
2.4 Board Size The number of directors on the board both executive and non-executive is referred to as board size. There are two types of board size - small size and large size. The day-to-day running of the company is the sole responsibilities of board of directors. Therefore, the size of the board could have a significant impact on the performance of the company. At the moment, there are different opinions as to which board size is the better.
Large board size encourages diversity in skills, gender, experience and race of board members (Dalton & Dalton, 2005). One disadvantage of a large board is that it slows down decision making process (Yermack, 1996). When the board is large, it resulted in time consuming and meaningless discussion (Lipton & Lorch, 1992). Moreover, large board can be less efficient (Hermalin & Weisbach, 2003). This also supports the view of Cheng (2008) that it is difficult to organize a meeting and reach agreement quickly with large boards. It can easily be manipulated when it comes to performance assessment of top management (Dalton, Daily, Johnson & Ellstrand, 1999). Also, large board increases agency cost or monitoring expenses, poor communication and co-ordination and all directors may not be carried along (Lipton & Lorsch, 1992; Jensen, 1993). However, another school of thought believes that a small board size positively affect company’s performance. Jensen (1993) argued that organizations support smaller board size in order to cut down cost. Smaller boards bring members closer together, easily reach and more easily able to reach consensus (Dalton et al., 1999). It reduces the possibility of free-riding and is more effective at monitoring top managers due to lower coordination costs. The disadvantage of small boards is that it lacks the spread of expert advice and opinion. The question one may ask now is “what should be ideal board size?” Lipton and Lorsch (1992) propose an ideal board size to be between seven and nine directions. Board size should be of significant size in relation to company’s operations.
According SEC (2006) board of directors should be selected in such a way that it will maintain its independence, ISSN: 2319 – 7285 G.J.C.M.P.,Vol.4(1):75-82 (January-February, 2015) integrity and also the ability of members to attend meetings. Jensen (1993) is of the opinion that the maximum board size should be between seven and eight directors. For instance, the mean board size in studies conducted by Yermack (1990) was 12.25% and 16.8% in Cornett, Hovakimian, Palia and Tehranian (2003).
The issue of board size and corporate performance was empirically tested by many researchers with mixed findings.
Yermack (1996) using a sample of 452 large US industrial corporations found a negative association between board size and company’s value. Another study conducted by Eisenbery, Sundgren and Wells (1998) on small and medium size Finnish firms also found an inverse relationship between board size and profitability. On the other hand, Dalton et al.
(1999) found non-zero positive relationship between company performance and board size.
In the same vein, Hermalin and Weisbach (2001) opined that board size corporate performance has a negative relationship. On the other hand, Bhagat and Black (2002) found no association between board size and company performance. Bonn, Yokishawa and Phan (2004) comparing between Japanese and Australian firms, found an inverse relationship between board size and company performance for Japanese firms but found no correlation between them in the case of Australian companies.
However, large board size was found to be positively corrected with company performance in a study conducted by Mak and Li (2001) on 147 Singaporean companies but not supported by regression results. Also, the study of Adam and Mehran (2005) using US financial institutions found a positive association between board size and performance (measured by Tobin’s Q). Dalton and Dalton (2005) meta-analysis reported a relationship between larger board’s size and company performance which is a direct opposite of an earlier meta-analysis result by Dalton, Daily and Johnson, (1999).