Evaluating the Influence of Corporate Governance on Firm Profitability: The Case of Quoted Food and Beverages Companies in Nigeria

Abstract

Corporate governance has the capacity to determine firm profitability. This study explored the underlying assumptions by examining the influence of corporate governance on profitability of firms, specifically using quoted food and beverages companies in Nigeria. The study employed two sets of secondary data – corporate governance characteristics and profitability indicators, while firm size served as a control variable over a period of ten years, spanning from 2003 to 2012. Five prediction models were employed to test the underlying assumptions. The data were analysed econometrically in software E–views 8.0 using basic descriptive statistics and pooled Ordinary Least Square (OLS) multiple regression in a panel data manner. The results from the study revealed that at 5 per cent level of significance, board size has negative and insignificant relationship with earnings per share and return on capital employed, but with positive relationship with return on equity, net assets per share and net profit margin. However, it was found that board composition has negative relationship with firm profitability. Findings also indicated that board skills and competence has negative and weak relationship with return on equity, net assets per share and net profit margin, but statistically significant positive relationship was found between board skills and competence and earnings per share and return on capital employed, while board gender diversity results indicated positive but weak relationship with earnings per share, return on equity, net assets per share and net profit margin, but with a negative and insignificant relationship with return on capital employed. The findings revealed that all other corporate governance characteristics indicated at least a positive relationship with profitability except board composition. Despite the mixed results, it can be argued that the empirical results support the contention that corporate governance has a positive influence on profitability of food and beverages firms in Nigeria, and the presence of good corporate governance tends to explain variance in firm profitability, thereby providing evidence to the implicit assumption that good corporate governance practices lead to stead increase in profitability of firms. It also concludes that improvement of the profitability of food and beverages firms in Nigeria is dependent on the effectiveness of corporate governance practices in place, hence good corporate governance serves as a veritable tool for sustaining business growth and survival as well as protecting and enhancing stakeholders’ interests. The study recommends among other things, that food and beverages firms in Nigeria should adopt strong corporate governance practice as a panacea to firm growth and survival and to review the method of appointing independent non–executive directors while empowering them with inclusive leadership approach in order to enhance their effectiveness in improving profitability. Further research on impact of corporate governance on performance of public sector entities in Nigeria will not only add value in explaining performance of public sector entities, but also add value to the academic literature.