THE EFFECT OF CEO DUALITY ON FINANCIAL PERFORMANCE OF LISTED OIL AND GAS COMPANIES IN NIGERIA

Abstract

This study was on the effect of CEO duality on financial performance of Listed oil and gas companies in Nigeria. Two objectives were raised which included; To determine whether Chief Executive Officer (CEO) duality has any effect on listed oil and gas company’s financial performance and to determine the relationship between firm board size and increased performance in listed oil and gas companies in Nigeria. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn Nigeria listed oil and gas companies in Nigeria. Hypothesis was tested using Chi-Square statistical tool (SPSS).

Chapter one

Introduction

1.1Background of the study

Corporate governance has important implications on the micro economic as well as the macroeconomic level, where poor corporate governance can result in the failure of corporations, as in the case of listed oil and gas companies in Nigeria. The role of different instruments in implementing corporate governance is important as highlighted by Bhagat and Black (1999, 2002). These instruments include board of directors, independent directors, board size, CEO, managers, efficient market, political regime, government, regulatory authority and judiciary. The independent directors, CEO, board of directors and managers can improve the value of a firm by performance of their fiduciaries. The role of the regulatory authority, government and judiciary is important to improve the value of a firm as these authorities can protect the rights of the shareholders and implement corporate governance in developing as well as developed financial markets. Corporate governance has significant impact in disciplining a powerful and independent CEO, bringing improvement to the value of a firm in developing and developed markets. Similarly, the board and CEO can also safeguard the interest of the shareholders by creating more value for them as argued by Bhagat and Jefferis (2002) and Gompers, Ishii and Metric (2003)

The Chief Executive Officer (CEO) of an organisation can play an important role in creating the value for shareholders. The CEO can follow and incorporate governance provisions in a firm to improve its value (Brian, 1997; Defond and Hung, 2004). In addition, the shareholders invest heavily in the firms having higher corporate governance provisions as these firms create value for them (Morin and Jarrell, 2001). The decisions of the board about hiring and firing a CEO and their proper remuneration have an important bearing on the value of a firm as argued by Holmstrom and Milgrom (1994). The board usually terminates the services of an underperforming CEO who fails to create value for shareholders. The turnover of CEO is negatively associated with firm performance especially in developed markets because the shareholders loose confidence in these firms and stop making more investments.

It is the responsibility of the board to determine the salary of the CEO and give him proper remuneration for his efforts (Monks and Minow, 2001). The board can also align the interests of the CEO and the firm by linking the salary of a CEO with the performance of a firm. This action will motivate the CEO to perform well because his own financial interest is attached to the performance of the firm as suggested by Yermack (1996). The tenure of a CEO is also an important determinant of the firm’s performance. CEOs are hired on short-term contracts and are more concerned about the performance of the firm during their own tenure causing them to lay emphasis on short and medium term goals. This tendency of the CEO limits the usefulness of stock price as a proxy for corporate performance (Bhagat and Jefferis, 2002). The management of a firm can overcome this problem by linking some incentives for the CEO with the long-term performance of the firm (Heinrich, 2002). The legislation that is responsible for regulating the Nigerian capital market has been reformed recently to partially reflect corporate governance principles. A key controversy in the corporate governance literature is the impact of CEO duality (used as a proxy for board leadership structure) on corporate performance. The duality of CEO refers to the situation where the executive manager also serves as the chairman of the board of directors. Studying the relationship between the duality of the CEO and corporate performance is an important issue for several different reasons. The CEO duality “has been blamed for poor performance and slow response to change in firms. A final motivating factor for the approach taken in this study is the fact that, although CEO duality is the common leadership structure among Nigerian listed oil and gas companies, there is very little empirical evidence regarding its impact on corporate performance in Nigeria. Thus, the aim of this paper is to empirically provide robust evidence regarding the relationship between CEO duality and corporate performance using rigorous econometric methods of analysis

Statement of the problem

Increase in productivity in different work places have recently been on the decline. The major cause for this is the increase in isolation of corporate governance. This has led to low organizational performance(s). Public and private organizations laid more emphasis on the decline of increased in productivity and solution are being sought as to improve organizational performance(s). The concept of corporate governance looks at the best approach to solve the problem of adverse selection and moral hazard attendant on the principal-agent issues. Ignoble alliance between the political and business class has created a system where corruption is institutionalized and further entrenched through a network of family owned and controlled oil and gas. The corruption is so pervasive such that corporate affairs commission cannot effectively monitor the firms

The question of whether the chief executive officer’s duality affects financial performance has been the subject of much debate and research. The chief executive officer duality is an essential feature of an efficient capital market that must be given a due attention. Based on this the researcher wants to investigate the Effect of CEO duality on financial performance of Listed oil and gas companies in Nigeria

Objective of the study

The objectives of the study;

1. To determine whether Chief Executive Officer (CEO) duality has any effect on listed oil and gas company’s financial performance.
2. To determine the relationship between firm board size and increased performance in listed oil and gas companies in Nigeria

Research hypotheses

The following research hypotheses were formulated

H0: Chief Executive Officer (CEO) duality has no effect on listed oil and gas company’s financial performance.

H1: Chief Executive Officer (CEO) duality has effect on listed oil and gas company’s financial performance.

H0: there is no relationship between firm board size and increased performance in listed oil and gas companies in Nigeria

H2: there is relationship between firm board size and increased performance in listed oil and gas companies in Nigeria

Significance of the study

The study will be very significant to students and listed oil and gas companies in Nigeria. The study will give a clear insight on the effect of CEO duality on financial performance of Listed oil and gas companies in Nigeria. This study is expected to help shareholders, board of directors, stakeholders, managers of both public and private company/organization to understand the need for corporate governance and its effect on organizational performance. It will also be valuable to both management and employee of Nigeria listed oil and gas companies

Scope and limitation of the study

The scope of the study covers the Effect of CEO duality on financial performance of Listed oil and gas companies in Nigeria

Limitations/constraints are inevitable in carrying out a research work of this nature. However, in the course of this research, the following constraints were encountered thus:

1. Non-availability of enough resources (finance): A work of this nature is very tasking financially, money had to be spent at various stages of the research such resources which may aid proper carrying out of the study were not adequately available.

Time factor: The time used in carrying out the research work is relatively not enough to bring the best information out of it. However, I hope that the little that is contained in this study will go a long way in solving many greater problems.

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