The Impact Of Corporate Ownership On The Firm Performance In Nigerian Companies

The Impact Of Corporate Ownership On The Firm Performance In Nigerian Companies

The Impact Of Corporate Ownership On The Firm Performance In Nigerian Companies

Literature Review

Theoretical Framework

The underlining theory for this dissertation will be the agency theory. According to Eisenhardt (1989) Agency Theory describes the relationship between principaland agent/s by using the metaphor of a contract. As per the views of Eisenhardtagency theory is one that suggests a relationship between the shareholders (or principals) and the management of companies (executives). Shareholders are the ones who supply capital to the company whereas management or the executives are the ones who spend the capital in such a way that the company earns the profits expected by the shareholders. In short, both shareholders and the management plays vital role in helping the company in developing in the right direction.

Agency theory is aimed to resolve any problem that can occur between the agent and the principle, primarily because their goals and objectives might be entirely different. In the context of corporate structure agency theory helps understand whether the shareholders that own a significant part of the company are using their power to run the company without the help of the agent. For example, in a study it was said that the CEO also acted as the chairman and there was more than one of the same family member that had a place on the board, as a result of this it had an adverse impact of the firm performance (Ehikioya, 2009). When more than a member of the same family presents in a company board, the interests of that family may get more importance rather than the interests of the company or the shareholders.

Furthermore, when a major shareholder acquires a firm, the concentration of ownership on a particular individual may result. As a result of that the agency cost may decrease (Ehikioya, 2009). Therefore, it is better for a company to have directors from different families. Moreover, it is not for the best interests of the company to have two or more directors with any close relationships. When directors function independently without any prejudices and biases, the company may develop in the right directions.

How does having an Ownership Structure impacts Firm’s Performance

According to Ahunwan (2003)the ownership structure can be divided into four major groups: Group A, Group B, Group C and Group D. Group A represents the sectors that the federal government and the state government take control. The government takes all the revenue collected from the businesses while the business functions under Group A. Group A business can be labelled as public sector business. In other words, all the people or the public have equal shares in such businesses. The government owns and operates such business on behalf of the people and the profits earned from such businesses will be delivered to the public in the form of infrastructure development or through any other social service channels.

Group B has businesses that are co-owned by the federal government and the foreign investors(Ahunwan2003). For example, Nigerian oil sector is working under Group B arrangement. In other words, Nigerian government and foreign companies have claims on such businesses. Foreign companies help Nigerian government in the extraction and purification of oil. These enterprises are listed in the stock markets.

Group C is concentrated with the rich people who have businesses and have enough capital to inject into the business to make it grow to the next levels (Ahunwan, 2003). In other words, Group C business is purely private business. Only rich people can operate such businesses. Even though government may enforce some control over group C business, majority of the policies and strategies of such businesses are determined by the private people.

Group D are small businesses that are either owned by individual of family enterprises characterised with low income and lack of capital for doing business (Ahunwan, 2003). For example, there are many small scale industries in Nigeria which are owned and operated by a group of people, mostly the members of a family. The decision making in such business is done by the members of the group that owns the business.

Under corporate ownership, every member in the board is responsible for all the activities that are taking place in the company. Moreover, every person in the company board should work hard to improve the company performance of the company.At the same time, it is possible for the major shareholders in corporate companies to exclude minority shareholder from corporate management role, even if a representative is available in the board to represent the minority group. A number of factors contribute to a well-arranged corporate ownership among the proprietors.Mahoney & Roberts, (2004) argue that big boards are less accurate and effective compared to a board with smaller number of members. When smaller number of directors is present in a company board, it is easy for the CEO to make a consensus while taking critical decisions. When more members are present in a company board, the CEO would struggle to take a decision because of the contrasting opinions of the board members.

Types of Business ownership

The legal ownership of business can be classified into three broad categories: sole proprietorship,partnership and corporate ownership. In a sole proprietorship, the losses and profits of a business are the sole property of the business owner. No other entities may have any claims on such things.  Moreover, there is no distinction made between personal and business income, when a business functions under sole proprietorship. On the other hand, a partnership is merely joint ownership;therefore, the losses and profits suffered by the business will be shared among the partners. Personal liability of the profits and losses suffered by such business depend on the amount of share hold by the partners.  Both sole proprietorship andpartnershipare simple arrangements that can be dissolved easily, without even a written contract. On the other hand, the operations of corporate ownership are much more complex, than the sole proprietorship andpartnership since it involves the creation of a legal identity that separates its owners. Even if a single person owns all the shares of a corporation, he or she is not personally responsible for it since corporation is a legal entity rather than individual entity. Corporation is immortal in nature whereas individuals are mortal in nature. In other words, a corporation may survive even after the death of its actual owner (Corporate Ownership, 2014).

Relationship between Corporate ownership and corporate governance

There are many definitions for corporate governance. One of them defines corporate governance as a coherent set of institutional arrangements that allow theenterprises to function and to ensure the legitimacy of decision making and control whereas another one defines it asa set of mechanisms having the effect of defining the powers and influencing the decisions of leaders. A third definition describes corporate governance as a set of mechanisms adopted by stakeholders to be represented and effectively assert their interests(Boudabbous, 2014, p.8). According to Magdi and Nadereh (2002) corporate governance is all about making sure that the business is runs well and investors get adequate returns. On the other hand, OECD (1999) has defined corporate governance as the system by which business corporationsare directed and controlled. In any case, it is evident from the above definitions that corporate ownership and corporate governance are connected in one way or another.

Bebczuk, (2005, p.3) conducted a study among 65 non-financial listedcompanies in Argentina in 2003-2004, in order to know the relationship between corporate governance and the ownership structure. He found that ownership appears to be quite concentrated at the level of the largest ultimate shareholder, but separation of control and cash flow rights prevails in less than half of the companies. According to Boudabbous(2014), corporate governance seeks to define the power of leadership and influence their decisions. In his opinion, corporate governance follows different mechanisms in order to minimize the agency costs resulting from conflicts of interest in situations of cooperation.

Relationship between Corporate ownership and the performances of companies

Brockman and Olson (2013, p.393) conducted a study to know more about the relationship between corporate ownership and the performances of companies. Their findings suggest that “the composition of ownership changessignificantly with a decrease in ownership concentration among inside equityholders, i.e. managers and directors who own shares of the firm”. It should be noted that a company may have different types of shareholders. Some of them could be the employees of the company (insiders) while the others could be ordinary people (outsiders). When managers and directors of a company own shares, it is quite possible that they will work hard to make the company profitable. In such cases, managers and directors will get more salaries as well as dividends when the company performs well. When the managers and directors do not have any share in the company, they may not perform well since they get fixed salaries irrespective of the performances of the company.

Concentrated ownership and its impact on the performance of a company

The financial Times (N.d.) defined concentrated ownership as an ownership in which investors holding at least 5% of equity ownership with the firm (Financial Times, N.D). In concentrated ownership the majority shareholders are more powerful than the other shareholders and they seem to get through with their decision. As per the views of Lemmon and Lins (2003) concentrated ownership resulted in side-lining of theminority shareholders by the majority shareholders of the company. Thus, concentrated ownership affects the performance of a company performance both negatively and positively. In other words, concentrated ownership helps majority shareholders to protect their interests at the expense of the minority shareholders. It should be noted that the views, opinions and suggestions of the majority shareholders will get approval in the decision making bodies since it is easy for them to get majority votes in such bodies.

According to Ehikioya (2009) the negative impact of concentrated ownership occurs when the majority shareholders impose their strategies of doing business that is not well researched. It will be difficult for the management of a company to put effective control on all the operations of the company when improper strategies are implemented. The implementation of improper strategies may result in crumbling of the company. Therefore, it is necessary for the majority shareholders to implement only well researched strategies at the first place of the company’s operations. Another drawback of concentrated ownership is pointed out by Heflin and Shaw (2000). In their opinion, as the equity fractionheld by majority investors increases, the information-related component of the spreadincreases and liquidity decreases. Shleifer and Vishny (1986) supported the arguments of Heflin and Shaw. As per their views, majority shareholders help in the enhanced monitoring of management and in increasing firm value. At the same time, they have the ability to reduce the liquidity of the firm’s stock.

At the same time, the positive impact of concentrated ownership is the ability of this ownership in providing better returns to majority investors as well as minority investors. There are few people who have capacity of investing huge amounts.  When the rich invests more, the other shareholders also have the opportunity to gain more even though they less investments in the company (Ehikioya, 2009). According to Ayyagari and Doidge(2010), controlling majority shareholders or blockholders inforeign firms capitalize on the increased liquidity following a cross-listing to reducethe costs of unloading shares.

The Impact of Corporate Ownership on the Performance of Nigerian Companies

Because of poor ownership structure and corporate governance, many of the Nigerian public sector organizations such as NITEL, NNSL, NEPA, and NRC were either dead or simplydrain pipes of public resources, in the 1990’s. Majority of the manufacturing units of these organizations were working below their capacity during this period. Not only manufacturing units, but also service sector undertakings such as banks were also functioning poorly in the 1990s. Many of the investors and shareholders have lost huge amounts of money because of the poor performances of these public sector companies.  It was difficult for the government to stay idle while majority of the public companies in Nigeria were collapsing. Nigerian government took a bold decision at the beginning of 2000, in order to make drastic changes in the corporate governance of Nigerian public sector companies (Kajola, 2008).

The government of Nigeria has introduced various institutionalarrangements to protect the interests of investors in the beginning of 2000. As part of these institutional arrangements, the government has devised a “code of corporategovernance best practices” in November 2003. These institutional arrangements have defined: The roles of the board and the management; Shareholders rights and privileges; and the role of the Audit Committee(Kajola, 2008).

The government has given the right of selecting the CEO to the board of directors. The CEO and the board of directors were given the responsibility of the day to day management of the affairs of the firm. Moreover, it was the responsibility of the board of directors to provide necessary leadership to the company. The CEO and the management on the other hand will be responsible for the operations of the firm in effective and ethical manner. Moreover, it was their responsibility of the CEO and the management to make suitable business strategies based on the developments in the market. Above all, it was the duty of the CEO to make sure that the financial reports are expected to comply with relevant statutory and professionalpronouncements. Shareholders on the other hand were given the right to communicate with the board at any time they like. Moreover, they were able to appoint or remove any board member. It was the duty of the CEO and the board members to clarify the doubts of the shareholders. The major responsibility of the audit committee was to make sure that the company’s published financial reports are correct.  It was the duty of the audit committee to increase public confidence in the credibility of the company (Kajola, 2008). The above measures helped Nigerian public sector companies immensely and these companies started to perform well after the introduction of the above institutional changes.

A study by Tsegbe and Herbert, found that foreign ownership has a positive impact on the performance of Nigerian companies.Prior to the Nigerian Independence in 1960, foreign ownership dominated the corporate structure in Nigeria (Tsegbe and Herbert, 2013). As a result of that, Nigerian companies were well accustomed to foreign ownership. In other words, Nigerian companies learned a lot in how to function effectively under foreign ownership because of the colonial rule prior to 1960.  It should be noted that foreigners have cultivated many positive values and attitudes among the communities in which they rule. In fact, Nigeria got lessons of civilization and modernism from the colonial rule. These learnings helped Nigerian companies very much in increasing productivity and efficiency.

Foreign investors have ruthless management stylethat affects performance and competitiveness of the business in the foreign countries. A company that is built by foreigners bring profit to the individual and the country in which the company is located (Loderer& Peyer, 2002). The foreign companies play a major role in the economy of the country through helping the government in exploration of resources For example; foreign companies have helped Nigeria in immensely in oil business. Itshould not be forgotten that the technological advancements in Nigeria is negligible compared to that in western countries. In fact Nigeria is importing technology from foreign countries. Oil drilling and purification are processes that require complicated technologies. Such technologies are provided to Nigeria by foreign companies. In fact it is impossible for poor people to invest in Nigerian oil sector because of the enormous money required for the investment in this sector. That is the board of directors of the oil companies in Nigeria comprises of only the rich people who have invested most in the industry (Ahunwan, 2002). It is evident that the ownership structure contributes to the prosperity of the company. The only problem of the concentrated ownership is that few people benefit from the oil business, and the poor remain peripheral with regard to enjoying the benefits (Ehikioya, 2009).

Kajola, (2008, p.16) conducted a study among of twenty Nigerian listed firms between 2000 and 2006 in order to examine the relationship between four corporate governancemechanisms (board size, board composition, chief executive status and audit committee) and two firm performance measures (return on equity, ROE, and profit margin, PM), using panel methodology. He has identified a positive significantrelationship between ROE and board size as well as chief executive status. Moreover, he has concluded that the board size should be reduced to a sizeable limit in order to help the company to perform better. In his opinion, chief executive and the board chair should be occupied by different persons in order to avoid the centralization of power on only one person.

Kajola’s findings were well supported by many scholars. Many studies have proved a negative relationship between firm value and board size. In other words, when board size increases, firm value decreases. Lipton and Lorsch (1992) pointed out that large boards are less effective. In their opinion, when a board gets too big, it will be difficult for the CEO to control and coordinate the activities and process of the company in the right direction. Yermack (1996)also supported the arguments of Kajola. They also found a negative relation between board size and profitability.Mak and Yuanto (2003) went one step ahead; they argue that firmvaluation is highest when board has 5 directors. After conducting a study among Nigerian firms Sanda et al (2003) also supported the arguments of Kajola.

Kajola’s findings are extremely significant in Nigerian business sector. Most of the Nigerian firms have only one power centre; ie CEO. It is possible for the CEO to dictate the functioning of the company. When a company has two or more power centres, it would be difficult for the CEO to dictate the management of the company. Collective decisions will takes place on such occasions and the company will be benefitted.

“In recent years, international economic pressures have induced Nigeria to adopt a program of economic liberalization and deregulation. Advocates of the reforms tout their potential not only for generating greater economic growth, but also for contributing to more responsible corporate governance”(Ahunwan, 2002, p.269). The introduction of globalization and liberalization has helped countries all over the world to liberalize their economic principles in order to attract foreign direct investments as much as possible. Even communist China has liberalized many of its economic policies in order to accumulate or attract foreign direct investments. In fact, it is suicidal for countries to stay away from liberalization at the moment. It is impossible for a developing country like Nigeria to keep a blind eye towards foreign direct investments and still able to develop properly. At the same time, responsible corporate governance is necessary for international companies while they invest in a country like Nigeria. It should be noted that the business climate in Nigeria is extremely different from that in other parts of the world. Corporate governance has little importance in Nigerian business sector. However, it will be impossible for foreign companies to invest in such countries where corporate governance is less respected. Therefore, it is inevitable for a country like Nigeria to improve the climate for responsible corporate governance in order to attract more foreign companies.

Application of Agency theory in corporate governance

The agency theory is derived principally from the organizational economics and management literatures. The major argument of this theory is that in structuring andmanaging contract relationships, the separation of ownership and control can be viewed as an efficient mode of economic organization within the nexus of contracts perspective (Tsegba, and Herbert, 2013, p.24).

Agency theory stresses the importance of relationship between shareholders and managers (Reference for Business, 2014). It is the duty of the managers to function in accordance with the interests of the shareholders since the capital used for the business is provided by the shareholders. In any business, investors should get adequate returns. The implementation of institutional changes in Nigerian public companies by the government helped the shareholders of those companies to get more benefits.

At times the agency conflicts may occur in the relationships between the shareholders and the managers (Reference for Business, 2014). In other words, it would be difficult for the managers to consider only the interests of the shareholders while taking decisions. For example, corporate social responsibility and sustainable development are some of the major topics in the corporate world. It would be difficult for the managers to neglect these things and obey the instructions of the shareholders all the time. Ultimately, shareholders like to maximize their returns from their investment. While strictly observing the principles of corporate social responsibility and sustainable development, shareholders may not get the expected returns from the business. “Indeed, agency theory is concerned with so-called agency conflicts, or conflicts of interest between agents and principals. This has implications for, among other things, corporate governance and business ethics” (Reference for Business, 2014)

According to agency theory, corporate governance should lead to higher stockprices and better long-term performance. There are many studies in support to the positive effects of agency theory in the corporate governance. For example, the studies by Weiback(1988) andResenstein and Wyatt (1990) Mehran (1995) proved that firms perform better when the number of board members will be less. Moreover, their studies proved that since managers are better controlled by the CEO and board members, agency costs should be decreased while agency theory is implemented in the corporate governance. The major reason for the poor performances of many Nigerian companies is the poor management. If the CEO travel in one direction and the managers travel in the other direction, the firm will not perform well. Agency theory argues that the performance of better managed firms will be excellent compared to the poorly managed firms. However, Pinteris (2002)argue that there are little evidencesto prove a positive associationbetween corporate governance and firm performance when agency theory is implemented in a firm. The findings of Pinteris stood out since majority of the studies have supported the value of agency theory in corporate governance and firm performances.










Ahunwan, B. (2002). Corporate governance in Nigeria.Journal of Business Ethics 37 (3):269 – 287 (2002)

Ahunwan, B. (2003).Globalization and corporate governance in developing countries : a micro analysis of global corporate interconnection between developing African countries and Developed countries. Ardsley, NY : Transnational Publishers, 2003.

Ayyagari, M. and Doidge, C. (2010), Does cross-listing facilitate changes in corporate ownership and control?,Journal of Banking & Finance, Vol. 34 No. 1, pp. 208-23.


Boudabbous, S.(2014). Corporate Governance and Human Resource Management: The Case of Employee Share Ownership. IUP Journal of Corporate Governance. Oct2014, Vol. 13 Issue 4, p7-23.

Bebczuk, R N. (2005).Corporate governance and ownership : measurement and impact on corporate performance and dividend policies in Argentina  Inter-American Development Bank Latin American Research Network . Research Network Working paper #R-516

Brockman, P. and Olson B.C. (2013), Warrants, ownership concentration, and market liquidity,Managerial Finance, Vol. 39 Iss 4 pp. 322 – 341

Corporate Ownership, (2014). Retrieved from

Ehikioya, B.I. (2009),Corporate governance structure and firm performance in developing economies: evidence from Nigeria”,Corporate Governance: The international journal of business in society, Vol. 9 Iss 3 pp. 231 – 243

Eisenhardt, K (1988), ‘Agency-and institutional-theory explanations: The case of retail salescompensation’, Academy of Management Journal, vol. 31, no. 3, pp. 488-511.

Financial Times, (N.D).Definition of ownership concentration.Retrieved from

Heflin, F. and Shaw, K.W. (2000), Blockholder ownership and market liquidity, Journal of Financial and Quantitative Analysis, Vol. 35 No. 4, pp. 621-33.

Kajola, S.O. (2008). Corporate Governance and Firm Performance: The Case ofNigerian Listed Firms. European Journal of Economics, Finance and Administrative SciencesIssue 14 (2008)

Lipton, M and J.W Lorsch (1992): “A modest proposal for improved corporate governance”,Business Lawyer, Vol 48(1), pp 59- 77.

Lemmon, M.L., Lins, K.V.(2003). Ownership structure, corporate governance, and firm value: evidencefrom the East Asian financial crisis. Journal of Finance 58, 1445–1468.

Loderer, C. and Peyer, U. (2002) Board overlap, seat accumulation and share prices,European Financial Management, 8, 165-192.

Mak, Y and Y, Kusnadi (2005): “Size really matters: further evidence on the negativerelationship between board size and firm value”, Pacific- Basin Finance Journal, Vol 13, pp301- 318.

Magdi, R and R, Nadareh (2002): Corporate governance: A framework for implementation,Britain World Group Journal, Vol 20, pp 123- 132.

Mahoney, L. and Roberts, R. W. (2004), ‘CorporateSocial Performance: Empirical Evidence on CanadianFirms’, Research on Professional Responsibility and Ethics in Accounting 9, 73–99.

OECD (1999) Principles of corporate governance. Retrieved from

Pinteris, G (2002): “Ownership structure, board characteristics and performance of Argentinebanks”, Mimeo, Department of Economics, University of Ilinois.

Rosenstein, S and J, Wyatt (1990): “Outside directors: board independence and shareholderwealth”, Journal of Financial Economics”, Vol 26, pp 175- 191.

Reference for Business, (2014) .Agency theory. Retrieved from

Shleifer, A. and Vishny, R.W. (1986), Large shareholders and corporate control, Journal of Political Economy, Vol. 94 No. 3, pp. 461-88.

Sanda, A.U, A.S, Mikailu and T, Garba, (2005): “Corporate governance mechanisms and firmfinancial performance in Nigeria”, AERC Research Paper 149, Nairobi

Tsegba, I. N. and Herbert, W.E. (2013).Corporate Governance, Ownership Structure and Firm Performancein Nigeria.Research Journal of Finance and Accounting.Vol.4, No.5, 2013

Weisbach, M (1988): “Outside directors and CEO turnover”, Journal of Financial Economics,Vol 20, pp 431- 460.

Yermack, D (1996): “Higher market valuation of companies with a small board of directors”,Journal of Financial Economics, Vol 40, pp 185- 211.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: