CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Corporate governance has become a fundamental pillar of modern business practice, providing
guidelines on how organizations are being directed, managed and held accountable. It involves
the structures, mechanisms and processes through which corporations align and balance the
interests of key stakeholders, including shareholders, auditors, management, regulators and the
wider society. Basically, corporate governance provides the framework through which companies
are guided, monitored and controlled, with significance of the roles of the board of directors,
audit committees, and internal management in ensuring transparency, accountability and ethical
conduct.

Corporate governance guidelines are supported by several laws, including the Nigerian Deposit
Insurance Act (1988), the Companies and Allied Matters Act (1990) and the Banks and Other
Financial Institutions Act (1991), among others. These laws aim to promote ethical management
practices and protect shareholder value. Strong corporate governance is widely regarded as
crucial for improving transparency, accountability and trust in capital markets, especially in
capital-intensive and publicly listed sectors such as the oil and gas industry.

In Nigeria, Africa’s largest oil producer which is the oil and gas sector accounts for a significant
share of government revenue, export earnings and foreign exchange inflows. The performance of
this sector directly affects macroeconomic stability, investor confidence and national
development prospects. Despite its economic importance, the sector has been struggling with
persistent challenges including regulatory instability, uncertainties in decision-making and
governance negligence that can impair performance outcomes.

At the firm level, study examines how corporate governance influences financial performance
which is being determine through some metrics like; Return on assets (ROA), return on equity
(ROE) and other profitability or market performance indicators. Empirical research studies have
shown that firms with stronger shareholder rights, that is, better governed firms are more
valuable (Gompers, et al, 2003 and Bebchuck, Cohen & Ferrell, 2004).

Other studies reveal that specific governance characteristics may exert negative or insignificant
impacts. For instance, larger board size, board composition and female director representation
have been found to negatively and significantly affect financial outcomes in certain samples,
indicating the potential for governance attributes to interact with firm complexity in
counterintuitive ways (Dalton et al., 1998; Adams & Ferreira, 2009; Coles et al., 2008).

Further studies indicate that board size can positively affect firm performance in certain
situations such as enhances return on assets, suggesting that effective oversight patterns improve
resource utilization and strategic decision-making. However, other governance features, such as
board independence and foreign ownership, do not always lead to better results and may even
reduce profitability, as measured by indicators like Return on Assets (ROA) and Return on Equity
(ROE).

Different research results show that there is still disagreement among scholars about how
corporate governance affects firm performance. According to agency theory, strong governance
systems help control managers’ self-interest and ensure that they act in the best interest of
shareholders, which should improve performance. However, other theories, such as stewardship
theory and resource dependence theory, suggest that the composition of the board such as size
and diversity can improve performance by providing valuable skills, experience and external
connections. Despite these views, in countries with weak institutions, such as Nigeria, where
regulatory systems and capital markets are still developing, corporate governance mechanisms
may not always work as expected. As a result, their impact on firm performance may differ across
firms and may not always be positive.

Although many studies have examined corporate governance and financial performance, there is
still a need for updated and detailed research focused on specific sectors, particularly the oil and
gas industry. This sector is highly important to both domestic and global fluctuations. The need
for such research is greater in Nigeria, where governance issues, changing regulations and
instability in market structure significantly affect company performance and investor confidence.

1.2 Statement of the problem

Despite the recognized importance of corporate governance in ensuring firm growth and
enhancing investor trust, the Nigerian oil and gas sector continues to struggle with persistent
governance issues. These challenges not only affect firm-level financial performance but also
raise broader concerns about transparency, accountability and economic impact. As a sector that
significantly contributes to Nigeria’s GDP, foreign exchange and government revenue generation,
any instability in its corporate governance practices raises serious implications for national
development. However, recurring problems such as weak board independence, ownership
concentration, regulatory deficiencies, uncertainties, board oversight and limitations in
transparency practices have made it difficult for many oil and gas firms to operate efficiently and
meet some of the stakeholder expectations. This persistent gap between governance ideals and
real-world practice calls for a closer investigation into how corporate governance influences the
financial result of companies in this significant industry.

Although Nigeria has introduced several governance reforms including periodic evaluation of the
Nigerian Code of Corporate Governance and the implementation of the Petroleum Industry Act,
governance failures remain noticeable in reported cases of financial adversity, decrease in
profitability and reductions in shareholder investment returns among some listed oil and gas
firms. These results suggests that simply following governance rules on paper doesn't always lead
to better financial performance especially in a system where their institutions are weak and
enforcement is lacking.
Empirical studies examining the relationship between corporate governance and financial
performance in Nigeria, the findings are often unclear and sometimes even contradict each other.
While some studies report that board independence, board size, CEO duality, or effective in audit
committee positively influence firm performance, others document negative or statistically
insignificant effects of similar governance mechanisms on profitability indicators such as return
on assets and return on equity (ROA and ROE). This inconsistency brings up a serious problem
regarding how effective the corporate governance mechanisms in Nigeria’s oil and gas industry
are, especially since these companies are more complex, expensive to run and face tougher
regulations compared to other sectors.

In addition, many previous studies face some limitations such as relying on outdated data,
covering only short timeframes, using small sample sizes, and overlooking recent changes in
regulations and ESG (Environmental, Social, and Governance) practices. With the governance
framework growth due to increased investor attention, growing emphasis on sustainability
reporting and new post-reform expectations, there is a clear need for more current and relevant
research that reflects current realities in Nigeria’s oil and gas sector.

The problem is further compounded by the limited number of sector-specific studies focusing
exclusively on listed oil and gas firms, despite their unique risk profile and strategic importance.
Many prior studies combine multiple industries, thereby obscuring industry-specific governance
performance dynamics. Therefore, policymakers, regulators and investors lack robust, current
and sector-focused evidence to inform governance reforms and investment decisions.

Against this backdrop, there exists a significant research gap regarding how corporate governance
mechanisms actually influence the financial performance of listed oil and gas firms in Nigeria
under contemporary regulatory and market conditions. Addressing this problem is essential not
only for advancing academic discourse but also for strengthening governance practices,
enhancing firm performance and restoring investor trust in Nigeria’s oil and gas sector and
broader implications for other emerging markets with similar characteristics and challenges in
their oil and gas sectors.

1.3 Research questions

• What is the relationship between corporate governance practices and the financial
performance of listed oil and gas firms in Nigeria?

• What is the current state of corporate governance practices in the Nigerian oil and gas sector?

• How does board size affect the return on assets (ROA) of listed oil and gas firms in Nigeria?
• Does the effectiveness of audit committee influence the financial reporting quality of the listed
oil and gas sectors in Nigeria?
• In what ways does the ownership structure ( managerial, institutional, and foreign ownership)
influence the financial performance of listed oil and gas companies in Nigeria?

1.4 Objectives of the study

The following are the main objectives of the study:

• To analyze the relationship between corporate governance practices and the financial
performance of listed oil and gas firms in Nigeria.

• To assess the state of corporate governance practices in the oil and gas sector.

• To investigate the effect of board size on the return on assets (ROA) of listed oil and gas firms in
Nigeria.

• To examine the effect of audit committee effectiveness on the financial performance of listed
oil and gas firms in Nigeria.

• To investigate how the ownership structure (managerial, institutional and foreign ownership)
affect the financial performance of listed oil and gas firms in Nigeria.

1.5 Research Hypotheses

The following hypotheses will be tested in the study:

H01: There is no significant relationship between corporate governance practices and the
financial performance of listed oil and gas firms in Nigeria.

H02: Corporate governance are not adequately implemented in the oil and gas firms.

H03: Board size has no significant effect on the return on assets (ROA) of the oil and gas firms.

H04: Audit committee effectiveness has no significant impact on the financial performance of
listed oil and gas firms in Nigeria.

H05: Ownership structure does not have significant effect on the financial performance of the oil
and gas firms.

1.6 Significance of the Study

This study on how corporate governance affects the financial performance of listed oil and gas
firms in Nigeria is important not just in theory, but also in real-life practice and empirical
perspective. The study contributes to wider and clearer understanding on how the key elements
of governance mechanisms such as audit committee effectiveness, board size and ownership
structure are serving their purpose of ensuring transparency, accountability and boosting the
financial performance.

Theoretically, this research contributes to the existing body of knowledge in corporate

governance and finance by providing updated empirical evidence from Nigeria’s oil and gas
sector, which remains relatively under explored in concurrent literature. By integrating agency
theory, stewardship theory and resource dependence theory, the study enhances understanding
of how governance mechanisms including board size, board independence, CEO duality, audit
committee effectiveness and ownership structure affect firm financial performance. Furthermore,
the study helps to bring reconciliation to the conflicting findings in the past studies by examining
the differential impacts of governance mechanisms on multiple performance measures, adopting
both accounting-based indicators (ROA and ROE) and market-based measures.

Empirically, the study fills a critical gap in the literature by providing sector-specific and updated
real-world insights on the relationship between corporate governance and firm performance
within Nigeria’s oil and gas industry. By using recent data from listed firms, the research captures
the effects of contemporary regulatory reforms, such as the Nigerian Code of Corporate
Governance and the Petroleum Industry Act, as well as increasing investor demand on
transparency, accountability and ESG compliance. The findings strengthen empirical literature on
corporate governance in emerging markets, where institutional weaknesses and market
inefficiencies may influence the effectiveness of governance mechanisms.

In practical use, the findings of this study are expected to provide valuable perspective for key
stakeholders, such as corporate managers by identifying governance structures and practices that
enhance financial performance and shareholder returns. Investors by offering guidance on the
role of firm-level governance quality in profitability, risk management and investment decision-
making.
Also, regulators and policymakers, by supplying evidence-based insights that can inform
governance codes, enforcement strategies and sector-specific ESG disclosure requirements.
It as well provide academics and researchers, by serving as a reference point for future studies on
governance–performance relationships in Nigeria and other emerging countries.

Social economic aspect, the strategic role of the oil and gas sector in Nigeria’s economy
contributing significantly to national revenue, employment and foreign exchange improved
corporate governance has broader implications for economic stability and sustainable
development. Enhanced governance practices can lead to better resource allocation, higher firm
profitability and greater investor confidence, which collectively support national economic
growth and social welfare in Nigeria.

1.7 Scope of the Study

The study focuses on the relationship between corporate governance mechanisms and financial
performance of the Nigeria oil and gas firms.
Specifically, it examines key governance variables such as board size, board independence, CEO
duality, audit committee effectiveness, ownership structure (managerial, institutional, and
foreign ownership). The financial performance is measured using both accounting-based
indicators such as, Return on Assets (ROA), Return on Equity (ROE) and market-based indicators.
he study emphasizes the sector-specific governance dynamics of oil and gas firms, which are
capital-intensive, highly regulated and strategically important to Nigeria’s economy.
Geographically,the research is limited to oil and gas firms listed on the Nigerian Stock Exchange
(NSE). This focus is justified by the fact that listed firms are subject to statutory corporate
governance codes, financial reporting standards and investor scrutiny, providing reliable data for
empirical analysis.
This study focuses on the recent period (2018 - 2024) to reflect recent developments in corporate
governance and regulations like the introduction of the Petroleum Industry Act, as well as the
growing expectations from investors around transparency and ESG (Environmental, Social, and
Governance) practices. Studying within the timeframe helps us understand how these changes
have influenced the financial performance of oil and gas companies in today’s business
environment.
The study examines corporate governance through the lens of agency theory, stewardship theory,
and resource dependence theory, allowing for a theoretical understanding of how governance
mechanisms influence financial performance. It does not explore other determinants of firm
performance outside governance, except as control variables (e.g., firm size, leverage, firm age) in
the actual models.
The study employs quantitative research methods, relying on secondary data such as annual
reports, published academic journals, previous theses, financial statements, corporate
governance reports.