Academic journal article Journal of Finance, Accounting and Management

How Employees on Top Affect Board Performance in Nigerian Firms: A SEM-Approach

Academic journal article Journal of Finance, Accounting and Management

How Employees on Top Affect Board Performance in Nigerian Firms: A SEM-Approach

Article excerpt

Introduction

Advocates of the Anglo-American governance arrangement identify the need to provide the shareholders with adequate protection. On the other hand, advocates of stakeholder theory argue that, a wider objective function of the firm is more equitable and more socially efficient than one confined to shareholder wealth (Freeman, 1984; Jones, 1995; Kay & Silberston, 1995; Donaldson & Preston, 1995; Collier, 2008; Sikka, 2008; and Fassin, 2009). They argue that, the well-being of other groups such as employees, suppliers, customers, lenders, local community, who have a long-term association with the firm and therefore a stake in its long- term success, is recognized. These stakeholders are able to build trust relations, which support profitable investments and mutually beneficial exchanges (Kay and Silberston, 1995). They cite Japan and Germany as successful industrial societies in which extensive stakeholder involvement with the firm is pervasive, and corporate goals are defined more widely than shareholders' profits. Others advocate for stakeholder participation in the firm's decision-making or governance through representation (Harrison & Freeman, 2004).

As a first line of agency framework criticism, Blair and Stout (1999) analyze US corporate law and argue that although it may be most efficient to have directors elected by shareholders; their fundamental responsibility is with the firm itself. Hence, the principal- agent representation of the corporation is at odds with the legal description of the firm as a separate entity. Similarly, the shareholders cannot be formally taken as principals. On the contrary, the board of directors itself is better conceived of as representing the top of the corporate hierarchy, and the board's fundamental role is to mediate between all corporate stakeholders in situations where stakeholders' interests do not necessarily coincide (Kostant, 1999). A broader view of director responsibilities is likely to lead to inclusion of strategic tasks as well. Therefore, a more inclusive approach about what boards should focus on, and how such tasks can be effectively operated calls for a broader conceptualization of board roles as an important element of corporate governance. Sikka (2008) uses stakeholder theory to focus entirely on the role and importance of workers within overall system of corporate governance. Hence, the literature is unanimous on the three major stakeholder groups: financiers, employees and customers (Fassin, 2009).

As a motivation, much of the argument behind stakeholder theory is that economic pressures to satisfy only shareholders is short-term thinking and organizations need to ensure their survival and success in the long-term by satisfying other stakeholders as well. Generally, stakes are held in the organization by employees, customers, suppliers, financiers, government and the community. All persons or groups with legitimate interests participating in an enterprise do so to obtain benefits, and there is no prima facie priority of one set of interests and benefits over another (Donaldson & Preston, 1995). Further, the questionable management integrity in the 2009/2010 financial crisis in Nigerian banks witnessed the indictment and sack of top executives by the Central Bank, akin to other rising spate of corporate scandals in Nigeria. The current code of corporate governance in Nigeria gives excessive power to the executive directors. As a result of the executives' mishap, thousands of employees lost their jobs, thus the need for re-examination of the status quo in the nation's public firms. Will there be any significant effect in terms of board performance if employees are represented on board? Correcting this anomaly can be disincentive for management misdemeanor, greater protection for outside shareholder, an aid to woo potential ones, and provide sustainable workforce.

Hypothesis Development: Contractual Stakeholders and Board Performance

There has been growing agitation by academic researchers, practitioners and nations' corporate laws to enhance the well-being and mutual trust relations of employees by adequately recognizing them in the corporate governance structure of firms and countries. …

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