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Stakeholder Perspective on Improving Board Performance

Traditional accounting research in corporate governance around the world and Nigeria in particular is dominated by the Anglo-Saxon model, reflecting the dominance of agency theory, thus making previous studies limited and incomprehensive. To narrow this gap, this study intends to extend the current literature by broadening the theoretical framework in the perspective of stakeholder theory (Freeman, 1984; Sikka, 2008; and Fassin, 2009), which incorporates both shareholders and non-shareholding stakeholders, in an attempt to offer more inclusive approach and strengthen the existing governance structure in Nigeria. This will suggset having employees, creditors and other debt investors sit on board for advisory role, with more monitoring by external regulators to serve as disincentive for management misdemeanor without removing incentives to hold controlling shares. In this paper, a conceptual model is proposed and tested on public listed companies in Nigeria. Based on a perception sample of 156 responses, and confirmatory factory analysis, I conclude that key company stakeholders affect board performance.


Since the creation of mankind, history abounds that in many ancient civilizations, there have been established governance regulations, with acceptable divine codes of conduct for human societies headed by effective leadership (Chapra & Ahmed, 2002). For example, Chapra & Ahmed (2002) state that Muslim civilizations encourage mutual trust and confidence, which were supported by high moral values and cooperative spirit that encourage self-enforcement. However, proprietorship and simple partnership were the forms of businesses, so separation of ownership and control was not a problem.

In the current period, as a result of separating wealth ownership from control, vast literature on corporate governance has been documented, with focus mainly on outside shareholder protection, and governance rules, which had thrived for centuries, seem to continue in the realm of contemporary literature but in different perspectives. In this respect, advocates of the Anglo-American governance arrangement identify the need to provide the outside investors with adequate protection. As a result, when principals attempt to ensure that agents act in their invested interests, agency cost is incurred (Jensen & meckling, 1976).

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.

Recently, broader approaches to corporate and accountability research beyond the traditional use of financial parameters to measure firm performance abounds. Brennan & Solomon (2008) encourage broader theoretical perspectives, methodological approaches, accountability mechanisms, sector analysis, developing economy studies and time horizon. In respect of this, they adopt an analytical frame of reference based on the factors mentioned above, and locate seven studies in the special issue in a framework of analysis showing how each one contributes to the field. For example, Gupta et al. (2008) recognize heterogeneity of outside board appointments and proxy for the latent aspect of the directorship quality appointments. In addition, using stakeholder theory, Collier (2008) focuses on regulator, lenders and tenants as other dimensions of corporate governance. Also, Sikka (2008) uses stakeholder theory by focusing entirely on the role and importance of workers within system of corporate governance.

In Nigeria, processes of globalization-such as integration of capital markets, emergence of information and communication technologies, privatization, and transformation of ownership structure led to increased attention to corporate governance. Adelegan (2004) finds slow trading, low market capitalization, and low liquidity as other factors that impair the effectiveness of corporate governance mechanisms in Nigeria.

In this respect, Berglof & Claessens (2004) observe that in many developing and transition countries, few of the traditional corporate governance mechanisms will be effective because the general enforcement environment is weak and specific enforcement mechanisms function poorly. They affirm that enforcement more than regulation or voluntary code is the key to effective corporate governance. They provide a framework for linkage, as they affect firms’ ability to commit to outside investors and other stakeholders. Unfortunately, the governance structure in Nigeria is characterized by weak compliance and enforcement (Oyejide & Soyibo, 2001; and Wilson, 2006).

In this circumstance, policymakers (regulators) normally focus on increased deterrence, which in practice usually means more enforcement. After all, if compliance with the code is 100%, there will be less need for enforcement. Therefore, this necessitates that; Nigerian firms ought to strengthen internal self-enforcement mechanisms as complement to the public regulatory enforcement bodies and empower them with full capacity to monitor and enforce compliance with governance code so as to achieve the optimum benefit (World Bank, 2004). Though effective enforcement requires a lot of expenditure, it is assumed that the benefits the economy yields outweigh the cost. Therefore structure for Nigeria could be a hybrid of both shareholder and stakeholder governance models.

Research Motivation

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, and other rising spate of corporate scandals in Nigeria demands for re-examination of the current code of corporate governance for public firms. The current code of corporate governance in Nigeria, gives excessive power to the executive directors. There is the need for advisory role of debt investors and employee consultation on operational matters. Correcting this anomaly will be disincentive for management misdemeanor, greater protection for both outside debt and equity investors, minority shareholders and an aid to woo potential ones.

The voluntary status of the Nigerian code means legal sanctions are not provided for non-compliance. However, Berglof & Claessens (2004) report that enforcement more than voluntary code is the key to effective corporate governance in transition and developing countries. World Bank (2004) reports Nigerian regulatory enforcement bodies lack the capacity to enforce compliance with regulations. Also minor penalties for major offences contribute to non-compliance of the govenance and other rules.

Arguments against Agency Theory

As a first line of criticism, it can be observed that this exclusive focus on the board’s monitoring tasks is at odds with both corporate law and corporate practice. 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 study of what boards actually do, and how independence affects these tasks, calls for a broader conceptualization of board tasks as important element of corporate governance.

A second line of criticism addresses two fundamental assumptions of the principal-agent model. Firstly, interactions between board members and management are essentially seen as discrete events in agency theory (Willenborg, van Ees & Huse, 2007). Consequently, decision-making in discrete settings is most efficient in case all actors act as if they meet for the first time. In particular, the disutility of monitoring perceived by board members should be minimal and unaffected by the interests of the managers. Hence, independent boards are required to optimize the quality of board decision-making. So, the emphasis is not on the process of decision-making itself, but on result-oriented decisions of the board with positive impact on firms.

Secondly, human nature in agency theory is at odds with real-world observations (Willenborg, van Ees & Huse, 2007). Human beings are assumed to be fully rational, capable and self-interested agents. Although corporate governance scandals have shown that self-interest exists, but it is not out of place to ponder on the old-adage that ‘it is human to err’. Consequently, the assumption that all deviations from goals are due to intentional misappropriation requires qualification (Hendry, 2005). This also implies that boards can be called upon to provide their expert advice to management instead of the saint-devil impression.

Stakeholder Theory

In the stakeholder theory, things are quite different. A wider objective function of the firm’s governance structure is proposed. Stakeholder theory derives from Freeman (1984) who defines a stakeholder as “any group or individual who can affect or is affected by the achievement of an organization’s objectives”. This means any individual or group that maintains a stake in an organization in the way shareholder possesses shares. Fassin (2008; 2009) observes that stakeholder theory has been complemented by a graphical framework model, which visually illustrates the relationships among the various groups of actors in and around the firm with considerable impact based on the cognitive power of visual representation. Several authors report that stakeholder concept has the potential to deliver a theory of the organization with practical usefulness for management (Attas, 2004; Freeman, 1999; Harrison & Freeman, 1999; Preston & Donaldson, 1999).

Nevertheless, Attas (2004) argues that stakeholders who have a relationship but lack an element of risk do not hold a stake in the company. Others advocate for stakeholder participation in the firm’s decision-making or governance through representation (Harrison & Freeman, 2004). On the wave of this interest, it has been ascertained that, Freeman originally presented the stakeholder model as a map in which the firm is the hub of a wheel and stakeholders are at the ends of spokes around the rim (Freeman, 1999). The design of the stakeholder model was influenced by the traditional input-output model of managerial capitalism in which the company is related to only four groups: suppliers, employees and shareholders providing the basic resources for the company, transformed into products or services for the fourth group, namely clients. Interestingly, the literature is unanimous on the three major stakeholder groups: financiers, employees and customers (Fassin, 2009). 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).

Literature Review

In the literature, there are growing movements to broaden the frontiers of corporate governance in several ways. Brennan and Solomon (2008) present an analytical frame of reference developed through a careful analysis of the extant literature in corporate governance within the accounting and finance field. From a methodological point of view, the development of the analytical framework was similar to factor analysis in quantitative research, in that “factors” or “themes” were derived from their interpretation from existing research. The analytical framework has “dimensions” considering broader perspectives of theory, studying a wider range of (e.g. accountability) mechanisms, using different methodological approaches, adopting a broader set of techniques, looking at governance and accountability in different (e.g. business) sectors/context, seeking to study models in previously un-researched markets ( due to globalization), and extending the time horizon studied (Brennan & Solomon, 2008).

In an analysis of the literature referring to stakeholder selection, Fassin (2009) further attempted to logically regroup common and related subgroups, and identify any common elements in the various selections. He tabulates a detailed list of the subgroups that explores how stakeholders can be better identified and categorized and how the imperfections (ambiguity, vagueness) and shortcomings of the graphical model can be reduced to arrive at a refinement of the stakeholder model. Fassin (2009) incorporates minor changes but respects the logical line of evolution initiated by Freeman’s first conceptual stakeholder model and its subsequent adaptations that provide a new and insightful extension to the existing stakeholder literature. The new concepts of stakewatchers (mainly pressure groups) and stakekeepers (largely regulators) have been introduced (Fassin, 2009). This view better reflects the distinct activities of stakeholders in one of three groups: “the stakeholder who holds a stake, the stakewatcher who watches the stake and the stakekeeper who keeps the stake”.

In the Nigerian CAMA 1990, which is mirrored from the UK’s company law, shareholders are in a privileged position compared with other stakeholders. However, other models of governance in Africa take a broader view. For example, in South Africa the King Committee on Corporate Governance (1994; 2002; and 2009) provided an integrated approach in the interest of all stakeholders, embracing social, environmental and economic aspects of organizational activities. It therefore, supports to some extent at least, a broader stakeholder model of governance (Collier, 2008).

Hypotheses development

Stakeholder theory does not provide an alternative answer to the question of whom, or what produces economic value. Its focus is on the distribution of the outcomes, the harms and benefits, and not on who produced the harms and benefits. It assumes value is produced by the enterprise itself and that stakeholders have a claim on some of this value because the enterprise is a creature of society. Stakeholder theory makes implicitly the assumption that Donaldson and Preston (1995) make explicit: the enterprise has a distinct, privileged social status. As a result, it claims a moral justification for limiting the rights of others, and importing the interests of stakeholders in to the operation of the firm.

However, Weis (1999) observes that this is inconsistent with the arrangement of the institution of modern capitalism, institution that legitimize the rights of owners to control the firm and use it for their own private purposes. Within the moral structure of capitalism, this is accepted as moral behavior. Stakeholder theory can be morally justified only if the rights of owners can be shown to be limited. However, it is argued that these claims are legitimate because the rights of owners rest on a weak legal and philosophical justification (Donaldson & Preston, 1995). The exclusive claims of the firm by its owners are morally justified because they have used their own property to create the firm and the economic value represented by its outputs. Within the institutional context of capitalism and its moral structure, the argument offers a plausible moral defense of the conventional view of the firm.

An ideological defense of professional managerial class has also been argued by Weis (1999). The legitimacy of the right of the managers to be in control, and the legitimacy of any authority they exercise over the firm, would be derived from a stakeholder model of the firm. The rejection of the conventional rights of owners, would also legitimate the control of the firm by management, and establish its independence of identifying, responding to, balancing and mediating among the interests of different stakeholders.

Berle and Means (1932) argued that, professional managers, separated from the social class interests of owners would put the general social interest above that of a mere profit. In this case, of course, the authors made explicit arguments to support the assertion that if professional managers were in control, business would be governed with an eye towards the general social good, rather than the immediate profits of owners.

Therefore, stakeholder theory offers a way to articulate the interests of members of this class, and legitimate its claims to authority and establish its autonomy from other institutions in society. By invoking the interests of a wide range of vaguely defined stakeholders who are to be served by a firm run in their interests by its managers, the managers can claim to be serving the interests of society in the name of the public good. As an ideology, stakeholder theory can be used to defend a manager’s interpretation of the merits of claims made by competing stakeholders and deflect critiques of managerial power and prerogatives. There is no instrumentality to review managerial decisions if management concludes that some action is in the best interests of stakeholders in general, even if it harms some specific stakeholders. At the same time, Donaldson and Preston (1995) affirm that stakeholder theory “prohibits any undue attention to the interests of any single constituency.”

On the other hand, Sikka (2008) stimulates debates about the creation of corporate governance mechanisms and processes in an attempt to secure an equitable distribution of income and wealth for UK workers. Therefore, his paper focuses entirely on the role and importance of employees within systems of corporate governance. He starts from the premise that employees, as essential group of stakeholders have been effectively ignored both in the academic research and in corporate governance practice. Using stakeholder theory, he shows that the UK lacks institutional structures, processes and mechanisms to enable workers to secure a higher share of the firm’s income.

In this regard, based on the literature discussed on the recent worldwide trend of a broader approach to wider recognition of other relevant stakeholders in the governance systems of corporations, and the assertions of Dore (2005) that, with the transformation in employment relations and the concomitant increase in the proportion of staff whose specific human capital is of obvious value to the employer in US, the co-determination system in Germany, the capillary control of younger managers and formal employee representation in Japan, employee power in corporate governance cannot be underestimated. Therefore, based on the arguments of the proponents of stakeholder theory, it is reasonable to hypothesize that:

H2 Employee representation on board constitutes effective corporate governance.

H2.1 Equitable wealth distribution is assured when employees are represented on board.

H2.2 Trust relations between firm and labor union is enhanced when employees are represented on board.

H2.3 High-skilled labor exit is reduced when employees are represented on board.

Another dimension of stakeholder theory, which the literature is unanimous about is the supplier of finance, i.e. the debt investor. Important questions are how do the suppliers of finance get managers to return some of the profit to them? How do they make sure that the managers do not steal the capital they supply or invest in bad projects? Unlike highly trained employees and managers, the initial debt investors have no special ability to help the firm once they have parted with their money. Their investment is sunk and nobody – especially the managers needs them (Shleifer & Vishny, 1997). Yet despite all these problems, outside finance occurs in almost all market economies, and on an enormous scale in the developed markets. Some reasons given in the literature are managers deliver on their agreement to pay back because of reputation-building (Diamond, 1991) and investor opportunism (Kaplan & Stein, 1993).

However, like shareholders, creditors have a variety of legal protection, which varies across countries. These may include the right to grab the assets that serve as collateral for the loans, the right to liquidate the company when it does not pay its debts, the right to vote out managers (Shleifer & Vishny, 1997). Nevertheless, when the bankruptcy procedure gives companies the right of automatic stay on the creditors, managers can keep creditors at bay even after having defaulted, due to the long legal proceedings of reclaiming assets especially when there are many diverse creditors with conflicting interests (Weiss, 1990). In this regard, OECD (1995) reports that significant creditors, such as the banks having a whole range of controls, combine substantial cash flow rights with the ability to interfere in the major decisions of the firm, such that in many countries, banks end up holding equity as well as debt investments in firms.

In spite of the theoretical backing of the importance of suppliers of finance in the governance structure, empirical evidence on governance discuss by large creditors is scarce. However, researchers find evidence of banks improving companies’ performance more so than other block-holders (Gorton & Schmid, 1996; Kaplan & Minton, 1994). In Germany and Japan, the powers of the banks vis-a-vis companies are very significant because banks vote significant block of shares, sit on board of directors, play a dominant role in lending, and operate in legal environment favorable to creditors. In the United States, Gilson (1990) reports that banks play a major governance role in bankruptcies, when they change managers and directors. In addition, DeLong (1991) points to a significant governance role played by J.P. Morgan partners in the companies they invested.

In Nigeria, where procedures for turning control over to the banks are not established, and where legal protection is not guaranteed (Okike, 2004) as well due to influences of personal interests or slow legal process (World Bank, 2004), the need to include large creditors in the investment decision processes of firms cannot be over emphasized. It is therefore reasonable to suggest that:

H3 Creditor representation on board constitutes effective corporate governance.

H3.1 Credit contracts are better enforced when major creditor is represented on board.

H3.2 High risk project is better monitored when major creditor is represented on board.

H3.3 Collateral and bankruptcy reform are protected when major creditor is represented on board.

According to OECD (2004), to ensure an efficient corporate governance structure, it is essential that an appropriate and efficient legal, regulatory and institutional foundation be established upon which all market participants can rely in establishing their private contractual relations. The OECD (2004) principles of corporate governance further state that a corporate governance framework will typically comprise elements such as legislation, regulation, voluntary commitments, and business practices that are based on a country’s specific circumstances such as history and tradition. On the wave of this interest, new experiences are being witnessed even in Africa, judging from the worldwide trend of recognizing other significant stakeholders in governance structures for sustainability, and the changed business circumstances of achieving wider objective functions (King Committee, I; II & III). Therefore, an adjustment in the content and structure of the governance framework in Nigeria may be required.

In this respect, it has been mentioned earlier that CAMA (1990) is one of the major corporate laws regulating business operations in Nigeria, which provides for the protection of shareholders, functions of directors and audit committee. However, weak regulatory framework, slow legal processes, and high-level corruption have been reported as factors hindering effective corporate governance in Nigeria (World Bank, 2004; Okike, 2004; 2007; and Okpara, 2009). Therefore, stakeholder theory view the corporation as an enduring social institution, with personality, character and aspirations of its own, with proper interests of a wide range of stakeholder groups, and with public responsibilities, such as government regulatory and enforcement agencies.

However, the OECD principles assume that all countries have efficient legal system and the means and capabilities to enforce it as obtained in the developed member-nations the organization’s principles represent. Stein (2008) examines the impact of government, governmental techniques, and regulatory reform to normalize the behavior of managers and accountants. The regulations examined are the US SOX, characterizing the power relationships of government, and the social construction of corporate governance and reforms through autonomous agents, including managers and accountants. In contrast, in developing countries, practices of self dealing and insider trading are widespread. Such offences are usually unpunished because in Nigeria, the penalties are minor (Okike, 2007) and even if there are stiff penalties in theory, enforcement is lax (World Bank, 2004; and Okpara, 2009). Even the professional auditing associations in Nigeria lack the capacity to impose effective sanctions on their erring members (World Bank, 2004; and Okike, 2004). Government departments and independent regulators responsible for monitoring and enforcement are generally weak, and subject to external influence by politicians (Okpara, 2009). Unlike in the UK, community whistle-blowing watchdog organizations such as consumer bodies are not well developed in Africa (Botha, 2001). Therefore, it is reasonable to suggest that:

H4 Enforcement mechanisms constitute effective corporate governance.

H4.1 Regulatory capacity is essential for strong enforcement of rules.

H4.2 Legitimacy of governance regulations is essential for strong enforcement.

H4.3 Staff training is essential in strengthening enforcement structures.


Globally, especially post-Enron, there is widespread recognition that strong board aids adequate investor protection, well-being of employees and other relevant stakeholders coupled with effective regulatory enforcement of governance code can substantially affect public firms, not only in their ability to commit to stakeholders, improve firm value and performance, but also the development of capital markets and the growth of the economy in general (Jones, 1995; Berglof & Claessens, 2004; Sikka, 2008; Bhagat et al., 2008; and Fassin, 2009). These developments sparked nations, academics and rating agencies develop many dimensions of corporate governance and indices for evaluating the quality of corporate governance practices in public firms.

However, Fig. 1.1 below depicts a Confirmatory Factor Analysis (CFA) model where a second-order factor (effective corporate governance) is introduced as the cause of the four first-order factors (Board roles, employee consultation, creditor advisory role and enforcement), each measured by three reflective indicators (items). It is important to note that the second-order factor changes the designation of the constructs. First, the first order factors from the CFA model (which were originally exogenous constructs) now become endogenous constructs (note the arrows point from the higher-order construct toward the first-order constructs). The second-order factor is now the specified cause of the four constructs versus using the correlational relationships among constructs to represent an unspecified common cause as was done in the CFA. Second, the higher-order construct is now the exogenous construct and it has no measured variables as indicators. Because it represents a relationship among constructs, the first-order factors act as its “indicators” through the structural model relationship. Finally, just as was required in specifying each first-order construct, the scale must be set for the second-order construct as well. This is an interdependence conceptual framework model that attempts to explain the latent constructs of corporate governance structure of relationships among respondents sharing similar characteristics, with the arrows pointing outward, in ways not captured by dependence relationships. The objective of interdependence methods is to identify the structure among a defined set of variables, or observations that offer not only simplicity, but also a means of description and even discovery (Hair et al, 2010).

Figure 1: CFA Measurement Model

In general, SEM requires a larger sample relative to other multivariate approaches (Hair, et al., 2010). A generally accepted ratio to minimize problems with deviations from normality is 15 respondents for each parameter estimated in the model. Therefore, to provide a sound basis for estimation, in this study, a total of 264 questionnaires will be distributed to survey the perceptions of the targeted respondents (22 respondents for the 12 indicator variables in the model). The banking sector is expected to respond to 80 of the questionnaires because it contributes more than half of the market share, having more branch networks, higher number of customers, and larger employee strengths in the Nigerian economy. Petroleum marketing sector in the sample is expected to respond to 50 questionnaires. In addition, external individuals at the institute of directors are expected to respond to 20 questionnaires; sector regulatory bodies (CBN and Department of Petroleum Resources) and listed firms regulatory and enforcement body (SEC) will be distributed with 30 questionnaires each; and finally sector customers will participate in the remaining 24 questionnaires. The sample size is considered adequate to produce more information and greater stability. It is expected that findings from the study sample will be adequate for generalization of the entire research population.

Based on the above sampling, and since all the listed firms have similar characteristics considering the criteria each firm must meet to be listed in the stock exchange, therefore multi stage sampling technique will be adopted for the study. One, purposive sampling technique will be suitable in identifying the company secretaries and independent directors in sample firms because they are known with certainty, and thus can be easily identified. Second, systematic random sampling technique will be adopted for other participants in the study, such as customers, institute of directors and staff of the regulatory and enforcement bodies because the working population is randomly distributed, therefore the study can systematically choose sample members by selecting from the universe (Rea & Parker, 2005) since the units are similar, and as such are guided by the NSE regulations.

4.4 The Research Instrument

As earlier mentioned, questionnaire instruments will be used for the collection of data for this study. “Questionnaire surveys are useful when the research questions indicate the need for a relatively structured data and when data are required from samples representative of a defined wider population” (Veal, 2005). To minimize the weakness of questionnaire survey such as incomplete and incorrect response, poor response rate, user unfriendliness etc., a questionnaire design process will be adopted and appropriate distribution channel will be chosen as recommended by Sekaran (2003). A number of rules will be applied; clear and precise instructions, questionnaire division into sections with linkage, asking simple interesting questions early, respect for respondents confidentiality, avoiding negative questions, avoiding leading questions, ambiguity, avoiding sensitive questions, tables for ease of ticks etc (Veal, 2005; Sekaran, 2003).

Besides delay postal services in Nigeria and low responses associated with mail surveys especially due to poor research culture, personal distribution of questionnaire will be adopted except in unavoidable circumstances. In addition and where necessary, the target respondents may require face to face discussion with the researcher on some specific questions of the instrument that usually arouse the interests of some respondents.

Due to the difficulty in designing questionnaire instrument, an attempt is being made to adapt some questionnaire items relevant for the study. In a study conducted in Nigeria, using modified version of a 31-item OECD questionnaire instrument related to the common problems in developing and implementing corporate governance structure, Okpara (2009) submitted the OECD instrument to a panel of 10 experts in corporate governance in Nigeria, the UK, and the US to review the items and determine their relevance for Nigerian environment. In their assessments, the experts recommend the use of the modified instrument and it was adopted by Okpara (2009). The instrument measured responsibilities of the board and minority shareholder protection, but does not recognize other stakeholders, such as employees in the governance structure. Moreover, a more comprehensive questionnaire developed by UK Innovation team as seen on survey question pro website. Hence, this study intends to adapt, where necessary both instruments mentioned above as basis for designing comprehensive and effective survey questionnaire considered relevant to achieving the research objectives of this study. The UK Innovation 10-page questionnaire instrument comprises of structured close-ended questions with answer options, ‘Yes’ or ‘No’, simple fill-in the-blank space questions, and 5-likert scale questions with answer options, ‘1 indicating Strongly disagree and 5 indicating Strongly agree. However, these instruments cannot be regarded as ideal for soliciting all the information deemed necessary for this study, but their inherent advantages as well as inherent flaws will be considered. Therefore, since questionnaire construction is a skill that is refined over time by experience (Rea & Parker, 2005), the researcher is still consulting and gathering information on designing a draft questionnaire for pretest to assess clarity, comprehensiveness and acceptability.

However, this study consists of four latent constructs and twelve indicator variables. Each indicator variable could be measured with a different number of potential scale values (5 points, 7 points, 50 points, etc.). Although some studies (van der Walt & Ingley, 2004; Lima, 2007; and Okpara, 2009) transformed the number of scale points to a common scale (5-likert scale questions) before estimating their respective models, Hair et al, (2010) state that it is not necessary to do so, because CFA is capable of analyzing multiple indicator variables using a different number of scale points. However, the scale to be used for this study shall be 5 points likert-scale since the sources of the questionnaire instrument to be adapted for this study used 5 points likert-scale (Okpara, 2009; van der Walt & Ingley, 2004; and the UK Innovation questionnaires).

4.6 Analytical Approach

This part explains about the scale validation, exploratory factor analysis and SEM to ensure that the measures are psychometrically sound. The scale validation above discussed about the preliminary examination of reliability and validity of the measures using Cronbach-alpha (CA).

Validity and Reliability Test for Pilot Data

Validity is the degree to which a measure accurately represents what it is supposed to (Hair et al., 2010), or the instrument measures what it supposed or intended to measure (Zikmund, 2000), or the extent that the construct accurately represent the concept of interest (Hair et al., 2006). On the other hand, reliability is an assessment of the degree of consistency between multiple measurements of a variable, or the degree to which the observed variable measures the “true” value and is “error free”; thus, it is the opposite of measurement error (Hair et al., 2010), or the respondent’s consistency of response by asking virtually the same question in a somewhat different manner and at a different place within the survey instrument (Rea & Parker, 2005).

In the initial stages of the survey research process, it is important to determine the relevant issues that bear on the purpose of the research. This is achieved by having in place a team of experts (supervisors) who jointly plan and implement the research study. As a prelude to the development of survey questions, the researcher gathered preliminary information about issues of importance from the literature and questionnaire instruments that have been used by experts in previous researches similar to the current study. Hence, most of questions in the draft questionnaire for the study were adopted with some modifications where necessary (details are provided in the table below).

At the conclusion of the preliminary information-gathering stage, the draft questionnaire was submitted to the supervisors and interested individuals (expert groups in Nigeria) deemed to have substantive knowledge of the political, socioeconomic, and cultural environment associated with the study. By so doing, issues and problems of relevance to the study can be debated, discussed, and refined openly and constructively (Rea & Parker, 2005).

A sample size of thirty respondents was taken to pretest the questionnaire in order to get feedback concerning the overall quality of the questionnaire’s construction. Rea & Parker (2005) assert that, a pretest is a small-scale implementation of the draft questionnaire that assesses critical factors as questionnaire clarity, comprehensiveness, and acceptability. In this respect, the researcher selected 15 respondents from a University community in Nigeria (researcher’s employer and sponsor) and 15 from the working population (to minimize cost, only SEC was chosen).

The research commenced with an introduction because Rea & Parker (2005) affirm that, it is important to inform potential respondents about the purpose of the study in order to convey its importance and alleviate any concerns that potential respondents are likely to have. This means there is a need to convince potential respondents that their participation is valued to both the study and themselves and that answers are neither correct nor incorrect. Any concerns that respondents may have regarding time, inconvenience, confidentiality, and safety have been allayed. In addition, respondents should be made to understand that there are no hidden agenda or undisclosed motivations behind the questionnaire and the characteristics the respondent possesses that led to his or her inclusion in the sample should be clearly delineated (Rea & Parker, 2005).

Therefore, having ascertained an assured level of instrument validity, the reliability of the measurements has also been considered. The Cronbach’s Alpha reliability tests being the most widely used measure that assesses the consistency of the entire scale were carried out on the pilot data for all the four constructs. The entire questionnaire consists of 75 corporate governance items. All 75 items show Crobach’s Alpha 0.829, which is greater than the 0.70, although it may decrease to 0.60 for exploratory research (Hair et al., 2010). Similarly, the four constructs, i.e. Board role performance, employee representation, creditor representation, and regulatory enforcement are internally consistent with Crobach’s Alpha of 0.644, 0.486, 0.627, and 0.751 respectively.

However, another reliability measure being considered is the item-to-total correlation, which rule of thumb suggest should exceed 0.50. In this study, when all items with negative item-to-total correlations were dropped, the internal consistency of the four constructs improved to 0.741, 0.606, 0.734, and 0.795 respectively, which reduces number of items from 75 to 62 and increases the overall Cronbach’s Alpha to 0.877.

In summary, reliability is necessary but not a sufficient condition that the measure is valid, but a valid test is always reliable (Churchill, 1979). The objective of validity is to ensure the measures can define the concept well.    

The measurement of the four constructs on corporate governance

The 1st construct, i.e. Board role has four dimensions (Shareholder Protection; Skill to monitor CEO; Independent Directors; and Board Process). Questions were adapted from the works of van der Walt & Ingley (2004); UK Innovation Question Pro; and Okpara (2009), which would be measured by (30 items). The 1st dimension, i.e. Shareholder Protection would be measured by 5 items (i.e. power to hire and sack board by dominant shareholder; power to influence board important decisions by dominant shareholder; increase in firm indicate board role performance; interests of dominant shareholder coinciding with minority shareholders pose challenge to board; and shareholders are well protected by the board. The 2nd & 3rd dimensions would also be measured by 5 items each, while the 4th dimension, i.e. Board Process would be measured by 15 items.

The 2nd construct, i.e. Employee Representation has three dimensions (Equity in wealth distribution; Union relations; and High-skill labor). Questions were adapted from Fassin (2009); Sikka (2009); Freeman et al., (2004); and UK Innovation Questionnaire, to be measured by 5 items each (15 items).

The 3rd construct, i.e. Creditor Representation has three dimensions (Protect high-risk projects; Enforce Credit Contracts; and Protect Collateral). The questions were adapted from the works of Shleifer & Vishny (1997); UK Innovation Questionnaire Pro, and would be measured by 5 items each (15 items).

The 4th construct, i.e. Regulatory Enforcement also has three dimensions (Training; Legitimacy; and Capacity). The questions were adapted from Okpara (2009); World Bank (2004); and Okike (2004), and would be measured by 5 items each (15 items). This gives the questionnaire instrument total of 75 items aimed at measuring effective corporate governance for Nigerian listed firms.

The respondents would be asked to indicate on the rating scale their perceptions for each statement on how to improve corporate governance for Nigerian listed firms. The rating scale of 1 to 5 (1= strongly disagree, 2= disagree, 3= Indisposed, 4= agree, and 5= strongly agree) would be analyzed based on their responses to the questionnaire.


It should be recalled that the objective of this paper is to explore stakeholder factors that relates to board performance using confirmatory factor analysis approach to analyze the perceptions of relevant sampled market participants: such as members in the institute of directors, middle and high-level managers, company secretaries, professional auditors, and the regulators.

Using Structural Equation Modeling (SEM), the researcher can assess the strength of relationships between any two factors more accurately with the use of Confirmatory Factor Analysis (CFA) to reduce measurement error due to the multiple indicators per latent variable. Other techniques can examine only a single relationship at a time with low measure for errors.

Also, an overall test of fit will be provided that will enable the researcher to assess the validity of a pre-specified set of hypotheses, each representing a regression-like relationship between factors. SEM also refers to a ‘hybrid of model’ with both multiple indicators for each latent variable, and paths specified connecting the latent variables, Hair et al (2010).

In this study, data collected was subjected to preliminary analysis-treating missing values, normality, scale reliability and validity, and exploratory factor analysis. Nevertheless, notwithstanding hypotheses developed for the study, CFA does not estimate direct or indirect causal relationships. Rather, it is meant to show the factors that correlate between board process variables and board role performance. Figure 2 of the CFA model shows how measurement errors were drastically reduced in a way that regression analysis cannot do. Overall, the output shows that the model fits the data. Based on the criteria for assessing CFA model fit, the normed chisquare has a value of 2.6. This is within the range of 2 & 5 as suggested by Hair et al, 2010; and Barbara, 2010). This figure makes up for the p-value of 0.000, which is less than the 0.05 threshold.

Moreover, a further criterion for acceptance of this model, is the Comparative Fit Indices (CFI), and Incremental Fit Indices, which were both greater than the 0.9 threshold. Also, the Root Mean Square of Appropriation (RMSEA) is threshold at 0.13 or below. In this model, the value of 0.13 meets the criteria 0f 0.8 or below for acceptance.

Most interesting are the high percentage of measurement error figures between the variables, and the strenghts of observed variables measuring the latent constructs. On the basis of the foregoing, it is likely that the informal board process (behaviorial) variables may be responsible for board role performance. Further step of SEM can reveal the direct or indirect causal relationship in a structure simultaneously.

However, some items do not measure the constructs and thus show low results. It is suggested that, they can be removed. It is clear that all the variables in employee representation measure the constructs because of the high impressive figures. This can further be used to find structure, hence a cause and effect relationship.

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