Tribal influence on corporate governance in Nigerian firms

Abstract

Publicly listed firms are composed of different parties, with the Board of Directors (BoDs) as the primary force influencing the firms’ governance (Baysinger & Butler, 1985; Fama & Jensen, 1983a; Williamson, 1983, 1984 as cited in Hassan, Marimuthu & Satirenjit, 2015). As a result of having multiple parties on a single board, there are always divergent interests (Eisenhardt, 1989). As such, a critical challenge with governance is aligning and balancing the interests of a company’s many stakeholders, especially those represented on BoDs in multi-ethnic settings. The multiplicity of their ethnicity can create complicated, divergent interests, even within their group. The shareholders’ role in governance is to appoint directors who apply appropriate governance to ensure the parties’ interests are represented. In contrast, the BoD’s role is to act on behalf of the shareholders via their control. This control exists along with and depends on the control of other stakeholders. The question arises: Is the board members’ capacity to exercise control influenced by any tribal connections among them? Or are tribal affiliations among shareholders’ representatives and managers associated with Type 1 agency costs? To address this question, this research initiates a review of corporate governance research, focusing on agency theory. Agency theory was chosen as a theoretical framework to explain many strengths and weaknesses of corporate governance, i.e. the structures that specify the distribution of rights and responsibilities. It also predicts the implications of relationships among various parties in controlling and directing the activities of a firm, e.g., understanding how tribal affiliations can influence a BoD’s capacity to perform its functions and reduce agency costs. First, the assumptions of agency theory are covered in the literature review. For a company with tribal ownership and/or control, agency theory predicts higher Type 1 agency costs (i.e., relating to tribal ownership and managerial control) and Type 2 agency costs (i.e., relating to tribal share ownership). However, following the data analysis, this research's empirical results contradict the negative prediction of agency theory for the predominant Nigerian tribe. Hence, alternative proximate theories like network, stewardship, and stakeholder theories as alternatives to agency theory may explain this refutation and comprehend the intricacy of interpersonal relationships within a firm