CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
In recent times, corporations are increasingly under pressure to ensure diversity within their boardrooms and extensive academic researchers have reported findings consistent with the view that boards perform better when they include a diverse range of people albeitsex, race, qualification etcetera.
Corporate diversity is defined as the variation of the age, race, ethnicity, gender, and social/cultural identities among employees within a specific corporation(Marimuthu, 2008).Van der Walt and Ingley (2003) defined diversity in the composition of the Board as the different combination of styles, characteristics and skills that their members have. This definition is also applied to the top management of an organization. Women and minorities have since been underrepresented on corporate boards of directors but this began to take a different tune in the 1990s Farrell and Hersch, (2005).
Women have unique characteristics needed to positively influence the strategic direction of a corporation and contribute to the growth offirms. In spite of such revelations, evidence suggests that women are under-represented in senior executive and board positions. In many parts of Africa, socio-cultural traditions inhibit women from attaining these roles.
Agency theory argues that where there is separation of management and ownership, the manager seeks to act in self-interest which is not in most cases in the best interests of the owner and departs from those required to maximize the shareholder‘s profit. This agency problem can be in two forms; adverse selection and moral hazard Eisenhardt,(1989). Adverse selection can occur if the agent misrepresents his ability to perform the functions assigned and gets to be picked as an agent. Moral hazard occurs if the chosen agent underperforms the responsibility due to lack of dedication to the assigned duties. Such under-performance by an agent, even if acting in the best interest of the principal, will result to a residual cost to the principal Jensen and Meckling,(1976). These costs, which results from sub-optimal performance by agents, are termed agency costs.
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The composition and structure of the board is of fundamental significance in assessing a board's ability andsuccess in achieving its objectives. The importance of a diverse board cannot be overemphasized as diversity results in injection of essential skills, ethnicity, cultures and views on wide range of issues. Consequently, Mallin (2010) argues that board diversity enables different viewsto be considered on various issues due to the fact that men and women approach issues from different perspective and may have different ethnicity, background and cultures which may bring additional and invaluable insights into the boardroom and reduce the likelihood of a ‘group think' mentality forming. A conceptual case for diversity is linked to the notion that it promotes deeper understanding of an increasingly varied marketplace, consequently results in better understanding of the complexities of the environment and more astute decisions, encourages effective global relationships and raises awareness of cultural sensitivity within the international environment. Board diversity will go a long way in reducing nepotism, promoting fairness and ensuring various stakeholder interests are well represented in order to promote their interests in corporate decision making. The Tyson Report outlines a number of benefits which can be achieved from board diversity. The report suggests that board diversity helps corporations manage key constituencies including shareholders and employees. Board diversity shows a commitment to promoting people from diverse ethnic backgrounds and a commitment to apolicy of non-discrimination against ethnic minority executives. This is also likely to have a positive impact on the external talent pool for board members, as the number of top female managers may influence career progression of women in lower roles, provide mentoring and networking opportunities for junior level female employees and possibly contribute to increased retention of female employees.
The presence of women might improve team performance, because more diverse teams may consider a greater range of perspectives and therefore reach better decisions. These better decisions then instantly could result to higher business value and business performance, Carter et al.( 2003). Failure to choose the most suitable candidate affects company performance and the absence of women might be suboptimal for the firm. Companies with a higher degree of diversity on the board also give an important positive signal to (potential) employees of that company.
According to Mordi&Obanya (2014) earnings of high quality are attributable to conservative accounting standards and/or strong cash flows. Low quality earnings come from artificial sources, such as inflation or aggressive accounting. For example, a publicly-traded company may claim strong earnings and consequently have a high stock price. However, the company may have low cash flow from operations and the strong earnings may come mainly from the accounting structures it uses.
Earnings quality emerged as an important measure of financial health for business unit and can be used in financial markets.Khajavi&Nazemi (2003) categorized earnings quality into three categories; earnings persistence, levels of accruals and profit that reflect a commitment to economic transaction.
However the quality of earnings is affected by managers opportunistically manipulating the reported earnings number, such earnings manipulation is usually too subtle to be observed by the market. However whether there is any link between earnings quality and board gender diversity of firms is an important concern to investors because it seeks to find out how true d profits they have declared is.
1.2 STATEMENT OF THE PROBLEM
The issue of board gender diversity has been a lingering bottle neck to investors and many other business interest groups as to how it affects or relates to earnings quality. Some have argued that male board gender give better earnings quality than female like Erhardt&Werbel, (2003), who opined that females acting as CEO’s of the firm leads the firm towards lower performance because of the cultural conditions, less emotional stability and patience issues. While some like Izgi et al, (2012) are of theopinion that female board gender do better. In his argument he opined that firms with female CEOs have higher profitability. Still there is still another school of thought who accepts that a good combination of both will maximize earnings quality Hoogendoorn, Oosterbeek&Praag (2011), who say that groups or teams which are made up of men and women both show better performance in terms of revenues, earnings per share and profits. But how best should this be is a fact to be considered.
However, this study is set to make findings on the relationship which exist between board gender diversity and earnings quality and to resolve the problem it possess on earnings quality which is a major interest to investors.
1.3 RESEARCH QUESTIONS
- What is the average number of female in the board?
- Do boards with more females have a significant impact on earnings quality in firms in Nigeria?
- To what extent does female chief financial officer affect earnings quality?
1.4 OBJECTIVES OF THE STUDY
The broad objective of this study is to examine the relationship that exists between board gender diversity and earnings quality. However below are the specific objectives to further enhance the research as stated bellow:
- To find out the average number of female in the board.
- To find out if boards with more females have a significant impact on earnings quality in firms in Nigeria
- To find out the extent to which female chief financial officer affect earnings quality.
1.5 RESEARCH HYPOTHESES
- The average number of female in the board is not high
- Boards with more females do not have a significant impact on earnings quality in firms in Nigeria
- Female chief financial officer does not affect earnings quality
1.6 SCOPE OF THE STUDY
This study is restricted to board gender diversity and earnings quality in quoted commercial banks in the Nigeria Stock Exchange within the period 2010 to 2014.
1.7 LIMITATION OF THE STUDY
This research would be likely be limited to its scope due to the followings factors
- Lack of sufficient fund.
- Limited literature on the research topic.
- Short time limit for conclusion.
1.8 SIGNIFICANCE OF THE STUDY
The study is relevant to management, investors, stake holders and prospective researchers. It will stand as a bases for their decision making as pertaining issues relating to gender performance, eg earnings quality, business survival and growth.
