CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Corporate governance has become a worldwide phenomenon that have continued to draw in

lot of interest in business and academia, especially within the light of recent global financial crises,

which arise to a degree as a result of non-optimal corporate governance practices among several

organizations across the world. The catastrophic losses of financial firms which almost led to a

collapse of the financial system followed by the deep global recession emphasizes the importance

of corporate governance (Kumar & Singh 2013).Many researchers have established a robust link

between good corporate governance and sustainable business and economic growth. Joshua &

Charles (2014) better corporate governance frameworks benefit firms through greater access to

financing, lower cost of capital, better performance and more favorable treatment of all

stakeholders. Corporate governance brings new strategic outlooks through external independent

directors; it enhances firms' corporate entrepreneurship and competitiveness. (Ujunwa, 2012,Abor

and Adjasi, 2007).

The need for effective corporate governance mechanisms in joint-stock companies arises

from the separation of ownership from control. The owners of the company, the shareholders,

employ managers as their agents to manage the business and take strategic and operational

decisions in the interest of the firm and shareholders. Because the agents and owners are separate

individuals and groups, the relationship between them often bring conflicts of interest. Whereas the

managers are employed to maximize returns to shareholders and also look after the interests of all

other stakeholders, they often pursue self-interest to the detriment of the financial interest of their

principals (Haji, 2014). By using insider knowledge, managers of corporations could hide and use

1
price sensitive information to benefit themselves (Appuhami & Bhuyan, 2015; Liu,Valenti, &

Chen, 2016).

Furthermore it has been seen that practicing corporate governance is beneficial for a company and

its stakeholders, as well as for the economy as a whole. It has been discovered by Sun (2016) that

corporate governance is of utmost prominence to every organization and, as such, nearly as

essential as organization’s business plan. Corporate governance describes how companies ought to

be run, directed and controlled. It is about supervising and holding to account those who direct and

control the management. For an SME, it concerns the respective roles of the shareholders as owners

and also the managers (the directors and other officers). It is about setting rules and procedures as

to how the company is run. It is also about putting checks and balances in place to prevent abuses

of authority and ensure the integrity of financial results.

These smaller businesses, and even market regulators, may assume that corporate

governance has no relevance for them; another challenge is that what is appropriate for a large or

listed company may be less relevant or appropriate for an SME, family-owned business. There’s

after all a scarcity of standardization of the components of ‘good’ corporate governance for SMEs;

another challenge is that when SMEs ask for help with implementing or improving corporate

governance, they may not fully understand the impact of the changes they need to make instituting

effective corporate governance may involve bringing outsiders into the business, as independent

NEDs, for example family insiders and business founders can find it quite challenging.

Having considered all this issues the intention of this research is to examine the prospect and

perspective of incorporating corporate governance into SMEs.

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1.2 Statement of Problem

Small and medium enterprises face many challenges while trying to survive in a competitive

business enviroment. The lack of scale and resourcese available to SMEs often leads to those

running the organization having to immerse themselves in an exceedingly wide variety of the

everyday operational functions, often to the neglect of the more strategic issues such as corporate

governance. additionally, the directors and the managers are repeatedly one and therefore same.

However, good corporate governance is siginificant to the future success of any organization,

irrespective of whether it’s a multinational or a small, family owned firrm.

There are many challenges to the effectiveness of corporate governance in Nigeria they

range from corrupt practices, ownership structure, slow and inefficient judicial process to lack of

enforcement mechanisms by regulatory bodies. Gull, Saeed, & Abid, (2013) alludes to an inherent

weakness with regards to corporate governance issues in organizations in many developing

countries. Like in most countries the corporate governance framework was designed with large

corporations in mind (ACCA, 2015). There are no corporate governance guidelines for SMEs.

Some operators have gone bankrupt and closed down due to poor management practices

(Kinadjian, 2012). As identified by Norwan, Mohamad & Chek, (2011) that poor financial

performance is directly linked to weak implementation of corporate governance. The entrepreneurs

are failing to attract capital investment funding to finance expansion, diversity and growth. There

are no significant value addition ventures within the sector. There are also challenges to

incorporating corporate governance in SMEs and these challenges are corporate governance codes

have generally been formed with large or listed companies in mind. This has created a challenge for

advocates of corporate governance among SMEs and private businesses.

SMEs have often discounted corporate governance as expensive or complex without fully

understanding the benefits this discipline can bring (Heeringa, 2012). The discipline has recently

3
become a pillar of market-leading organizations. Given the competitive climate with which

business operates, businesses must find ground-breaking ways to reach new markets. It is on this

premise that consistent management, monitoring and improvement of a business is vital and this is

where corporate governance can play a vital role. The challenge remains for many SMEs as to how

to incorporate their executive discipline into their business.

Despite the growing number of studies on corporate governance and SMEs Most of the

existing literature represents other contexts in countries and regions of the world such as Europe,

USA, Asia and Australia. Studies have not been carried out on this topic as relating to Nigeria,

corporate governance only deals with incorporated companies that are under CAC and this is not

good. The political environment the corporate organization finds itself is too corrupt that being

uncorrupted is like standing and fighting a whole army alone. Others include ignorance and poverty

of minority shareholders, failed public governance, lack of board of director to oversee the

activities of the Most SMEs business, lack of separation of ownership and management, no

regulation guiding SMEs just like other large corporation and lack of knowledge in sourcing for

fund. It was also discovered that most SMEs owners are scared of changes because introducing

corporate governance means opening the business to a whole new world which include investors

investing in the business and bringing in outside board of directors which would change how the

business is run completely.

Taking the foregoing into account, this research intends to determine whether incorporating

corporate governance into medium scale will contributes significantly or not in the economy of the

nation and benefit its owners.

1.3 Research Questions

In achieving the objectives the following research questions are raised:

i. What is the acceptance level of corporate governance practice among SMEs in Nigeria?

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 ii. What are the challenges of incorporating corporate governance into SMEs practice in

Nigeria?

iii. What is the impact of incorporating corporate governance on the financial performance of

SMEs in Nigeria?

1.4 Objectives of the Study

The broad objective of the study is to determine the need of corporate governance in small and

medium scale enterprises in Ondo State. The specific objectives are to;

i. Determine the acceptance level of corporate governance practice among SMEs in Nigeria.

ii. Identify the challenges of incorporating corporate governance into SMEs practice in

Nigeria.

iii. Assess the impact of incorporating corporate governance on the financial performance of

SMEs in Nigeria.

1.5 Research Hypotheses

To provide answers to the research questions the below hypothesis shall be tested:

i. Ho1: Incorporating corporate governance has no impact on the financial performance of

SMEs in Nigeria.

1.6 Significance of the Study

This study would serve as a contribution to knowledge and also to other studies done by

other authors on incorporating corporate governance in SMEs. This study would enlighten the

public on the usefulness and benefits to be derived from incorporating corporate governance, it

would also help gather information on why SMEs owners don’t want to incorporate corporate

governance.

This study would be of benefit to three categories of people namely; SME owners,

Government and academic researchers.SME owners would better understand the meaning of

5
corporate governance and the benefits in incorporating corporate governance into their business

through this study and It would also help them conquer their fears on incorporating governance as

this study would be exploring a lot of benefits.

Secondly, this study would help the government see the different challenges facing SMEs

and how there are striving to survive. This would help the government enact more regulations that

would be In favor of the SMEs. The study would also be an eye opener for the government for the

need of a new code of corporate governance especially for SMEs as this new code would cover all

that SMEs contain. This study would also help the government to increase their public governance

as it affects the corporate world. Thirdly, this study would help the policy maker (shareholders) of

SMEs to be well informed about good business practice and it would help them be confident

whistle blowers who knows when their rights are been trampled upon.

Lastly, this study would serve as a contribution to knowledge and it would serve as a basic for

further study. This study is very few in Nigeria from the journals mapped and this study would help

other researchers to conduct further research on the subject matter. The findings in this study would

be used as basis for further research and investigation in form of literature for other upcoming

researchers.

1.7 Scope of the Study

The study focuses on the prospects and perspective of incorporating corporate governance into

small and medium scale enterprises in Nigeria. The study covers 194 Medium scales in Ondo state,

and information will be derived from business owners directly through the use of research

instruments.

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1.8 Operational Definition of Terms
Corporate governance: is a way a corporation policies itself and as such it is regarded as a

method of governing a company like a sovereign state instating its own customs, policies and laws

to its employees from the highest to the lowest levels (Sun,2016).

Small and medium-sized enterprises (SMEs):Small-sized firms are those with total assets value

(excluding land and buildings) above ₦5 million but not exceeding ₦50 million with a total

workforce of above 10 employees but not exceeding forty-nine (49) employees. On the other

hand, the medium-sized firms are those enterprises with total assets value (excluding land and

building) above ₦50 million, but not more than ₦500 million with a total workforce of between 50

and 199 employees (SMEDAN, 2012).

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 CHAPTER TWO

LITRATURE REVIEW

This chapter provides the relevant and related literature on the prospects and perspective of

incorporating corporate governance into SMEs. The chapter is grouped into three sections; section

one presents the conceptual framework, the second section presents theoretical framework on the

study under review and section three reviews empirical

2.1 Conceptual Review

2.1.1 Corporate governance

Corporate governance can be defined as the way by which companies are directed and

controlled. It has to do with the duties and responsibilities of the board of directors of a company to

effectively lead the company, and their relationship with its shareholders and other stakeholder

groups (Ngozi & Remond, 2013). Corporate governance is the process and structure used to direct

and run the business affairs of a company towards enhancing business success and accountability.

Also, corporate governance encompasses the authority, accountability, stewardship, leadership,

directing and control exercised in the process of managing organization. The main objective of

corporate governance is to achieve long-term shareholders’ value, while taking into consideration

the interests of other stakeholders (Muhammad, Ukairo & Buhari, 2019).

According to Organization for Economic Co-operation and Development corporate

governance deals with the way in which suppliers of finance to corporate assure themselves of

getting a return on their investment. The corporate governance framework that is applied to any

business has to be fit for purpose, which includes being suitable for the size and maturity of the

business. In general, a healthy and efficient corporate governance framework consists of a number

of features and characteristics. There should be clear reporting lines and transparency about how

8
decisions are made and how risks controlled, and about other matters that need to be brought to the

notice of the board (or the attention of committees) for review or authorization. The framework

should encourage understanding of roles and responsibilities and restrictions of authority and set

the balance the board wants to see between, for example, acceptable risk and reward.

Any incentives for members of staff need to be supportive of board strategies. There needs to

be clear communication (of strategic goals, expected behavior) by the board to management and

staff appropriate internal controls should be established, related to key risks. Boards are required to

have good visibility of management actions and decision making, which includes the provision of

high quality information on business performance and risk management. Board structures may

differ among family-owned SMEs. There may not, for example, be a unitary board. Some firms

may have a (formal or informal) dual board arrangement, with an operations board and a separate

advisory board addressing more strategic issues or representing wider family interests.

As noted earlier, the significance of corporate governance has been debated mostly within the

setting of larger firms and outside Africa. For example, Kim, Sung and Wei (2017) investigated the

two dimensions of investor heterogeneity and how corporate governance has diffused into rising

markets using Korean data. Fuenzalida et al. (2013) evaluated whether or not good governance

practices improve or limit returns on the Lima Stock Exchange using data from Peruvian firms.

Arosa, Itturralde and Maseda (2013) examined the impact that the structure of the board has on firm

performance using data collected from SMEs in Spain and established a negative effect of the

outside director’s proportion along with the board size on firm performance.

2.1.2 SMEs administration in Nigeria

According to SMEDAN/NBS (2019), the small and medium scale enterprises are defined

under the Nigerian National Policy on SMEs. Small-sized firms are those with total assets value

(excluding land and buildings) above ₦5 million but not exceeding ₦50 million with a total

9
workforce of above 10 employees but not exceeding forty-nine (49) employees. On the other

hand, the medium-sized firms are those enterprises with total assets value (excluding land and

building) above ₦50 million, but not more than ₦500 million with a total workforce of between 50

and 199 employees.

The Federal Ministry of Commerce and Industry defined a small-scale enterprise as a

business entity with a total assets value of not exceeding ₦5,000,000 (excluding cost of land).

Meanwhile, the Central Bank of Nigeria (CBN), in its guidelines to commercial banks, defined

small-scale enterprises as “those entities with annual net sales not more than ₦5,000,000”.

However, for merchants banks, they regard small-scale enterprises as those with total assets value

not more than ₦2,000,000 (excluding cost of land) or with maximum net sales of not more than

₦5,000,000 (Muhammad, Ukairo&Buhari,2019).

SMEs are recognized in the Nigerian economic policies and programs as a growing business

with major contribution to economic growth and development. This is especially in the area of

income generation, poverty reduction, employment generation, and provision of both consumables

and industrial goods with the fact that a small amount is needed to start its operation (Sunday,

2017). However, the sector is found to be underperforming in Nigeria over the years. Realizing the

importance of the SMEs sector, different policies and programs are put in place by different

countries, international organizations such as World Bank and other supporting agencies for SMEs’

development. For instance, in Nigeria, the Small and Medium Scale Enterprises Development

Agency of Nigeria (SMEDAN) was established in 2003 (SMEDAN/NBS survey, 2018).

The National Enterprises Development Programme (NEDEP) came into existence in 2003

for the purpose of addressing the needs of SMEs in the area of access to affordable source of

finance, access to market, capacity support, business development services, and formalization of

business operations. In addition, a reduction of 50% business registration cost for small businesses

10
was made for capital conservation in Nigeria. The relevance of SMEs and their contribution to

economic growth and development cannot be overemphasized. According to Sunday (2017), SMEs

remain the most powerful instruments of economic growth and development of any nation in the

world. SMEs represent an important breakthrough in various emerging sectors. Sunday argues that

most breakthroughs in information technology (IT) in the U.S., China, South Korea, Malaysia, and

India are propelled by SMEs. Also, most consumables and industrial goods in a developing

economy are the end-products of SMEs (Oni, Paiko, &Ormin, 2015).

2.1.3 Corporate governance and business practice of listed firm

Corporate governance is often mistakenly linked with the red tape barriers and

agency problems that are left to large firms (Bates 2013). Corporate governance can be considered

to be a systemic approach to managing and supervising organizations properly which can positively

impact their sustainability and profitability. Corporate governance, being the opposite of 'bad

governance' is aimed at proper running, management and supervision of a company by the board. A

practical example of good governance is conducting regular board meetings, audits

etc. Theoretically, corporate governance, concerns itself with people, competencies (performance),

processes and policies. These are known collectively as the 4 P's of  corporate governance (Olisa,

2021).

According to a report written by the OECD (2016), it indicated that organizations which

invest more resources in Good Corporate governance practices, systems and policies 'produce

substantially better market results and can help companies weather the storm of an economic

recession. Additionally, good corporate governance has been found to enhance the decision making

process at the top level, create better control environments and reduce wastage. The implementation

and practice of good governance may be said to improve the value proposition of organizations

11
because companies which take governance and due process more seriously tend to be less likely to

run into trouble. In practice, this translates to greater financial management and supervision, and

incidents such as internal corruption, financial leakages, 'cooking the books' etc., become less of an

occurrence. 

Companies and organizations which continually invest in strengthening its corporate

governance mechanisms could, by doing so,  increase stakeholder confidence in the process, which

can reflect positively on the balance sheet in the long term. When commitment to good corporate

governance exists in an industry, it can have  a positive effect on the market collectively which

helps with market confidence and promotes stable, long-term international investment flows into

the country (Olisa, 2021). It is clear that there is a cost of good governance due to the fact that it

requires investing in skilled and experienced people, processes and policies; however

notwithstanding in the long run it is still a worthwhile investment. Building companies and

organisations is a form of economic and social activity that should be done with a long term view

and so it is necessary to remind all companies and stakeholders that corporate governance must not

be taken for granted no matter how small or large the company may be. Invest in good corporate

governance not just for profitability but also for sustainability.

Thus, the quality of corporate governance principles in place affects individual

organizations’ performance and the economy at large. Regulatory bodies in Nigeria (SEC, FRC &

CBN) propose reforms that will enhance transparency in financial reporting; thereby improving

corporate practices and decrease information asymmetry. However, earlier studies on corporate

governance practices in Nigeria (Stephen & Benjamin, 2013; Akinkoye & Olasanmi, 2014;

Marshall, 2015; Daniel, 2015; Miko & Kamardin, 2016; and Okike, 2019) did not put conglomerate

companies into consideration; however, the Nigerian conglomerate companies play an important

12
role in the country due to the vital services and products they provide to the individuals and

corporate organizations. This sector was ignored by previous studies, especially in assessing their

compliance with corporate governance practice; but, the sector has the potentials to influence

economic growth and development, hence the need to carry out a study to provide clear evidence on

the level of compliance with 2011 SEC code of corporate governance in Nigeria.

2.1.4 Corporate Governance and business practice on SMEs

Corporate governance is a topic that has been totally divorced from mainly small and

medium enterprises (SMEs), due to the nonexistence of the agency problem because the owners of

these firms are the directors and managers and take up many other duties in the firm (Progress &

David, 2017). However, in reality, as argued by Bates (2013), corporate governance in its practical

application is a vital key, which unlock the true value of a business irrespective of the firm size.

Willan et al. (2016), whose study showed that organizations whether large or small have the same

benefits, influences and problems when it comes to applying corporate governance, confirmed this.

In other words, corporate governance can shift the SME firm from a survivalist organization unable

to grow past the abilities of its owners, to being an entity with realistic and sustainable growth

through enhanced competitiveness, firm performance and value (Bates 2013). As such, the global

world in the present-day has gradually been concerned with the application of corporate governance

in SMEs, also owing to the crucial developmental roles fulfilled by these SMEs in a number of

economies. All such efforts to promote corporate governance adoption and compliance by SMEs

are motivated by the fact that SMEs in developing nations, particularly in Nigeria, are seen as

primary creators of employment and poverty alleviators. In other words, the continued existence,

expansion and sustained growth of SMEs in such emerging economies are essential aspects of both

public and political life (Hove & Chikungwa 2013). Nevertheless, despite all government efforts to

13
stimulate their growth, most SMEs in Nigeria have been reported to be having a high rate of failure

especially in the first 2 years of operation (Olawale & Garwe 2016).

The application of corporate governance in African SMEs is an issue still in its early stage,

where most studies are still concerned with the issue of compliance (Flowers et al. 2013). More so,

there is little or no consideration at all given to the influence that corporate governance has on

SMEs’ competitiveness and performance. In reality, many literatures have dwelt greatly on leading

firms because of the misconception that corporate governance is applicable to just the superior

firms that struggle with the agency problem (Muniandy & Hillier 2015; Ntim, Lindop & Thomas

2013). Nevertheless, corporate governance might be of high importance also to the underrated

SMEs, operated by a sole proprietor or owner who also acts as the manager and director (Ansong

2015). Promoting good corporate governance in SMEs could assist Nigeria and other African

countries in strengthening its corporate governance opacity index rated low (at a score of 16), and

its anticorruption index rated fairly weak (at a score of 40) in 2013 (Claessens & Yurtoglu 2013).

Thus introducing corporate governance into the activities of SMEs will enhance operational

costs in the form of higher start-up cost which could discourage many from starting business. The

government can resolve this crisis through the introduction of subsidies for the SMEs. It is

imperative at this stage to dwell on a previously alluded issue of stakeholder theory on corporate

governance. From the analysis so far it is quite clear that corporate governance bothers around the

role a board plays in directing the agent (manager) of a firm to attain the main aim of its principal

(shareholder) to carry out a contractual responsibility. However, for advocates of stakeholder

theory, shareholders are only a fraction of an important stakeholder group. Hence corporate

governance mechanisms must include these other stakeholders. The inclusion of these groups of

stakeholders on the board of firms will assist in promoting corporate governance by promoting the

interests of these previously excluded groups (Sunday, 2017).

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2.1.5 Challenges of incorporating corporate governance into business practice in Nigeria

Corporate governance has become a burning issue all over the world. It became the most

pronounced in the United States particularly after the collapse of two corporate giants- Enron which

represents the power sector and WorldCom which represents the communication sector in 2001 and

2002 respectively. In addition, one of the world’s top-five accounting firms –Arthur Andersen,

collapsed under the corporate scandal that was generated in Enron. They audited the accounts. The

awareness of major corporate governance issue in Nigeria started with the discovery of

overstatements in the accounts of Cadbury Nigeria Plc. in 2007. Since then, a lot more have

followed. It takes a holistic view of corporate governance to mean that issues of institutional, legal

and capacity building and also the rule of law in a certain society are at the very heart of corporate

governance.

Corruption is one of the main challenges that prevent the smooth practice of corporate

governance in Nigeria. It is the common belief that nothing can be gotten, especially from

government or public officials without offering a bribe. Therefore, private business managers who

need to obtain some permission or waivers from the government cannot do so unless by means of

corrupt practices. Corruption permeates everywhere. It is the same practice even among persons in

high positions in both public and private sectors.

As earlier said, the Nigerian private sector was under the domination of British Companies

(after British interests during the colonial era). Following political independence, one of the major

economic freedoms (development strategies) immediately pursued by the then Nigerian

government was to promote domestic ownership and control of the Nigerian Private Sector.

Conventionally, this had significant implications for corporate governance. By restricting

significant foreign ownership that could have served as external checks and balances, the resulting

15
original owners and major shareholders were able to pull off several corrupt transactions at the

expense of minority investors.

However, it must be noted that the limitation in foreign ownership through the Nigerian

Enterprises Promotion Act of 1972 and 1977, still gave room for foreign participation for up to 60

or 40 per cent depending on the industry. Indeed, a lot of foreign companies were still able to

develop strategies (such as buying stakes through indigenous investors or local firms to evade the

regulations so as to hold percentages in Nigerian companies higher than those provided in the law

(Achebe, 1989). It is therefore essential to balance the view that restrictive foreign ownership might

have impacted positively on Nigerian corporate governance system, especially with examples of

corporate scandals in Cadbury Nigeria, 2007; Halliburton scandal 2008 and Siemens bribery

scandal 2009. No evidence that majority foreign ownership could enhance corporate governance in

those corporations.

The system of justice in Nigeria is not only inefficient, slow and costly but has been stained

with dishonesty and corruption. Court cases take an average of 10 to 20 years before delivering

judgment. In most cases, the parties involved in the cases are either too old or have died. If the

corruption level in the judiciary has become so rampant to the point that Supreme Court Justices

and Senior Advocates are being tried for taking part, how can an average Nigerian get justice from

such a system?

In spite of all our God-given natural resources, Nigeria is one of the poorest nations in the

world. What naturally follows is that people are subjected to diseases, hunger and untimely death.

Is it any wonder that Nigeria has the highest number of religious followers in the world? If the

leaders cannot fix the problems of the country with the available resources, the followers can at

least, nourish them with the word of God. Therefore, our religious institutions are the most

populated in the world. This poverty level will make it hard, if not impossible for the average

16
Nigerian to actively take part in whistle blowing which is part of the ways to promote good

corporate governance.

The level of sophistication of a society and the degree of its adherent to good principles of public

governance largely determines its level of corporate governance. A country whose citizen is very

poor and does not observe the rule of law is unlikely to be good at promoting corporate governance.

Therefore, there is need for Nigeria to raise its game in terms of its observance of good public

governance principles in order to have strong corporate governances.

2.1.6 Corporate governance and Financial Performance of SMEs

Corporate governance and firm performance has gone beyond large corporations to include

studies in relation to small and medium-sized enterprises (SMEs).According to Muhammad, Ukairo

& Buhari, (2019) and Lappalainen and Niskanen (2012), majority of the preceding studies on

corporate governance with firm performance focused mainly on publicly listed companies in

developed economies such as the U.S and U.K. This is because, traditionally, compliance to

corporate governance has been the norm in the large listed companies due to separation of

ownership and control (Muhammad, Ukairo & Buhari, 2019).This means that there is compliance

to code of corporate governance lies with publicly listed firms in many countries of the world. This

means that small and medium-sized firms do not strictly abide by the code due to the absence of

agency problem and less pronounced separation of ownership and control. Thus, corporate

governance may result in the increase in performance of SMEs as well, if appropriate measures are

commanded by the regulators.

Firm financial performance is a concept that supports the efficient and effective use of

financial resources to accomplish overall corporate goals which include both shareholders wealth

maximization and profit maximization objectives (Urhoghide & Omolaye , 2017). Performance of

business refers to the ability of business to meet the required standards, increased share value,

17
improve facilities, ensuring returns on profitability, and total reduction and once this is achieved, a

business is assumed to be performing efficiently. A study by Ashe-Edmunds (2016) showed that

corporate governance has been a practice that is associated with public companies only; however,

some small businesses can also gain from this practice. Mugwati & Nkala (2012) alludes this

phenomenon to the fact that some authors have defined the term with reference to large companies.

In a research conducted by Barca and Trento (1997) in Italy and Rabelo and Vasconcelos (2012) in

Brazil, it was observed that absence of corporate governance structures incapacitated individually

and family owned businesses to gain access to capital for their expansion.

Owners and managers of private companies have for many years regarded corporate

governance as an alien concept, and often dismissed it as an issue for public companies. While the

legislative emphasis on public companies causes such dismissal to be pardoned, it would be a

blunder to view corporate governance as having no relevancy in the private sector because good

corporate governance practices can lead to significant benefits for both public and privately-owned

businesses (Hubbard & Wood, 2013).Corporate governance as suggested by Prem (2014) is as

significant to SMMEs as it is for large corporations as with it, the application of cost-effective and

modest mechanisms and processes will establish structure, contribute to business growth and

improve operations, as such, guarantee functioning compliance with the law.

2.2 Theoretical Review

2.2.1 Agency Theory

The agency theory can be traced back to (Berle & Means, 1932) some authors are of the

opinion that this can be traced back to Adam Smith in 1776 and his renowned book, “The Wealth

of Nations.” Letza Sun & Kirkbride (2004) point out that the agency problem was effectively

identified by Adam Smith when he argued that company directors were not likely to be careful with

other people’s money as they would with their own. This has ultimately led to consequent review of

18
a set of contradicting relationships amongst individuals. The most essential among these was the

agency relationship, defined as a contract in which one or more persons (the Principal(s) engage

another person the (agent) to carry out some service on their behalf that involve delegating some

decision making authority to the agents the agency relationship can be a problem because the agent

may not always act in the best interest of the principal(s).

Agency costs are then incurred by the principal, which consist of monitoring costs incurred

by the principal, bonding costs incurred by the agent and decrease in welfare resulting from

decisions taken by the agent which are not in line with the maximization of the principal’s welfare

moreover, Jenson & Meekling were fully aware that it was costly, if not possible, to write up

contracts which would clearly define the rights of principles for all possible contingencies. The

assumption of the agency theory is that the role of the organization is to maximize the wealth of

shareholders or owners of the firm (Ujunwa, et al, 2012). The agency theory is concerned with

analyzing and resolving the conflicts of interest that occur between the shareholders or owners and

the agents or the management (Mulili & Wong, 2011). The conflict originated from the separation

of ownership from control in which the shareholders or owners perceive that the manager’s actions

are based on self-interest (Achchuthan & Kajananthan, 2013; Ujunwa et al., 2012).

2.2.2 Stewardship Theory

The stewardship theory, according to Mulili and Wong (2011), suggests that, “organizations

serve a broader social purpose than just maximizing the wealth of the shareholders”. Stewardship

Theory Maybe the most important organizational theory building on Theory Y is stewardship

theory (Davis, Schoorman, and Donaldson 1997; Donaldson and Davis 1991), which in opposite to

agency theory presume that “stewards are motivated to operate in the best interest of their

principals” (Davis, Schoorman, and Donaldson 1997, 24). Stewardship theory assumes a model

whose behavior is structured in a way “such that pro-organizational, collectivistic behaviors have

19
higher utility than individualistic, self-serving behaviors” (Davis, Schoorman, and Donaldson 1997,

24).

The main entrance of Stewardship Theory into the mainstream standard of organizational

theory was the article by Davis, Schoorman and Donaldson 7 (1997) who were able to differentiate

stewardship from agency theory (Eisenhardt 1989; Jensen and Meckling 1976) and to elaborate the

psychological and situational mechanisms and assumptions intrinsic in stewardship theory. It was

the paper in 1997 that has proven to start the research stream on stewardship, arguing its

implication for the whole of organization research. Stewardship assumes a convergence in the goals

between principal and agent, since the collective behavior and orientation of the agent will

generally benefit principals such as company owners. The orientation works as well intra-

organizationally, where for instance middle managers will profit from the steward-like behavior of

their subordinates since they will foster the common goal.

The best interest of the group is mostly seen as a “viable, successful enterprise” (Davis,

Schoorman, and Donaldson 1997,). Since the steward in the entity will work towards the

organizational goals, the individual can and should be trusted and therefore given more liberty to

act pro-organizationally. As such, stewardship theory especially differs from agency theory, which

assumes that the agents cannot be trusted and accordingly need to be controlled (Eisenhardt 1989).

According to Davis and colleagues (1997), control can even be counterproductive since it may

lower the motivation of the steward. Since the principal does not necessarily need to control the

steward, also the costs of monitoring are reduced. Donaldson and Davis (1991) in their study on the

positive effect of stewardship in boards and CEOs show that stewardship leads to higher corporate

performance. They point out it would ultimately lead to the question why not all companies are

structured according to stewardship theory. Davis et al.’s answer seems to be very much grounded

20
in game theory since they argue that if either principal or agent defects from their steward stance,

the other party will lose out in the relationship.

Especially in case the principal enters the relationship as a steward while the agent acts self-

interested, the organizational outcome can be dramatic. From a game theory argument, the principal

might therefore choose the strategy that would make huge losses unlikely, hence, an agency stance.

Not long ago, one of the authors had a conversation with a fellow researcher about agency and

stewardship theory, and the colleague mentioned that he did not ‘believe’ in stewardship theory,

despite the fact that he was well aware that agency theory does not cover all aspect of human

interaction. Looking at the reality in organizations, we can see both types of behavior (e.g.

Chrisman et al. 2007). Already Donaldson argued, reflecting on the fundamental model, that to

explain behavior, “some more complex and contingent admixture of the two approaches” will be

required (1990, 372). In the explanation or accounting for benevolent behavior however,

Stewardship theory at first glance seem to be more prone due to its assumption of the collectivistic

orientation of actors.

Stewardship theory has a little, but impactful history in the area of family business. It is

argued to have a natural application to family businesses (Blumentritt, Keyt, and Astrachan 2007,

323) and has been extensively used and regarded. Taking a look at stewardship in different

organizations, Corbetta and Salvato argue that it may “differ between family and non-family firms”

(2004, 356), with family businesses rather relying on trust and intra-familial altruism. Family

businesses follow family goals, both financial and non-financial in nature (Tagiuri and Davis 1996),

an argument that relates back to Granovetter’s (1985) point of rationality of action not being located

only in economic reasoning. Hall explains this out by arguing that family business are “not

irrational but multi-rational” (2002, 43). Also, Corbetta and Salvato (2004) pointed out that self-

actualizing traits in family business is not irrational, but that the complex rationality of family firms

21
cannot be captured sufficiently by the self-interested rationality underlying agency theory.

Recently, Madison, Holt, Kellermanns and Ranft followed a similar argument by combining agency

and stewardship in their review of family business articles, arguing that both theories offer

“mutually enabling explanations of the family firm” (2015). Relying on a thorough review of the

literature, they show how managers, both family and non-family, act as stewards as well as agents.

Therefore, the stewardship theory is inferring that governance has both a service and strategic role

that SMEs can utilize to improve growth, development and value creation.

2.2.3 Resource Based View

Pfeffer (1973) developed the resource dependence theory. It emphasized that non-executive

directors improve the capacity of a firm to protect itself against the external environment, decrease

uncertainty, or co-opt resources that enhance the firm's ability to raise funds or enhance its status

and recognition. Firms make attempt to decrease the uncertainty of outside influences to make sure

that the availability of resources essential to their survival and development. The board is therefore

seen as a facilitator which would facilitate access to the resources that are crucial to the company’s

success. There are four major types of broadly defined resources that the SME boards of directors

would provide. These are; advice, counsel, and know-how; legitimacy and reputation; channels for

communicating information between external organizations and the firm; and preferential access to

commitments or support from key actors outside the firm (Pfeffer and Salancik, 1978) cited in Abor

and Biekpe (2007).

The resource role being played by board of directors is facilitated mostly through their social

and professional networks (Johannisson and Huse, 2000), and through interlocking directorates

(Lang and Lockhart, 1990) cited in Abor and Biekpe, (2007). Effective and efficient consumption

of the firm’s resources by the boards of directors can allow SMEs to operate and manage

22
economically viable organizations that can create long-term competitiveness. Likewise, the

provision of resources as a vital role of board members is also the underpinning principle of the

stakeholder theory. The main resource of the stakeholder theory is consensus. According to this

view, the board membership should include representatives of all parties that are crucial to the

company's success. This could result in improving the firm's ability to build consensus among all

important stakeholders. The board of directors is hence seen as the medium where conflicting

interests are reconciled, and where the necessary unity is created Abor and Biekpe, (2007).

The theory is premised on the assumption of considerable and continual firm heterogeneity in

terms of resource endowments. It is commonly proposed that this heterogeneity emanates from the

inability of firms to modify their acquired stock of resources over time (De Wit & Meyer 2005).

The model holds that the core of the strategy is or should be defined by the unique resources and

capabilities of a firm (Spanos &Lioukas 2001). Also, the theory argue that the persistent differences

in firm performance require that either the firm’s product be differentiated, or that it attains a low

cost position or focus leadership in relation to its competitors (Louw& Venter 2010:245). In other

words, the main argument of the Resource-Based View is that resources and capabilities determine

how effectively and efficiently a firm performs and functions. It is worth noting that a given

strategy will create a sustainable competitive advantage and performance differential if, and only if,

the resources used to visualize and execute it are valuable, rare, inimitable and non-substitutable

(Ehlers & Lazenby 2007). However, corporate governance can be instituted in SMEs to ensure a

check-and-balance in the process of managing the organization for the benefit of all the

stakeholders In the light of the above, this theory explain good and effective adoption of corporate

governance as a distinctive capability, which creates a competitive advantage and improves

performance for the SMEs.

23
 This study adopts the agency theory as a framework for this research because it gives insight

into the agent behavior and the agent-principal relationship. Manager (agent) in playing their role of

presenting timely financial information to the shareholders (principal) and other stakeholders may

delay and give misleading information mainly due to their selfish gains. The issue of corporate

governance arose from the activities of managers or agents in sharp practices, which usually are not

in the principals (owners of the business) interest. Over time, situations have risen where the

directors do not take action in shareholders’ best interest. This problem forms the core issue which

agency theory addresses. This problem arises because of the disassociation of the control of a firm

from ownership of such firm; hence the directors control the firm while the shareholders are the

owners. This arrangement invariably gives rise to a conflict of interest amongst principal (i.e.

shareholders) and agent (i.e. managers). This conflict of interest is the foremost problem that the

principle of corporate governance intends to address. Companies should then seek to reduce this

principal-agent problem through an effective and solid corporate governance mechanism.

2.3 Empirical Review

Mollah, Al Farooque and Karim (2012) study the effect of corporate governance and

ownership structure on the financial performance of listed firms in Botswana. The study utilized 19

sample firms listed on the Botswana Stock Exchange over the period of 2000 – 2007. The data for

the study was analyzed using Ordinary Least Squares (OLS) regression model. The findings of the

study showed separate effects of corporate governance and ownership structure on the different

measures of firm performance, proxies by ROA, ROE and Tobin’s Q.

Osino (2013) worked on the relationship between corporate social responsibility and

financial performance of SMEs in Kenya. The study was to determine the relationship between

corporate social responsibility and financial performance of SMEs in Kenya. Inferential statistics

Regression analysis Spearman's correlation coefficient Questionnaire was used for the research

24
design. The finding was that there is a positive relationship between CSR and ROA and level of

income of SMEs.

Ngozi and Raymond (2013) conducted a research on the appraisal of corporate governance

issues in enhancing transparency and accountability in small and medium enterprises (SME). The

paper assess whether corporate governance contributes significantly in ensuring accountability and

transparency in order to improve performances of an enterprise and to determine the extent at which

corporate governance can facilitates the organizations in achieving their social responsibilities to

the environment. The population for the paper was selected judgmentally from the management,

staff of seven SMEs in Anambra state, Nigeria. Data for the study were collected from both primary

and secondary sources. The Hypotheses formulated for this paper were analyzed and tested with the

Two Way ANOVA for opinion differences, using the Statistical Package for Social Sciences

(SPSS) version 17.0 software package.

Gibbet, Satinder, and Rafael (2013). Their research was designed to unlock the importance

of Corporate Governance in the Manufacturing Small and Medium Enterprises (SMEs) in

Zimbabwe. They believe corporate and their executives need to account for their actions and

activities. SMEs and their executives are not exceptional to the rule. The sample size of the research

paper consisted of 1000 SMEs located in 5 out of a total of 10 Zimbabwean Provinces, namely

Bulawayo Metropolitan, Harare Metropolitan, Matabeleland North, Matabeleland South and

Midlands. The research instrument used was the self-administered questionnaire. Data collected

was analyzed using both inferential and descriptive statistical tools. Results obtained from the study

revealed that corporate governance is not applied in SME Organizations.

Akpan and Amran (2014) investigated the relationship between board characteristics and

firm performance of Nigerian companies. The study utilised data from 90 listed firms on the NSE

over a period of three years from 2010 – 2012. The finding of the study shows that board size and

25
educational level of the directors are positively and significantly related to firm performance. In

contrast, a significantly negative relationship is found between women directors and the firm’s

turnover.

Afrifa and Tauringana (2015) examined the effect of corporate governance on the

performance of UK SMEs. The study utilized unbalanced panel data of a sample of 8,234 UK

SMEs for a period of 10 years from 2003 – 2013. The finding of the study shows that board size,

CEO age and tenure, and directors’ remuneration are significantly related to SMEs’ performance.

Overall, the study shows that corporate governance affects SMEs’ performance.

Pathan, Haq and Gray (2015) examined whether board structure (board size, composition

and gender diversity) in banks relate to their performance in US. The results showed a negative

association between board size in banks and their performance. There is also some evidence of a

negative relation between board independence and performance. In addition, the findings supported

a positive association between gender diversity and bank performance. The study also showed that

Sarbanes-Oxley Act of 2002 (SOX) has had an impact on the board structure and performance

relation. Specifically, the negative effect of bank board size on performance is more pronounced in

the post-SOX period.

Afande (2015) examined the extent of adoption of corporate governance practices

and financial performance of SMEs in Kenya. The study employed both quantitative and

qualitative method of data collection on 30 registered manufacturing SMEs. The result of the

study reveals a positive relationship between corporate governance practices and SMEs’

profitability. The study concludes that corporate governance practices enhance firms’

entrepreneurship and competitiveness.

Garba and Abubakar (2016) investigate the effect of ethnic diversity of firm performance in

Nigerian insurance industry. They discovered that ethnic diversity does not have any significant

26
impact on firms’ performance in both models, using all the specifications of firms’ performance

(Tobin’s Q, ROE and ROA). Since the study was conducted on insurance industry, it may be

interesting to investigate how ethnic diversity affects firm financial performance in the banking

industry.

Benjamin and Asunka (2017) conducted a research on a case for regulating corporate

governance in Ghana To develop and enact a code of corporate governance meant specifically for

SMEs in Ghana Literature review was used (found from google scholar) 40 were accessed but 15

were reviewed because they specifically dealt with the challenges facing SMEs in Ghana Effort

should be taken to enact code of corporate governance for SMEs in Ghana to curb the

challenges(internal and external) faced or reduced to the barest minimum Code of corporate

governance should be established for SMEs.

Zerrouki and Fellag (2017) carried out a research on corporate governance among SMEs in

Algeria: barriers to the practice of corporate governance system. The study aims to shed light on the

fact of corporate governance in the Algerian small and medium size enterprises where the intention

is to identify and make the point over the fact of corporate governance in Algerian joint-stock

enterprises, so as to state the major and essential obstacles that stand against the good practice of

corporate governance. The study was carried out in 4 joint-stock entities in the region of CHLEF,

the empirical study was about a questionnaire in which we tried to recognize the fact of corporate

governance of the stated companies and to pull out the different problems that impede the

enterprises path toward the good development. However, our reached results were that the

corporate governance concept is not enabled as it should be and the SMEs in Algeria suffer from a

lot of problem in which initially the family nature and successions problems, also the relation

between the main actor’s elements is not good and the legal and organizational environment is not

encouraging.

27
 Hove-Sibanda, Sibanda,& Pooe, (2017) their study examined the impact of corporate

governance adoption on the firm competitiveness and performance of SMEs in Vanderbijl park.

The study employed a cross-sectional research design, which used quantitative methods. One

hundred and fifty-two SME owners or managers were chosen from Vanderbijl Park in Gauteng,

South Africa. The collected data were analyzed using a structural equation modelling system by

using Smart PLS software. The principal findings of the study revealed that the implementation of

corporate governance by SMEs significantly and positively affected their competitiveness and

performance. The article provided practical implications and made some recommendations. The

article bridges the gap between theory and practice because it has both an economic and

commercial impact in practice. It can be used to influence public policy, research and teaching

because it contribute to the body of knowledge, particularly regarding SME corporate governance

in emerging markets. An important aspect of their work was that it gives a framework for additional

similar studies in other locations within emerging markets to test the generalizability of the

findings. For the purpose of teaching, it provides a model on how to appraise the link that exists

between corporate governance and SME performance. Finally, the study gave a distinctive

empirical analysis of the relationship that exists between corporate governance compliance and

performance of firms in South Africa, and thereby giving a suitable input to corporate governance

literature.

Muhammad, Ukairo and Buhari(2019) the study reports the outcome of an empirical study

on the relationship between corporate governance and firm performance of Small and Medium-

Sized Enterprises in Nigeria. SMEs are the backbone of developing economies but the SME sector

in Nigeria is found to be underperforming due to inadequate funding and poor management which

results in the unemployment increase and slow economic growth. The study used a survey research

design using balanced panel data. The data were gotten from a sample of 55 Nigerian SMEs in

28
Katsina state in the period 2012 - 2016. The result of the study showed significant positive

association between CEO tenure and family ownership with SMEs’ performance and significant

negative association between CEO duality and women on board with SMEs’ performance. The

research indicates that family-owned SMEs and SMEs with longer-tenure CEOs are associated with

increase in firm performance, whereas SMEs with CEO duality and women directors are associated

with decrease in firm performance. Their findings suggested that SMEs’ owners should infuse a

good corporate governance structure for increased performance.

Tereza and Charity (2019) carried out a research on SMEs: Towards the development of

socially sustainable communities. The study investigated how SMEs facilitate the ability of

communities to develop socially sustainable practices. The study adopted Exploratory and

qualitative research design Secondary and primary source of data - semi structured interview. The

findings revealed Respondent believe that it is their duty to reduce future risk and contribute to both

local and global effort in achieving socially sustainable communities.

Abraham (2019) conducted a research on the effect of corporate governance mechanisms on

corporate performance: an empirical study of non-financial firms in Nigeria. The objective of the

research was to examine the influence of corporate governance mechanisms on corporate

performance of non-financial firms in Nigeria. The study adopted an ex-post facto research design

Secondary data were sourced from companies’ annual financial statements and the Nigeria Stock

Exchange (NSE), a population of 80 listed companies The study adopted judgmental sampling

technique. The study discovered that multidimensional change in governance mechanism by firms

may imply substitutability among mechanisms; it is then necessary for firms, regulatory bodies and

researchers to integrate this into their regulations and analysis, respectively. Firms need to

incorporate value-enhancing governance mechanisms as well as harmonizing mechanisms to

forestall the simultaneous experience of good and bad changes in governance mechanisms. The

29
study has some limitations. First, the data of most firms that would have been included were not

available at the time of collection hence only 34 out of 80 listed companies that produced and

submitted their financial statements to the NSE between 1990 and 2017 were used. Also, the

current study does not provide a detailed analysis on the manner of substitution among governance

mechanisms and the characteristics of firms that are likely to experience good or bad governance

changes. These may be the focus of future research.

Lawrence, Felicia, Johnson, Felix and Uzohue (2020) carried out a research on Effect of corporate

governance on the financial performance of commercial banks in Nigeria. The research paper

explores the nexus between governance practices and bank profitability in Nigeria. It adopts the

size of bank board and directors’ stake as proxies for corporate governance; with return on assets

and return on equity as representations for financial performance. The research integrates firm size

as a controlled variable. The estimation method of the Generalized Method of Moments was

employed. Evidence from the research reveals that board size, directors’ equity, and firm size

substantially affect Nigerian banks’ financial performance. Besides, the study shows a robust effect

of lagged return on equity on the current level of performance.

Adedeji and Ajulo (2021) investigated the Impact of Corporate Governance on the Performance of

Selected Banks in Nigeria. The study aims to examine the relationship that exists between corporate

governance and banks performance of selected commercial banks in Nigeria. Using regression

analysis of 5 years from 2014 – 2018. The stock performance being the response variable was

captured by Market price per share (MPS) while the explanatory variables include Board Size (BS),

Corporate Governance Disclosure Index (CGDI), Non-Executive Director (NED) and Number of

Female Director (NUM) are the regressors used in achieving this objective. Descriptive analysis

was employed to ascertain the mean (1.64141; MPS, 2.658831; BS, 2.145323; NED, 1.127043;

NUM 0.933143; CGDI) median, Maximum, Minimum. Correlation was carried out and a positive

30
and strong relationship was generated. Post estimation diagnostic test of Hausman test and

redundant fixed effect test were adopted in selecting the most appropriate model to capture the

impact of corporate governance characteristics on stock performance of banks. The test indicated

that random effect is not an appropriate model and non-normality of the variables will not

encourage the use of ordinary effect, therefore, in estimating the parsimonious model of the

variable, fixed effect will be an appropriate assumption. 86.78% of the stock performance of banks

was accounted for by the explanatory variables.

Ngozi and Patricia (2021) investigated corporate governance and firm performance: A study

of conglomerates in Nigeria. The study assesses corporate governance and firm performance: a

study of conglomerates in Nigeria. expost facto research design was adopted. The population

constituted the conglomerate firms in Nigeria. Data for this study were sourced from annual reports

and accounts of the firms. Regression analysis was used in testing the hypotheses.

Isaac, Samuel and Kennedy (2021) investigated corporate governance and financial

performance of insurance firms in Kenya. The study investigated the relationship between corporate

governance and the financial performance of insurance firms in Kenya over the period 2013–2018.

The data were collected from 51 Insurance firms that have the license to operate in Kenya as of 31

December 2018. Regression analysis was employed and the results showed that corporate

governance significantly affects the financial performance of insurance firms. In particular, the

findings revealed that board composition negatively and significantly affects financial performance.

2.4 Gap in Literature

Despite the growing number of studies on corporate governance and SMEs it was deduce

that most of the existing literature represents other contexts in countries and regions of the world

such as Europe, USA, Asia and Australia such as board composition is the beating heart of good

corporate governance and high performance (Charlotte valeur, 2017), Ways to increase corporate

31
governance (Michael volkov, 2013), Corporate governance in SMEs and its relationship with

corporate performance (Brand spur, 2018).After careful review of related journals it was deduced

that enough studies have not been carried out on this topics as relating to Nigeria, corporate

governance and they only deals with incorporated companies that are under CAC which is not right

(Muhammad, Ukairo and Buhari, 2019). This studies looks to fill the gap of corporate governance

by bringing it to the SMEs in Nigeria and how it can work for the business owners.

32
 CHAPTER THREE

METHODOLOGY

This chapter describes the procedure used for the study. It outlined the study design, source

of data, population of the study, sample and sampling techniques adopted, research instrument used,

validity and reliability of instrument and method of data analysis.

3.1 Research Design

The study made use of the survey research design to obtain information about prospects and

perspective of incorporating corporate governance in SMEs in Akure south metropolis. Data were

collected from primary sources through the employment of questionnaire distributed to target

respondents. The target respondents are owners and managers of the SMEs. The questionnaire is

structured in a close ended form with five likert scale. The data collected was analyzed using

descriptive and inferential statistics.

3.2 Source of Data

Data was derived from primary source. The data was collected using questionnaire which

are administered to respondents who are owner/managers of medium scale enteprises in Akure

South metropolitans, Ondo State, Nigeria, which are considered to be relevant for the purpose of

this study.

3.3 Population of the Study

The target population of this study is 194 medium scale enterprises according to

(SMEDAN, 2019) from across different sectors ranging from manufacturing, services and trading

within major commercial centers in Akure South, Ondo State, Nigeria as at the end of 2020.

33
3.4 Sample Size and Sampling Technique

The sample size is 194 medium scale enterprises using census sampling techniques. It is

known as the complete enumeration or complete survey. This sampling technique is used because

an intensive and robust study is required for the purpose of this study.

3.5 Research instrument

A structured closed ended questionnaire was used for data collection for this study. The

questionnaire is divided into two sections (A&B), where section A consist of background

information about the respondents; while section B consists 19 questions/statements that points to

obtaining information about the perception of respondents about the prospect and perspective of

incorporating corporate governance in small and medium scale enterprises in Akure south

metropolis.

3.6 Reliability and Validity research Instrument

The questionnaire was designed based on earlier studies conducted to enhance the strength

of the research work. The questionnaire were presented to and assessed by my supervisor. A pilot

study was also conducted on a small group of respondent to validate the questionnaire to determine

if the question are reliable and meet up with requirement of the study. To further establish the

validity of the research instrument, Cronbach Alpha was used to test if the questions asked in the

questionnaire are significantly relevant to each objective of the study. The percentages of reliability

of questions raised to assess governance practices among SMEs in Nigeria showed 70.3 percent;

reliability of questions raised to identify the challenges of incorporating corporate governance into

SMEs practice in Nigeria revealed that it is 63.29 valid; and lastly the results on the assessment of

the impact of incorporating corporate governance on the financial performance of SMEs in Nigeria

showed that the questions are 68 percent relevant and reliable.

34
Variables Cronbach Alpha Average inter-item No of items

covariance:

1 0.7030 .2204405 10

2 0.6329 .2463864 6

3 0.6820 .1500864 10

Source: Researchers’ Computation (2021)

3.7 Model specification

To study the relationship between financial performance, level of acceptance, challenges of

acceptance and corporate governance incorporation. We estimate a model which in its form is as

follows:

Y = f(x1, x2, x3)

Yt = x + β1 xt + β2 X2t + β3 X3t + et………..equation(1)

Y = financial performance

X1 = level of acceptance

X2 = challenges of acceptance

X3 = corporate governance incorporation

3.8 Data Analysis Technique

To provide answers to research questions and to achieve stated objectives, information

obtained will be analyzed using descriptive statistics such as bar chart, percentages, mean

distribution and inferential statistics using statistical packages. In other to achieve stated objectives,

hypothesis would be tested using Ordinary Least Square (OLS) to test the relationship between the

variables.

35
 CHAPTER FOUR

DATA PRESENTATION, ANALYSES AND DISCUSSION OF FINDINGS

This chapter contains the presentation, analysis and interpretation of the data collected for

this study through the use of questionnaire as the study focuses on prospects and challenges of

incorporating corporate governance among the SMEs in Ondo State. The data were analyzed using

descriptive statistics and inferential statistics. The chapter also discussed the implication of the

findings on the study.

4.1 Descriptive statistics

Table 4.1 shows the representation of the respondents, according to the representation

described in the table, it was indicated that the total no of questionnaires administered are 194 of

which the percentage of respondents that were male are 36.60 and female 63.40 percent while 35.05

percent of the respondents are CEO, 24.74 are managing Director; 37.11 senior managers and 3.09

percent of the respondents fall on other categories implying that the questionnaire were fairly

distributed to individuals that have ability to give opinion on the subject matter. From table 4.1,

how the questionnaire were distributed among the major lines of business in Nigeria were shown

and the percentage indicated that 28.87 percent are into agriculture, 27.32 percent into

manufacturing; 26.8 percent into trading and 17.0 engaged in other businesses. It was further

indicated in the table that 52.06 percent of the business have been in existence between 0-10 years

while 28.8 percent have been in business for about 11 to 15 years. It was further shown that 12.37

businesses have been in existence since for over 21 years. 57.22 percent of the SMES have

employees ranging from 50-100, 26.80 percent have employee ranging from 100 to 150 while the

remaining 15.98 of the SMEs have employees between 151 and 200.

The descriptive statistics of the respondents shows that the SMEs of sampled area cut across

important line of business that will boost the economic growth of the area and it is evident that

36
majority of them fall under the category of medium sized companies as majority of them have

employees that their number does not exceed 100.

Table 4.1.1 Demographic Information of Respondents

Demographic Information Frequency Percentages Cumulative

Gender
Male 71 36.60 35.57
Female 123 63.40 100
Position of respondents
CEO 68 35.05 35.05
Managing Director 48 24.74 59.79
Senior Manager 72 37.11 96.91
Others 6 3.09 100.0
Line of Business
Agriculture 56 28.87 28.87
Manufacturing 53 27.32 56.19
Trading 52 26.80 82.99
Others 33 17.01 100.00
Years of Business Existence
0-10 101 52.06 52.06
11-15 56 28.87 80.93
16-20 24 12.37 93.30
21 and above 13 6.70 100.00
No of Employees within the organization
50-100 111 57.22 57.22
101-150 52 26.80 84.02
151-199 31 15.98 100.00
Source: Researcher’s Computation (2021)
4.2 Acceptance level of corporate governance practices among SMEs in Nigeria.

In order to achieve specific objective one, the item response theory (IRT) with the aid of

graded response model was employed. It is a mathematical model that explains the relationship

37
between latent traits unobservable characteristic and their observed responses or performance. It is

considered appropriate to analyze the objective as it seeks to establish a link between the properties

of items on research instrument and individuals responding to these items. Therefore, its usage in

the study focuses on establishing the respondent’s position on corporate governance practices.

From table 4.2, the response as regards the first item addressing business structure and

accountability shows 43.5% of the respondents is positive that the business structure of the SMEs is

adequate for accountability purpose as prescribed by the corporate governance code and it is

statistically significant at 5%. As regards involvement in sustainability practices to attract investors,

the result showed a co-efficient of 92.2 percent and statistically significant with p-value of 0.026

indicating that SMEs equally embrace the idea of sustainability practices. From table 4.2, 42.2

percent of respondents are positive about the idea of external auditing as they considered it

important for SMEs survival which is statistically significant as shown under the result for item 3.

The result of item 4 on table shows that the respondents have difficulty in accepting the idea of

separation of ownership and management of the business as the co-efficient falls under the category

of difficulty where the curve is at its steepest. The coefficient is negative at the rate of 72.15 percent

and their opinion is considered significant.

Likewise, the result for the graded response model for item 5 indicates that the respondents

also have difficulty in accepting that SMEs should have supervisory board that regulates its

operation with just 18 percent of them agreeing to the idea which their opinion is considered

insignificant with the p-value of 0.272. From the table as well, the coefficient of item 6 shows that

71.94 percent agreed that there are internal rules that guide the scope of their responsibilities which

is statistically significant at 0.01 while the result for item 7 shows that there is difficulty in

accepting the fact that they need to disclose their financial reports like that of public corporation but

they are positive about it with co-efficient of 55.13% which is significant at 5 percent. For item 8,

38
the result showed coefficient of 53% agreeing that there is supervisory committee that regulate the

activities in the SMEs which is significant at 0.003.

The result further showed that for item 9, the respondents is positive about the government

regulating their mode of business with coefficient of 0.96 which is significant and lastly, the result

for the last item showed that the respondent find it difficult to accept the fact that there should be a

law that regulates the returns of SMEs, it has the co-efficient value of 47 percent which interprets

that there opinion is statistically significant.

Osino (2013) worked on the relationship between Corporate Social Responsibility and

financial performance of SMEs in Kenya. The study was to determine the relationship between

Corporate Social Responsibility and financial performance of SMEs in Kenya and the findings

showed that there was a positive relationship between CSR and ROA and the level of income of

SMEs. This agrees with our study that SMEs involvement in sustainability practices will increase

the financial performance and that SMEs embrace the idea of sustainability practices.

Table 4.2.1 Determination of the acceptance level of corporate governance practices among
SMEs in Nigeria
Quest. Items Coef. Std. Err. z P>|z| [95% Conf. Interval]

1
Discrim .4353353 .196477 2.22 0.027 .0502474 .8204232
>=3 -7.387117 3.314263 -2.23 0.026 -13.88295 -.8912815
>=4 -6.003627 2.676879 -2.24 0.025 -11.25021 -.7570412
=5 -.9360055 .5259077 -1.78 0.075 -1.966766 .0947547
2
Discrim .9220182 .2243603 4.11 0.000 .4822802 1.361756
>=3 -6.138754 1.7173 s -3.57 0.000 -9.5046 -2.772909
>=4 -2.876776 .6392239 -4.50 0.000 -4.129632 -1.62392
=5 .1521626 .1859708 0.82 0.413 -.2123334 .5166586
3

39
Discrim .4227165 .1759035 2.40 0.016 .0779519 .7674811
>=2 -8.741489 3.699299 -2.36 0.018 -15.99198 -1.490997
>=3 -5.981487 2.492703 -2.40 0.016 -10.8671 -1.095879
>=4 -1.867272 .8437495 -2.21 0.027 -3.520991 -.2135536
=5 1.772746 .7770548 2.28 0.023 .2497463 3.295745
4
Discrim 1.547922 .2923474 5.29 0.000 .9749315 2.120912
>=2 -2.460487 .383324 -6.42 0.000 -3.211789 -1.709186
>=3 -1.4481 .2325448 -6.23 0.000 -1.903879 -.9923204
>=4 -.7215144 .1579056 -4.57 0.000 -1.031004 -.4120251
=5 .5048481 .1492303 3.38 0.001 .2123621 .797334
5
Discrim 1.109844 .2326266 4.77 0.000 .6539042 1.565784
Diff
>=2 -3.275541 .6407925 -5.11 0.000 -4.531471 -2.019611
>=3 -2.147423 .4074474 -5.27 0.000 -2.946005 -1.348841
>=4 - 1.364541 .2783048 -4.90 0.000 -1.910008 -.8190737
=5 .180457 .1643145 1.10 0.272 -.1415935 .5025075
6
Discrim 1.051674 .2283453 4.61 0.000 .6041252 1.499222
Diff
>=2 -3.742173 .762389 -4.91 0.000 -5.236428 -2.247918
>=3 -2.435499 .4818719 -5.05 0.000 -3.37995 -1.491047
>=4 -.8297356 .2239678 -3.70 0.000 -1.268704 -.3907668
=5 .7194568 .2090757 3.44 0.001 .309676 1.129238
7
Discrim 1.215767 .239456 5.08 0.000 .7464418 1.685092
Diff
>=2 -2.55193 .4445178 -5.74 0.000 -3.423169 -1.680691
>=3 -1.471387 .2710593 -5.43 0.000 -2.002654 -.9401208
>=4 -.6040565 .1765284 -3.42 0.001 -.9500458 -.2580672
=5 .551318 .1731995 3.18 0.001 .2118533 .8907827
40
8
Discrim .5389432 .1798154 3.00 0.003 .1865115 .8913749
Diff
>=2 -5.419995 1.797277 -3.02 0.003 -8.942593 -1.897397
>=3 -4.078532 1.344672 -3.03 0.002 -6.71404 -1.443024
>=4 -1.500826 .5441805 -2.76 0.006 -2.5674 -.4342515
=5 1.600358 .5807954 2.76 0.006 .4620196 2.738696
9
Discrim .9670847 .2167162 4.46 0.000 .5423287 1.391841
Diff
>=2 -2.900737 .6078909 -4.77 0.000 -4.092181 -1.709293
>=3 -1.276948 .2932488 -4.35 0.000 -1.851705 -.7021909
>=4 -.432805 .1868142 -2.32 0.021 -.7989542 -.0666558
=5 .951571 .2589024 3.68 0.000 .4441317 1.45901
10
Discrim 1.514713 .2826628 5.36 0.000 .9607036 2.068721
Diff
>=2 -2.73669 .4531035 -6.04 0.000 -3.624756 -1.848623
>=3 -1.738046 .2686373 -6.47 0.000 -2.264566 -1.211527
>=4 -.8522821 .1663694 -5.12 0.000 -1.17836 -.5262041
=5 .4778973 .1493267 3.20 0.001 .1852224 .7705722
Graded response model Number of obs = 194
Log likelihood = -2414.9535
Source: Researcher’s Computation (2021)

4.3 Challenges of Incorporating Corporate Governance into SMEs Practice in Nigeria.

To analyze the challenges raised in section Bii of the research instrument, the opinion of the

respondents were first described and a t-test was conducted to give empirical backup to their

opinion upon which inferences and conclusion can be drawn from. For the t-test, it was

hypothesized that if the t-value <3, the null hypothesis will be accepted and if >3 it will be rejected.

41
From the first challenge raised represented by C1, 154 individuals representing, 79.17 percent of

the respondents agreed that cost attached to corporate reporting is a challenge to incorporating

corporate governance as many of the SMEs could not afford it. The t-value for C1 is 13.93 which is

statistically significance at 95 percent confidence level, hence the null hypothesis is rejected. For

C2, result from the descriptive statistics shows that 75.26 percent of the respondents agreed that the

SMEs have a challenge of the appropriate risk management to adopt. From table 4.3, the t-test for

C2 indicates 11.2510 which is statistically significant. Also, the descriptive statistics shows that 133

of the respondents consent to the fact that the auditing and supervisory process of corporate

governance is too cumbersome for SMEs to adopt and this opinion shows from the tables that C3

have t-test value of 11.6940 which is significant with p-value of 0.000. Furthermore, 68.56 percent

of the respondent agreed that separation of ownership and management is a challenge because they

believed that the management will mismanage the business if the owner does not stay in the middle

of affairs. The t-value for C4 shows 13.4458 with p-value of 0.0000.

From table 4.3, t-test for C5 shows 9.7140 which is statistically significant at 5 percent

giving empirical support to the 58.25 percent of the respondents that are of the opinion that fear of

loss of contract will make it difficult to incorporate corporate governance in SMEs in Nigeria.

Lastly from the table, the result for C6 shows t-test values of 7.9124 which is statistically

significant. The results support the 64.95 percent of the respondents that opined that the SMEs do

not have accounting system to support the requirement of corporate governance.

Gibbet, Satinder, and and Rafael (2013). Their research was designed to unlock the

importance of Corporate Governance in the Manufacturing Small and Medium Enterprises (SMEs)

in Zimbabwe. Results obtained from the study revealed that corporate governance is not applied in

SME Organizations. This agrees with our study because after identifying challenges that SMEs face

42
in incorporating corporate governance we came to the conclusion that corporate governance is not

in full application for SMEs.

Table 4.3.1 Identification of the Challenges of SMEs in Incorporating Corporate Governance

Variable Obs Mean Std. Err. Std. Dev. t Pr(T > t)

C1 194 4.015464 .0728948 1.015307 13.9305 0.0000

C2 194 3.819588 .0728457 1.014623 11.2510 0.0000
C3 194 3.871134 .0744939 1.03758 11.6940 0.0000
C4 194 3.876289 .065172 .9077414 13.4458 0.0000
C5 194 3.737113 .0758818 1.056911 9.7140 0.0000
C6 194 3.706186 .0892509 1.243121 7.9124 0.0000

Source: Researcher’s Computation (2021)

4.4 Impact of incorporating corporate governance on the financial performance of SMEs in

Nigeria.

The study estimate the model prescribed under methodology to achieve the third specific

objective which is the impact of incorporating corporate governance on the financial performance

of SMEs, multiple regressions was used and the result is presented in table 4.5. The explanatory

power of the model shows that acceptance level of corporate governance, challenges of

incorporating corporate governance and corporate governance incorporation can only cause 20

percent variation in the dependent variable as reflected by the R-square result. This result is further

established with table generated from the multiple regression conducted with F-Value of 16.8

which is significant at 5% with 0.000.

Table 4.5 further shows test for the individual variables that describe the prospects and

challenges of incorporating corporate governance in SMEs. The acceptance level of corporate

governance shows a positive co-efficient of 0.2950 which is statistically significant at 5 percent

indicating that acceptance of corporate governance measures among SMEs in Akoko Metropolis

43
will have positive and significant effect on their performance. Also, the result shows that there is

positive relationship between challenges of incorporating corporate governance and financial

performance with coefficient value of 0.6854 even though it is not statistically significant as it has

p-value of 0.323 and lastly from the table, the result indicate that incorporating of corporate

governance measures will improve financial performance by 24.85 percent which is statistically

significant at 5 percent. The results implies that if the corporate governance measure can be

incorporated by SMEs, their financial performance will greatly improve and any challenges they

might face thereof can be surmountable without their financial performance being negatively

affected.

Afrifa and Tauringana (2015) examined the effect of corporate governance on the

performance of UK SMEs. The findings showed that corporate governance affects SMEs

performance this agrees with our study that the acceptance level of corporate governance measures

among SMEs in Akure metropolis will have positive and significant effect on their performance.

Issac, Samuel and Kennedy (2021) investigated corporate governance and financial

performance of insurance firms in Kenya. The study investigated the relationship between corporate

governance and the financial performance of insurance firms in Kenya over the period 2013-2018.

Their findings revealed that board composition negatively and significantly affects financial

performance, this analysis gives a negative relationship as against this study which positions a

positive effect on financial performance of SMEs.

44
Table 4.5: Regression Result
FP Coef. Std. Err. t P>|t| [95% Conf. Interval]
ALCG .2950767 .0731698 4.03 0.000 .1507472 .4394062
CICG .0685427 .069161 0.99 0.323 -.0678794 .2049648
ICG .2485816 .0772719 3.22 0.002 .0961607 .4010025
_cons 1.831859 .3453764 5.30 0.000 1.150594 2.513123
Number of obs = 194
F(3, 190) = 16.81
Prob> F = 0.0000
R-squared = 0.2097
Adj R-squared = 0.1972
Source: Researchers’ Computation (2021)

45
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

This chapter represents the summary of major findings on incorporating corporate

governance into small and medium scale business practice in Nigeria: prospects and perspective,

Conclusions and recommendations from the study were also presented.

5.1 Summary

The study was carried out to assess corporate governance practice among smes in nigeria;

identify the challenges of incorporating corporate governance into smes practice in nigeria; and to

assess the impact of incorporating corporate governance on the financial performance of SMEs in

Nigeria. In order to achieve the stated objectives,

Chapter one provides background to the study which explains the global stands, the current

state of the topic in Nigeria. The evolution, divergent opinion and recent issues surrounding

incorporating corporate governance into small and medium scale enterprises by different scholars

and authors. It also explains statement of problems which arises as a result of diverse opinions of

scholars relating to the study and the specific problems which the study wants to solve. The

research questions and objectives were also formulated.

Chapter two focused on the review of literatures to explain the variables contained in the

study by defining the concept, as well as reviewing existing literatures on research that have been

conducted both in Nigeria and other countries in the world in the area of this study in order to

reveal the gaps to be filled by this study. Different theories that supported this study were also

explored and this study hinged on these theories which were used to develop a theoretical review

for this study.

Chapter Three contain explanation on the method in which study was carried out to achieve

the research objective. This chapter explained research design, source of data, population, sample

46
size and sampling technique, model specification, measurement of variable and date analysis

technique used in analyzing the research variables.

Chapter Four involves the presentation, analysis and interpretation of data obtained here,

each objective was analyzed using descriptive and inferential statistics which include; statistics

summaries, and regression analysis. The summary of the findings are;

The first objective is to assess corporate governance practices among SMEs in Akure metropolis,

the result of the analysis revealed that it is difficult to accept the fact that there should be a law that

regulates the returns of SMEs

The second objective is to identify the challenges of incorporating corporate governance

into SMEs practices in Akure metropolis and the result of the findings showed that SMEs do not

have accounting system to support the requirement of corporate governance.

The third objective is to asses the impact of incorporating corporate governance on the

financial performance of SMEs in Akure metropolis, the analysis result revealed that if corporate

governance measure can be incorporated by SMEs their financial performance will greatly improve

and any challenges they might face thereof can be surmountable without their financial

performance being negatively affected.

5.2 Conclusion

It can be concluded based on the analysis and findings of this study that there are more

prospect and potentials for the adoption of corporate governance among SMEs in Ondo state than its

current implementation. Most SME’s staffs in Ondo state gave credit to the fact that they are aware

of corporate governance and also of its adoption and current impact. Although its current level of

implementation is low among SME’s in Ondo state. Nevertheless, much statistical analysis puts

together has led to the following conclusion. This study concludes that there is a positive advantage

47
irrespective of numerous hitches in the adoption of corporate governance among SMEs in Ondo

state.

5.3 Recommendations

Based of the findings, the study make the following recommendation:

i. It is therefore recommended that awareness should be created on the need of corporate

governance at SMEs level as the activities of these enterprises affect the economy and several

stakeholders.

ii. Awareness should be created within the sector for adopting corporate governance and its

consequent benefits and provides strategies for effectiveness in SMEs operation.

iii. Efforts should be made to enact the code of corporate governance specially for SMEs to curb the

challenges both internal and external that are faced by SMEs.

48
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 APPENDIX I

QUESTIONNAIRE

Dear Respondent,

REQUEST FOR COMPLETION OF QUESTIONNAIRE

I am an undergraduate student in the Accounting department of Adekunle Ajasin University

Akungba- Akoko currently undergoing a B.Sc programme. I am conducting a research on the study

titled “Prospects and Perspectives of Incorporating Corporate Governance into Small and

Medium Scale Enterprises in Nigeria” This study will help SME owners and managers see the

benefit of incorporating corporate governance into their businesses. I hope to have a few minute of

your time to assist in completing the questionnaire. Your personal information and all other

information provided will be treated with strict confidentiality and used solely for academic

purpose.

Thanks for your assistance and cooperation.

Yours faithfully,

Akintujoye Esther

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 SECTION A (Demographic data)

Instructions:

Kindly tick (  ) on that which agrees with your opinion.

1. Gender: Male Female

2. Position of the respondent: Owner Managing Director

Senior Manager Other (Specify): ………………….

3. Line of business: Agriculture Manufacturing Trading

Other (specify): ………………….

4. Years of business existence (tick appropriate):

Below 5-10 11-15 16 -20 21 and above

5. What is the number of employees within your organization?

50-100 101-150 151-199

SECTION B

This section consists of sets of statements asked with respect to prospects and perspective of

incorporating corporate into small and medium scale enterprises in selected south-western

states in Nigeria. Please tick (√) the most appropriate option to the statements outlined below.

Code: SA=Strongly agree, A=Agree, UD =Undecided, D=Disagree, SD=Strongly disagree

Bi). The acceptance level of corporate governance practice among SMEs in Nigeria.

S/N STATEMENTS SA A UD D SD

5 4 3 2 1

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1 Do you agree that your business structure is adequate enough to

uphold accountability?

2 Do you agree that SMEs need to get involved in sustainability

practice in other to attract investors to your company?

3 Do you agree that it is appropriate to allow external audit for

SMEs survival?

4 Do you agree that there should be separation of ownership and

management of your company?

5 Do you agree that it is appropriate to have supervisory board

that regulates the operation of SMEs?

6 Is there any internal rules that guide the scope of responsibility

in your company?

7 Do you agree that you should disclose your financial reports of

your public corporation?

8 Is there supervisory committee that regulate the activities in

place in your company?

9 Would you agree that government regulate the mode of running

your business?

10 If there is a law that regulates the returns of SMEs, would you

globally accept the law?

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Bii): Challenges of incorporating corporate governance into SMEs practice Nigeria.

S/N STATEMENTS SA A UD D SD

5 4 3 2 1

1 Do you agree that SMEs cannot afford the cost attached to

corporate reporting?

2 The challenge of risk management strategies to adopt is more

in SMEs in Nigeria?

3 The auditing and supervisory process is too cumbersome for

SMEs to adopt?

4 The management will mismanage the business if the owner

does not stay in the middle of affairs?

5 The fear of loss of contract will make it difficult to incorporate

corporate governance in SMEs in Nigeria?

6 The SMEs does not have accounting system to support the

requirement of corporate governance?

Biii): Impact of incorporating corporate governance on the financial performance of SMEs in

Nigeria.

S/N STATEMENTS SA A UD D SD

5 4 3 2 1

1 Do you agree that the presence of government regulation in

SMEs will promote your performance?

2 Companies with independent supervisory bodies will affect

more investors

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3 Do you agree that the management of companies should be

based on expertise of the owner and not the provider of capital?

4 Do you agree that if there is a change of your present

government the performance will be better?

5 Do you agree that employees are capable of analysing the

business better than the owners?

6 Do you agree that the disclosing of your business activities to

the public will promote credibility of your business?

Code: HL= High level, ML= Medium level, UD= Under level, LL= Low level, VLL= Very low
level.
Biv): Financial Peformance
S/N STATEMENTS HL ML U LL VLL

5 4 D 2 1

1 What is the range that you can grade the profitability of your

company?

2 What is level of placement of your products your industry?

3 At what level is the turnover compared to the effort put into

the business?

4 Do you agree that your business is performing well

financially as compared to other companies in the same line

of business?

Thank you for your time.

61