Corporate Governance Practice And Investment Performance

This study was designed to empirically investigate the effect of corporate governance on the investment performance of pension fund administrators in Nigeria within the period of 1999–2010. The study employed the use of secondary data sourced from the websites and audited financial statements of pension fund administrators in Nigeria. For the purpose of the study, board size and board composition were used as the proxy for corporate governance and return on asset was used a proxy for the investment performance of pension fund administrators. These variables were then subjected to a multiple regression analysis using the Ordinary Least Squares (OLS) estimator at 5% level of significance with the return on asset as the dependent variable. From the study, it was found that board size has a positive and statistically insignificant relationship with the return on asset of pension fund administrators. On the other hand, board composition measured by ratio of board members with financial expertise (experience in banking/investment, insurance and/or pension), to total number of the board members was found out to have a negative but no statistically significant relationship with the return on asset of pension fund administrators. This could be as a result of involving more board members who are not financial expertise in the board of pension fund administrators and as such, their decisions and their inexperience of financial matters tends to be detrimental to the performance of the pension fund administrators in Nigeria. The study therefore recommended that, in board composition, there should be a reduction in the number of board members who do not have financial expertise especially in the area of banking/investment, insurance and/or pension as this professional expertise is vital for high profitability of pension fund administrators in Nigeria.

TABLE OF CONTENTS

COVER PAGE

TITLE PAGE

APPROVAL PAGE

DEDICATION

ACKNOWELDGEMENT

ABSTRACT

CHAPTER ONE

• • INTRODUCTION

• • BACKGROUND OF THE STUDY

• • AIM/OBJECTIVE OF THE STUDY

• • PURPOSE OF THE STUDY

• • SCOPE OF THE STUDY

• • RESEARCH HYPOTHESIS

• • SIGNIFICANCE OF THE STUDY

• • LIMITATION OF THE STUDY

• • RESEARCH QUESTION

• • DEFINITION OF TERMS

• • PROJECT PLAN

CHAPTER TWO

LITERATURE REVIEW

• • OVERVIEW OF THE STUDY

• • THEORETICAL FRAMWORK

• • PENSION INSTITUTIONAL SETTING

• • THE IDEOLOGICAL IMPACT OF PENSION

• • MODELS OF CORPORATE GOVERNANCE

• • THE PRINCIPAL-AGENT OR FINANCE MODEL

CHAPTER THREE

METHODOLOGY

• • INTRODUCTION

• • RESEARCH DESIGN

• • METHOD OF DATA COLLECTION

• • SAMPLE COLLECTION

• • STATISTICAL ANALYSIS

CHAPTER FOUR

RESULT ANALYSIS

• • INTRODUCTION

• • RESULT

CHAPTER FIVE

• • SUMMARY

• • CONCLUSION

• • RECOMMENDATION

• • REFERENCES

CHAPTER ONE

1.0                                                        INTRODUCTION

1.1                                         BACKGROUND OF THE STUDY

As a result of the current crisis in the OECD countries, the losses of pension funds are estimated to be $5.4 trillion or about 20% of the value of assets in 2008 (Antolín & Stewart, 2009). Consequently, in a large number of countries policy makers are again paying attention to how private pension funds are managed (Rudolph et al., 2010) and taking into consideration different reforms that may dramatically change the pension system in some countries.¹ The goal of this re- form is often to increase investment returns of pension funds and, consequently, their asset value. However, little attention has been paid thus far to the pension funds’ governance structures and whether they may have an impact on their performance.

Over the last decades, various scholars have found positive associations between better corporate governance and firm market value and performance. Surprisingly, the impact of the governance structures in privately managed pension funds’ on its performance has received little attention in the empirical research. In contrast, Besley and Prat (2003) used a theoretical model to show that governance structure matters in defined benefit (DB) and defined contribution (DC) pension plans with respect to three potential sources of agency problems: the responsibility for monitoring the asset manager, asset allocation decisions, and the plan’s level of funding.

The two types of pension plans differ from each other, and the Besley and Prat (2003) model presents the different ways that the funds should be governed. In a DB plan, the beneficiary is given a set retirement benefits based on a formula that considers years of salary, cost of living adjustments, and other factors. As the future benefits of such plans do not change with the performance of their assets, the fund owners bear the risks of the poor investment performance. Consequently, the potential conflicts between the beneficiaries and the fund’s owner are reduced. In contrast, in a DC plan, the beneficiaries receive retirement, which is based on their contribution to the fund and its investment performance. At the same time, the fund’s profit- ability depends on the size of the managed assets and is almost independent of the investment performance of the assets that it manages on behalf of the beneficiaries. As a result, the governance structure matters, as the beneficiaries and the fund do not have complete contracting ability. Therefore, according to the Besley and Prat model, the optimal governance structure is one in which the beneficiaries have the ability to control and monitor the managers of the pension fund company, who they call the trustees.

This study analyzes the different aspects of governance, including the composition of the board, using information on virtually all DC pension funds in Poland from the beginning of their operations in 1999 until 2010. Using this wide a data set decreases the potential for significant sample selection biases as well as problems related to different institutional frameworks and investment policies of pension funds across different countries (Rudolph et al., 2010). At the same time, during the period of study, the pension funds underwent significant, dynamic changes of all types, which provided an excellent laboratory for examining the impact of different governance factors on their performance.

Indeed, the result of this study confirms that the selection of independent board members may be an important governance factor that determines the return on the pension fund’s assets. Moreover, the results suggest that not only is the number of independent board members important but also their quality, including their incentives to monitor the pension fund managers. Furthermore, using a combination of corporate governance indices, the study confirms that the interests of the beneficiaries and pension owners are different. As a result, I document that other governance factors are important for the beneficiaries and pension fund owners, while combining them may turn out to be a difficult task in the future. However, the study also documents that the current governance of pension funds is weak, which may also explain their underperformance in many countries during the crisis.

This study we review so many literatures on corporate governance and pension funds. Most importantly, it adds to the scarce literature on corporate governance of pension funds by documenting some factors that impact their investment and economic performance. Second, this study provides some new evidence on the impact of board structure and characteristics on pension fund performance. As such, it provides an empirical proof for the theories on governance in DC pension funds outlined by the Besley and Prat model. Third, the study also presents other governance factors that may determine fund performance that have received limited attention in the literature so far. Finally, the study provides new and relevant insights into the current regulatory debate on the reforms of the pension fund industry, arguing that the board structure may be a way to improve its governance and, hence, its performance.

1.2                      AIM AND OBJECTIVE OF THE STUDY

The objective of this study is to determine the effect of corporate governance practices on the performance of pension scheme in Nigeria. Theoretical and empirical studies of this work relied on the relationship between corporate governance practices and performance of pension scheme in Nigeria.

1.3                                  PURPOSE OF THE STUDY

The main purpose of this study is to address this issue and analyze whether governance issues affect the performance of the pension funds.

1.4                                   SCOPE OF THE STUDY

There were severe economic problems resulting from poor performance of public institutions, poor social services delivery, dwindling cash base and financial sustainability crisis orchestrated by bureaucratic corruption. In the pension subsector, huge pension liability, lack of transparency and accountability and the absence of regulatory and supervisory framework were the characteristic phenomenon. The paper in its analysis acknowledged the efficient result achieved so far and called for the strict enforcement of regulatory provisions in the pension industry and civil society activism to strengthen the culture of financial accountability and the sector’s performance in alleviating old age poverty among retirees.

1.5                             SIGNIFICANCE OF THE STUDY

This study provides us with the new evidence on the impact of governance on the performance of privately defined contribution pension plans. This study also made us to understand different governance factors are found to be important for pension fund return on invested assets and also for its economic performance.

1.6                                             HYPOTHESIS

Hi: there is a relationship between corporate governance practices and performance of pension scheme in Nigeria

H2: there is no relationship between corporate governance practices and performance of pension scheme in Nigeria

1.7                               LIMITATION OF THE STUDY

This study is only investigating the effect of corporate governance on the investment performance of pension fund administrators in Nigeria within the period of 1999–2010.

1.8                                    RESEARCH QUESTION

1. 1. What evidence is there that good corporate governance can improve corporate performance?

1. 1. How does corporate governance affect performance?

• • How important is corporate governance when it comes to investing in a firm?

1. 1. What is meant by corporate governance?

1.9                                    DEFINITON OF TERMS

Corporate governance: This is the structure of rules, practices, and processes used to direct and manage a company.

Pension: this is a regular payment made by the state to people of or above the official retirement age and to some widows and disabled people.

1.10                                         PROJECT PLAN

The remainder of the paper is organized as follows. Section 2 reviews some of the research literature on the performance effects of corporate governance and outlines the predictions regarding pension funds. Section 3 gives background information on the pension reforms and the system in Poland. Section 4 presents the data and the empirical model, and Section 5 concludes.