March, 2012.

Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.
A literature review and research agenda.
Olufemi-Ayoola, Folasade.A.

Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.

INTRODUCTION The later part of the 70s decade has been described as a very special period in the development of organizational theories. (Davis and Cobb, 2009; Amburgey and Rao, 1996). Not only did it witness the emergence of theories such as transaction cost economics (Williamson, 1975), agency theory (Jensen and Meckling, 1976), neo-institutional theory (Meyer and Rowan, 1977), population ecology (Hannan and Freeman, 1977) and resource dependence theory (Pfeffer and Salancik, 1978), it also heralded an era which facilitated various studies underpinned by these theories. Theory in itself has been described as, a statement of relationships between units observed or approximated in the empirical world (Bacharach, 1989) and while there is a limit to just how much of the complexities of the empirical world a theoretical statement can capture due to the necessity of establishing boundaries to define the assumptions it must inevitably test, for theory to be regarded as sound, it must be capable of being disproved by experience while at the same time provide a platform for accessing the hows (predictions) and the whys (explanations) regarding the observed phenomena, by others interested in understanding the occurrence. (Bacharach, 1989). Vast research literature abounds providing insights into problem definitions of various organizational phenomena based on the above theoretical frameworks; however most of these studies focus on explaining organizational phenomena observable within developed countries (particularly United States of America and Western Europe). An example is the corporate governance phenomena which gained prominence in literature based on various events in developed countries ranging from the collapse of
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Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.

the stock markets in the eighties,(Parker, 1996), to the high profile corporate scandals of the early 2000s (Enron, WorldCom and Parmalat to mention a few), and the more recent global economic crisis of 2008, which emanated from the financial crisis that engulfed the mortgage sector of the United States. While these events have drawn interest from different spheres- regulatory, practitioner and academic, eliciting various responses such as the generation of the Cadbury Report (1992), the Hampel Committees combined code (1998), the Sarbanes-Oxley Act (2002) and various research dissecting and analyzing different aspects of corporate governance (Monks and Minow, 1996; Shleifer and Vishny,1997; Daily, Dalton and Cannella, 2003) there are still challenges of generalizabity which limits direct comparison of corporate governance experiences in developed countries with those of developing countries due to the different peculiarities and contextual settings involved, (Okeahalam and Akinboade, 2003; Petrovic, 2009; McGee, 2009;Adegbite and Nakajima, 2011). Africa is not exempt from these phenomena, but the dearth of research literature and empirical data on corporate governance in Africa in comparison to the United States and Europe places a limitation. (Shleifer and Vishny, 1997; Okeahalam and Akinboade, 2003; Okike, 2007; Inyang, 2009; Muili and Wong, 2011). As in Africa, so it is in Nigeria, but the cheering news is the nascent growth of the body of work researching corporate governance practice. Beyond the comprehensive review of extant literature on corporate governance in Africa by Okeahalam and Akinboade (2003) which highlighted the peculiar issues leading to the under-researched nature of corporate governance in Africa, studies have been
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Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.

made to trace the evolution of corporate governance in Nigeria, from the perspective of the evolution of legal/ regulatory framework and economic policy reforms(Ahunwan, 2002; Oyejide and Soyibo, 2001) as well as perspective (Yakasai, 2001). Other studies have taken a look at the mechanisms of corporate governance in Nigeria, (Okike, 2007; Amao and Amaeshi, 2008), while Okpara (2010) and Adegbite and Nakajima, (2011), contribute evidence-based perspectives to the discourse on corporate governance in Nigeria. In this paper, we focus on an aspect of corporate governance practice in Nigeria specifically taking a look at the function of corporate boards in ensuring organizational effectiveness and survival through the lens of the resource dependence theory. We attempt a review of the literature on the theory to find out to what extent it provides a valid theoretical framework and we propose a research agenda to test how boards function in a developing country using Nigeria as our reference and whether boards in a developing country function the way the resource dependence theory suggests before proposing further areas of study as we conclude. We believe that this will contribute to the emergent literature on corporate governance in Nigeria, while enriching the resource dependence theoretical framework as most of the previous studies done focus more on using the theory to explain corporate governance phenomena observable within developed countries from the financial/ banking sector

WHAT IS CORPORATE GOVERNANCE?

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Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.

A scan through extant literature on the subject does not provide an indication of consensus on a definition, as definitions on corporate governance abound from different perspectives. Perhaps, this is quite understandable, given the extensive regulatory, financial, socio-political areas corporate governance covers particularly when consideration is given to the different contextual settings and unique country situations which affect the practice of corporate governance in countries. For instance, corporate governance may be viewed from a narrow or broad perspective (Oyejide and Soyibo, 2001). Using related terms, Babic, Nikolic and Eric (2011) describe corporate governance based on internal mechanisms (which include aspects like ownership structure and board of directors for instance) and external mechanisms (which focus on corporate market control and the regulatory system). For the purpose of this paper and in order to provide a working understanding of the concept, we adopt the following definition(s): The system by which business are directed and controlled (Organization of Economic Cooperation and Development. (OECD, 1999), it is related to the competition for scarce resources, (Palepu, Khanna and Kogan, 2002) and involves holding the balance between economic and social goals and between economic and communal goals to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources (Cadbury,2000).

CORPORATE GOVERNANCE IN THEORY

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Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.

Several theories have been used in the study of various aspects of corporate governance ranging from agency theory (Jensen and Meckling, 1976), which defines the relationship between the principal and agent and highlights the problem arising from the separation of ownership and control, to resource dependence theory (Pfeffer and Salacink, 1978), which focuses on the ability of organizations to survive subject to their ability (through boards) to manage external uncertainties, as they seek required resources to function. Other theories such as: the stakeholder theory (Freeman, 1984), explores the network of relationships connected to an organization and the need to ensure that the various interests represented are considered when pursuing organizational objectives; similarly, the stewardship theory (Donaldson and Davis,1991), contrary to the notion of self-interest of agents advanced by the agency theory, explores the enlightened self-interest of an agent (in this case, managers), as good stewards, able to align their goals to ensure the success of their organizations.. However, despite the proliferation and the use of several theories in researching corporate governance, clear evidence exists as to the preferred use of the agency theory as a foundational theory for examining corporate governance phenomena. Udayasankar (2008:169) captures this view succinctly as he notes that, Predominantly, agency theory has informed the context, or base knowledge system of corporate governance itself, while other theories tend to offer explanations for relationships between various elements within this system. Particularly, resource-dependence and institutional theories inform a significant body of research. Yet, these theories are viewed as explanations, which remain embedded in a context that is largely still defined by agency theory.
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Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.

In his opinion, the changing business environment extends corporate governance interfaces to multiple domains beyond the traditional principal agent construct of the agency theory; hence he makes a case for the use of the resource dependence theory as an alternative theory and the basis for a new epistemology.

The Resource Dependence Theory: An Overview The fundamental idea within the theory is the fact that organizations are impacted by environmental dynamics as they source for resources critical to their survival and they seek to manage the uncertainty in their environment (Pfeffer, 1972), in order to control the external dependencies which they are subject to. The theory is important due to the survival implication for organizations- an organization that cannot obtain a proper mix of resources, will eventually fail. (Sheppard, 1995). The theory using an organization at the individual level of analysis, (Johnson, 1995) acknowledges the fact that organizations operate within a social context or environment and require resources (i.e. economic, physical, political, financial, etc) from within the environment to function effectively however the need for resources create dependencies which make organizations vulnerable to and potentially dependent on the external sources of the required resources (Pfeffer and Salancik, 1978). Inherent within this main point are certain issues which help to sum-up the resource dependence perspective: The nature of organizations- coalitions of groups and interests interacting to ensure survival (March and Simon, 1958)

Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.

The need of organizations- no organization is totally self-sufficient, limitations on organizational resources impose constraints on organizations survival ability within the environment.

The network of organizations organizations do not operate in a vacuum, there are other existing organizations, associations and relationships operating within an organizations environment which impacts its social context.

The non-neutrality of organizational interactions Since the environment within which interactions occur is not stable, organizations must manage uncertainty and the ensuing exchange - dependence imbalances which their interactions generate.

According to Pfeffer and Salancik (1978), there are five ways by which organizations can manage their environments to reduce uncertainty: Through the use of horizontal and vertical mergers Inter-organizational cooperation through the use of joint ventures and other interorganizational relationships The use of boards of directors Through the use of law and social sanction Executive succession.

Hillman, Withers and Collins (2009: 1408) in a comprehensive review of the theory on the occasion of its 30th anniversary, note research on boards of directors as an area where the theorys influence can be exerted, even though dominant theory has been agency theory. This view would also seem to advance the case for a more critical look at corporate governance through the resource dependence theory perspective.
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Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.

Resource Dependence Theory and Board Roles: A closer look. Boards are an aspect of the internal mechanism of corporate governance. (Fan, 2004; Babic, Nikolic and Eric , 2011). Mock and Minow, (2002) uses the metaphor of a link and a connector to describe the board. Initial studies establishing the important role boards play took an agency theory perspective. For instance, Fama and Jensen, (1983), identified decision control as a boards primary function, Zahra and Pearce (1989), identified three main roles for the board namely control, service and strategy functions, Johnson, Daily and Ellstrand (1996), recognize control, service and resource dependence as the primary roles of a board. From a resource dependence theory perspective, the primary role of the board is to interface with the external environment to secure critical resources while managing external dependencies. This is done through the different unique attributes individual directors bring to the organization. (Pfeffer and Salancik, 1978; Gales and Kesner, 1994; Johnson, Daily and Ellstrand, 1996). Pfeffer and Salancik, (1978) assert that boards interface with the external environment, to further provide four benefits: provision of specific resources like expertise and advice; communication channels through which the organization interfaces with the external environment; support from important members external to the organization and legitimacy. Hillman, Cannella and Paetzold (2000) developed a taxonomy of directors (Insiders, Business experts, Support specialists and Community influencers) based on the above
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Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.

benefits to test the effect environmental changes play on director roles by applying the taxonomy to a sample of US airline firms undergoing deregulation. Their findings show that changes in environmental conditions do impact the roles which directors play. THE CASE FOR NIGERIA Corporate governance in Nigeria, can trace its roots to the British system of corporate governance, but it has evolved along a different path, owing to the peculiar sociopolitical and economic challenges of corruption, high unemployment and poverty levels, weak social infrastructures and even weaker market and political institutions. (Ahunwan, 2002; Okike,2007, Adegbite and Nakajima,2011). The function of the board is outlined and duly recognized by the Company and Allied Matters Act (1990) which plays an important role in regulating the corporate sector. Also, various codes such as the Central Bank of Nigeria (CBN) code of corporate governance for banks (2006) and the Securities Exchange Commission (SEC) 2003 code of corporate governance for public companies (now reviewed as Code of Corporate Governance, 2011) have been enacted to encourage good corporate governance practice in Nigeria. In spite of this, the state of corporate governance practice in Nigeria remains weak, as evidenced by quite recent instances of abuse of office and executive excesses- the case of Cadbury Nigerias financial scandal (2006), Siemens bribery scandal (2009) and the dismissal and eventual prosecution of eight chief bank executives and their board by the CBN and the Economic Financial Crimes Commission respectively for financial misappropriation of funds and indiscretion are still quite fresh.

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Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.

Theoretically, while there are strong arguments for agency and stakeholder theories playing out in these events,(Yakasai, 2001; Adegbite and Nakajima, 2011), the lack of enforcement of enacted laws and codes of governance is another factor responsible for the current state of affairs. We cast our minds back to the resource dependence perspective on board roles and attempt to find out how well it explains the unfolding events. RESEARCH STRATEGY AND METHODOLOGY To start with, a focus group will be conducted with not more than 5- 7 key corporate executives in order to get their perspectives on corporate governance in practice. The session will be recorded and outcome of the focus group will form the basis for the design of a survey questionnaire at a later stage. A survey questionnaire will be administered on a random sample of 200 employees randomly drawn from 50 listed companies in the Nigerian Stock Exchange. Where location poses a challenge in administering the questionnaire, the use of electronic survey will be considered as an option. Following the works of McGee (2009) and Okpara (2011), two instruments shall be used to measure the research: a questionnaire consisting of 10 items measuring effective corporate governance system and a modified version of the OECD corporate governance assessment instrument which measure 31 items related to the common problems in developing and implementing a corporate governance program. The following hypotheses drawn from the literature shall also be tested: H1: A significant relationship exists between board function and good corporate governance.
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Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.

H2: A boards ability to source critical external resources has a positive significant impact on good corporate governance.

H3: A significant relationship exists between a sound regulatory framework and good corporate practice.

Finally a regression model will be built to test for the extent to which resource dependence function of the board, explains effective board functions in Nigeria.

CONCLUSIONS This paper explores the theoretical underpinnings which drive the corporate governance phenomenon, focusing on the role the resource dependence theory plays in explaining board role functions. We have argued for the fact that theory should lend itself to being refuted by experience and have highlighted the issue of fundamental differences between experiences of developed countries and developing countries which might pose a challenge to direct application due to peculiarities surrounding the economies. Much of what has been discussed has been guided by extant literature and the research findings will be limited to a representative sample of Nigerian companies. The study can be improved on by replicating on a larger scale, other methods can be used in carrying out the enquiry, further research can be conducted to investigate other mechanisms of corporate governance in Nigeria, the list is endless.

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Corporate Board Roles in Nigeria: through the Resource Dependence Theory lens.

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