“Unobservable characteristics of board directors and the performance of financial services firms in Nigeria”

This paper examines the intricate link between unobservable characteristics of direc- tors on the corporate board and firm performance. It aims to extend the literature on corporate governance and firm strategic performance from the perspective of emerg- ing African economies. A mix of performance measures were used (Tobin Q, return on assets, and share price) and unobservable characteristics were captured as a stochastic element or heterogeneity of observable board characteristics (board activity, gender diversity, size, and independence). The study applied non-linear generalized auto-re- gressive conditional heteroscedasticity model to examine the data set consisting of 299 firm-year observations from 23 financial firms listed on the Nigerian Stock Exchange from 2006 to 2018. Positive skewness and leptokurtic distribution were found for all the variables. Correlation matrix revealed no multicollinearity, as the highest value was 0.2386. Empirical results suggest that unobservable characteristics significantly and positively influence firm performance as measured by return on assets and share price. This is because the coefficient of the lagged-value of the variance scaling parameter is positive and significant at the 1% level. However, with respect to Tobin Q measure, the result was positive but not significant at the 5% level. Implicitly, the result is sensitive to performance proxies. Accordingly, this study concludes that unobservable charac- teristics drive firm performance. It is recommended that boards and regulators should pay attention to unobservable characteristics. governance mechanism in corporate in information asymmetry mitigate Garcia-Martin suggest that the board of directors should come in as an essential element of corporate governance.


INTRODUCTION
The need for effective corporate governance in companies is not unconnected with a financial scandal and eventual collapse of some corporate giants like Enron and WorldCom. The recognition of "not too big to fail" in the corporate world has led to the institution of corporate governance mechanism in organizations. Different countries now have formalized codes of corporate governance to regulate corporate affairs (Akpan & Amran, 2014;Imade, 2019). Regulation of corporate affairs is necessary to mitigate the conflict of interest between the owners and managers. The separation of ownership from control does lead to an agency problem when managers engage in information asymmetry (Pereira & Filipe, 2014). To mitigate this, Garcia-Martin and Herrero (2018) suggest that the board of directors should come in as an essential element of corporate governance.
Basically, boards are charged with monitoring and supervision, preventing management opportunism, and providing decision-makers with advice to improve strategic performance (Horvath & Spirollari, 2012). The performance of a board largely depends on the character of an individual director (Fernau, 2013). In this regard, it is necessary to state that a significant difference exists between the skills of a director and the characteristics (also behavior) of a director that make him or her contribute effectively to board performance. Clearly, the combination of requisite skills and desirable characteristics will determine the value of a director's contribution to organizational success.
There are quite a number of empirical studies on board characteristics or attributes as influencer of firm performance (see Garcia Pereira & Filipe, 2014). This strand of literature focuses on examination of board size, board gender diversity, board activity, independent or non-executive directors, insider ownership, board age, chief executive officer (CEO) duality, and audit committee on firm performance.
However, unobservable characteristics of board directors in relation to firm performance have not yet received rigorous study in the empirical literature. Gantenbein and Volonte (2011, p. 3) alluded to this by stating that studies "do not often address director skills, because detailed data of these characteristics is not readily available, and personal factors (e.g., talent) are either not observable or difficult to proxy". The concern of this paper, therefore, is to fill this empirical gap in knowledge. Specifically, the paper focuses on board directors' unobservable characteristics and how well they influence firm performance.
To mitigate the concerns for lack of proxy, this study deviated from the traditional methodology of ordinary least square and panel data regression. It adopted the generalized auto-regressive conditional heteroscedasticity (GARCH) model wherein the residuals of observed characteristics are taken as proxy for unobserved characteristics and modeled as conditional variance of firm performance. The study also tests the sensitivity of the model to three different measures of firm's financial performance, namely Tobin Q, return on assets (ROA), and share price. It is hoped that this effort will contribute to building a body of literature on directors' unobservable characteristics and the financial performance of firms.

LITERATURE REVIEW
The functions the board of directors should undertake can be viewed from any of four perspectives, namely: legal, resource dependence, class hegemony, and agency theory (Pereira & Filipe, 2014). From the legal perspective, board can influence the performance of their companies if they carry out their required responsibilities. Such responsibilities include selecting the CEO, setting executive compensation and the strategy of the firm, nominating new directors, and monitoring. Board can also provide inter-organizational relationship. Board is also a means of keeping capitalist elite power, and a corporate control system to dissuade executives from opportunistic behavior. A significant amount of board time is spent on technical processes relating to board's procedures and responsibilities, as well as control structures. This need for supervision and monitoring affects board size, independence, and diversity (Garcia-Martin & Herrero, 2018). The corporate governance codes have some prescriptions on the ap-propriate size of a board, which is a function of the industry and firm characteristics measured by its complexity. However, there is no unanimity in the empirical literature on the influence of board size on firm performance. While Lehn, Patro, and (2009), Ironkwe and Adee (2014), and Kyere and Ausloos (2020) made a case for large boards because this affords higher standard of advice, Shrivastav and Kalsie (2020) differ by stating that reaching a consensus in decision making with large boards is difficult and may also lead to the inhibition of the director.
On independence, the argument is whether executive directors have greater knowledge of the business and the company than non-executive directors. Coles, Daniel, and Naveen (2008) are of the view that executive directors have more and better information when it comes to specific aspects of the company. Olatunji and Ojeka (2011) added that because of the part-time nature of non-executive directors, they are too busy and committed to too many things at a time. Shrivastav and Kalsie (2020) found a significant negative impact of independent directors on firm performance. Contrary to this view, Boone et al. (2007) advocate for more non-executive directors as they provide better advice and have greater experience, which they bring from other sectors. Farag and Mallin (2017) reported a positive relationship between firm performance and the number of independent directors. Due to their independence, they tend to be more loyal as they are chosen in accordance with the interest of shareholders. Imade (2019) is of the view that non-executive directors provide objective criticism because they have legal duties like their executive counterparts. The study further notes that the Central Bank of Nigeria's code of corporate governance requires non-executive directors to, among other things, have broad experience, integrity, and independent judgment to make them dispassionate on issues of key appointments and evaluation of strategic performance.
Board composition should promote diversity wherein different attributes, characteristics, and levels of experience are combined. Aligning with this view, Umar and Sani (2020) found significant relationship between board composition and firm performance measured by ROA. Campbell and Minguezvera (2008) found a significant positive relationship between percentage of women in the board and Tobin Q. Adams and Ferreira (2009) submit that greater gender diversity exhibits higher degree of attendance at board meetings and attendance is a matter of commitment. Akpan and Amran (2014), and Bianco et al. (2015) opine that women bring resources like skills, prestige, and connection to external resources to the board. On board activity, normally approximated by frequency of board meeting, it has been observed that too frequent meetings signal some communication issues (Horvath & Spirollari, 2012).
Studies have shown that market reacts to individual director characteristics. Reaction to the expertise of the director that is newly appointed was investigated by Defond et al. (2005) found the reaction to be significantly positive for expertise in finance. With respect to news about appointment of an independent director, Fich and Shivdasani (2006) reported insignificant reaction. However, the study found that when a CEO of other companies is an appointed outside director, the market reacts positively and significantly. This evidence suggests that market evaluates the ability of a new director to contribute to the board. However, market reaction is positive if only the new outside director is truly independent, that is, where the director is nominate by the board. The contribution of members of the board has also been found to depend on the information processing loads by the members (Khanna et al., 2014).
Board members' education and performance of firms have also been examined. For instance, Francis et al. (2015) found that having academic professors on the board correlate with performance in the areas of higher information conveyed by stock price and lower CEO compensation. This performance was attributed to the advising capability. In the same vein, Ujunwa (2012) reported that higher level of education of directors has a positive association with firm's outcomes. Nguyen et al. (2017) also found evidence of human capital adding value to the firm for publicly listed companies.
There is growing recognition that the character of the individual director that makes up the board is crucial to the success of the board. The characteristics of a director will determine whether he or she will contribute effectively to board performance. Characteristics describe the behavioral traits of individual directors the aggregate of which provides the raw ingredients for a high performing board (Reio & Callahan, 2004). These characteristics can be categorized either into observable or unobservable ones. This is analogous to KPMG (2001) hard and soft personal profile factors of directors where experience, know-how, education, and expertise (financial, industrial, and international experience) are viewed as hard profile factors, while integrity and credibility as soft profile factors. These profile requirements could be specified by the firm, regulations, and legal compliance as boards today, than never before, are subject to duties of diligence due to increasing threats of litigation (Gantenbein & Volonte, 2011).
The literature is not mute on director's emotion and firm performance. According to Scherer (2005), emotions are generally stimulus events. This implies that something happens to the individual that stimulates or triggers a response after having been evaluated for its significance.
Emotion is event focused, appraisal driven, and has behavioral impact in that it prepares adaptive action tendencies. An individual's emotional state could affect work performance. The degree to which one experiences feelings such as sadness, happiness, and anger is a strong predictor of job performance (Reio & Kidd, 2006). Researches support the fact that emotions, mood, and affect influence performance as they contribute to attitudinal and cognitive decisions about job satisfaction (Reio & Callahan, 2004). Judge, Heller, and Mount (2002) have also found that neuroticism as a personality trait correlates with job satisfaction.
A director's commitment can be associated with performance. Commitment is the strength in identifying and integrating oneself into the organization. Toban and Sjahuruddin (2016) found three dimensions of commitment that affect performance: identification with the organization that manifests in the form of trust, involvement in work activities that make the individual ready and happy to cooperate with others, and loyalty wherein organizational interest is placed ahead of personal interest with no expectation of reward (Zehir et al., 2012).
Interpersonal relationship and communication skills of a director have also been linked with performance. Relationship is the wheel on which organization as a system function. Workplace performance relationships, and indeed board relationships, are interpersonal relationships involving individuals in the process of performing their tasks (Abe & Mason, 2016). In interpersonal relationship, there is psychological orientation and interdependence (Deutsch, 2011). Bowen, Holden, and Lynch (2010)  In the light of the extant literature reviewed, the motivation of this paper is to measure the impact of unobservable characteristics on corporate performance. To facilitate empirical investigation, the study hypothesized, in the null form, that board directors' unobservable characteristics have no significant impact on performance measured respectively by Tobin Q, ROA, and share price.

METHODS
This study used data of twenty-three (23)  The dependent variable for this study is financial performance of a firm. A mix of financial performance proxies is employed. Tobin Q was used as a market-based proxy. ROA was used as an accounting-based measure, and share price as a market performance measure. Using alternative measures of performance provide rich information for analysis (Farag &  The methodological framework of the study is to model unobservable characteristics as the fixed effect or the stochastic element of observable characteristics. To this end, the independent variables are board's observable characteristics that bear on unobservable characteristics like interpersonal relation, communication skills, emotions, commitments, and loyalty. This study focuses on board activity, board gender diversity, board size, and board independence as the independent variables. Furthermore, prior year performance or the one-period lagged dependent variable is used as one of the explanatory variables. This can control for the dynamic nature of governance-performance relation and problem of auto-regres- This study adopts a dynamic modeling framework of the GARCH model. In this type of model, the conditional variance is a function of variables that are in the information set available at time t. This model extends the basic ARCH model (Bollerslev, 1986). The GARCH (1 1) model specified for this study is:

Definition and measurement Dependent variables
Tobin Q It is the ratio of the sum of the market value of the firm's shares and book value of debt to book value of total assets Return on Assets (ROA) It is a measure of the profitability of a firm in relation to its total asset and computed as net income divided by year end assets Share price (SPx) This is the closing price of the share as at the last trading day of the year

Independent variables
Board activity One period lagged value of a dependent variable

RESULTS
The results of the descriptive statistics to illuminate the data are presented in Table 2.
Three proxies were used to measure the dependent variable, namely Tobin Q, ROA, and SPx. Board size has a mean value of 11.44147. Implicitly, board is composed of an average of 11 members, with minimum of three and maximum of 21 members. The Jarque-Bera statistic of this variable shows that it is normally distributed. This is so because the probability value (0.660649) exceeds the 5% level of significance. This result is confirmed by the skewness and kurtosis values, which are approximately zero and three, respectively. In sum, the fact that the majority of the variables are not normally distributed suggests that non-linear models will be more appropriate to the data.
In addition to the descriptive statistics, the study also presents the correlation matrix, which shows how the variables relate with one another. The result is presented in Table 3.
From Table 3, Tobin Q has a negative relationship with all other variables. The implication of this is that the explanatory variables do not contribute to firm performance measured by Tobin Q. Also, board independence is negatively correlated with  Board size is positively related to the share price measure of performance, but negatively related to Tobin Q and ROA. Clearly, none of the correlation coefficients exceeds 0.9; therefore, there is no a multicollinerity problem (Tabachnick & Fidel, 2007). The highest correlation is 0.238604, which is between board size and share price.

Empirical results
The results of the estimation of the model captured by equations (1) and (2) are presented here to ascertain the impact of director unobservable characteristics on the performance of the firm. The model is estimated for Tobin Q, ROA, and share price, respectively, as dependent variables to illuminate the sensitivity to different proxies of performance. Table 4. Result of the model with Tobin Q as a performance measure Source: Authors' computation. In the mean equation panel, the coefficient of lagged value of performance TobinQ(-1) is positive and statistically significant at 1%. This implies that current performance is influenced by past performance. Board activity is positive (0.212035) and significant. Board gender is negative (-0.007747) and significant. Board size is negative (-0.001918) but not significant. Board independence is neg-ative (-0.013501) and significant. Clearly, while board activity significantly increases the performance of the firm, the other director-level variables reduce firm performance.

Variable
In the variance equation panel, the lagged value or residual squared ( ) 1 , β which is also called the ARCH term, transmits news about the variation in firm performance. This value is positive (4.131807) and also significant. 2 β , which is also called the GARCH term, is the estimate of the influence of director unobservable characteristics on firm performance. This estimate is positive (0.013833) but not statistically significant as the probability value of the z-statistic (0.3136) is greater than the 0.05 level of significance. Therefore, with the result of this model, directors' unobservable characteristics do not significantly influence performance. Table 5. Result of the model with ROA as a performance measure Source: Authors' computation.  and statistically significant at 1%. Clearly, this result implies that director unobservable characteristics significantly increase firm performance.

DISCUSSION
The results of the analysis of the models for different dimensions of performance show that the result is sensitive to a proxy used for firm performance. While unobservable characteristics were not significant in explaining firm performance on the dimension of Tobin Q, it was highly significant on the dimensions of ROA and share price. Therefore, the mix result in some prior studies is due partly to different proxies for firm performance. Using Tobin Q to measure performance, this result did not support Shabbir (2018) in the area of board gender diversity and board independence. It also did not support Gantenbein and Volonte (2011) Kyere and Ausloos (2020). The result that greater board independence leads to lower firm performance is attributable to the lack of specific knowledge by independents for specific industries, which reduces their efficiency. The overall finding that director unobservable characteristics influence firm performance reinforces the earlier submissions by Gantenbein and Volonte (2011) and Fernau (2013) that director's fixed effect or unobserved managerial heterogeneity are important in the explanation of firm performance.

CONCLUSION
In this paper, an attempt has been made to investigate the complex link between characteristics of board directors that are not readily observable and the performance of the firm. This is against the backdrop that corporate boards are no longer mere presiding institutions, but are an active instrument for the strategic development of the firm. To palliate the lack of proxies, this study mirrors the unobserva-