The purpose of this study was to explore the motives (especially the agency motives) for corporate diversification from the perspective of corporate executives who make such strategic decisions and manage the diversified firms daily.
A qualitative research approach was adopted, and 12 chief executive officers (CEOs) of diversified firms in Nigeria were interviewed for their perspectives on the motives for corporate diversification.
Stewardship motives – diversification to use excess capacities in assets and resources to exploit opportunities in the market and defend against adverse environmental developments – were the most cited reasons for diversification. The relevant agency problem related to corporate diversification motive in Nigeria is the principal–principal (majority shareholder-minority shareholder) one. CEOs with substantial holdings in their firms indicated that they use diversification to reduce their investment risk and retain control of their portfolio.
The findings suggest that in corporate environments such as Nigeria that feature blockholding prominently, the corporate strategy-related agency problem that policymakers should pay greater attention to is the principal–principal conflict rather than the traditional agent–principal problem that has influenced corporate governance over the years. There is also a need to revise the dominant view that diversification is a value-destroying strategy motivated by the self-seeking behavior of managers who have little or no shares in the companies they manage.
The few studies on motives for corporate diversification that incorporated the perspectives of corporate executives did not address the agency motives of diversification. To the best of the authors’ knowledge, this is the first study that has done so.
