CHAPTER 1
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
The institutions of governance provide a framework
within which the social and economic life of countries is conducted. Corporate
governance concerns the exercise of power in corporate entities.
Corporate Governance is the key foundation for firms
to be more productive and have a long existing product life cycle. The levels
of institutional collapse and firm’s failure worldwide from unforeseen
circumstances, there have been new concepts or theories on how an organization
should effectively run.
Through past researches it has been observed that the
Management of firm and survival of companies are associated with the type of Management
that is in place and the global competitive environment requires sound
corporate governance.
This research study will examine the effects of
healthy corporate governance in an organization. It looks into the factors
necessary to achieve successes in relation to the Board of Directors of an
organization; Corporate Ethics; Mechanisms of Corporate Governance;
Responsibilities of Shareholders; Structure and Responsibilities of a Board;
and Organization of Audit.
This research focuses on Corporate Governance in the
Nigerian Organizations and it looks into ways in which mechanisms in relation
to Corporate Governance can be put into place to achieve proper Management, so
as to achieve effective productivity.
Nigeria is not
left out in the campaign for proper Corporate Governance, especially with
recent events of Nigerian Banks closing down or Banks being crippled through
unprofessional decisions made by those on the Board.
This approach not only narrows the dimensions of corporate
governance to a restricted set of interests, as a result it has a very limited
view of the dilemmas involved in corporate governance. There are competing
corporate governance systems in the market based Anglo-American system; the
European relationship based system; and the relationship based system of the
Asia Pacific (Clarke 2007). This diversity of corporate governance systems is
based on historical cultural and institutional differences that involve
different approaches to the values and objectives of business activity. Furthermore
the importance of strategic choice in the determination of governance systems
“Entrepreneurs, investors and corporations need the flexibility to craft
governance arrangements that are responsive to unique business contexts so that
corporations can respond to incessant changes in technologies, competition,
optimal firm organization and vertical networking patterns…To obtain governance
diversity, economic regulations, stock exchange rules and corporate law should
support a range of ownership and governance forms”.
The OECD provides the most authoritative functional
definition of corporate governance:
"Corporate governance is the system by which business
corporations are directed and controlled. The corporate governance structure
specifies the distribution of rights and responsibilities among different
participants in the corporation, such as the board, managers, shareholders and
other stakeholders, and spells out the rules and procedures for making
decisions on corporate affairs. By doing this, it also provides the structure
through which the company objectives are set, and the means of attaining those
objectives and monitoring performance."
However corporate governance has wider implications and is
critical to economic and social well-being, firstly in providing the incentives
and performance measures to achieve business success, and secondly in providing
the accountability and transparency to ensure the equitable distribution of the
resulting wealth. The significance of corporate governance for the stability
and equity of society is captured in the broader definition of the concept
offered by Sir Adrian Cadbury (2002): "Corporate governance is concerned
with holding the balance between economic and social goals and between
individual and communal goals. The governance framework is there to encourage
the efficient use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible the
interests of individuals, corporations and society." It is therefore
logical to study the influence of Corporate Governance mechanism on performance
of companies.
1.2 STATEMENT OF THE PROBLEM
There has been renewed interest in the corporate
governance practices of modern corporations since 2001, particularly due to the
high-profile collapses of a number of large firms such as Enron
Corporation and MCI Inc.
Bold, broad efforts to reform corporate governance
have been driven, in part, by the needs and desires of shareowners to exercise
their rights of corporate ownership and to increase the value of their shares
and, therefore, wealth. Over the past three decades, corporate directors’
duties have expanded greatly beyond their traditional legal responsibility of
duty of loyalty to the corporation and its shareowners.
Nevertheless "corporate governance," despite
some feeble attempts from various quarters, remains an ambiguous and often
misunderstood phrase. For quite some time it was confined only to corporate
management. That is not so. It is something much broader, for it must include a
fair, efficient and transparent administration and strive to meet certain well
defined, written objectives.
Corporate governance must go well beyond law. The quantity, quality and
frequency of financial and managerial disclosure, the degree and extent to
which the board of Director (BOD) exercise their trustee responsibilities, and the commitment to run a
transparent organization.
Therefore in an attempt to redress Corporate
Governance principles and practices, this study looks at ideal ways in which
Corporate Governance principles and practices can be executed and used
properly, and what factors are necessary, for corporate governance to succeed.
Specifically the study shall attempt to establish the relationship between
Corporate Governance principles and the productivity of the firm.
1.3 OBJECTIVES
OF THE STUDY
The objective of the study is;
1. To
determine the relationship between Corporate Governance and the productivity of
a firm.
2. To identify
and understand the factors that hinders good governance.
3. To
appreciate the relevance of Corporate Governance in the Global Market.
4. To
determine the proper elements necessary to achieve sound Corporate Governance.
1.4
SIGNIFICANCE OF THE STUDY
The subject matter; ‘Corporate Governance and its
impact on the Productivity of a firm’ is aimed at making the following
contributions as stated below:
1. It will
enhance firms view on corporate governance and how it can affect the
productivity of a firm.
2. It will
allow firms to properly restructure their corporate governance so as to improve
effectiveness.
3. It will
give Organizations insight on the various factors necessary for sound
governance practice.
4. It will
highlight the role and relevance of stakeholders in a firm.
5. It would
emphasis the benefits to be derived if firms could adhere to proper corporate
governance.
1.6 SCOPE OF
THE STUDY
The study is limited by the overall objective view of
the surveys and interviews. The study is also limited to Peugeot Automobile
Nigeria and Nassarawa State University, being the case study under examination,
which although the organizations are very diverse in nature; both firms to an
extent practice corporate governance.
The extent to which the study will meet the issues
raised in the previous section can be curtailed by the realities of data
availability in Nigeria.
Corporate Governance is a sensitive issue as it focuses on the organizations
observance of rules of ethics, social responsibility etc. even in the most
advanced opened democracies, companies find it difficult to divulge such issues
because they might be considered company secrets; this is even more in Nigeria.
Therefore findings of this report will be affected by the quantity quality and
reliability of data.
1.6 DEFINITION
OF TERMS
a.
Accountability:
the allocation or acceptance of responsibility for actions
b.
Audit: a
systematic check or assessment, especially of the efficiency or effectiveness
of an Organization or process, typically carried out by an independent
assessor.
c.
Balance of
Power: the distribution of power among two or more group of people,
where the pattern of force and dominance among them is balanced in such a way
that no single entity has dominance over another.
d.
Board of
Directors:
e.
CEO – Chief
Executive Officer
f.
Codes of
Best practices – These codes are non-binding rules that go beyond the
law, taking country-specific conditions into account and often exceeding the
standards set by international guidelines.
g.
Corporate
Governance: is the set of processes, customs, policies, laws, and
institutions affecting the way a corporation (or company) is directed,
administered or controlled.
h.
Remuneration:
the paying or rewarding of somebody for goods or services or for losses
sustained or inconvenience caused.
i.
Shareholders:
somebody who owns one or more shares of a company’s stock.
j.
Stakeholders:
a person or group with direct interest, involvement, or investment in
something, e.g. the employees, stockholders, and customers of a business
concern.
k.
Transparency:
the quality or state of being transparent (completely open and frank).
1.7 PLAN OF
STUDY
This study is divided into five (5) chapters. The
first chapter is introduction which includes background of the study,
background of the study, statement of the problem, objective of the study,
significance of the study, scope of the study, and definition of terms and
finally the plan of the study.
The second chapter has to do with reviews relevant
literature, which covered areas in corporate governance like an overview of
corporate governance; models and mechanisms; governance structure, role of
stakeholders; board of directors; board organization or structure; regulations;
ownership perspective of corporate governance; governance viewed as leadership;
governance as a decision making vehicle; business ethics in relation to
corporate governance; link between effective corporate governance practices and
firm performance; corporate social responsibility; corporate sustainability;
corporate governance reform, benefits and finally a summary.
The third chapter is the methodology and it exposes
the methods used in obtaining data and technique used in analyzing data as well
as justification of methods of data analysis used.
The fourth chapter consists of the Data presentation
and analysis which covers areas like; Directors and the performance of a firm;
Management and their influence on profitability; stakeholders impact on the
performance of an organization; role of shareholders in the management of a
corporation; board structure; board composition; board size; creditors
influence; and relevance of Audit Committee.
Finally the fifth chapter consists of the summary,
conclusions and recommendations. The summary is an overview on sound corporate
governance and how it affects the level of productivity of a firm.
Recommendations cover areas like proper roles and responsibilities of both
Directors and Management; shareholders activism; positive influence of
stakeholders; relevance of Audit; and proper board composition and structure.