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Impact Of Corporate Governance On Organizational Performance

Chapter one of Impact Of Corporate Governance On Organizational Performance

INTRODUCTION

1.1   Background to the Study

Corporate governance has in recent years become a topical issue both in business and academic circles. The concern in business arose out of the perceived importance that a tradition should be developed that supports moral and ethical conduct in business affairs which will create a general climate (both legal and social environment) that will promote good governance of firms. In the academic world, it is established that business decisions are not made in a vacuum. Business decision makers have objectives outside the firms’ objectives, for example managers are interested in their own personal satisfaction, in their employees’ welfare, as well as in the good of the community (society) at large and these objectives impact on shareholders wealth adversely (Akeem, 2014).

The genesis of Corporate Governance lies in business scams and failures. The Watergate scandal, the junk bond fiasco in USA and the failure of Maxwell, BCCI and Polypeck in UK resulted into setting up of the Treadway committee in USA and the Cadbury committee in UK on corporate governance.

The guiding principle of good corporate governance is “transparency and ethics” should govern corporate world. Increasing strategic importance of professional management probably constitutes the most important aspect of changing profile of corporate governance. Given the global challenges, the only choice left with business and economic enterprises is to follow the corporate governance practices – the path for living, working, surviving, successing and the excelling in the future (Bansal and Bansal, 2014).

Directors without corporate enforcement mechanism may paint misleading pictures of financial performance of their organisations to lure unsuspecting investors. However, the effect of these actions on some corporations is devastating. There is the collapse of the energy corporation Enron in 2001 in US, WorldCom, Global Crossing, and Rank Xerox, most of which filed for bankruptcy after adjusting their accounts. Between 2002 and 2005, several international corporations failed, including Mutual Risk Management Ltd, Equitable Life Assurance Society UK collapsed in year 2000 because directors of the companies unlawfully used money met for guaranteed annuity rate policies to subsidize current annuity rate policies. Lion of Africa Insurance in Nigeria also liquidated because of board crisis it liabilities outweighed the assets and could not recapitalize in 2007 (Momoh and Ukpong, 2013).

The increasing incidence of corporate fraud relating to exaggerated and overstated accounts have informed renewed global emphasis on the need for good corporate governance. According to Nwachukwu (2007), there is a growing consensus that good corporate governance has a positive link to national economic growth and development. Checks and balances in an organization are strengthened through good corporate governance.

By definition, corporate governance is a system or an arrangement that comprises of a wide range of practices (accounting standards, rules concerning financial disclosure, executive compensation, size and composition of corporate boards) and institutions (legal, economic and social) that protect the interest of corporation’s owners.

Furthermore, adherence to good corporate governance is inevitable especially in the Nigerian business climate considering the critical multiplier effects a failed corporate entity would cause to investment decision, unemployment rate and economic growth. Thus, the practice of a good corporate governance system helps to provide a degree of confidence that is necessary for the proper functioning of the market economy and hence organisatiomal performance (Momoh and Ukpong, 2013).

To this end, there is also a widely held view that better corporate governance is associated with better firms’ performance, but the evidence is not sufficiently available in the Nigeria context. As such, providing an additional empirical evidence of the impact of good corporate governance on organizational performance is urgently needed.

1.2   Statement of the Problem

Incorporation may mean that the owners of the organization are not necessarily the managers and this may create agency issues which include managers acting for their own selfish interest at the expense of other stakeholders. Despite tight regulatory framework corporate governance continues to weaken in Nigeria (Momoh and Ukpong, 2013). Many companies have been characterized by scandals. Directors have acted illegally or in bad faith towards their shareholders.

Corporate governance which is hitherto seen as the foundation for good corporate performance has received lack-luster attention from corporate bodies globally for a considerable length of time. This attitude which bordered on neglect of corporate strategies may have eventually led to the recent global high profile corporate failures. Notable among such failed corporate bodies are HIH Insurance and One-Tel both in Australia, Maxwell Communications Corporation, and Bank of Credit and Commerce International (BCCI) both in the United Kingdom; Enron and Worldcom both in the United States and Parmalat in Italy. All these failures have been attributed to poor corporate governance (Tennyson, 2010).

In Nigeria, the story is not different. There has been several corporate failures and large-scale misappropriation of funds in the recent past in Nigeria, involving both public and private organizations such as AVOP Oil, Anambra State Motor Manufacturing Company, African Petroleum Nigeria Limited, and many others.

The consequences of institutional failure (considering the multiplier effect of financial institutional failure on the real sector of the economy) are unacceptably costly to a developing country like Nigeria. This affects the level of confidence the public has in various corporate establishments. The consequences of ineffective governance systems leading to corporate failure will not only affect the shareholders but also, the employees, suppliers, consumers and the nation as a whole. Thus, a good governance system that will promote ethical value, professionalism and transparent application of best practices is desirable.

This study will examine the impact of good corporate governance on organizational performance with a specific reference to First Bank Nig Plc.

1.3   Objectives of the Study

The major objective of the study is to examine the impact of good corporate governance on organizational performance. Other specific objectives are as follows:

i.        To explore the relationship between corporate governance and organizational performance.

ii.        To find out the impact of corporate fraud on organizational survivability

iii.        To investigate the effect of corporate dividend policy  on shareholders’ interest

iv.        To identify the role of Corporate Regulatory Agencies in ensuring transparency and ethics in the Nigerian banking industry.

1.4   Research Questions

The undertaking of this research project will beam a searchlight on the following research questions;

i.        What is the relationship between corporate governance and organizational performance?

ii.        Is corporate fraud a significant predictor of organizational survivability?

iii.        To what extent does corporate dividend policy impact on shareholders’ interest?

1.5   Research Hypotheses

The researcher intends to test the following hypotheses;

Hypothesis One:

Ho1:There is no significant relationship between corporate governance and organizational performance

Hypothesis Two:

Ho2:  Corporate fraud is not a significant predictor of organizational survivability

Hypothesis Three:

Ho3There is no significant relationship between corporate dividend           policy and          shareholders’ interest

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