CHAPTER ONE
1.0 GENERAL INTRODUCTION
1.1 Background to the Study
Corporate organisations are the drivers of every nation‟s
industrialization, commerce, employment and general economic development.
Companies are business ventures that are established to produce goods or
provide services for consumption by individuals, organisations and government.
They are regarded as the engine of growth and development1. Companies provide investment
outlets for the public to invest with the expectation to receive returns on
their investments and improve their economic strength. In order to carry on
their activities, companies employ people in various levels of the workforce
who are remunerated in form of salaries, wages and allowances. Those who receive
financial benefits from companies use their money to improve their standard of
living by taking care of themselves, their families, accessing health care,
sending their children to good schools and payment of taxes to the government.
Companies also engage in corporate social responsibilities in their host
communities to improve the social wellbeing of the people. Some companies
provide scholarship; others build schools and other philanthropic activities.
In addition companies provide taxable revenue to the government. Companies pay
corporate tax while employees and investors pay taxes on income derived from
companies. The revenue derived from these taxes by the government is used for
government operation and provision of infrastructures that would become factors
of economic and technological development in the country. Based on the above
premise the performance of companies is of interest to not only government but
also individuals. Several classes of people have stake in the company and would
not want their stake to be destroyed due to the collapse of the company.
The experience of the great depression between 1929 and 1939, points to the devastating consequence of corporate failures. The great depression has been acclaimed as the deepest and longest-lasting economic downturn in the history of the Western industrialized world. In the United State of America, it began soon after the stock market crash of October, 1929, which sent Wall Street into a debacle and wiped out millions of investors. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and rising levels of unemployment as failing companies laid off workers2. By 1933, when the great depression reached its nadir, some 13 to 15 million Americans were unemployed and nearly half of the country‟s banks had failed3.
In a similar vein the financial crisis that affected almost every nation‟s economy in the world otherwise popularly called the financial meltdown between 2007 and 2008 was triggered by the bursting of the United States of America housing bubble which peaked in about 2005 – 20064. Easy availability of credit in the United States fueled by large inflows of foreign funds led to a housing construction boom and facilitated debt financed consumer spending. tax lending standards made it easy for loans of various types to be obtained and consumers assumed an unprecedented debt load5. However, as housing prices declined major global financial institutions that had borrowed and invested heavily in mortgages reported significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses were estimated in trillions of United States Dollars globally
The United States financial crisis inquiry commission reported its findings in January, 2011 and concluded that “the crisis was avoidable and was caused by widespread failures in financial regulation… dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk… and systemic breaches in accountability and ethics at all levels.”7It is against this backdrop that all stakeholders including government desire that corporations not only survive but operate in the best interest of all stakeholders and the economy in general. This is the hallmark of corporate governance.
