CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
One feature of Modern Corporation is the separation of ownership from management. Hitherto, the typical business is owned and managed by the same individual or group of persons. Thus a firm was characterized by its numerous owners having no management function, and managers with no equity interest in the firm. Under the new dispensation, however, professional managers who are considered more competent than the owner manager are hired to run and manage the affairs of the company (Wikipedia, 2007). Thus it was important that an appropriate framework be put in place that would guarantee transparency, accountability and fairness in the management of companies (Howard, 2000)
Corporate governance is therefore about ensuring that various mechanisms are in place to guarantee that the goals pursued by managers do not different from that of the owners of the company. Tricker, who conceived the term “corporate governance” back in 1984, made the very clear distinction between management and control in taking the position that: “if management is about running business, governance is about seeing that is run properly”
Corporate governance is concerned with ways in which all parties interested in the well-being of the firm (the stakeholders) attempt to ensure that managers and other insiders take measures or adopt mechanisms that safeguard the interests of the stakeholders. Such measures are necessitated by the separation of ownership from management, an increasingly vital feature of the modern firm.
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. Therefore, by doing this it also provides the structure through which the company’s objectives are set and the means of attaining those objectives and monitoring performance. This definition is in line with the submissions of, Wolfensohn (1999) Uche (2004) and Akinsulire (2006).
The board of directors is central to the corporate governance mechanism in market economies. The board is one of the most important and possibly beneficial internal mechanisms of corporate control (Manne, 1965; Alchian and Demetz, 1972; Bonnierand Bruner, 1989). The importance of internal control mechanisms has arguably increased following legal and regulatory developments that curtailed activity in the external market for corporate control (Jensen, 1991; Denis and Denis, 1995). The board is viewed as a primary means for shareholders to exercise control over top management, along with external markets for corporate control and institutional and concentrated shareholding.
A change in the composition of a firm’s board can take the form of a new appointment or some form of removal from the board: new appointment, resignation, retirement or death. Each of these changes may or may not be considered significant by the market. Change can also take the form of an increase or decrease in the proportion of outside directors to inside directors.
Effective corporate governance therefore reduces the “control rights” shareholders and creditors confer on managers which increases the probability that managers invest in positive net present value projects. Thus, the relationship between the board and management, according to Al-Faki (2006), should be characterized by transparency to shareholders, and fairness to other Stakeholders. This will in effect mitigate the agency cost as predicted by Jensen and Meckling (1976) and boost corporate performance.
Furthermore, corporate performance is an important concept that relates to the way and manner in which financial resources available to an organization are judiciously used to achieve the overall corporate objective of an organization, it keeps the organization in business and creates a greater prospect for future opportunities.
Moreover, the financial scandals around the world and the recent collapse of major corporate institutions in the USA, South East, Europe and Nigeria such as Adelphia, Enron, World Com, Commerce Bank and recently XL Holidays, Pollybeck, Xerox, Cadbury, BCCI communication. Most public Nigerian corporations, such as NITEL, NNSL, NEPA, and NRC were either dead or simply drain pipes of public resources to mention but a few which have all been attributed to poor corporate governance was caused by greed, lax oversight of company board members and incompetent national body at noting the issues on time.
A review of the status of corporate governance in Nigeria from the sectorial perspectives- public, financial and real sectors reveals the absence of strong commitment to the tenets of good corporate governance. In view of the importance attached to the institution of effective corporate governance, the Federal Government of Nigeria, through her various agencies came up with various institutional arrangements to protect the investors of their hard earned investment from unscrupulous management and directors of listed firms in Nigeria. These institutional arrangements, produced the “Code of corporate governance best practices” issued in November 2003.
The code proposes that the business of a firm should be managed under the direction of a board of directors at which they delegate to the CEO and other management staff on the day to day management of the affairs of the firm. The best practices of the code also recommend that the board sees to the appointment of a qualified person as the CEO and other management staff. The directors, with their wealth of experience, are expected to provide leadership and direct the affairs of the business with high sense of integrity, commitment to the firm, its business plans and long-term shareholder value. In addition, the board provides other oversight functions. Thus there are other mechanisms of corporate governance which includes; the audit committee, shareholders rights and privileges.
The emergence of mega banks in the post consolidation era prompted the Central Bank of Nigeria to issue a new code of corporate governance which became operative in 2006. In the same vein, the Nigerian Securities and Exchange Commission (SEC), published the revised Code of Corporate Governance in September, 2009 after consultations with other regulatory bodies. The new code was issued to address the weaknesses of the 2003 code and to improve the mechanism for its enforceability.
