CHAPTER ONE
INTRODUCTION
This Chapter presents the background of the study, statement of the problem, and the research objectives as well as the questions. It also discusses the significance of the research, the scope, limitations and organization of the study.
Background of study
Corporate governance evolved in the 1700s during the South Sea bubble in England. During that period, stock prices on the London stock market rose to inexplicable heights before crashing. This was as a result of fraudulent activities and folly (Paul 2015). The south sea bubble had followed a similar crash on the Paris stock market (Mississippi bubble) around the same period (Colombo 2012). Due to this, developed countries and investors began paying particular attention to corporate governance structures of organizations and this attention has increased after the collapse of a number of large corporations during the recent global financial crisis in 2007- 2009. This has also influenced researchers, policy makers and investors to examine the impact of corporate governance on shareholder’s wealth and financial distress.
According to Mayer (1997), corporate governance refers to “ways of bringing the interests of investors and managers into line and ensuring that firms are run for the benefit of investors.”
“Corporate governance is about supervising and holding to account those who direct and control the management” (Abor 2007).
The main aim and objective of shareholders investing their wealth in a company’s shares is to see their investment appreciate in value. However, the interest in corporate governance is concerned with decreasing conflicts of interests between shareholders and management (Jensen & Meckling, 1976).
The principal–agent issue arises between upper-management (the agent) which may have very different interests and by definition considerably more information, than shareholders (the “principals”). The danger arises that, rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and obliged to management.
Traditionally, accounting based performance measures have for a long time been a norm and have been used by many to address this measure. Its seemingly simple methods of calculation led to its popularity among many academic and policymakers (Altman, 1968). However, this measure is usually one-dimensional in nature, which does not show a holistic picture of the financial health of a business but only returned a single figure which was used to define a firm’s financial status as good or bad.
In order not to only know if a firm appears profitable under the traditional accounting measures, when in reality they may not, leverage as well as profit margin on sales will be employed as a metric to assess the value created on shareholders wealth over time.
Problem Statement
Effective corporate governance is critical to every functioning firm and the economy at large. The primary objective of corporate governance should be safeguarding stakeholders’
interest in conformity with public interest on a sustainable basis. That is, corporate governance should be based on the principles of integrity, fairness, transparency and accountability. However, the recent crisis in the Ghanaian banking institution is not merely a case of financial misappropriation but it is a case of a breakdown in the corporate governance structures that has led to a major ripple effect in the industry. The Bank of Ghana as a regulatory body has realized the need for a more effective corporate governance structure and this is highlighted in its new directive “The Banking Business- Corporate Governance Directive 2018”.
In times like this, it becomes relevant to understand the structure of corporate governance in institutions and how management affects the overall performance of institutions.
Also in previous years, financial health of firms has commonly been measured by accounting based performance measures (return on equity ROE, return on assets ROA and earnings per share EPS). Although these metrics are considered widely as good ones, there is the need to find out the value maximized by shareholder’s which is an important objective of every firm and also, to be able to explain the changes in a corporation’s market value.
This study will use both the accounting-based performance measures (ROE and ROA) as well as leverage and profit margin on sales as tools to measure firm performance. This will help in estimating the well-being of firms from two different perspective; the accounting oriented measures and general or direct measures of firms.
Objectives of the Study
The study seeks to achieve the following objectives:
- To examine the relationship between corporate governance and firm performance measures.
- To examine the dynamics of these relationship by imploring selected statistical tools and techniques.
- To identify the differences in impacts on financial firms as opposed to non-financial firms.
