CHAPTER
ONE
INTRODUCTION
1.1 Background of the Study
Corporate
governance practices are seen to have great impact to maximization of
stakeholder wealth and to the growth prospects of an economy. They are
practices considered as paramount to management of constraint, such as the
issue of reducing risk for investors, attracting investment capital, and
improving the performance of companies. However, the way in which corporate
governance is organized differs from company to company and from country to
another, depending on their economic, political and social situations.
Corporate
Governance has been perceived differently by different people. Kajola (2008) concurred
that corporate governance is making sure the business is well managed and shareholders
interest is protected at all times. Organization for Economic Cooperation and
Development (OECD) (1999) claimed corporate governance is broad in practice. It
defines corporate governance as the system by which business corporations are
directed and controlled. It further states that 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 thus spells out the rules and procedures
for making decisions on corporate affairs. It also provides the structure
through which the company’sobjectives are set and the means of attaining those
objectives and monitoring performance (Akinsulire, 2006).
Corporate
governance is a mechanism that is employed to reduce the agency cost that
arises as a result of the conflict of interest that exists between managers and
shareholders. The conflict emanates, almost naturally, because the seperation
of ownership from control of the modern day business places the managers at a
privileged position that gives them the latitude to take decisions that could
either converge with or entrench the value maximization objective of the firm.
Thus, managers can use their control over the firm to achieve personal
objectives at the expense of stakeholders. In this regard, Kang and Kim (2011)
note that management could influence reported earnings by making accounting
choices or by making operating decisions discretionally. One of such
discretionery decisions to manipulate reported earnings is imbedded in the
accrual-based accounting.
Financial
scandals around the world and the recent collapse of major corporate institutions
in the Nigeria such as Oceanic Bank, Intercontinental Bank and Cadbury have shaken
the faith of investors in the capital markets and the efficacy of existing corporate
governance practices in promoting transparency and accountability. This has
brought to the fore the need for the practice of good corporate governance.
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, which
in-turn, keeps the organization in business and creates a greater prospect for
future opportunities.
There
have been debates regarding the issue of corporate governance in Nigeria,
involving both local and international stakeholders in the business realm. It
has been addressed as one of the major factors that have led to a reduction in
capital flows and subsequent slow down the rate of economic growth in the country.
However, since the adoption of corporate governance code of conducts, there has
been a steady trend towards implementing good governance structures both in
public and private sectors.
The
introduction of corporate governance practices in Nigeria is aimed at providing
a mechanism to improve the confidence and trust of investor in the management
and promote economic development of the country. However, efficiency of the
corporate governance structures and practices on corporations operating in the
highly volatile environment of Nigeria has not been empirically investigated (Nworji,
Olagunju and Adeyanju, 2011).
Good
corporate performance keeps the organization in business and creates a greater
prospect for future opportunities. In the present changing economic
environment, the corporate sector must brace up to the challenges of
globalization where firms that cannot adapt to modern business culture may not
survive. It is therefore important for firms to find out the best corporate
practices in other parts of the world and how they can integrate these into
their business culture to enhance their performance.
The
mechanisms can be divided into five: striking a balance between outside and
inside directors; promoting insider (i.e., managers and directors) shareholding;
keeping the size of the board reasonably low; encouraging ownership
concentration; and encouraging the firm to have a reasonable amount of leverage
in the expectation that creditors might take on a monitoring role in the firm
in order to protect their debt holdings.
1.2 Statement of the Problem
Corporate
governance mechanisms such as CEO duality, directors shareholdings, board size,
board composition, quality audit committee, executive compensation, quality audit
committee, executive compensation and board independence have been found to
relate to measures of firms’ performance (Bedard, Chtourou, and Courteau 2004; Tehranian,
Cornett, Marens and Saunders 2006; Xie, Davidson and Dadalt, 2001; Zhou and
Chen, 2004). Due to the growing concerns and need to align practices in Nigeria
to international best practices, the Peterside’s Code of corporate governance
in Nigeria was released in 2003 for public companies. But, despite the
introduction of the codes of best governance practices in Nigeria in 2003 and
its continuous modifications, the result that it has achieved can be said to be
minimal as there are fresh cases of governance malpractices that threaten the
survival of quite a number of firms in different sectors of the economy (Hassan
and Ahmed, 2012).
Corporate
governance is considered to involve a set of complex indicators, which face substantial
measurement error due to the complex nature of the interaction between
governance variables (such as board size, board composition, Managerial
shareholding etc) and firm performance indicators (return on assets, return on
equity, Earnings per share etc) (Babatundeand Olaniran, 2009). Nevertheless,
previous empirical studies have provided the nexus between corporate governance
and firm performance, (Sanda, Mikailu and Garba; 2005; Kajola, 2008, Roger
2008, Hassan 2011, Lenee and Obiyo 2011, Agrawal and Knoeber 2012). However, despite
the volume of the empirical work, there has been no consensus on the impact of corporate
governance on firm performance generally. Consequently, this lack of consensus
has produced a variety of ideas (or mechanisms) on how corporate governance
influence firm performance.
In
addition, despite the renewed interest in issues of corporate governance in the
African continent, relevant empirical studies are many in Nigeria (which
include the studies of Oyejide and Soibo, 2001; Adenikinju and Ayorinde, 2001
and Sandaet al., 2005)
Kajola, 2008; Tahir 2010; Owuigbe 2011 and Hassan 2011). However, none of these
focused specifically on the Nigerian manufacturing industries like cement
industries; hence this study intends to reduce the knowledge gap.
Also,
to date, little effort has been put by researchers to examine the influence of
governance structures on corporate performance when performance is adjusted to
take into account the wealth maximizing of cement industries. Closest to this
work are that of Cornett et al.
(2008) and Zhu and Tian (2009). Cornett et
al. (2008) find that adjusting for impact of earnings management
substantially improves the relevance (importance) of governance variables and
significantly declines the importance of incentive-based compensation for firm
performance. However, Zhu and Tian (2009) find that the coefficient of CEO
compensation significantly falls when firm performance is adjusted to exclude
discretionery accruals. Their findings also reveal that board composition is
more effective towards improving firm performance when actual performance is
considered. The few studies that exist in this area of research are products of
developed countries that have different regulatory frameworks and governance
mechanisms with that of Nigeria. Also, these studies document inconclusive
evidences, which calls for an investigation into the Nigerian scenario.
1.3
Objectives of the Study
The
main objective of this study is to investigate the effects of corporate
governance on the wealth performance of quoted cement companies in Nigeria. The
specific objectives are to:
i)
assess the effect of (Board Size, Board Composition, Composition of Audit
Committee, Managerial Shareholding and Institutional Shareholding) on the
Dividend per Share of quoted cement companies in Nigeria;
ii)
examine the effect of ( Board Size , Board Composition , Composition of Audit
Committee,
Managerial Shareholding and Institutional Shareholding) on the Return On
Capital
Employed of the companies and;
iii)
evaluate the effect of (Board Size, Board Composition, Composition of Audit
Committee, Managerial Shareholding and Institutional Shareholding) on the Net
Asset per Share of quoted cement companies in Nigeria.
1.4
Research Hypotheses
In
line with the objective of the study, the following hypotheses have been in
null form;
H01:
Corporate governance has no significant effect on the Dividend per Share of
quoted cement companies in Nigeria.
H02:
Corporate governance has no significant effect on the Return on Capital
Employed of quoted cement companies in Nigeria.
H03:
Corporate governance has no significant effect on the Net Asset per Shares of
quoted cement companies in Nigeria.
1.5
Scope of the Study
The
scope of this study shall comprise of all listed cement firms in Nigeria as at
December, 2009. The sector was selected as population because of the important
of the sector to economy development of the nation especially in the area of
job creation in the recent time. The period to be covered by this study is 7
years (i.e. 2009 to 2015). A seven-year period is considered because the
Securities and Exchange Commission (SEC) code of corporate governance was
readily available in Nigeria this time period. The code has been the document
that provides the benchmark for the period. The components of Corporate
Governance considered are: board composition, board size, institutional
shareholding, managerial shareholding and composition of audit committee.
However, other aspects of corporate governance not mentioned are outside the
scope of this study because of non-availability of data. Whereas financial performance
will be measured by ROCE, DPS and NAPS as these can easily be extracted from the
firms’ financial statements.
1.6 Significance of the Study
The
results of this study will enrich the literature in several ways. First, the
study will show whether or not corporate governance mechanisms are significant
financial performance determinants in the Nigerian cement industry. Second, it
will provide empirical support for agency theory, because it will show whether
or not a relationship exists between financial performance and governance
mechanisms, consistent with the prediction of agency theory.
In
addition to the above, it is hoped that shareholders and regulatory
authorities, such as Securities and Exchange Commission, and the Nigerian Stock
Exchange, would find the outcome of the study beneficial as it will give them
clues, as to the existence, nature and extent of the effect of Corporate
Governance on financial performance of the listed firms in the cement industry
in Nigeria. This will help them in their various policy formulation and
implementation. Board of Directors would find the study useful as this would
help them to appreciate the need to use Corporate Governance as a tool for
enhancing the corporate decision- making activities. It is therefore hoped that
this research will stimulate further empirical studies on corporate governance
and firm financial performance in Nigeria.
================================================================
Item Type: Project Material | Attribute: 80 pages | Chapters: 1-5
Format: MS Word | Price: N3,000 | Delivery: Within 30Mins.
================================================================
No comments:
Post a Comment