1.1. BACKGROUND TO THE STUDY
Considerable attention given to the
issues of corporate governance as a veritable tools for organizational
effectiveness in recent years shows that when corporate governance
mechanisms are strong, managers find less time to deceive and this
consequently increases the quality and reliability of their financial
Academic researches show that the weaker
the corporate governance mechanism, the higher the profit management;
and this ultimately indicate low earnings quality. Researches also
revealed that weak corporate governance mechanism is connected with weak
financial managements and high cheating levels.
In today’s global economy, the success
of the national economy depends on the crucial role of organisations’
competitiveness, transparency and governance structure which operate
within her territory, since organisations are the entities that create
economic value (ICAN, 2009).
Indeed, the need for trust and
transparency in the governance of corporate organizations has been one
of concern for standard setters all over the world. This need has
obviously spurred renewed interest in the corporate governance practices
of modern corporations, particularly in relation to accountability and
economic performance (ibid). The position above could not be separated
from prior submission where Nwachukwu (2007) emphasize the growing
consensus that good corporate governance has positive link to national
economic growth and development. The degree of trust accorded to the
managers of companies by its owners is strengthened through corporate
governance. Directors without corporate governance mechanism may paint
misleading pictures of financial and economic performance of their
company to lure unsuspecting investors.
A corporation is a ‘congregation’ of
various stakeholders, namely, customers, employees, investors,
vendor-partners, government and society. The relationship between
shareholders and corporate managers is fraught with ‘conflicting’
interests that arise due to the separation of ownership and control,
divergent management and shareholder objectives, and information
‘asymmetry’ between managers and shareholders. Due to these conflicting
interests, managers have the incentives and ability to maximize their
own utility at the expense of corporate shareholders. As a result,
corporate governance structures evolve that help in mitigating these
agency conflicts (Dey 2008). Simply stated, “Corporate governance
(henceforth Corporate Governance) is the system by which businesses are
directed and controlled.” In fact, Corporate Governance deals with
conducting the affairs of a corporation in such a way that there is
‘fairness’ to all stakeholders and that its actions benefit the
‘greatest’ number of stakeholders.
Corporate Governance is the acceptance
by management of the inalienable rights of shareholders as the ‘true’
owners of the corporation, and of their own role as ‘trustees’ on behalf
of the shareholders. This has become imperative in today’s globalized
business world where corporations need to access ‘global’ pools of
capital, need to attract and retain the ‘best’ human capital from
various parts of the world, need to ‘partner’ with vendors on mega
collaborations, and finally, need to live in ‘harmony’ with the
Corporate Governance is the system of
rules and norms, either institutional or market, within which arise or
are pursued various categories of stakeholders, shareholders,
management, public administration, personnel, customers, suppliers,
etc.. This definition should be completed with the expressly stated
objective supplemented by the „Principles of Corporate Governance”
issued by OECD (1999), i.e. „providing company's strategic direction,
effective control management of the board members, trust and loyalty of
the shareholders”. Systems of governance have in fact two main
objectives: ensuring the integrity of the management and to guide it to
maximize the value created for shareholders. In the pioneer countries in
Corporate Governance, such as the U.K. and U.S., public regulations
follow the private ones. Continental European countries, notably in
Italy and France, market regulation and companies’ management is
prevalent public, this difference having a substantial meaning – the
„origin” public intervention is inserted in a context less receptive and
exposed to many environmental adverse conditions.
Corporate Governance mechanisms
generally include shareholders and their ownership structure, board
members and their composition, and management of the company which is
driven by the managing director or chief executive and other
stakeholders that may affect the company's movement, and it against this
reasons, that this study tends to investigates the effect of corporate
governance mechanisms on organizational effectiveness.
1.2. STATEMENT OF PROBLEM
The increasing incidence of corporate
fraud relating to exaggerated and fleeting reports have reinforced the
renewed global emphasis on the need for effective corporate governance.
CBN (2006) reported that despite the significance of good corporate
governance to national economic development and growth, corporate
governance was still at rudimentary stage as only 40% of publicly quoted
companies, including banks had recognised corporate governance in
The separation of ownership from the
management of business organisations spurs a divergence of interest
amongst the parties. The divergence of the interests of the management
and its owners has undermined investors’ confidence in the Board. Hence,
investors are interested about the level of accountability displayed by
the Board of directors. The outcry of investors and other stakeholders
as a result of mismanagement and inadequate financial disclosures given
by the management has deemed it necessary for the institution of sound
corporate governance procedures .
Furthermore, many country leaders all
over the world has increased concern over corporate governance due to
the increase of reported cases of frauds, inside trading, agency
conflicts among other corporations saga (Enobakhare, 2010). Corporate
failure has recently witnessed in both developed and developing
countries with the reported cases of the collapse of Enron in 2001 and
WorldCom in 2002, (Inyang, 2009) and theongoing economic financial in
The crises emanated from the poor
governance practices from the financial sector (the mortgage market).
Since mortgage market was the mother of the crisis, this has triggered
the world leaders to enact some laws, which increase banks governance.
This is supported by Ahmad (2006) who argued that a sound financial
system in any organisation requires appropriate infrastructure to
support efficient conduct of such business operating environment,
governance and regulatory framework at domestic as well as international
levels in order to reduce the financial crisis and inversely improve
1.3. OBJECTIVES OF THE STUDY
The main objective of the study is to
assess effect of corporate governance as catalyst for organizational
performance in banking sector.
Other specific objectives include:
- Determine corporate governance impact on banks productivity
- Examine the relationship between corporate governance and organisational performance.
- Ascertain whether good corporate governance practices enhances organizational effectiveness
- Determine how good corporate governance practices protect the interest of the shareholders.
- Identify the causal links between corporate governance and audit committee of corporate organizations.
- To give recommendations to the stakeholders on strategies that can
improve corporate governance practices so as to improve the performance
of commercial bank.
1.4. RESEARCH QUESTION
In order to achieve the above stated objectives, this study has asked the following questions:
1. Do corporate governance has impact on organisation productivity?
- What are the relationship between corporate governance and organisational performance?
- Whether good corporate governance practices enhances organizational effectiveness?
- Determine how good corporate governance practices protect the interest of the shareholders?
- Are there any causal links between corporate governance and audit committee of corporate organizations?
- What are the possible recommendations to the stakeholders on
strategies that can improve corporate governance practices so as to
improve the performance of commercial bank?
1.5. STATEMENT OF HYPOTHESIS
Following from the objectives of the study, the following hypothesis were tested under the present study:
H0: There is no significant relationship between corporate governance and organizational performance.
H1: There is significant relationship between corporate governance and organizational performance.
H0: There is no significant relationship
between corporate governance practices (board size ratio, board
composition ratio, internal board committee`s ratio and board diversity
ratio) and commercial banks efficiency.
Hi: There is a significant positive
relationship between corporate governance practices (board size ratio,
board composition ratio, internal board committee`s ratio and board
diversity ratio) and commercial banks efficiency.
1.6. SIGNIFICANCE OF THE STUDY
This study shall provide knowledge on
the effort in strengthening corporate governance beyond the rights and
responsibilities of different stakeholders in the management of an
organization into areas involving the relationship between finance
providers and an organization, compliance with legal, ethical and
environmental needs of the society, among others.
Furthermore, this study shall set out to
further develop our understanding of corporate governance and its
affect on corporate performance and economic performance. In doing so,
it addresses some of the underlying factors that promote efficient
corporate governance, and examines some of the strengths, weaknesses and
economic implications associated with various corporate governance
It shall also seeks to enhanced our
understanding about the interpretations which have shaped corporate
governance in relation to organizational performance and effectiveness
both in theory and practice.
This study will be of great importance
to the corporate world, government, corporate individual or firms, SMEs,
financial and non-financial institution since it will help to determine
the actual roles played by accounting department/unit of various
organisation, as it will also provide indepth knowledge on the role of
accounting information in a corporate settings.
Finally it will be of
great significance to schools and students, it will serve as a reference
point for future researchers who will want to research more on the
1.7. SCOPE OF THE STUDY
In most recently, researchers worldwide
have grown interest on corporate governance and organsational
performance of corporate organizations as witnessed by an explosion
research on corporate governance (Adams, 2012).
Commercial banks usually show good
corporate governance since they play a critical role in the corporate
governance of other firms (Franks & Mayer, 2001; Santos &
Rumble, 2006), as creditors or equity holders of firms.
Commercial banks must be transparent, accountable, trustworthy and responsible to the public.
In this regard, the scope of the study shall hovers around commercial banks around Ikeja Local government of Lagos Metropolis.
1.8. LIMITATION OF THE STUDY
One of the major problems of this study
was lack of accessing the exact information about the ownership
combination of the companies. Notes associated with financial statements
include the combination of stakeholders which is usually presented by
arbitrary and inconsistent information.
Other stakeholders are just the group or
general entities that some individuals are disparately located in them.
Companies, pension funds and individuals are located in the group of
other shareholders that are very diverse in their nature and function.
If access to more accurate information was available, it was possible to achieve different results.
Due to the calculations done to achieve
the last digit of a variable, possible errors made in calculation can
also be considered as one of the limitation of the study.
Financial constraint was one of the limitation faced in the course of the research study.
1.9. DEFINITION OF TERMS
1. Corporate governance
Corporate governance is the system of
rules and norms, either institutional or market, within which arise or
are pursued various categories of stakeholders, shareholders,
management, public administration, personnel, customers, suppliers, etc.
- 2. Board Diversity
Board diversity is the mixture of men
and women, people from different age brackets, people with different
ethnic groups and racial backgrounds
- 3. Board Committees
Board committees are internal regulatory
and supervision board chaired by an external director which over sees
the effective operation and acts of the board of directors (RBZ, 2004).
They are calculated as the total minimum number of internal committees,
which the central bank and international corporate governance codes
- 4. Audit committee and Risk management committee
Audit committee and Risk management
committee - review the financial conditions of the banking institution,
internal controls, bank performance and the findings of the internal
auditors will be reported to the board with some recommended
- 5. Board Composition
According to Enobakhare (2010) board
composition is the total number of directors brought from outside the
company to sit on the board divided by the board size in a given period.
- 6. Profitability
Profitability is the relative tendencies
of profit making in alternative courses of action or decision (Ilaboya,
2005: 56). Profitability is a relative measure showing a more
- A corporation is a ‘congregation’ of various stakeholders, namely, customers, employees, investors, vendor-partners, government and society.
- 8. Organizational effectiveness
Organizational effectiveness was
succinctly defined by Daft (1983) as “the degree to which an
organization realized its goals”. However, Mondy, (1990) defined it
aptly as “the degree to which an organization produce the intended