CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE OF MANUFACTURING COMPANIES: A STUDY OF SELECTED MANUFACTURING COMPANIES IN OGUN STATE
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Corporate governance is the system by which corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as; boards, managers, shareholders and other stakeholders) and spells out the rules and procedures and also decision making assistance on corporate affairs (Ayogu, 2017).
The industrial revolution which led to the separation of ownership from control of business, especially joint stock company made it necessary that financial report of the business are prepared for the owners by the management of the company as a means of providing information on stewardship (Krivogosky, 2016). In pursuing the objective of ensuring that proper and accurate report of stewardship are given to all stakeholders in the business, management often design a system of internal control utilizing professionals in ensuring that proper mechanism are put in place and necessary compliance to organizational policies and legal framework are strictly adhered to. For managers to act in the best interest of shareholders by maximizing values and ensuring good organizational image, it becomes imperative to ensure that good and sound corporate governance exist in the organization. Over the last two decades, corporate governance has attracted a great deal of public interest because of its apparent importance for the economic health of corporations and society in the general.
Some corporations have grown dramatically in a relatively short time through acquisitions funded by inflated share prices and promises of even brighter futures (many of these corporations have now failed) (Young, 2013). In others it seems as if checks and balances that should protect shareholders interests were pushed to one side, driven by a perception of the need to move fast in the pursuit of the bottom line. Corporate governance is seen as a system in which the directors and management of an organization are charged with the responsibility of directing and controlling the affairs of the company and ensuring effectiveness in the internal control system. Corporate governance provides a structure that works for the benefit of the firm and can help in increasing firm’s financial performance. Shleifer and Vishny (2017) state that, “Corporate governance deals with the ways in which suppliers of finance to corporations assure them of getting a return on their investment”.
Corporate governance is concerned with the processes, systems, practices and procedures as well as the formal and informal rules that guide institutions, the manner in which these rules and regulations are applied and followed, the relationships that these rules and regulations determine or create, and the nature of those relationships (Kama & Chuku, 2010). It also addresses the leadership role in the institutional framework. Corporate governance, therefore, refers to the manner in which the power of a corporation is exercised in the stewardship of the corporation’s total portfolio of assets and resources with the objective of maintaining and increasing shareholder value and satisfaction of other stakeholders in the context of its corporate mission. Corporate governance implies that companies not only maximize shareholders wealth, but balance the interests of shareholders with that of other shareholders, employees, customers, suppliers and investors so as to achieve long term sustainable value. From a public policy perspective, corporate governance is about managing an enterprise while ensuring accountability in the exercise of power and patronage.
Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders. Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have impact on the way a company is controlled. An important theme of corporate governance is the nature and extent of accountability of people in the business. A related but separate thread of discussions focuses on the impact of a corporate governance system on economic efficiency, with a strong emphasis on shareholders’ welfare. In large firms where there is a separation of ownership and management and no controlling shareholder, 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 beholden to management. This aspect is particularly present in contemporary public debates and developments in regulatory policy.
1.2 Statement of the Problem
The incessant scandals, crises and wreckage of organizations around the world are so alarming that the global financial market has been greatly destabilized and the growth of economies impeded. Notable organizations such as Arthur Anderson, Enron, Kmart, Adelphia Communications, and WorldCom area few of the numerous international organizations that have collapsed as a result of the heightened crises. The sustained crises have not left Nigeria out of the whole saga. It affected companies such as Intercontinental bank, Oceanic bank, Cadbury, etc., thereby contributing to the downturn of the economy. With all of these, companies’ sustainability has become an issue in determining the survival and continued growth of a country (Apodore & Zainol, 2014).
The priority of any organization is to effectively, efficiently and ethically manage the company for profitable long term growth and perpetual existence; the policies and practices of management must also align with the interest of shareholders and other stakeholders. Thus, the development of good corporate governance is essential in order to protect corporate stakeholders, and maintain factors for control and prevention of collapse and long lasting economic depression.
In the achievement of the business objectives, corporate governance is a major factor and it is concerned with the relationships that exist among firms’ management, board of directors, shareholders and other stakeholders. Osundina, Olayinka and Chukwuma (2016) emphasized that corporate governance is a non-financial factor that affects the performance of companies and increases accessibility of external finance that brings sustainable economic growth. Weak corporate governance may manifest in form of non-accountability and transparency to stakeholders, bribery scandals, violation of the rights of the minority shareholders, official recklessness among the managers and directors, weak internal control system, insider abuses and fraudulent practices (Olumuyiwa & Babalola, 2012). Also, non – distinction between ownership and control of organization has been identified to be a major reason for weak corporate governance. The shareholders, who are the principals in an agency relationship delegate control to directors and managers who are the agents to enhance smooth and efficient flow of operations.
In most cases, the directors/ managers act for their own self-interest without regard for shareholders’ returns on investment. This leads to conflicts between both parties; this is regarded as agency conflict which has a consequent loss. This is evident from the reasons for the collapse, in Nigeria, in 2009/ 2010, of some listed companies especially the eight (8) Universal banks which resulted in a loss of over N1.2 trillion shareholders’ funds, as reported by Famogbiele (2012). Therefore, it is necessary for the board to uphold transparency and fairness to shareholders and other stakeholders to abate agency cost which has a consequent negative effect on the corporate performance.
1.3 Objectives of the Study
The purpose of this study is to investigate corporate governance and financial performance of manufacturing companies. A study of 5 selected manufacturing companies in ogun state.
Specifically, the objectives of the study are:
To ascertain the effect of corporate governance on organizational profitability.
To examine if delegate control to directors and managers enhance smooth and efficient flow of operations
To determine the impact of transparency and fairness to shareholders on corporate performance.
1.4 Research Questions
To achieve the above stated objectives, answers would be provided to the following questions.
What is the effect of corporate governance on organizational profitability?
How does control to directors and managers enhance smooth and efficient flow of operations?
To what extent has transparency and fairness to shareholders influence corporate performance?
1.5 Research Hypotheses
The following hypotheses would be tested.
H01: Corporate governance has no impact on organizational profitability
H02: Delegate control to directors and managers does not enhance smooth and efficient flow of operations
H03: Transparency and fairness to shareholder does not influence corporate performance
1.6 Significance of the Study
This research work will help manufacturing companies in Ogun state to identify the problems involved in corporate governance and suggest lasting solutions. It will also help them to increase the sale volume, profit and market share.
It will be an added value and benefit to the other researchers and students of other institutions in related courses.
It will enable the researcher to ascertain the problem associated with the corporate governance and how corporate governance has effected on financial performance.
The study will further provide insights into how Government can help the manufacturing industry in Nigeria by providing better policy formulation.
1.7 Scope and limitation of the Study
This research work focuses on Unilever Nigeria Plc, De-United Food industry, Rite Food Limited, Along Sagamu-Benin express way, Ososa Ijebu Ogun State, Dangote Cement Factory, Ibese and Nestle Nigeria Plc, Agbara, Ogun, the scope of corporate governance and financial performance will be discussed.
The limitation of this study is the time factor. Since the researcher carried out the research of the same time with her studies, there was limited time for to cover all the necessary areas of the research study. And also lack of audience from the respondent.
1.8 Definition of Key Terms
An organization: This entity comprising multiple people, such as an institution or an association that has a collective goal and is linked to an external environment.
Corporate Governance: Corporate Governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the major stakeholders/participants in the corporation, such as the board, managers, shareholders and even the other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs..
Financial performance: it is referred to as measure the efficiency and effectiveness of organization internal as well external actions / operations.
Profitability: This refers to the rate of profit making by business organization.
Sales volume: This is quantity of items a business sells during a given period, such as a year or fiscal quarter. Sales revenue equals the dollar amount a company makes during the period under review.
Transparency and fairness: it a process of being clear, open and honest with people from the start about who you are, and how and why you use their personal data.
Delegate control: the shifting of authority and responsibility for particular functions, tasks or decisions from one person (usually a leader or manager) to another. Most delegated tasks take some time, planning and effort to complete properly