Description
the Impact of Corporate Governance on the Productivity of a Firm
Research Reports on the Impact of Corporate Governance on the Productivity of a Firm
ABSTRACT
The research looks into the relationship between corporate governance and organizational performance., through the processes of research multiple variables are examined; the complex set of relationships between a Corporation and its board of directors, management, shareholders, stakeholders, customers, creditors and how effective Corporate Governance can improve the productivity of a firm. Due to the nature of the research, the methodology used was focused on extensive interview, textbooks, journals and articles. Interview questions were focused on the variables that could affect the performance of a firm; textbooks, journals and articles were used as secondary data to have a past insight on how organizational performance affects a firm. The research demonstrates that high governance risk correlates with lower performance, and robust governance is associated with more sustained performance. Companies with higher standards of governance were discovered to have higher performance). Further findings indicated that one of the more difficult things in assessing the influence of corporate governance upon firm performance is to take into account the impact of changes in the market: at times of rapid expansion many companies will perform well, in times of recession most companies will find it more difficult to perform. Recommendations made focuses on improving the relationship between an organization, as a wholes and shareholders, stakeholders, management, creditors,
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and customers, through proper Corporate Governance. Once this is achieved to a certain degree, it will positively affect the level of performance of a firm, directly or indirectly.
TABLE OF CONTENT
1.
CHAPTER ONE – INTRODUCTION ……………………………………………………..1 ……………………………………………………..............4 ……………………………………………………..5 ……………………………………………………..6 ……………………………………………………...6 ……………………………………………………………...7 ……………………………………………………………...8
1.1 Background of the Study 1.2 Statement of the Problem 1.3 Objective of the Study 1.4 Significance of the Study 1.5 Scope of the Study 1.6 Definition of Terms 1.7 Plan of Study
2. CHAPTER TWO – LITREATURE REVIEW 2.1 An Overview of Corporate Governance 2.2 Models of Corporate Governance 2.3 Mechanisms of Corporate Governance 2.4 Governance Structure ………………………………...........…...9 ……………………………….................16 ……………………………………..........40
………………………………………………...................42
2.5 Potential Role of Stakeholders in Corporate Governance .................................49 2.6 Board of Directors and Corporate Governance 2.7 Board Organization & Structure …..........………………….....52
…………………………………………..............61
2.8 Corporate Governance Systems in Different Countries ………………...............75 2.9 Quality of Corporate Governance and Firm Performance …………….........79
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2.10 Corporate Social Responsibility 2.11 Corporate Sustainability 2.12 Corporate Governance in Nigeria 2.13 Benefits of Corporate Governance 2.18 Summary
…………………………………………..............80 …………………………………………………..82 ............................................................83 ……………………………….................86
............………………………………………………………………........88
3. 3.1
CHAPTER THREE – RESEARCH METHODOLOGY Introduction ......………………………………………………………….................90 .....……………………………………………………….........90 …………………………………………….......99
3.2Research Methods 3.3 3.4
Methods of Data Collection Method of Data Analysis
……………………………………………….................104 ……………………………………………….....109
3.5 Justification of Method
4. 4.1 4.2 4.3
CHAPTER FOUR – DATA PRESENTATION, ANALYSIS AND INTERPRETATION Introduction ………………………………………………………………........110 ……………………………………………………….......113
Interpretation of Data
Summary of Analysis ………………………………………………………...................126
5. 5.1 5.2 5.3
CHAPTER FIVE – SUMMARY, CONCLUSION AND RECOMMENDATION Summary Conclusion …………………………………………………………………….........130 …………………………………………………………………...........133 ………………………………………………………….........137
Recommendation
Bibliography
…………………………………………………………….............141
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CHAPTER 1
INTRODUCTION
1.1 BACKGROUND OF THE STUDY The institutions of governance provide a framework within which the social and economic life of countries is conducted. Corporate governance concerns the exercise of power in corporate entities. Corporate Governance is the key foundation for firms to be more productive and have a long existing product life cycle. The levels of institutional collapse and firm?s failure worldwide from unforeseen circumstances, there have been new concepts or theories on how an organization should effectively run. Through past researches it has been observed that the Management of firm and survival of companies are associated with the type of Management that is in place and the global competitive environment requires sound corporate governance. This research study will examine the effects of healthy corporate governance in an organization. It looks into the factors necessary to achieve successes in relation to the Board of Directors of an
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organization; Corporate Ethics; Mechanisms of Corporate Governance; Responsibilities of Shareholders; Structure and Responsibilities of a Board; and Organization of Audit. This research focuses on Corporate Governance in the Nigerian Organizations and it looks into ways in which mechanisms in relation to Corporate Governance can be put into place to achieve proper Management, so as to achieve effective productivity. Nigeria is not left out in the campaign for proper Corporate Governance, especially with recent events of Nigerian Banks closing down or Banks being crippled through unprofessional decisions made by those on the Board. This approach not only narrows the dimensions of corporate
governance to a restricted set of interests, as a result it has a very limited view of the dilemmas involved in corporate governance. There are competing corporate governance systems in the market based AngloAmerican system; the European relationship based system; and the relationship based system of the Asia Pacific (Clarke 2007). This diversity of corporate governance systems is based on historical cultural and institutional differences that involve different approaches to the values and objectives of business activity. Furthermore the importance of strategic choice in the determination of governance systems
“Entrepreneurs, investors and corporations need the flexibility to craft governance arrangements that are responsive to unique business
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contexts so that corporations can respond to incessant changes in technologies, competition, optimal firm organization and vertical networking patterns…To obtain governance diversity, economic
regulations, stock exchange rules and corporate law should support a range of ownership and governance forms”. The OECD provides the most authoritative functional definition of 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 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. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance." However corporate governance has wider implications and is critical to economic and social well being, firstly in providing the incentives and performance measures to achieve business success, and secondly in providing the accountability and transparency to ensure the equitable distribution of the resulting wealth. The significance of corporate governance for the stability and equity of society is captured in the broader definition of the concept offered by Sir Adrian Cadbury (2002):
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"Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society." It is therefore logical to study the influence of Corporate Governance mechanism on performance of companies. 1.2 STATEMENT OF THE PROBLEM There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large firms such as Enron Corporation and MCI Inc. Bold, broad efforts to reform corporate governance have been driven, in part, by the needs and desires of shareowners to exercise their rights of corporate ownership and to increase the value of their shares and, therefore, wealth. Over the past three decades, corporate directors? duties have expanded greatly beyond their traditional legal
responsibility of duty of loyalty to the corporation and its shareowners. Nevertheless "corporate governance," despite some feeble attempts from various quarters, remains an ambiguous and often misunderstood phrase. For quite some time it was confined only to corporate management. That is not so. It is something much broader, for it must
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include a fair, efficient and transparent administration and strive to meet certain well defined, written objectives. Corporate governance must go well beyond law. The quantity, quality and frequency of financial and managerial disclosure, the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities, and the commitment to run a transparent organization. Therefore in an attempt to redress Corporate Governance principles and practices, this study looks at ideal ways in which Corporate Governance principles and practices can be executed and used properly, and what factors are necessary, for corporate governance to succeed. Specifically the study shall attempt to establish the relationship between Corporate Governance principles and the productivity of the firm. 1.3 OBJECTIVES OF THE STUDY The objective of the study is; 1. To determine the relationship between Corporate Governance and the productivity of a firm. 2. To identify and understand the factors that hinders good
governance. 3. To appreciate the relevance of Corporate Governance in the Global Market. 4. To determine the proper elements necessary to achieve sound Corporate Governance.
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1.4
SIGNIFICANCE OF THE STUDY The subject matter; „Corporate Governance and its impact on the Productivity of a firm? is aimed at making the following contributions as stated below: 1. It will enhance firms view on corporate governance and how it can affect the productivity of a firm. 2. It will allow firms to properly restructure their corporate governance so as to improve effectiveness. 3. It will give Organizations insight on the various factors necessary for sound governance practice. 4. It will highlight the role and relevance of stakeholders in a firm. 5. It would emphasis the benefits to be derived if firms could adhere to proper corporate governance.
1.6
SCOPE OF THE STUDY The study is limited by the overall objective view of the surveys and interviews. The study is also limited to Peugeot Automobile Nigeria and Nassarawa State University, being the case study under examination, which although the organizations are very diverse in nature; both firms to an extent practice corporate governance. The extent to which the study will meet the issues raised in the previous section can be curtailed by the realities of data availability in Nigeria. Corporate Governance is a sensitive issue as it focuses on the
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organizations observance of rules of ethics, social responsibility etc. even in the most advanced opened democracies, companies find it difficult to divulge such issues because they might be considered company secrets; this is even more in Nigeria. Therefore findings of this report will be affected by the quantity quality and reliability of data. 1.6 DEFINITION OF TERMS a. Accountability: the allocation or acceptance of responsibility for actions b. Audit: a systematic check or assessment, especially of the efficiency or effectiveness of an Organization or process, typically carried out by an independent assessor. c. Balance of Power: the distribution of power among two or more group of people, where the pattern of force and dominance among them is balanced in such a way that no single entity has dominance over another. d. Board of Directors: e. CEO – Chief Executive Officer f. Codes of Best practices – These codes are non-binding rules that go beyond the law, taking country-specific conditions into account and often exceeding the standards set by international guidelines.
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g. Corporate Governance: is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. h. Remuneration: the paying or rewarding of somebody for goods or services or for losses sustained or inconvenience caused. i. Shareholders: somebody who owns one or more shares of a company?s stock. j. Stakeholders: a person or group with direct interest, involvement, or investment in something, e.g. the employees, stockholders, and customers of a business concern. k. Transparency: the quality or state of being transparent
(completely open and frank). 1.7 PLAN OF STUDY This study is divided into five (5) chapters. The first chapter is introduction which includes background of the study, background of the study, statement of the problem, objective of the study, significance of the study, scope of the study, and definition of terms and finally the plan of the study. The second chapter has to do with reviews relevant literature, which covered areas in corporate governance like an overview of corporate governance; models and mechanisms; governance structure, role of stakeholders; board of directors; board organization or structure; regulations; ownership perspective
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of
corporate
governance;
governance viewed as leadership; governance as a decision making vehicle; business ethics in relation to corporate governance; link between effective corporate governance practices and firm
performance; corporate social responsibility; corporate sustainability; corporate governance reform, benefits and finally a summary. The third chapter is the methodology and it exposes the methods used in obtaining data and technique used in analyzing data as well as justification of methods of data analysis used. The fourth chapter consists of the Data presentation and analysis which covers areas like; Directors and the performance of a firm;
Management and their influence on profitability; stakeholders impact on the performance of an organization; role of shareholders in the management of a corporation; board structure; board composition; board size; creditors influence; and relevance of Audit Committee. Finally the fifth chapter consists of the summary, conclusions and recommendations. The summary is an overview on sound corporate governance and how it affects the level of productivity of a firm. Recommendations cover areas like proper roles and responsibilities of both Directors and Management; shareholders activism; positive influence of stakeholders; relevance of Audit; and proper board composition and structure.
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CHAPTER 2
LITERATURE REVIEW
2.1 An Overview of Corporate Governance
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large. Corporate governance can also be defined as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders management and other stakeholders, with good by directing and controlling objectivity,
activities
business
savvy,
accountability and integrity. A good corporate governance regime helps to assure that corporations use their capital efficiently. Good corporate
governance helps, to ensure that corporations take into account the interests of a wide range of constituencies, as well as of the communities in which they operate, and that their boards are accountable to the company and to the shareholders. This, in turn helps to assure that corporations operate for the benefit of society as
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a whole. It helps to maintain the confidence of investors – both foreign and domestic – and to attract more „patient? long-term capital. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. The positive effect of corporate governance on different stakeholders ultimately is a strengthened economy, and hence good corporate governance is a tool for socio-economic development. Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization. Commonly accepted principles of corporate governance include:
?
Rights and equitable treatment of shareholders : Organizations should respect to the rights of shareholders rights. rights They by and can help help
shareholders shareholders
exercise
those their
exercise
effectively
communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.
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?
Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.
?
Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors.
?
Integrity and ethical behavior: Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.
?
Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of
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accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information. Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports. Apreda (2008) provides a unifying view of governance as a distinctive field of learning and practice identifying interlinked themes that arise from corporate, public and global governance, and identifies the core of governance in all three domains as: 1. 2. 3. 4. 5. 6. 7. A founding constitution A system of rights and duties Mechanisms for accountability and transparency Monitoring and performance measures Stakeholder rights Good governance standards Independent gatekeeper
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The Board of Directors meets according to a fixed schedule, set at the beginning of each year, which enables it to properly discharge its duties. As a rule, the Board of Directors meets at least five (5) times a year. Non-executive Directors are required to meet separately from executive members at least once a year. All Directors are expected to be provided with a concise but comprehensive set of information by the Company Secretary in a timely manner, concurrently with the notice of the Board meeting, not lee than fourteen (14) days before each meeting. This set of document is to include; ? An agenda ? Minutes of the prior Board Meeting ? Key performance indicators, by including relevant and financial clear
information
prepared
management,
recommendations for actions. The diversity of corporate governance systems is based on historical cultural and institutional differences that involve different approaches to the values and objectives of a business activity. Furthermore the importance of strategic choice in the determination of governance systems
“Entrepreneurs, investors and corporations need the flexibility to craft governance arrangements that are responsive to unique business contexts so that corporations can respond to incessant changes in technologies,
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competition, optimal firm organization and vertical networking patterns…To obtain governance diversity, economic regulations, stock exchange rules and corporate law should support a range of ownership and governance forms. Corporate governance is concerned with the processes, systems, practices and procedures as well as the formal and informal rules that govern 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. 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 those of other stakeholders, 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 by firms.
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2.2
Models of Corporate Governance
2.2.1 The simple finance model 'In the finance view, the central problem in corporate governance is to construct rules and incentives (that is, implicit or explicit 'contracts') to effectively align the behavior of managers (agents) with the desires of principals (owners)', (Hawley & Williams 1996:21). However, the 'rules' and 'incentives' considered, are generally only those within the existing US system of publicly traded firms with unitary boards. The rules and incentives in the finance model refer to those established by the firm rather than to the legal/political/regulatory system and culture of the host economy or the nature of the owners. The finance view represents a sub-section of the political model of corporate governance. The political model interacts with the 'cultural', 'power' and 'cybernetic' models. It is the nature of the owners which exacerbates corporate control problems found in Anglo countries like the US, Canada, UK and Australia. In each of these countries, institutional investors own the majority of the shares in most of the largest publicly traded firms unlike in continental Europe and Japan (Analytical 1992). Institutional investors, such as pension and mutual funds, collectively owned more than 57% of the top US 1,000 firms in 1994 (Hawley & Williams 1996:8). The problem with institutional ownership is that their investment managers are fiduciary agents of the beneficial owners and so the situation is created of agents representing agents. Hence the term
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'Fiduciary Capitalism' or what Peter Drucker (1976) more provocatively described as 'Pension Fund Socialism'. The problem of agents being responsible to agents is that it compounds the agency costs identified by Jensen &Meckling (1976). A basic assumption is that managers will act opportunistically to further their own interests before shareholders. Jensen and Meckling showed how investors in publicly traded corporations incur costs in monitoring and bonding managers in best serving shareholders. They defined agency costs as being the sum of the cost of: monitoring management (the agent); bonding the agent to the principal (stockholder/'residual claimant'); and residual losses. Their analysis showed amongst other things: why firms use a mixture of debt and equity; why it is rational for managers not to maximise the value of a firm; why it is still possible to raise equity; why accounting reports are provided voluntarily and auditors employed by the company; and why monitoring by security analysts can be productive even if they do not increase portfolio returns to investors. A basic conclusion of agency theory is that the value of a firm cannot be maximized because managers possess discretions which allow them to expropriate value to themselves. In an ideal world, managers would sign a complete contract that specifies exactly what they could do under all states of the world and how profits would be allocated. 'The problem is that most future contingencies are too hard to describe and foresee, and as a result, complete contracts are
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technologically unfeasible' ( Shleifer&Vishny 1996). As a result, managers obtain the right to make decisions which are not defined or anticipated in the contract under which debt or equity finance is contributed (Grossman & Hart 1986; Hart & Moore 1990). This raises the 'principal's problem' (Ross 1973) and 'agency problem' (Fama& Jensen 1983a,b). How can publicly traded firms with such incomplete contracts with their managers be effective in efficiently raising funds? The 'agency problem' is particularly acute in Anglo cultures with dispersed ownership where corporations do not have a supervisory board or what Monks (1994) describes as a 'relationship investor'. When all shareholders own small minority interests to create diverse ownership it is not rational for any investor to spend time and incur costs to supervise management as this provides a 'free ride' for other investors. In any event, small shareholders may lack the power and influence to extract information which could reveal expropriation or mismanagement. In many Anglo countries, the law may limit the ability of shareholders to become associated together to form a voting block to influence or change management unless they make a public offer to all shareholders. Insider trading laws may also inhibit or prohibit shareholders from obtaining the necessary information to monitor and supervise management. Monks (1996), an Assistant Secretary of Labour in the Reagan Administration, describes how US managers
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have influenced law making to protect themselves from shareholder interventions. 2.2.2 The stewardship model In the stewardship model, 'managers are good stewards of the corporations and diligently work to attain high levels of corporate profit and shareholders returns' (Donaldson & Davis 1994). Donaldson & Davis note that 'Managers are principally motivated by achievement and responsibility needs' and 'given the needs of managers for responsible, self-directed work; organizations may be better served to free managers from subservience to non-executive director dominated boards'. According to Donaldson & Davis, 'most researchers into boards have had as their prior belief the notion that independent boards are good' and 'so eventually produce the expected findings'. There are influential and powerful sources who recommend the need for independent non-executive directors such as the Council of Institutional Investors in the US, Cadbury (1992) in the UK, Australian Institutional investors (AIMA 1995), existing professional directors, and all those would like to become non-executive directors. However, supporting stewardship theory are the individuals who contribute their own money and other resources to non-profit organizations to become a director. In analyzing the welfare distributed to stakeholders through introducing a division of powers, Persson, Roland &Tabellini (1996) made provision in their equations to
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include the welfare contributed by controllers. In commenting on stewardship theory, Hawley & Williams (1996:29) state that 'The logical extension is either towards an executivedominated board or towards no board at all'. Donaldson & Davis point out: 'the non-executive board of directors is, by its design, an ineffective control device' and cite evidence to support the view that 'the whole rationale for having a board becomes suspect'.
Brewer(1996) reported that 'One of Canada's best-known business leaders suggested last month that boards of directors should be abolished and replaced by a formal committee of advisors'. This view arose from the businessman in question being sued as a director of an insurance company for over a billion dollars from actions taken by management. Boards can become redundant when there is a dominant active shareholder, especially when the major shareholder is a family or government. One could speculate that some boards are established from cultural habit, blind faith in their efficacy, or to make government or family firms look 'more business like'. However, research by Pfeffer (1972) has shown that the value of external directors is not so much how they influence managers but how they influence constituencies of the firm. He found that the more regulated an industry then the more outsiders were present on the board to reassure the regulators, bankers, and other interest groups. Tricker (1996:29) points out: 'underpinning company law is the
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requirement that directors show a fiduciary duty towards the shareholders of the company'. Inherent in the idea of directors having a fiduciary duty is that they can be trusted and will act as stewards over the resources of the company. Thus in Anglo law, directors duties are based on stewardship theory. This duty is higher than that of an agent as the person must act as if he or she were the principal rather than a representative. Many writers, and especially the proponents of stewardship and agency theory, see each theory contradicting the other. Donaldson & Davis raise the possibility that there is some deficiency in the methodologies of the numerous studies they cite which provide support for both theories. Some possibilities are that the studies did not separate out the affect of firms being in a regulated industry as analyzed by Pfeffer (1972) or possessing a dominant shareholder acting as a supervisory board or 'relationship investor'. The existence of an influential supervisory investor is not uncommon in Anglo cultures and it is the rule rather than the exception in other cultures (Analytica 1992; Tricker 1994; Turnbull 1995c,d,f). Ghosal& Moran (1996:14) raise the possibility that the assumption of opportunism on which agency theory is based, 'can become a selffulfilling prophecy whereby opportunistic behavior will increase with the sanctions and incentives imposed to curtail it, thus creating the need for even stronger and more elaborate sanctions and incentives'. Likewise, stewardship theory could also become a self-fulling. This
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would appear to be the situation in firms around Mondragón which have no independent directors. All board members are either executives or stakeholders (Turnbull 1995d). However, each firm and each group of firms in the Mondragón system is controlled by three or more boards/councils or control centers which introduce a division of power with checks and balances. The inclination of individuals to act as stewards or self-seeking agents may be contingent upon the institutional context. If this is the case, then both theories can be valid as indicated by the empirical evidence. Stewardship theory, like agency theory, would then be seen as sub-set of political and other broader models of corporate governance. Psychological analysis supports both theories. Warring (1973), a professor of psychology, states that: 'differences between individuals are significant and important'; the need for money and approval, etc. is 'determined and limited by the necessity of maintaining the organism in a state of dynamic equilibrium'; people stand 'in an interactive cybernetic relationship to his/her community and environment, and is changed as a result of any interaction' and individuals are 'sometimes competitive, sometimes collaborative: usually both'. The inclination of individuals to act as selfless stewards may be culturally contingent. The 'company man' in Japan may place his employer before family. The voluntary resignation of executives is not uncommon when a firm is disgraced and instances of suicide are still
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reported. 2.2.3 The stakeholder model In defining 'Stakeholder Theory' Clarkson (1994) states: '"The firm" is a system of stake holders operating within the larger system of the host society that provides the necessary legal and market infrastructure for the firm's activities. The purpose of the firm is to create wealth or value for its stake holders by converting their stakes into goods and services'.This view is supported by Blair (1995:322) who proposes:
... the goal of directors and management should be maximizing total wealth creation by the firm. The key to achieving this is to enhance the voice of and provide ownership-like incentives to those participants in the firm who contribute or control critical, specialized inputs (firm specific human capital) and to align the interests of these critical stakeholders with the interests of outside, passive shareholders.
Consistent with this view by Blair to provide 'voice' and 'ownership-like incentives' to 'critical stakeholders', Porter (1992:16-17) recommended to US policy makers that they should 'encourage long-term employee ownership' and 'encourage board representation by significant customers, suppliers, financial advisers, employees, and community representatives'. Porter (1992:17) also recommended that corporations 'seek long-term owners and give them a direct voice in governance' (i.e. relationship investors) and to 'nominate significant owners, customers, suppliers, employees, and community representatives to the board of directors'. All these recommendations would help establish the sort of business alliances, trade related networks and strategic associations which Hollingsworth and Lindberg (1985) noted had not evolved as much in
26
the US as they had in continental Europe and Japan. In other words, Porter is suggesting that competitiveness can be improved by using all four institutional modes for governing transactions rather than just markets and hierarchy. This supports the need to expand the theory of the firm as suggested by Turnbull (1994a). However, the recommendations of Porter to have various stakeholder constituencies appoint representatives to a unitary board would be counter-productive for the reasons identified by Williamson (1985:300), Guthrie & Turnbull (1995) and Turnbull (1994e;1995e). Williamson (1985:308) states: 'Membership of the board, if it occurs at all, should be restricted to informational participation'. Such information
participation is achieved in Japan through a Keiretsu Council and in continental Europe through works council and supervisory boards. These provide the model for establishing 'stakeholder councils' as described by Guthrie & Turnbull (1995) and Turnbull (1994d; 1997c,e,f). Hill & Jones (1992) have built on the work of Jensen &Meckling (1976) to recognize both the implicit and explicit contractual relationships in a firm to develop 'Stakeholder–Agency Theory'. The interdependence between a firm and its strategic stakeholders is recognized by the American Law Institute (1992) which states: 'The modern corporation by its nature creates interdependences with a variety of groups with whom the corporation has a legitimate concern, such as employee, customers, suppliers, and members of the communities in which the corporation operates'.
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Both stakeholder voice and ownership, as suggested by Porter and Blair, could be provided by 're-inventing' the concept of a firm as proposed by Turnbull (1973, 1975a, 1991a, 1994d, 1997f). The proposal is based on tax incentives providing higher short term profits to investors in exchange for them gradually relinquishing their property rights in favour of strategic stakeholders. Control of the firm is likewise shared between investors and stakeholders through multiple boards to remove conflicts of interest and so agency costs in a manner similar to that found in continental Europe and especially in Mondragón. 2.2.4 The political model The political model recognizes that the allocation of corporate power, privileges and profits between owners, managers and other
stakeholders is determined by how governments favor their various constituencies. The ability of corporate stakeholders to influence allocations between themselves at the micro level is subject to the macro framework, which is interactively subjected to the influence of the corporate sector. According to Hawley & Williams (1996:29): 'the political model of corporate governance has had immense influence on corporate governance developments in the last five to seven years'. However, Hawley & Williams focus their discussion only on the micro aspects of how shareholders can influence firms. Firms have also been influential in molding the US political/legal/regulatory system over the last few centuries. According to Justice Felix Frankfurter of the US Supreme
28
Court, the history of US constitutional law is 'the history of the impact of the modern corporation upon the American scene', quoted in Miller (1968:1). Roe (1994) provides an elaboration of the historical evolution of the political model and like Black (1990) and others, argues that the finance model's nearly exclusive reliance on the market for corporate control, was primarily the result of the political traditions of federalism/decentralization dating back to the American Revolution. However, these traditions have been subject to substantial changes. After the Revolution, there was concern that newly won political freedoms could be lost through foreigners gaining control of corporations (Grossman & Adams 1993:6). As a result, the lives of all corporate charters were limited to 50 years or less up until after the Civil War. Nor did these charters provide limited liability for the owners. Most states adopted a ten year sunset clause for bank charters and sometimes they were as short as three years. 'Early state legislators wrote charter laws and actual charters to limit corporate authority, and to ensure that when a corporation caused harm, they could revoke the charter' (p. 1). However, 'During the late 19th century, corporations subverted state governments' (p:1) and according to Friedman (1973:456), corporations 'bought and sold governments'. In 1886 the US Supreme Court ruled that a private corporation was a natural person under the US constitution, sheltered by the Bill of Rights and the 14th Amendment. 'Led by New Jersey and Delaware,
29
legislators watered down or removed citizen authority clauses. They limited the liability of corporate owners and managers, then started handing out charters that literally lasted forever' (Grossman & Adams 1993:21). 'Political power began flowing to absentee owner?s intent upon dominating people and nature' (p.15). Grossman & Adams (1993:26) went on to say: 'No corporation should exist forever'. As a reaction to the corporate power extant at the end of the 19th century, a number of states introduced cumulative voting to allow minority interests to elect directors (Gordon 1993). Gordon describes how this initiative was subverted by competition between states to attract corporate registrations or what Nader (1976:44) describes as 'charter mongering'. Monks (1996) describes this as 'the race to the bottom' and explains how contemporary corporations are influencing the determination of accounting and legal doctrines and promoting a management friendly political/legal/regulatory environment. Monks (1996) states that 'The hegemony of the BRT (Business Round Table) is not a sustainable basis for corporate governance in America'. During the beginning of the 20th century, at the federal level, laws were introduced in the US to limit bank ownership of corporations and related party transactions between corporations. This forced both the pattern of ownership and control of US firms and the pattern of trading relationships to diverge from that found in continental Europe and Japan. Kester (1992) describes the latter patterns as 'contractual governance' as analyzed by Coase and Williamson while limiting the
30
term corporate governance to the problem of co-ordination and control as analyzed by Jensen &Meckling (1976) and Berle and Means (1932). Hawley & Williams (1996:29) focused on the micro level of the political model as articulated by Gundfest (1990) and Pound. Pound (1993b) defined the 'political model of governance' as an approach, '... in which active investors seek to change corporate policy by developing voting support from dispersed shareholders, rather than by simply purchasing voting power or control...'. Pound (1992:83) states: 'this new form of governance based on politics rather than finance will provide a means of oversight that is both far more effective and far less expensive than the takeovers of the 1980's'. Gundfest (1993) points out that 'an understanding of the political marketplace is essential to appreciate the role that capital-market mechanisms can... play in corporate governance'. For example, Gordon & Pound (1991) showed that corporations with fewer antitakeover provisions in their constitutions out performed those with antitakeover measures in place. While the political form of governance is new to many US scholars, the importance of 'political procedures' (Jensen &Meckling 1979:481) have been recognized in worker-governed firms by Berstein (1980), Turnbull (1978a:100), and many others, with stakeholder-controlled firms analyzed by Turnbull (1995d). While recognizing the cultural and contextual contingencies of the US
31
system, the current political model focuses on contemporary issues such as the US proclivity for market liquidity over institutional control (Coffee 1991). The political model is also concerned with the related issue of trading off investor voice to investment exit, and institutional agents monitoring corporate agent, i.e. Watching the Watchers (Monks &Minow 1996). All these issues are influenced by government laws and regulations and so subject of public policy debate for changes and reform. Black & Coffee (1993) states that:
According to a new 'political' theory of corporate governance, financial institutions in the U.S. are not naturally apathetic, but rather have been regulated into submission by legal rules that—sometimes intentionally, sometimes inadvertently—hobble American institutions and raise the costs of participation in corporate governance.
Bhide (1994) develops details of this position. Hawley & Williams (1996:32) state:
The political model of corporate governance (whether Pound's or Gundfest's version) places severe limits on the traditional economic analysis of the corporate governance problem, and locates the performance-governance issue squarely in a broader political context. Political does not mean necessarily imply a government role merely that it is non-market.
In other words, the analysis of economists needs to be truncated and integrated into the insights of Ben-Porath (1978) and Hollingsworth & Lindberg (1985) to understand how both economic transactions and their co-coordinating institutions are governed. An aspect also neglected by economists is that national income can be distributed without work or welfare by spreading corporate ownership directly to individuals rather than through institutional intermediaries (Kelso &
32
Adler 1958; Kelso &Hetter 1967, 1986; Turnbull 1975a, 1988, 1991b, 1994b).
2.2.5
Other Ways of Analyzing Corporate Governance There are other models of corporate governance to consider based on culture, power and cybernetics. A synthesis of all models may be required if we are to efficiently develop, construct, test and implement new approaches.
2.2.5.1Culture Hollingsworth, Schmitter&Streeck (1994:6) provide an example of a cultural perspective:
...transactions are conducted on the basis of mutual trust and confidence sustained by stable, preferential, particularistic, mutually obligated, and legally non–enforceable relationships. They may be kept together by value consensus or resource dependency—that is, through 'culture' and 'community' - or through dominant units imposing dependence on others.
This statement was made in the context of transactions being governed by networks at the 'meso level (e.g., the intermediate location between the micro level of the firm and the macro level of the whole economy)' rather than of the firm. However, it is also relevant within firms, and in this way it would subsume elements of the stewardship model. Porta, Lopez-de-Silanes, Shleifer, &Vishny, (1997) found that the type of dominant religion in a culture can affect trust and hence the ability of strangers in large organizations to co-operate. In particular, they found that trust in large organizations increases as the proportion of the
33
population
involved
in
hierarchical
religions,
like
Catholicism,
decreases. While Japan showed an above average degree of trust is was not as high as Nordic countries and China. Some scholars have speculated that the Japanese commitment to employee participation and the forming of strategic alliances between firms arises from their embedded belief in the inter-dependency of their many Gods. It might be interesting to research if Christian economists and managers, or other types of monotheists, have an embedded belief in hierarchies rather than alliances and networks. Williamson (1975:38) noted the short-comings of economic analysis in neglecting 'the exchange process itself as an object of value'. He identified the concept of 'atmosphere' to 'raise such systems issues: supplying a satisfying exchange relation is made part of the economic problem, broadly construed'. However, this insight is not mentioned or used in Williamson (1985) or in many of his later writings. The need to consider the cultural context or 'atmosphere' of transactions within and between firms has been analyzed by Maruyama (1991). Mondragón illustrates the importance of culture as it provides 'an environment where there is no perceived threat of opportunism, even from opportunists!', to use the words of Ghoshal and Moran (1996:26) in another context. 'Mondragón makes it clear that market or planning decisions are value decisions' (Morrison 1991:98). This is seen as an advantage by economists Bradley & Gelb (1983:30) from the World Bank. They favorably compare Mondragón
34
with the 'enriched employment relationship extending far beyond the cash nexus' of Japanese firms and X-inefficiency (Leibenstein, 1987) found with 'Western' practices. The importance of culture is evident from the view in Mondragón that social adaptability is the most critical condition in converting a firm owned by an entrepreneur to a co-operative (Whyte & Whyte (1988:86). 'Mondragón is unlikely to undertake a conversion if the prospects of re-socializing managers and workers appear poor.' In this regard, the Catholic influence in Mondragón is at odds with the findings of Portaet. al. (1997). Morrison (1991:111) quotes the founder of Mondragón, Father Arizmendi as saying: 'A company cannot and must not lose any of its efficiency just because human values are considered more important than purely economic or material resources within the company; on the contrary such a consideration should help efficiency and quality'. Contrary to the concerns of Ghoshal& Moran, Williamson (1979:104) accepted that trust can transcend opportunism when he stated: Additional transactions-specific savings can accrue at the interface between supplier and buyer as contracts are successively adapted to unfolding events, and as periodic contract-renewal agreements are reached. Familiarity here permits communication economies to be realized: specialized language develops as experience accumulates and nuances are signaled and received in a sensitive way. Both institutional and personal trust relations evolve.
35
The reference to 'communication economies' will be taken up below. However, there is obviously need to integrate culture into the research calculus of firm structure and performance as undertaken by Berger (1976) in evaluating economic development.
2.2.5.2Power Perspective of Corporate Governance, From this perspective, it is the ability of individuals or groups to take action which is the over-riding concern. The related viewpoint of 'resource dependency' was developed by Pfeffer (1972); Pfeffer& Leong (1977) and Pfeffer&Salancik (1978). However, the explicit use of power seems to be neglected topic. Even when shareholders, directors, management or any other stakeholder have the knowledge and will to act, this is of no avail unless they also possess the power to act. The power of shareholders to act is part of the political model of corporate governance. Hawley & Williams (1996:57-60) identify various inhibitions on the power of shareholders to act arising from security laws, agenda setting by management at general meetings, proxy procedures, voting arrangements and the corporate by-laws. The power of directors to control management is dependent upon there being a sufficient number of directors who also have the knowledge and will to act to form a board majority. Even if independent directors have the knowledge to act, they may not have the will and power to act because they are loyal or obligated to
36
management and/or hold their board position at the grace and favor of management. Directors are unlikely to act against management unless they are supported by shareholders. However, many institutional shareholders lack the will to act. This was found to be a major problem for US firms in a report into their competitiveness by Regan (1993). Hawley & Williams (1996:65) noted that management controlled 'the information that does reach the board. The result can be a board knowing too little, too late and, even if it is willing to act to confront a growing problem or crisis, it is often unable to do so'. An appropriate separation of powers to create checks and balances provides a way to increase the welfare of stakeholders according to Persson, Roland &Tabillini (1996). Persson, Roland &Tabillini make the point that negative welfare may result if the division of power is not 'appropriate'. An analysis of appropriate division of powers has been made by Bernstein (1980) and Turnbull (1978a:100;1993b; 1997c). Calls by reformers for greater disclosure and transparency as a way to control firms are made on the assumption that there are shareholders who possess both the will and power to act. The validity of this implicit assumption is largely ignored. While disclosure is a necessary condition for regulation, self-regulation and self-governance, it is not sufficient unless there also exists both the power and will to act. All suggestions for reform of corporate governance processes need to consider the power of agents to act, or be subject to a veto, when there is a compound board. Pound (1993a) makes the points: 'always
37
have an opposition view' and 'there must be an opposition party and the prospect of insurgency'. However, Pound does not consider the principle of a division of power in his political model of corporate governance, even though he participated as co-chair of the shareholders' committee established at USX for this purpose (Pound 1992). While the power model of the firm may be but a part of the political model, it should never be neglected because without the power to take corrective action, no action can take place. For any action to be appropriate, the actors also need information which is accurate, timely, sufficient and yet manageable. While Pound (1993a) talks about 'feedback' it is from institutional investors who do not, cannot, and should not, have firm specific inside expert information. This leads us to consider the cybernetic approach to corporate governance. 2.2.5.3Cybernetic Analysis Cybernetic analysis in social institutions is concerned with their information and control architecture. As control is dependent upon power, a cybernetic investigation is dependent upon an analysis of power. Cybernetics is based on the mathematics of information theory where the basic unit of analysis is described as a 'bit'. A bit can be thought of as a letter in a language with eight bits creating what can be considered to be word, described as 'byte'. The ability of computers to store, process or transmit information is measured in thousands or
38
millions of bytes described respectively as kilobytes and megabytes. Like computers, humans have physical limitations on their ability to receive, store, process and transmit information. Williamson (1979:99) recognized that 'the efficient processing of information is an important and related concept' to transaction costs and stated in note 4, 'but for the limited ability of human agents to receive, store, retrieve, and process data, interesting economic problems vanish'. Wearing (1973) observed that an individual has 'limited information processing capacity so prefers slow rates of change, i.e. nearly stable systems,' and 'reduces, condenses, summarizes (and thus necessarily loses) information, in addition, an "imperfect" communications network in the environment also restricts and attenuates the flow of information'. Another reason for economizing information is to reduce the problem of 'bounded rationality' which refers to human behavior that is 'intendedly rational but only limitedly so' (Simon, 1961:xxiv). According to Williamson (1975:21), 'Bounded rationality involves neuro-
physiological limits on the one hand and language limits on the others'. Williamson (1975:45-6) notes that 'a change in organizational structure may be indicated' when individuals are exposed to information overload. To undertake tasks which exceed the capacity of one computer, two or more computers can be connected together in the same way humans solve more demanding tasks by working in teams, groups, alliances and networks. Cybernetics considerations cannot be ignored
39
in understanding or designing teams, divisions, the need for one or more boards and their structure, or the architecture of external alliances with stakeholders. The cybernetic perspective provides a basis for evaluating the integrity of corporate governance information and control systems from a number of aspects. Evaluating the integrity of information channels was investigated by Shannon, a founder of information theory. Shannon (1949) showed that reliable information can be obtained from unreliable channels if they are used in parallel. In other words, boards need to obtain information from strategic stakeholders as well as from management to avoid bias, distortion or errors as discussed by Turnbull (1993a; 1997c,e,f). The errors and distortions in management hierarchies have been reported by Downs (1967:116-118), Williamson (1975:122), and Demb&Neubauer (1992b). Another important insight of cybernetics is the 'law of requisite variety' which states that to counter any variable the organization must have matching responses. In other words, complexity can only be managed through complexity (Ashby 1968:202). Complex organizations, and/or those operating in a complex dynamic environment require complex control systems. This might be reflected in a compound board and/or a network of firms (Craven, Piercy & Shipp, 1996) and/or by involving strategic stakeholders in the control of a firm. The cybernetic concept of 'feedback' is a condition precedent for self-regulation or self-governance. If a firm is not to affect adversely its
40
stakeholders through its 'actions or inactions' it will require governance processes which allow its stakeholders to participate in establishing performance standards. Such arrangements are commonly
established in quality assurance programs. However, for stakeholders to have the will to act, they need a power base independent of management to protect them from being treated as whistle blowers. Independently elected Stakeholder Councils would represent the 'opposition party' sought by Pound. As strategic stakeholders would possess inside, expert information, they provide a way to inform management and their monitors, of any operational shortcomings as sought by Pound. The design of such arrangements would require the use of both the power and cybernetic perspective of corporate governance.
2.3 Mechanisms of Corporate Governance 2.3.1Internal corporate governance controls Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals, which include:
?
Monitoring by the board of directors : The board of directors, with its legal authority to hire, fire and compensate top
management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be
41
more independent, they may not always result in more effective corporate governance and may not increase performance.[7] Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.
?
Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting
?
Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose
42
company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.
?
Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.
2.3.2 External corporate governance controls External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include:
? ? ?
competition debt covenants demand for and assessment of performance information (especially financial statements)
? ? ? ?
government regulations managerial labor market media pressure takeovers
43
2.4 Corporate Governance Structure 2.4.1Board Composition Board composition has been claimed as a key factor in allowing the board to act as a guardian of the principal?s interests. Inside directors have access to information that is relevant to assessing managerial competence and the strategic desirability of initiatives. In that sense, they are better able to discriminate legitimate or illegitimate causes of organizational misfortune. However, insider directors usually do not make exhaustive evaluation of the strategic decision processes since they are influenced by the CEO. Outside directors are not members of the top management team, their associates, or families; are not employees of the firm or its subsidiaries; and are not members of the immediate top management group. They normally serve as directors on several boards. Between managing their own businesses and serving on multiple boards, outside directors lack firm-specific knowledge and may not be able to understand each business and the complexities of the firm well enough to be truly effective. However it is less likely that t they are controlled by the CEO. Accordingly, outside directors could make exhaustive and profound evaluation of the strategic decision processes and the actions of managers. From the standpoint of agency theory, the interests of insiders are theorized to be aligned with those of the management, while the interests of outsiders are aligned
44
with the principals? interests. 2.4.2Board Leadership CEO duality refers to board structure where one person occupies two positions – a CEO position and a chairperson position of the board of directors. Non-duality implies that the different individuals serve as the CEO and chairperson. Proponents of CEO duality argue that it should lead to superior organizational performance as it permits clear-cut leadership. However, there is a downside to it: CEO duality firmly entrenches a CEO at the top of an organization, challenging a board?s ability to effectively monitor and discipline top management. CEO duality reduces the board?s ability to fulfill its proper governance function as an independent body. It signals the absence of separation of decision management and decision control... the organization suffers in the competition for survival. 2.4.4Board Size Board size has a number of implications. On the one hand, a smaller board is manageable from the CEO?s point of view. A smaller board size is viewed as an indicator of the CEO?s profound influence on proceedings in board meetings. On the other hand a larger board, although potentially unmanageable, may be valuable for the breadth of its services pool of expertise and resources for the organization. From an organizational dynamic perspective, however, a larger board is more likely to develop factions and coalitions that can increase group conflicts. The first step in structuring an effective board is to
45
shrink it, probably because a large board is more difficult to coordinate. A larger board is less likely to become involved effectively in the strategic decision-making process. A smaller board seems to be more effective than a larger board in the sense that it allows the board to support the strategic decisions of managers without frequent interruptions and to take decisive governance actions in a
coordinated fashion. However from an agency theory perspective, previous research has argued that CEOs may easily exert their influence on small boards but find it difficult to influence large ones. In firms with large boards, CEOs would experience greater difficulty to influencing all board members to agree and make decisions, including a decision to implement golden parachutes, than they would in firms with small boards.
2.4.5Executive Compensation Relating to compensation schemes, agency theory suggests that firms can choose between behavior-based and out-come based pay, depending on the difficulties in monitoring job performance. On the one hand, firms operating in context where appropriate managerial behaviors are well understood tend to rely on the behavior-based compensation plans. Under the behavior-based compensation the scheme, the optimal contract pays the agent a fixed wage for taking well-defined actions and penalizes him or her for taking sub-optimal actions are relatively contractible, and, as a result, managerial risk
46
associated with the behavioral-based compensation plans is relatively low. On the other hand, firms operating in a context where appropriate managerial behaviors are not well understood rely on the outcomebased compensation plans that are designed to reward managers for their performance instead of their actions. That is the optimal contract gives the agent a share in the outcome. In addition because the performance, such as stock price, is affected by external factors beyond the agent?s influence, tying compensation to the
performance will increase the agent?s exposure to risk. Since the outcome-based compensation plans create another risk for
managers, higher amount of compensation would be paid to managers; otherwise managers will make overly conservative
decisions. Therefore it is suggested that the outcome-based plans tend to be balanced with greater amounts of compensation.
2.4.6Board Composition and Leadership Boards of directors of large publicly owned corporations vary in size from industry to industry and from corporation to corporation. In determining board size, directors should consider the nature, size, and complexity of the corporation as well as its stage of development. Smaller boards are often more cohesive and work more effectively than larger boards. It is believed that having directors with relevant
47
business and industry experience is beneficial to the board as a whole. Directors with such backgrounds can provide a useful perspective on significant risks and competitive advantages and an understanding of the challenges facing the business. Because the corporation's need for particular backgrounds and experiences may change over time, the board should monitor the mix of skills and experience that directors bring to the board to assess, at each stage in the life of the corporation, whether the board has the necessary tools to perform its oversight function effectively. The board of a publicly owned corporation should have a substantial degree of independence from management. Board independence depends not only on directors' individual relationships – personal, employment or business – but also on the board's overall attitude toward management. Providing objective independent judgment is at the core of the board's oversight function, and the board's composition should reflect these principles; Board independence: A substantial majority of directors of the board of a publicly owned corporation should be independent of
management, both in fact and appearance, as determined by the board. Assessing independence: An independent director should be free of any relationship with the corporation or its management that may impair, or appear to impair, the director's ability to make independent
48
judgments. The listing standards of the major securities markets relating to audit committees provide useful guidance in determining whether a particular director is "independent." These standards focus primarily on familial, employment and business relationships. However, boards of directors should also consider whether other kinds of relationships, such as close personal relationships between potential board members and senior management, may affect a director's actual or perceived independence. Relationships with not-for-profit organizations: Some observers have questioned the independence of directors who have relationships with non-affiliated not-for-profit organizations that receive support from corporations. The Business Roundtable believes that such relationships and their effect on a director's independence should be assessed by the board or its corporate governance committee on a case-by-case basis, taking into account the size of the corporation's contributions to the not-for-profit organization and the nature of the director's relationship to the organization. Independence issues are most likely to arise where a director is an employee of the not-for-profit organization and where a substantial portion of the organization's funding comes from the corporation. By contrast, where a director merely serves on the board of a not-for-profit organization with broad community representation, there may be no meaningful independence issues. Corporations are well served by a structure in which the CEO also serves as chairman of the board. The CEO serves as a bridge between
49
management and the board, ensuring that both act with a common purpose. Some corporations have found it useful to separate the roles of CEO and chairman of the board to provide continuity of leadership in times of transition. Each corporation should make its own determination of what leadership structure works best, given its present and anticipated circumstances. The board should have contingency plans to provide for transitional board leadership if questions arise concerning management's conduct, competence, or integrity or if the CEO dies or is incapacitated. An individual director, a small group of directors, or the chairman of a committee may be selected by the board for this purpose.
2.5
The Potential Role of Stakeholders in Corporate Governance When a corporation is in a serious financial distress, residual claimants include not only shareholders, but also other stakeholders. Thus creditor banks and employees are likely to have particularly strong incentives to monitor firms. Given Asian enterprises? vulnerability to abuses by controlling families, their heavy dependence on banks, and the increasing importance of "knowledge workers," the scope for other stakeholders to play a corporate governance role could be considerable. The actual or potential roles of stakeholders are likely to depend on firms? characteristics in relation to their dependency on bank loans, level and type of technology, and extent of human
50
capital. The survey attempts to evaluate the degree to which firms pay attention to the interests and potential roles of various shareholders. Corporate directors in the countries surveyed seem to view the roles of broader stakeholders rather positively. Banks have certainly
strengthened their monitoring of their corporate clients since the Asian crisis, and companies are interested in having a close, long-term relationship with their creditor banks, particularly in Indonesia and Thailand. The survey results also show a relatively high prevalence of joint labor-management committees (JLMCs) in Indonesia and Korea, although they seem to play only a limited role as a potential governance mechanism. Nevertheless, employees are likely to play a substantial corporate governance role in the future given their fairly high level of education and relatively long tenure along with the prevalence of various complementary mechanisms whereby
employees could play an enhanced role, including shop-floor and financial participation. Corporate directors seem to believe in the rising importance of human capital for corporate success without being overly concerned about the downside of employees having a stronger voice or participating more actively. 2.5.1Role of Stakeholders in General
51
Some
people
view
corporate
governance
as
dealing
with
mechanisms whereby the stakeholders of a corporation exercise control over corporate insiders and management in such a way that the stakeholders? interests are protected (Berglöf and von Thadden 1999; John and Senbet 1998). The single-minded pursuit of
shareholders? interests with little regard paid to other stakeholders might be both unfair and inefficient.56 In reality, most managers, even in Anglo- American enterprises, seem to believe that the relationship between stakeholders and the firm is one of the key elements of corporate success, if not the most critical factor. The role of various stakeholders may be even greater in many Asian enterprises, where a key challenge is to prevent the abuse of power by controlling owners. Stakeholders primarily include investors, managers and employees, customers, suppliers and other business partners, and local
communities. Regulatory and supervisory agencies, civil activists, and the media may play an important role in enhancing corporate governance. Securities regulatory bodies and fair trade commissions are directly involved in setting and enforcing the rules on the conduct of business by corporations for the purpose of protecting investors. Media attention can motivate politicians, bureaucrats, controlling families, and managers, who are concerned about damage to their reputations, to adopt more effective corporate governance laws, policies, and practices (Dyke and Zingales 2002a, 2002b).
52
2.6
Board of Directors and Corporate Governance The Board of Directors should comprise of a broad range of expertise. Each individual Director should and have experience necessary to knowledge, effectively
qualifications,
expertise
integrity
discharge the duties of the Board of Directors. It is believed in Corporate Governance that experienced Directors with diverse company background are essential for the provision of successful and strategic direction for the Company. The composition, competencies and mix-skills are adequate for its oversight duties and the development of the corporate vision and strategy. The Board of Directors through its Corporate Governance Committee establishes which members are independent and it also recommends the appropriate size of the board. Directors act in good faith with due care and in the best interests of the Company and all its shareholders – and not in the interests of any particular shareholder – on the basis of relevant information. Each Director is expected to attend all Board of Directors meetings and applicable committee meetings. A company can not prohibit its Directors from serving on other Board of Directors. Directors are expected to ensure that other commitments do not interfere in the discharge of their duties. Directors can not divulge or use confidential or insider information about the company.
53
It?s the Boards duty to discharge its duties, adopt best practices and principles, some of which include: ? The Chairman should be a non-executive Director. ? To maintain balance of interest and ensure transparency and impartiality, a number of Directors are independent. The independent Directors are those who have no material relationship with the Company beyond their Directorship. ? Directors abstain from action that may lead to conflict of interest and are to ensure they shall comply with the Company?s policy on Related Party Transaction. The remuneration of non-executive Directors is competitive and is comprised of an annual fee and a meeting attendance allowance. The remuneration package shall, however, not jeopardize Directors independence. Executive Directors are not paid fees beyond their executive remuneration package. The Board of Directors shall through its remuneration committee, periodically review the remuneration paid to Directors. The Board undertakes, annually, a formal and rigorous evaluation of its performance and that of its committees and individual Directors. This serves to continuously stimulate a high level of performance, identify the strengths and the weakness of the individual Directors and articulate ways to bridge identified gaps thereby leading to further strengthening of the Board. The result of the evaluation is presented to the whole Board for consideration and adoption.
54
Given the accelerated nature of change, innovation and progress in Corporate Governance it is essential to know the principles that guide Board of Directors. These principles should help to guide the continual advancement of corporate governance practices. These guiding principles include; First, the paramount duty of the board of directors of a public corporation is to select a Chief Executive Officer and to oversee the CEO and other senior management in the competent and ethical operation of the corporation on a day-to- day basis. Second, it is the responsibility of management to operate the corporation in an effective and ethical manner in order to produce value for stockholders. Senior management is expected to know how the corporation earns its income and what risks the corporation is undertaking in the course of carrying out its business. Management should never put personal interests ahead of or in conflict with the interests of the corporation. Third, it is the responsibility of management, under the oversight of the board and its audit committee, to produce financial statements that fairly present the financial condition and results of operations of the corporation, and to make the timely disclosures investors need to permit them to assess the financial and business soundness and risks of the corporation. Fourth, it is the responsibility of the board and its audit committee to engage an independent accounting firm to audit the financial
55
statements prepared by management and to issue an opinion on those statements based on Generally Accepted Accounting
Principles. The board, its audit committee and management must be vigilant to ensure that no actions are taken by the corporation or its employees that compromise the independence of the outside auditor. Fifth, it is the responsibility of the independent accounting firm to ensure that it is in fact independent, is without conflicts of interest, employs highly competent staff, and carries out its work in accordance with Generally Accepted Auditing Standards. It is also the responsibility of the independent accounting firm to inform the board, through the audit committee, of any concerns the auditor may have about the appropriateness or quality of significant accounting treatments, business transactions that affect the fair presentation of the corporation's financial condition and results of operations, and weaknesses in internal control systems. The auditor should do so in a forthright manner and on a timely basis, whether or not management has also communicated to the board or the audit committee on these matters. Sixth, the corporation has a responsibility to deal with its employees in a fair and equitable manner. These responsibilities, and others, are critical to the functioning of the modern public corporation and the integrity of the public markets. No law or regulation alone can be a substitute for the voluntary
56
adherence
to
these
principles
by
corporate
directors
and
management. The board's oversight function carries with it a number of specific responsibilities in addition to that of selecting the CEO. These include responsibility for: Planning for management succession.The board should plan for CEO and senior management succession and, when
appropriate, replace the CEO or other members of senior management. Understanding, reviewing and monitoringimplementation of
the corporation's strategic plans. The board has responsibility for overseeing and understanding the corporation's strategic plans from their inception through their development and execution by management. Once the board reviews a strategic plan, the board should regularly monitor implementation of the plan to determine whether it is being implemented effectively and whether changes are needed. Understanding budgets. and reviewing annual operatingplans and
The board has responsibility for overseeing and
understanding the corporation's annual operating plans and for reviewing the annual budgets presented by management. The board should monitor implementation of the annual plans to assess whether they are being implemented effectively and within the
57
limits of approved budgets. Focusing on the integrity and clarity of the Corporation's financial statements and financial reporting. While financial reports are primarily theresponsibility of management, the board and itsaudit committee should take reasonable steps to
becomfortable that the corporation's financial statements and other disclosures accurately presentthe corporation's financial condition and results ofoperations to stockholders, and that they do so in anunderstandable manner. In order to do this,
theboard, through its audit committee, should have abroad understanding of the corporation's financialstatements, including why the accounting principlescritical to the corporation's business were chosen,what key judgments and estimates were made bymanagement, and how the choice of principles, andthe making of such judgments and estimates,impacts the reported financial results of thecorporation. Engaging outside auditors and The board, through its
consideringindependence issues.
auditcommittee, bears responsibility for engaging anoutside auditor to audit the corporation's financialstatements and for ongoing communications withthe outside auditor. through its auditcommittee, should The board, consider
periodically
theindependence and continued tenure of the auditor. Advising management
58
on
significant
issues
facingthe
corporation.
Directors can offer management a wealth of They provide
experience and a wide range of perspectives.
advice and counsel to management in formal board and committee meetings and are available for informal consultation with the CEO and senior management. Reviewing and approving significant corporateactions. As
required by state corporate law, theboard reviews and approves specific corporateactions, such as the election of executive officers,declaration of dividends and appropriate majortransactions. The board and senior management should have a clear understanding of what level or types of decisions require specific board approval. Nominating directors and committee members andoverseeing effective corporate governance. It is theresponsibility of the board and its corporategovernance committee to nominate directors andcommittee members and to oversee
thecomposition, structure, practices and evaluation ofthe board and its committees.
The CEO and Management It is the responsibility of the CEO, and of senior management under the CEO's direction, to operate the corporation in an effective and ethical manner.
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o The governance model followed by most public corporations in the United States has historically been one of individual, rather than group, leadership. U.S. corporations have traditionally
vested responsibility in the CEO as the leader of management rather than diffusing high-level responsibility among several individuals. o The CEO should be aware of the major risks and issues that the corporation faces and is responsible for supervising the corporation's financial reporting processes. For example, the
CEO is responsible for providing stockholders and others with information that the CEO believes is important to understanding the corporation's business. Of course, the CEO necessarily relies on the expert advice of others on technical questions and legal requirements. As part of its operational responsibility, senior management is charged with: Operating the corporation. The CEO and senior management run the corporation's day-to-day business operations. With a thorough understanding of how the corporation operates and earns its income, they carry out the corporation's strategic objectives within the annual operating plans and budgets reviewed by the board. Strategic planning. The CEO and senior management generally
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take the lead in strategic planning. They identify and develop strategic plans for the corporation; present those plans to the board; implement the plans once board review is completed; and recommend and carry out changes to the plans as necessary. Annual operating plans and budgets. With the corporation's
overall strategic plans in mind, senior management develops annual operating plans and annual budgets for the corporation, and the CEO presents those plans and budgets to the board. Once board review is completed, the management team implements the annual operating plans and budgets. Selecting qualified management and establishing effective
organizational structure. Management is responsible for selecting qualified management and for implementing an organizational structure that is efficient and appropriate for the corporation's particular circumstances. Identifying and managing risks.Senior Management identifies and manages the risks that the corporation undertakes in the course of carrying out its business. It also manages the corporation’s overall risk profile. Good financial reporting. Senior management is responsible for the integrity of the corporation's financial reporting system. It is senior management's responsibility to put in place and supervise the operation of systems that allow the corporation to produce financial statements that fairly present the corporation's financial
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condition and thus permit investors to understand the business and financial soundness and risks of the corporation.
2.7
Board Organization (Responsibilities) In general, there are six (6) core areas of board responsibility; failure in any of these activities will have fundamental implications for the performance of the organization. a. Strategic Planning/Implementation b. Risk Management c. Management Evaluation and Succession Planning d. Internal Controls e. Communications corporate policies) f. Organizational Success Virtually all boards of directors of large, publicly owned corporations operate using committees to assist them. A committee structure (formulating and communicating
permits the board to address key areas in more depth than may be possible in a full board meeting. Decisions about committee membership should be made by the full board, based on recommendations from a committee responsible for corporate governance issues. The board should designate the chairmen of the various committees, if this is not done by the committees themselves.
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Committees should appraise the full board of their activities on a regular basis. Processes should be developed and monitored for keeping the board informed through oral or written reports. The functions generally performed by the audit, compensation and corporate governance committees are central to effective corporate governance. A particular committee structure is essential for all corporations. What is important is that key issues be addressed effectively by the independent members of the board. Thus, the references below to the functions performed by particular committees are not intended to preclude corporations from allocating these
functions differently. Other committees, such as executive or finance committees, also may be used. Some corporations find it useful to establish additional
committees to examine special problems or opportunities in greater depth than would otherwise be feasible. The responsibilities of each committee should be clearly defined and understood. A written charter approved by the board, or a board resolution establishing the committee, is appropriate. All the committees have terms of reference which guides them in the execution of their duties. Each committee reports to the Board of Directors. Each committee provides draft recommendations to the Board on matters that fall within the Boards ambit. Every publicly owned corporation should have an audit committee comprised solely of independent directors.
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2.7.1 Audit Committee Audit Committees typically consist of 3 to 5 members. The listing standards of the major securities markets require audit committees and require that an audit committee have at least 3 members and that all members of the audit committee qualify as independent. Audit committee members should meet minimum financial literacy standards, and at least one of the committee members should have accounting or financial management expertise, as required by the listing standards of the major securities markets. However, more important than financial expertise is the ability of audit committee members, as with all directors, to understand the corporation's business and risk profile, and to apply their business experience and judgment to the issues for which the committee is responsible with an independent and critical eye. The audit committee is responsible for oversight of the corporation's financial reporting process. The primary functions of the audit committee are the following: Risk profile: The audit committee should understand the
corporation's risk profile and oversee the corporation's risk assessment and management practices. Outside Auditors: The audit committee is responsible for
supervising the corporation's relationship with its outside auditor, including recommending to the full board the firm to be engaged
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as the outside auditor,
evaluating the auditor's performance,
and considering whether it would be appropriate for the outside auditor periodically to rotate senior audit personnel or for the corporation periodically to change its outside auditor. The selection of an outside auditor should involve an annual due diligence process in which the audit committee reviews the qualifications, work product, independence and reputation of the proposed outside auditor. The audit committee should base its decisions about selecting and possibly changing the outside auditor on its assessment of what is likely to lead to more effective audits. Based on its due diligence, the audit committee should make an annual recommendation to the full board about the selection of the outside auditor. Independence: The audit committee should consider the
independence of the outside auditor and should develop policies concerning the provision of non-audit services by the outside auditor. The provision of some types of audit-related and consulting services by the outside auditor may not be inconsistent with independence. Critical accounting judgments and estimates: The audit
committee should review and discuss with management and the outside auditor the corporation's critical accounting policies and the quality of accounting judgments and estimates made by management.
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Internal controls: The audit committee should understand and be familiar with the corporation's system of internal controls and on a periodic basis should review with both internal and outside auditors the adequacy of this system. Compliance: Unless the full board or another committee does so, the audit committee should review the corporation's procedures addressing compliance with the law and important corporate policies, including the corporation?s code of ethics or code of conduct. Financial statements: The audit committee should review and discuss the corporation's annual financial statements with
management and the outside auditor and, based on these discussions, recommend that the board approve the financial statements for publication and filing. Most audit committees also find it advisable to implement processes for the committee or its designee to review the corporation's quarterly financial
statements prior to release. Internal audit function: The audit committee oversees the corporation's internal audit function, including review of reports submitted by the internal audit staff, and reviews the appointment and replacement of the senior internal auditing executive. Communication: The audit committee should provide a channel of communication to the board for the outside auditor and
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internal auditors and may also meet with and receive reports from finance officers, compliance officers and the general counsel. Hiring auditor personnel: Under audit committee supervision, some corporations have implemented "revolving door" policies covering the hiring of auditor personnel. For example, these policies may impose "cooling off" periods prohibiting employment by the corporation in senior financial management positions of members of the audit engagement team for some period of time after their work as auditors for the corporation. The audit committee should consider whether to adopt such a policy. Any policy on the hiring of auditor personnel should be flexible enough to allow exceptions, but only when specifically approved by the audit committee. Audit committee meetings should be held frequently enough to allow the committee to appropriately monitor the annual and quarterly financial reports. For many corporations, this means four or more meetings a year. Meetings should be scheduled with enough time to permit and encourage active discussions with management and the internal and outside auditors. The audit committee should meet with the internal and outside auditors, without management present, at every meeting and communicate with them between meetings as necessary. Some audit committees may decide that specific functions, such as quarterly review meetings with the outside auditor or
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management, can be delegated to the audit committee chairman or other members of the audit committee. 2.7.2 Corporate Governance Committee Every publicly owned corporation should have a committee that addresses corporate governance issues. A corporate governance committee (often combined with, or referred to as, a nominating committee) is central to the effective functioning of the board. Traditionally, the corporate governance/nominating committee's role were to recommend director nominees to the full board and the corporation's stockholders. Over time, the committee's role has expanded so that, today, it typically provides a leadership role in shaping the corporate governance of a corporation. ? A corporate governance committee should be comprised solely of independent directors. While the CEO typically works closely with the corporate governance committee, a committee made up exclusively of independent directors reinforces the idea that the governance processes of the corporation are under the control of the board, as representatives of the stockholders. ? A corporate governance committee performs the core function of recommending nominees to the board. The committee also recommends directors for appointment to committees of the board. These responsibilities include establishing criteria for board and committee membership, considering rotation of committee
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members, reviewing candidates' qualifications and any potential conflicts with the corporation's interests, assessing the
contributions of current directors in connection with their renomination, and making recommendations to the full board. The committee also should develop a process for considering stockholder suggestions for board nominees. While it is
appropriate for the CEO to meet with potential director nominees, the final responsibility for selecting director nominees rests with the board. ? A corporate governance committee should monitor and safeguard the independence of the board. The important function of corporate governance committee, related to its core function of recommending nominees to the board, is to ensure that a substantial majority of the directors on the board are, in both fact and appearance, independent of management. ? A corporate governance committee should oversee and review the corporation's processes for providing information to the board. A corporate governance committee should assess the reporting channels through which the board receives
information, and the quality and timeliness of information received, so that the board obtains appropriately detailed information in a timely fashion. ? A corporate governance committee should develop and recommend to the board a set of corporate governance
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principles applicable to the corporation. These principles should be communicated to the corporation's stockholders and should be readily available to prospective investors and other interested persons. ? A committee comprised of independent directors should oversee the evaluation of the board and management. Specifics concerning the evaluation process are discussed below under "Board and Management Evaluation." 2.7.3 Compensation Committee Every publicly owned corporation should have a committee comprised solely of independent directors that addresses has two
compensation
issues:
Compensation
committee
interrelated responsibilities; overseeing the corporation's overall compensation programs, and setting CEO and senior
management compensation. Overall compensation structure: In addition to reviewing and setting compensation for management, a compensation
committee should look more broadly at the overall compensation structure of the enterprise to determine that it establishes appropriate incentives for management and employees at all levels. In doing so, the committee should understand that incentives are industry-dependent and are different for different categories of people. All incentives should further the
corporation's long-term strategic plan and should be consistent
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with the culture of the corporation and the overall goal of enhancing enduring stockholder value. A diverse mix of compensation for the board and management can foster the right incentives and prevent a short-term focus or a narrow emphasis on particular aspects of the corporation's business. ? Trend toward equity compensation for directors and management: In recent years, many corporations have increasingly moved toward compensating directors and management with stock options and other equity compensation geared to the corporation's stock price. While this trend may align director and management interests with stockholder value, equity compensation should be carefully designed to avoid unintended incentives such as an undue emphasis on short-term market value changes. ? Management Compensation:Management compensation practices will necessarily differ for different corporations. Generally, however, an appropriate compensation package for management includes a carefully determined mix of long- and shortterm incentives. Management compensation packages should be designed to create a commensurate level of
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risk and opportunity based on business and individual performance. The structure of management compensation should directly link the interests of management, both individually and as a team, to the long-term interests of stockholders. ? Management benefits: A compensation committee should consider whether the benefits provided to senior management, including post-employment benefits, are proportional management. to the contributions made by
2.7.4 Board Operations Serving on a board requires significant time and attention on the part of directors. Directors must participate in board meetings, review relevant materials, serve on board committees, and prepare for meetings and for discussions with management. They must spend the time needed and meet as frequently as necessary to properly discharge their responsibilities. The appropriate number of hours to be spent by a director on his or her duties and the frequency and length of board meetings depend largely on the complexity of the corporation and its operations. Longer meetings may permit directors to explore key issues in depth, whereas shorter but more frequent meetings may help directors stay up-to-date on emerging corporate trends
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and
business
and
regulatory
developments. When arranging a meeting schedule for the board, each corporation should consider the nature and complexity of its operations and transactions, as well as its business and regulatory environment. Directors should be focused on long-term stockholder value. Including equity as part of directors' compensation helps align the interests of directors with those of the corporation's stockholders. Accordingly, a meaningful portion of a director's compensation should be in the form of long-term equity. Corporations may wish to consider establishing a requirement that, for as long as directors remain on the board; they acquire and hold stock in an amount that is meaningful and appropriate to each director. Service on too many boards can interfere with an individual's ability to perform his or her responsibilities. Before accepting an additional board position, a director should consider whether the acceptance of a new directorship will compromise the ability to perform present responsibilities. It also is good practice for directors to notify each board on which they serve before accepting a seat on the board of another business corporation, in order to avoid potential conflicts. Similarly, the corporation should establish a process to review senior management service on other boards prior to acceptance. Independent directors should have the opportunity to meet outside the presence of the CEO and any other management directors.
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Many board responsibilities may be delegated to committees to permit directors to address key areas in more depth. Regardless of whether the board grants plenary power to its committees with respect to particular issues or prefers to take recommendations from its committees, committees should keep the full board informed of their activities. Corporations benefit greatly from the collective wisdom of the entire board acting as a deliberative body, and the interaction between committees and the full board should reflect this principle. ? Management presentations should be scheduled to allow for question-and-answer sessions and open discussion of key policies and practices. Board members should have full access to senior management. Generally, the CEO should be advised of significant contacts between board members and senior management. ? The board must have accurate, complete information to do its job; the quality of information received by the board directly affects its ability to perform its oversight function effectively. Directors should be provided with, and review, information from a variety of sources, including management, board committees, outside experts, auditor presentations, and
analyst and media reports. The board should be provided with information before board and committee meetings with
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sufficient time to review and reflect on key issues and to request supplemental information as necessary. ? Many corporations provide new directors with materials and briefings to permit them to become familiar with the corporation's business, industry and corporate governance practices. The Business Roundtable believes that it is
appropriate for corporations to provide additional educational opportunities to directors on an ongoing basis to enable them to better perform their duties and to recognize and deal appropriately with issues that arise. ? From time to time, it may be appropriate for boards and board committees to seek advice from outside advisors independent of management with respect to matters within their
responsibility. For example, there may be technical aspects of the corporation's business – such as risk assessment and risk management – or conflict of interest situations for which the board or a committee determines that additional expert advice would be useful. Similarly, a compensation committee may find it useful to engage separate compensation
consultants. Access to outside advisors in such cases is an important element of an effective corporate governance system.
2.8
Corporate Governance Systems in Different Countries
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Corporate Governance covers the way of organizing ownership, management, and control of a corporation. The prevailing corporate governance system influences the corporation regarding overall strategy that is the recognition of stakeholders? interest, especially the interest of customers, shareholders, banks, institutional investors, financial community, management and employees. It is necessary to balance the varying interest among the parties involved and the existing asymmetries in information consequently. However the mechanisms of balancing these interests vary across different countries. A number of studies found significant differences in the institutional context, in which corporate governance relationships are embedded. It identifies two general systems of corporate governance. The United States and the UntiedKingdom are characterized by relatively passive shareholders, board of directors that are not always independent of managers, and active markets for corporate control. The system found in Continental Europe and Japan is associated with coalitions of active shareholders, boards of directors that are more independent of management and limited markets for corporate control. These differences are thought to influence greatly the goals and performances of companies. These findings indicate the significant differences across countries due to different corporate governance mechanisms. One of the key differences lies in the orientation towards the shareholders value perspective or the
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stakeholders? value perspective. Japan however does not seem to perfectly fit in to these two systems, hence it is frequently suggested that the countries be divided into three groups, with monistic, dualistic or pluralistic concepts. The monistic concept with the corporate board as the center of power and control of corporation is highly shareholder oriented. The corporation is regarded as the private property of its owners. The primary focus is on shareholders value creation: Cost of capital is decreasing since equity can be raised more easily and with the increase in value of the firm and its creditworthiness the cost of debts is decreasing. Lower cost of capital symbolizes the central argument in favor of this capital market-oriented approach towards corporate governance, which is prevalent in the United States and the United Kingdom. In stakeholder value approach the balancing of interests of various stakeholders (shareholders, employees, banks and so on) is of primary importance. The stakeholder approach is part of the dualistic system of corporate governance. The dualistic system is widely used in Germany, where the corporate governance concept differentiates between the groups of people who are leading the firm, on the one hand and on the other hand the group of people who are exercise control. In this dualistic system power and control are split between those two groups in order to be able to serve better all stakeholders? interests. Another characteristic of the dualistic system prevalent in Germany is
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the principle of cooperative decision making within the board of directors, whereas, in countries like the United States and the United Kingdom, with a monistic system, the principle of directorship dominates, based on the authority of the CEO. The CEO is held responsible and thus his performance is crucial. This principle of directorship is in line with the market-oriented corporate governance approach. The principle of directorship in the monistic system is also evident in terms of remuneration of top management. Especially in European companies, stock options are considered with increasing suspicion. This form of remuneration is considered to represent an incentive for increasing corporate value. However, by using remuneration through stock options it is assumed that the stock prices reflect the actual value created. In the United States management is usually
remunerated to a large extent by stock options. In dualistic system of corporate governance, remuneration of top management is less capital market-oriented. In Germany for instance remuneration usually contains a fixed payment plus a dividend-based amount. In discussing the advantages and disadvantages of the monistic concept over the dualistic there has to be considered a third system; the pluralistic concept. The pluralistic system of corporate governance is prevalent in Japan. The assumption behind the pluralistic approach is that the corporation belongs to all stakeholders, with primary focus on the employees? interests. This system is specific to Japan, where
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long-term relationships dominate business practices. In this pluralistic approach power and control are exercised by numerous interest groups the governance concept is based on the principle of seniority and its long-term relationships. Thus, in terms of management payments, incentives are not directed towards sharing of profits.
2.9
Quality of Corporate Governance and Firm Performance Owners and Managers in corporate organizations create or destroy economic value through choices made regarding ownership and capital structure of firms and in the design and management of internal control processes. A clear structure of transparent decisionmaking and accountability, with independent, powerful supervision and control to hold management accountable for performance and results is therefore a primary requirement of governance. In essence, corporate governance creates a framework of goals and policies to guide an organization?s progress and forms a foundation for assessing board and management performance. There is strong evidence to suggest that corporate performance and to an extent economic stability, is directly impacted by the quality of corporate governance. Studies by the Yale School of Management show that the quality of governance can influence a company?s cost of capital, as well as the size and vibrancy of a country?s capital markets. It was demonstrated that during financial crises, the exchange rates and stock markets of
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countries with poor governance standards crumbled, while those with higher governance standards suffered less. The Enron/Andersen debacle is more recent and prominent examples of corporate governance failure where greed, lax oversight and outright fraud brought down two of America?s largest companies.
2.10 Corporate Social Responsibility Since the origins of industrial capitalism corporations have wrestled with the dilemma of whether their sole purpose is to generate wealth or whether corporations have broader obligations to the communities in which they are situated, and from which they derive not only their fundamental resources, but their license to operate. Bridging the divide between corporate governance and corporate social
responsibility has proved a great challenge to managers for generations. O?Rourke (2008) assesses the benefits and limitations of institutional shareholder activity to persuade corporations towards the exercise of greater responsibility. Though such pressure may be increasingly sophisticated as the voting power and knowledge base of the institutional investors develops, such activism is largely devoted to achieving incremental steps towards the adoption of corporate social responsibility rather than some transformative change. To help clarify the different approaches to corporate social
responsibility, Garriga and Mele (2008) attempt a classification of the main theories and related
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approaches
into
four
groups:
instrumentaltheories, in which the corporation is seen as simply an instrument for wealth creation, and its social activities are only a means to achieve economic results; political theories, concerned with the power of corporations in society and the responsible use of this power in the political arena; integrative theories, concerned with the corporation?s responsibility to meet social demands; and ethical theories, based on ethical responsibilities of corporations to society. These theories represent four dimensions of corporate activity related to profits, political performance, social demands and ethical values. How to integrate these four dimensions remains a vital task in resolving the relationship of business and society. Beltratti (2008) takes issue with the failure of the financial sector to appreciate the significance of corporate social responsibility, and the negative externalities inflicted on the economy as a whole by failures in socially responsible business behavior. Corporate governance and corporate social responsibility may reinforce each other in the search for a vision of the firm as an institution which may create value while having regard for the welfare of stakeholders.
2.11 Corporate Sustainability What is emerging as the most important – and fragile – relationship of all, is that between corporate activity and the ecology. This has become the most critical issue for both corporate governance and
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corporate social responsibility to address - if corporations and economies are to achieve sustainability, they can only do so through creating a greater balance with the natural environment (Hawken et al 1999; Hancock 2005). Cogan (2008) illuminates in detail the connection between corporate governance and climate change in comprehensive examination of how the world?s largest corporations are positioning themselves in a carbon-constrained world. Investors are increasingly assigning value to companies responding to the business challenges and opportunities posed by climate change, and will assign more risk to companies that are slow to do this. Corporate effectiveness in combating climate change will increasingly be measured in terms of board oversight, management execution, public disclosure, emissions accounting and strategic planning for emissions reduction. Stern (2008) considers the challenges of building and sustaining frameworks for international collective action on climate change with important initiatives coming from both national
governments and corporations. The various dimensions of action required to reduce the risks of climate change are considered: both for mitigation (including through carbon prices and markets,
interventions to support low-carbon investment and technology diffusion, cooperation on technology development and deployment, and action to reverse deforestation), and for adaptation. These dimensions of remedial action are interdependent: a carbon price is essential to provide incentives
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for
investment
in
low-carbon
technology around the world, and can be strongly complemented by international co-operation to bring down the costs of new low carbon technologies. The success of international co-operation on mitigation will determine the scale of action required for adaptation, which is how we learn to cope with climate change. An overview of existing international co-operation on climate change indicates the immense scale of the problem, and the huge global effort that will be required to resolve this. Responsible corporate governance will be essential to securing a sustainable balance between business, society and the environment.
2.12 Corporate Governance in Nigeria For a developing country such as Nigeria, corporate governance is of critical importance. In its recent history, that lack of corporate governance has led to economic upheavals. Two examples illustrate the point being made. In the late 1980?s and early 1990?s the country witnessed a near collapse of the financial sector through the phenomenon of failed banks and other financial institutions. In consequence, the failed Banks and financial malpractice in Bank act was promulgated to facilitate the prosecution of those who contribute to the failure of Banks and to recover the debt owed to the failed banks. Secondly, privatization and commercialization program of the Nigerian Government was a reaction to the failure of corporate governance in state owned enterprises. The privatization functions lies
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with the Bureau of public Enterprises (Vincent O. Nmehielle and Eyinna S. Nwauche, 2004). Other corporate governance failures in Nigeria include: ? In the Bank loans case, capital market operators were charged, accused of sale of forged certificates and were required to buy back. ? A number of publicly quoted companies have gone into oblivion for reasons bordering on ineffective and non existent systems e.g. NASCOM Plc. ? Falsification of accounts by the then directors/management of Lever Brothers Plc, where over-valuation of stocks running into millions of naira discovered, and African Petroleum Plc where about N24 billion credit facilities were not disclosed, in spite of the due diligence review carried out by the core investors and reporting accountants. It is noteworthy that the last AGM before privatization AP still paid N3 as dividend and a section of shareholders Association praised then to high heaven. In the last five years, corporate governance has become one of the most debated corporate issues in Nigeria. In 2001 the securities and Exchange Commission (SEC) of Nigeria set up a committee that came up with a code of best practices for pu blic companies in Nigeria (“The Code” in 2003) in 2005 the institute of Director of Nigeria set up a center for corporate governance to champion the cause of good
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corporate governance amongst its members. In 2006 the Central bank of Nigeria issued post-consolidation corporate guidelines for all banks operating in Nigeria. The Nigerian code of Corporate Governance is primarily aimed at ensuring that managers and investors of companies carry out their duties within a framework of accountability and transparency. This should ensure that the interest of all stakeholders are recognized and protected as much as possible. The code of Best practices for Public Companies in Nigeria (“The Code”) is voluntary even though it is recommended that all Nigerian public companies comply with the code and are required to state reason for non-compliance. Corporate Governance simply put, is ensuring good business behavior. It is about the way in which boards oversee the running of a company by its managers, and how board members are in turn accountable to shareholders and the company. This has implications for the company behavior towards employees, shareholders, customers, and other stakeholders. Poor corporate governance can weaken a company?s potential and can pave way fro financial difficulties and even fraud. In the case of Nigeria, the need is for good business behavior is even more important, in view of the country?s image of corruption and lawlessness.
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2.13 Benefits of Corporate Governance When fully implemented, good corporate governance ensures that large corporations are well-run institutions that earn the confidence of investors and lenders. The process ensures safeguards against corruption and mismanagement, while promoting fundamental values of a market economy in a democratic society. These are quite critical for the transitional African economies that are struggling to attract foreign direct investment. In a globalized economy, the
implementation or otherwise of good corporate governance will increasingly determine the fate of individual companies and entire economies. The quality of governance is of absolute importance to shareholders as it provides them with a level of assurance that the business of the company is being conducted in a manner that adds shareholder value and safeguards its assets. This means that there is less uncertainty associated with the investment - a situation that encourages bankers and lenders to be favorably disposed to the company. Furthermore, the higher the risk, the higher the expected rate of return. If a company adopts and implements good corporate governance practices, shareholders are retained and new investors attracted. Institutional investors have indicated a willingness to pay a premium for the shares of a well-governed company. Around the world, price: earnings ratios are higher among companies with good disclosure.
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Hence good corporate Governance is necessary in order to: 1. Attract investors both local and foreign and assure them that their investments will be secure and efficiently managed, and in a transparent and accountable process. 2. Create competitive and efficient companies and business enterprises. 3. Enhance the accountability and performance of those entrusted to manage corporations. 4. Promote efficient and effective use of limited resources. Corporate governance enhances the performance and ensures the conformance of corporations. Its principles stimulate the performance of corporations by creating and maintaining a business environment that motivates managers and entrepreneurs to maximize firms' operational efficiency, returns on investment and long –term
productivity growth. They ensure corporate conformance with investors' and society's interests and expectations by limiting the abuse of power, the siphoning–off of assets, the moral hazard, and the wastage of corporate-controlled resources (so–called "agency
problems"). Simultaneously, they establish the means to monitor managers' behavior to ensure corporate accountability and provide for the cost–effective protection of investors' and society's interests vis – ?–vis corporate insiders.
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2.14 Summary In conclusion, it can be said that most corporate governance failures can be traced to ineffective service provided by Board Advisors and inadequate controls on governance processes. This is true for large and small corporations alike. In climate of increased focus on
corporate governance, Board themselves need to ensure that fundamental governance practices and processes are in place at their companies. Having a sound Corporate Governance program in place is a corporate imperative in today?s regulatory climate, both from an internal as well as external perspective. The practices above are just some of the fundamental processes that directors should expect from their companies and are in use by Corporate Secretaries at many companies. Directors need to know that they are getting what they need to make their decisions, that minutes are being drafted to reflect their deliberations, and that appropriate records of those meetings are being kept. Externally, regulators expect their requirements to be met. Finally, with a strong governance program in place the company?s reputation with investors, creditors, insurers, and other stakeholders will be enhanced. Therefore companies with sound governance programs may perform better.
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CHAPTER 3
RESEARCH METHODOLOGY
3.1 INTRODUCTION The research design used for this study involves the collection of data from the institutions involved with corporate governance, such as Peugeot Automobile Nigeria and NassarawaStateUniversity. Automobile Nigeria The and
representative
sample,
Peugeot
NassarawaStateUniversity showed the extent of corporate governance application in the two organizations in the past one year was chosen as variables. Data collected were analyzed using content analysis which yielded the extent of corporate governance in the two organizations. 3.2 RESEARCH METHODS This study will take both explorative and descriptive approach. The choice of method to be used depends on the purpose of the study, the problem and the hypothesis to be tested. In many cases more than one is used jointly. The methods include; ? Basic Research ? Applied Research ? Historical Research ? Experimental Research ? Social Research ? Education Research
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? Descriptive Research 3.2.1 Basic Research This is also referred to as pure or fundamental research and is concerned with theoretical aspect of science and only indirectly interested in the practical application which the finding may have. It is aimed at discovering more about the laws of nature. It may also be interested in discovering or conforming basic truths or principles.
3.2.2 Applied Research This is also referred to as field research to participant observation and case studies. It has to do with our ability to observe what is happening and trying to understand it. It is therefore, not only a data collecting activity but, theory generating activity. It involves observation, development of tentative general conclusions for observations, and revisions of conclusions to reflect what was observed. 3.2.3 Historical Research Historical research is concerned with what was and uses it to compare with what is and uses the knowledge to predict the future. In it the researcher examines available records in order to arrive at conclusions on how far events affected or influenced the behavior of past generations. He may use written documents, oral traditions or interviews for research. Its main aim is to use historical facts to
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solve problems in the field in which research is conducted. 3.2.4 Social Research This category of research is broad and includes studies in the field of sociology, anthropology, psychology, etc. it involves studying human beings and how they behave at different situations. 3.2.5 Education Research This is a systematic and scholarly application of the scientific method, interpreted in the broad sense to the solution of educational problems. It is aimed at providing educationist with effective means of attaining worth with educational goals. 3.2.6 Market Research This is useful in business for the promotion of sales and assist of manufacturers to survive in a world of competition. It involves surveys or opinion polls using sales agents as enumerators. During the surveys, sample or specimen products can be distributed to potential customers to test the market 3.2.7 Descriptive Research This consists of the following: ? Experimental ? Correlation ? Observation ? Survey
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? Case Study a) Experimental This method is one in which a researcher manipulates a variable under highly controlled conditions to see if this produces any changes in second variable. The variable or variables, that the researcher manipulates is called the independent variable while the second variable, the one measured for changes, is called the dependent variable. Independent variables are sometimes referred o as
antecedent conditions. All scientific disciplines use this method because they are interested in understanding the laws of nature. The power of the experimental method derives from the fact that it allows researchers to detect cause-and-effect relationships. In order to see cause-and-effect relationships the researcher must be sure that his manipulations are the only variables having an effect on the dependent variable. He does this by holding all other variables, variables that might also affect the dependent variables, constant. Only by this highly controlled procedure can the researcher be sure that the observed changes in the dependent variable were in fact caused by his manipulations. Experimental studies, therefore, are used when the researcher is interested in determining
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cause-and effect relationships. Also this method can be used when it is appropriate, both practically and ethically, to manipulate the variables. However, a major limitation is that this method can only be used when it is practical and ethical for the researcher to manipulate the antecedent conditions. A second limitation to this method is that experimental studies are usually done in the highly controlled setting o the laboratory. These conditions are artificial and may not reflect what really happens in the less controlled and infinitely more complex world. b) Correlation Correlation is classified as a descriptive method. The reason for that is because variables are not directly manipulated as they are in the experimental method. Although correlation is often described as a method of research in its own right, it is really more of a mathematical technique for summarizing data, it is a statistical tool. A correlation study is one designed to determine the degree and direction of relationship between two or more variables or measures of behavior. The strength of this method lies in the fact that it can be used to determine if there is a relationship between two variables without having to
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directly
manipulate
those
variables.
In
other
words
correlation can be used when it is impractical and/or unethical to manipulate the variables. Correlation can also be used as a basis for prediction. The greatest limitation of correlation, one that is often forgotten, is that it does not tell researchers whether or not the relationship is casual. In other words, correlation does not prove causation. It only shows that two variables are related in a systematic way, but it does not prove nor disprove that the relationship is a cause-and-effect relationship. Only the experimental method can do that. c) Observation The observation is a type of study classified under the broader category of field studies; non-experimental
approaches used in the field or in real-life settings. In the naturalistic observation method the researcher very carefully observes and records some behavior or phenomenon, sometimes over a prolonged period, it its natural setting. The subject or phenomenon is not directly interfered with in any way. In the social sciences this usually involves observing humans or animals as they go about their activities in real life stetting. In the natural sciences this may involve observing an animal or groups
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of
animals
or
some
physical
phenomena. The major strength of this method is that it allows researchers to observe behavior in the setting in which it normally occurs rather that the artificial and limited setting of the laboratory. Further uses might include studying nature for it own sake or using nature to validate some laboratory findings or theoretical concept. The limitations of this method are many. First and foremost this is a descriptive method, not an explanatory one. That is without the controlled conditions of the laboratory, conclusions about causes-and-effect
relationships cannot be drawn. Behavior can only be described, not explained. This method can also take a great amount to time. Researchers may have to wait for sometime to observe the behavior or phenomenon of interest. Further limitations include the difficulty of observing behavior without disrupting it and the difficulty of coding results in a manner appropriate for statistical analysis. d) Survey The survey, another type of non-experimental, descriptive study, does not involve direct observation by a researcher. Rather, inferences about behavior are made from data collected via interviews or questionnaires. Interviews or questionnaires commonly include an assortment of forcedchoice questions (e.g. true or false) or open-ended
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questions (e.g. short answer essays) to which subjects are asked to respond. This sort of data collection is sometimes referred to as a self-report. Once again, this is a non experimental, descriptive approach. Surveys are particularly useful when researchers are
interested in collecting data on aspects of behavior that are difficult to observe directly and when it is desirable to sample a large number of subjects. Surveys are used extensively in the social and natural sciences to assess attitudes and opinions on a variety of subjects, from political views facility usage etc. The major limitation of the survey method is that it relies on a self-report method of data collection. Intentional deception, poor memory, or misunderstanding of the question can all contribute to inaccuracies in the data. Furthermore, this method is descriptive, not explanatory, and, therefore, cannot offer any insights into cause-and-effect relationships. e) Case Study This method is also a non-experimental, descriptive type of study. It involves an in-depth descriptive record, kept by an outside observer, of an individual or group of individuals. In the social sciences this often involves collecting and examining various observations and records of an
individual?s experiences and/or behaviors. Typical data
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collected
might
include
biographical
data,
medical
records, family history, observations, interviews, and the results of various psychological tests. In the natural sciences case studies might involve in-depth studies of a particular animal or group of animals or some detailed investigation of a particular physical phenomenon. Case studies are particularly useful when researchers want to get a detailed contextual view of an individual?s life or of a particular phenomenon. In the social sciences they are often used to help understand the social and familial factors that might be part of the development of some form of deviant behavior in an individual. Cases studies are also useful when researchers cannot, for practical or ethical reasons, do experimental studies. First and foremost this is a descriptive method, not an explanatory one. That is without the controlled conditions of the laboratory, conclusions about cause-and-effect
relationships cannot de drawn. Behavior can only be described, not explained. Case studies also involve only a single individual or just a few and therefore may not be representative of the general group or population. In the social sciences case studies often rely on descriptive information provided by different people. This leaves room for important details to be left out. Also, much of the
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information collected is retrospective data, recollections of past events, and is therefore subject to the problems inherent to memory.
3.3 METHODS OF DATA COLLECTION
3.3.1 POPULATION OF THE STUDY Peugeot Automobile Nigeria and NassarawaStateUniversity which are both diverse in types of industries have been duly selected for the research. The research shall appraise the level of awareness of corporate governance in each firm; to what extent does each firm apply corporate governance practices; and to what extent has the level of corporate governance best practices affected their
productivity or achieving organizational goals.
3.3.2 SAMPLING TECHNIQUES Peugeot Automobile Nigeria and NassarawaStateUniversity were carefully studied to investigate and assess their performance in relation to the level of extent of corporate governance best practices. The aforementioned organizations are expected to practice a level of corporate governance. The degree of each firms performance or achievements are determined in relation to the extent in which corporate governance was applied to the firm.
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The researcher intends to utilize clusters and stratified sampling technique for selecting the sample of Peugeot Automobile Nigeria and NassarawaStateUniversity to be covered in the project.
3.3.3 DATA COLLECTION TECHNIQUES Data collection techniques allow us to systematically collect
information about our objects of study (people, objects, phenomena) and about the settings in which they occur. In the collection of data we have to be systematic. If data are collected haphazardly, it will be difficult to answer our research questions in a conclusive way. Various data collection techniques can be used such as; ? Documentation Review ? Observation ? Interviewing (face-to-face) ? Focus group discussion ? Case studies
3.3.3.1 Documentation Review Usually there is a large amount of data that has been collected by others, although it may not necessarily have been analyzed or published. Locating these sources and retrieving the information is a good starting point in any data collection effort. Information routinely collected from unpublished reports and
publications in archives and libraries or in offices at the various sources
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may be a study in itself. Usually, however, it forms part of a study in which other data collection techniques are also used. Other sources of available data are newspapers and published case histories. The advantage of using existing data is that collection is inexpensive, information exist, doesn?t interrupt program or client?s routine in program provide comprehensive and historical information. However, it is sometimes difficult to gain access to the records or reports required. 3.3.3.2 Observation Observation is a technique that involves systematically selecting, watching and recording behavior and characteristics of living beings, objects or phenomena. It is a much-used data collection technique and can be undertaken in different ways, either by participant observation (the observer takes part in the situation he or she
observes), or by Non-participant observation (the observer watches the situation, openly or concealed, but does not participate. 3.3.3.3 Interview An interview is a data-collection technique that involves oral questioning of respondents, either individually or as a group. Answers to the questions posed during an interview can be recorded by writing them down (either during the interview itself or immediately after the interview) or by tape-recording the responses, or by a combination of both.
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Interviews can be conducted with varying degrees of flexibility i.e. high and low degree of flexibility. A flexible method of interviewing is useful if a researcher has as yet little understanding of the problem or situation he is investigating, or if the topic is sensitive. It is frequently applied in exploratory studies. The instrument used may be called an interview guide or interview schedule. Less flexible methods of interviewing are useful when the researcher is relatively
knowledgeable about expected answers or when the number of respondents being interviewed is relatively large. Then questionnaires may be used with a fixed list of questions in a standard sequence, which have mainly fixed or per-categorized answers. The advantage here is that it permits clarification of questions thereby providing full range and depth of information. 3.3.3.4Focused Group Discussion A focus group discussion allows a group of 8-12 informants to freely discuss a certain subject with the guidance of a facilitator or reporter. Two sources of data were used in this study, which are primary and secondary sources. Primary sources include first hand collection of information through surveys (interview) and participant observation. This method is best suited in cases where organizations views are essential to the outcome and conclusions of the research. Secondary sources include documentation review i.e. data from documentation – published and unpublished such as, book journals, official bulletin
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and electronic publications. Often both primary and secondary information supplement each other. This is the situation with this research; secondary materials provided the main source for this research, which include annual reports, presented papers, journals, books, etc. 3.3.3.5Case Studies This is used in order to fully understand or depict clients? experiences in a program, and conduct comprehensive examination through cross comparison of cases. It represents depth of information, rather than breadth, but is usually time consuming to collect, organize and describe.
3.4 METHODS OF DATA ANALYSIS The choice of statistical method depends mainly on the level of measurement of the two variables, and how much detail versus summarization is desired. There are two types of data analysis namely Descriptive and inferential analysis. 3.4.1 Descriptive Analysis Descriptive analysis deals with the study of the variables off study (in relation to subjects) such as profiles of respondents, organizations, groups or any other subject. Descriptive analysis can either be qualitative or quantitative. Qualitative analysis is used to verbally summarize the information gathered in the research. Quantitative
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descriptive analysis is used to summarize mass information generated in the study, so that appropriate analytical methods could be used to further discover relationship between variables. It includes frequency distribution, measures of central tendency, measures off dispersion and content analysis. Content analysis is a research tool used to determine the presence of certain words or concepts within texts or set of texts. Texts can be defined broadly as books, book chapters, essays, interviews,
discussions, newspaper, headlines and articles, historical documents, speeches, conversations, advertising and theater, informal
conversation, or really any occurrences. To conduct a content analysis on any such text, the is coded, or broken down, into manageable categories on a variety of levels word, word sense, phrase, sentence, or theme and then examined using one of content analysis? basic methods: conceptual analysis or relational analysis. In conceptual analysis, a concept is chosen for examination, and analysis involves quantifying and tallying its presence. Conceptual analysis begins with identifying research questions and choosing a sample or samples. Once chosen, the text must be coded into manageable content categories. Relational analysis begins with the act of identifying concepts present in a given text or set of texts. However, relational analysis seeks to go beyond presence by exploring the relationships between the concepts identified. In other words, the focus of relational analysis is to look for
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semantic, or meaningful, relationships, individual concepts, in and of themselves, are viewed as having no inherent meaning. Rather, meaning is a product of the relationships among concepts in a text.
3.4.2 Inferential Analysis Inferential distribution includes some of the following, Chi-square, T test Correlation regression and General linear model, which are briefly discussed below: ? Chi-Square – The chi-square tests for independence used in situations where you have two categorical variables. A
categorical variable is a qualitative variable in which cases are classified in one and only one of the possible levels. ? T Test – The test is a useful technique for comparing mean values of two sets of numbers. The comparison will provide you with a statistic for evaluating whether the differences between two means are statistically significant. T test can be used either to compare two independent groups or to compare observations from two measurement occasions for the same group. To conduct a t test, your data should be a sample drawn from a continuous underlying distribution. If you are using the t test to compare two groups, the groups should be randomly drawn from normally distributed and independent populations.
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? Correlation – Correlation is one of the most common forms of data analysis both because it can provide an analysis that stands on its own, and also because in underlies many other analyses, and can be a good way to support conclusion after primary analyses have been completed. Correlation are a measure of the linear relationship between two variables. A correlation
coefficient has a value ranging from -1 to 1. Values that are closer to the absolute value of 1 indicate that there is a strong relationship between the variables being correlated whereas values closer to 0 indicate that there is little or no linear relationship. The sign of a correlation coefficient describes the type of relationship between the variables being correlated. A positive correlation coefficient indicates that there is a positive linear relationship between the variables: as one variable increases in value, so does the other. A negative value indicates a negative linear relationship between variables: as one variable increases in value, the other variable decreases in value. ? Regression – Regression is a technique that can be used to investigate the effect of one or more predictor variables on an outcome variable. Regression allows you to make statements about how well one or more independent variables will predict the value of a dependent variable. ? General linear Model – The majority of procedures used for conducting analysis of variance in Statistical Package for Social
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Sciences (SPSS) can be found under the General Linear Model (GLM) menu item in the Analyze menu. Analysis of variance can be used in many situations to determine whether there are differences between groups on the basis of one or more outcome variables or if a continuous variable is a good predictor of one or more dependent variables. There are three varieties of the general linear model this include, univariate, bivariate, and multivariate. o Univariate Analysis: This is done by examining one variable at a time. The basic format here would be by reporting all individual cases i.e. reporting the attributes describing each case under study in terms of variable in question. The information is presented in frequency distribution and percentages, beyond this data can be presented in the form of summary averages or measures of central tendency (Mean Median or Mode). Although this type of analysis is said to be elementary, it can be made interesting by presenting the data in histogram or polygon graph. o Bivariate Analysis:This is used when tow variables are being used together i.e. concerned with the relationships
between pairs of variables (X,Y) in a data set. It is the process of describing the relationship between each pair of variables. Specifically it refers to the cross tabulation of
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responses to two questionnaire items or two variables simultaneously. o Multivariate Analysis:This means the manipulation of two, three or more independent variable at a time. Here tables are used to present data in order to take care of the complexity often experienced in the analysis of more than two independent variables. Data here is collected by the use of questionnaires and presented in tabular form.
3.5 JUSTIFICATION OF METHOD Ability of the method to manage the interrelation among variables. Also it usually relies on inductive reasoning processes to interpret the structure the meanings that can be derived from data. The ability to uncover historical knowledge and recent performance of
organizations. They also can allow for both quantitative and qualitative operations, provides valuable historical/cultural insights overtime
through analysis of texts, can be used to interpret texts for purposes such as the development of expert systems (since knowledge and rules can both be coded in terms of explicit statements about the relationships among concepts), is an unobtrusive means of analyzing interactions.
3.6 Summary The data are from primary and secondary sources. The secondary data
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were through existing body of knowledge such as books, newspapers, journals, bulletins etc. Data collected from the sample size Peugeot Automobile Nigeria and Nassarawa State University, were analyzed using descriptive qualitative technique. The technique of data collection used here largely involved
concentrated amount of desk research. The secondary data were subjected to qualitative analysis to test the hypothesis and to find out the extent of the impact of corporate governance on the value of a firm.
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CHAPTER 4
DATA PRESENTATION, ANALYSIS, AND INTERPRETATION
4.1 Introduction As the scale and activity of corporations has increased
immeasurably, the governance of these entities has assumed considerable importance. Business corporations have an enduring impact upon societies and economies, and “how corporations are governed - their ownership and control, the objectives they pursue, the rights they respect, the responsibilities they recognize, and how effective governing influences the performance of a firm – has become a matter of the greatest significance, not simply for their directors and shareholders, but for the wider communities they serve. This study attempts to access the various factors that can affect the performance of a firm in relation to Good Corporate Governance practices. Through the course of study on Corporate Governance and its impact on the performance of a firm, the research indicated that better corporate governance leads to better corporate
performance. Good governance means little expropriation of corporate resources contributes by to managers better or controlling of shareholders, and which better
allocation
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resources
performance. As investors and lenders will be more willing to put their money in firms with good governance, they will face lower costs of capital, another source of better firm performance. Other stakeholders, including employees and suppliers, will also want to be associated with and enter into business relationships with such firms, as the relationships are likely to be more prosperous, fairer, and longer lasting than those with firms with less effective governance. This can be done by; ? Directors of a Board fully complying with their roles, duties and responsibilities. ? Management conforming to their roles, duties and responsibilities towards the Board. ? Management sensitivity to Creditors, and realizing their function towards the successes of the organization. ? Stakeholder?s ability to positively influence the performance of the firm. ? Controlling the level of Shareholders Activism in the decision making of an organization. ? Having an ideal state of Board Composition ? Knowing The Board Size necessary for effective decision making. ? Boards having an effective Audit Committee
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In this course of study it was discovered that various factors of Corporate Governance influenced the level of performance of a firm. The study survey revealed that organizations could perform much better if there was a level of degree of good corporate governance practices. Focus was given to factors like directors roles and responsibilities; management roles and responsibilities; relationship between an organization and its stakeholders;
shareholders activism; board composition; board structures; and corporate governance models. The research revealed that if these factors of corporate governance that are mentioned above were to be adapted effectively, then it could directly or indirectly improve the performance of a firm. However some factors (like corporate governance models, board composition, management roles and responsibilities; shareholders activism) tend to influence firm performance more then other factors mentioned above. Below are some of the findings from the study. In this research the case study was focused on two diverse organizations; Peugeot Automobile Nigeria, which is an international-private organization, based in Kaduna state; and NassarawaStateUniversity, which is a government owned organization, based in NassarawaState, Keffi local government. 4.2 Interpretation of Data
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4.2.1 Directors and the Performance of a Firm The findings showed that board of Directors in both Peugeot Automobile Nigeria and NassarawaStateUniversity, play a critical role in the performance of any company. From the research conducted it was established that there are general roles, responsibilities and duties necessary upon Directors that bring about a better performance in these organizations. These roles, responsibilities and duties include; ? To provide purposeful and strategic direction and to manage the company. ? To ensure compliance with the memorandum and Articles of Association of the company. ? To act at all times, in the best interests of the company, including shareholders, employees and other stakeholders. ? To report regularly and fully on their stewardship to the owners of the company. ? To act as trustees in respect to the companies assets. ? To exercise the best degree of skill and care, depending upon their personal knowledge and experience. ? To declare all and any interests and to act honestly and reasonably, particularly where their own interests may be in conflict with the interests of the company. ? To ensure compliance with the provision of the law, including the code of conduct provision.
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? To ensure that the financial records and reports of the company are prepared in accordance with legal and accounting requirements. Once these roles, responsibilities and duties are followed then it will go a long way in improving the general performance of a firm. Organizations that do not practice these roles, responsibilities and duties tend to lack high tendency of performance or even fail. 4.2.2 Management and their Influence on Profitability Management is responsible for the day-to-day running of an organization. In respect to the research on Peugeot Automobile Nigeria and NassarawaStateUniversity, in both cases Top
Management are appointed by the Board of Directors to participate in direction and policy setting, and in articulating and managing the strategic direction of the organisation. The Management team of Peugeot Automobile Nigeria, appointed consists of the Managing Director, Chief Operating Officer, and a few General Managers. In the case of Nassarawa State University the Management team appointed are made up of the Vice Chancellor, both Deputy Vice Chancellors (Administration and Academics) and Deans of a few faculties. In both scenarios Management play a big role in all decision making and are responsible in leading organizations. The boards of both organizations limit their involvement to the appointment of
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top-level
Managers,
assessment
of
their
performance
and
termination of unsatisfactory managers in the event of low level of performance. Therefore Top Management of Peugeot Automobile Nigeria and Nassarawa State University need to posses the requisite standards
4.2.3Creditors Impact on the Performance of an Organization. The central hypothesis is that creditors play an important role in corporate governance even outside of states of payment default or bankruptcy. Looking at both case studies it was realised that
NassarawaStateUniversity is a government based organization, therefore are not associated with creditors. Peugeot Automobile Nigeria on the other hand is a profit-private based organization, therefore are highly associated with creditors. From the analysis made it was observed that increased creditor control might lead to declines in the value of the borrowing firm. It was further observed that creditors play an active role in the governance of corporations; the analysis of Peugeot Automobile Nigeria showed that violations are followed immediately with an increase in CEO turnover; an increase in the incidence of corporate restructuring and hiring of turnaround specialists; a decline in acquisitions and capital expenditures; and a sharp reduction in leverage and shareholder payouts.
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It was further observed that changes in the investment and financing behaviour of violating firms coincide with amended credit agreements that contain stronger restrictions on firm decision-making. In addition, changes in the management of violating firms suggest that creditors exert considerable behind-thescenes influence on governance in addition to contractual control. We also show that firm operating and stock price performance improve following a violation, suggesting that actions taken by creditors benefit shareholders skills and competencies for effective organizational performance. 4.2.4 Stakeholders Influence on the Productivity of a Firm Besides the principal owner and management, organizations like Peugeot Automobile Nigeria, and Nassarawa State University must deal with many other stakeholders like staff, banks, customers, local communities, investors, suppliers local and federal government, network dealers, business partners; all these make up the network of these organizations. Each stakeholder plays their role by making sure that the management of the organization is being monitored; that there is a certain level of discipline at all levels of the organization; motivation is accelerated to help boost
management degree of activity. If all these functions are fully utilized by stakeholders, it will bring about a drastic improvement in the productivity both Peugeot
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Automobile Nigeria and NassarawaStateUniversity. Two forms of behaviors have been identified during the course of the research, which can be distinguished in corporate governance issues related to other stakeholders: stakeholder management and social issue participation. For the first category, firms like Peugeot Automobile Nigeria and NassarawaStateUniversity has no choice but to behave "responsibly" to stakeholders: they are input factors without which the firm cannot operate; and these stakeholders face alternative opportunities if Peugeot Automobile Nigeria or NassarawaStateUniversity does not treat them well. typically for example if Peugeot Automobile Nigeria decides to treat its staff unfairly then they could decide to go on strike which will affect level of production of cars, thus have a negative impact on the performance of a firm; like wise if Nassarawa State University decides to treat its staff unfairly, this could lead to a strike action by staff, thus all school activities seizes and students become dormant, thus affect the reputation of Nassarawa State University. Acting responsibly towards each of these stakeholders is thus necessary for both organizations. Collectively, a high degree of corporate responsibility can ensure good relationships with all the firm's stakeholders and thereby improve the overall performance of both Peugeot Automobile Nigeria and NassarawaStateUniversity.
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4.2.5 The Role of Shareholders Activism in the Management of a Corporation Shareholders are the owners of the firm and, although their primary concern is value maximization for their investments, they have a critical responsibility to ensure that an appropriate governance structure is put in place in their organization. In the course of the research it was discovered that though NassarawaStateUniversity is a government owned par status. The government tends to play the role of shareholders, Peugeot Automobile Nigeria is typically owned by private individual shareholders. The shareholders in both organizations have general key roles that are necessary in effectively managing both organizations. These roles include; o Election of Board (Members) of Directors o Delegation of authority as owners to elected Directors. o Appointment of Auditors to give an independent report on financial performance to the shareholders. These activities are strongly present in both organizations. In the case of Peugeot Automobile activities are Nigeria performed by and the
NassarawaStateUniversity,
shareholders (private individuals and government) in general meetings, Peugeot Automobile once
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Nigeria year.
usually In the
holds instants
their of
shareholders
meeting
a
NassarawaStateUniversity
government
(shareholders)
convene
extra-ordinary meetings to respond to/resolve issues that require immediate attention. For both organizations shareholders appoint and delegate
responsibility and authority to a Board of Directors to act on their behalf within the defined governance arrangements. The Boards of Directors assume delegated authority and give account of their stewardship at least once every year or special circumstances to the shareholders. Typically, Peugeot Automobile Nigeria?s shareholder power is proportional to the number of shares held in the company or voting power. In the case of NassarawaStateUniversity, it is owned by NassarawaState government (representing the people of
NassarawaState). Therefore exert a fair amount of influence on the organization through the Board of Directors. 4.2.6 Board Composition and its impact on the Performance of a firm Through the research conducted on Peugeot Automobile Nigeria and NassarawaStateUniversity, the studies show how board membership and structure can have an impact on firm performance. During the course of the interview conducted it was concluded that there would be better performance for both Peugeot Automobile Nigeria and NassarawaStateUniversity, if Boards of
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Directors were dominated by outsiders. Boards dominated by insiders are not expected to play their role as effective monitors and supervisors of management. This is particularly so when the board chairperson is also the firm?s CEO. While outside directors bring a breadth of knowledge and expertise to the firm, they may have a limited understanding of the firm's business, which would impede their ability to guide and supervise the management and could even stifle strategic action and result in excessive monitoring. It was also realized that outside Directors of both organizations under research provides these firms with windows or links to the outside world, thereby helping to secure critical resources and expand networking. They normally serve as Directors of several Boards. Between managing their own business and serving on multiple Boards, outside Directors lack firm-specific knowledge and may not be able to understand each business and the complexities of the firm well enough to be truly effective. However it is less likely that they are controlled by the Managing Director (MD) or Vice Chancellor that and (VC) is the Inside relevant strategic Directors to have access to
information competence
assessing of
managerial initiatives.
desirability
However, insider Directors usually do not make exhaustive evaluation of the strategic decision processes since they are influenced by the Managing Director (MD) or Vice Chancellor
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(VC). Therefore it is concluded that their should be a greater level of independence that will allow outside Directors to fulfill their monitoring duties more effectively, which in turn will bring about an improvement on firm performance. Through the course of the survey it was perceived Institutional investors typically view a well-governed company as one that has a majority of outside directors with no management ties to its board, undertakes formal evaluations of directors, and is responsive to requests from investors for information on governance issues. Directors should also hold significant
shareholdings in the company, and a large part of their pay should come in the form of stock options. . The independence of directors and boards of state enterprises, in their various forms, in many emerging and transition economies, especially those in Africa, remains a challenge–not only for the directors themselves but also for those with whom such enterprises contract. There is a particular problem associated with the shortage of skills and lack of familiarity with board functions and fiduciary responsibilities. The lack of enforcement of existing regulatory measures, whether outdated or not, has contributed to poor corporate governance practices. Many corporate board members in Africa, especially of state-owned companies,
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some private companies and management committee of cooperatives have limited understanding of their roles, and are usually open to manipulation by management, chairmen, or principal shareholders. Some are outright incompetent. Nonexecutive directors in Africa need to play any meaningful role in the governance of business enterprises. However many simply act as rubber stamps for decisions taken outside the board. 4.2.7 The Effect of Board Size on the Performance of the Firm From the research conducted on both Peugeot Automobile Nigeria and NassarawaStateUniversity it was realized that board size has a number of implications. On one hand, a smaller board is manageable from the Managing Director's (MD) or Vice
Chancellor's point of view. A smaller board size is viewed as an indicator of the CEO's profound influence on proceedings in board meetings. On the other hand, a larger board, although potentially unmanageable, may be valuable for the breadth of its services. A larger board has been shown to provide an increased pool of expertise and resources for the organization. From an organizational dynamic point of view, however, a larger board is more likely to develop factions and coalitions that can increase group conflicts. Therefore it was observed that for both Peugeot Automobile Nigeria and NassarawaStateUniversity, the first step in structuring an
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effective board is to shrink it, probably because a larger board is more difficult to coordinate. It was further observed that a larger board is less likely to become involved effectively in the strategic decision making process. a smaller board seems to be more effective than larger board in the sense that it allows the board to support the strategic decisions of Managers without frequent interruptions and to take a decisive governance actions in a coordinated fashion. However further research revealed that Managing Director and Vice Chancellor can easily exert their influence on small boards but find it difficult to influence large ones. It is very likely that, if both Peugeot Automobile Nigeria and NassarawaStateUniversity were to have a large board size, the Managing Director and Vice Chancellor, would experience greater difficulty influencing all board members to agree and make decisions.
4.2.8 The Relevance of Audit Committee in a Board Structure Internal Accounting and Financial Audit The internal audit is an integral element of corporate governance and is carried out by an internal auditor who reports to the chief executive officer (Vice Chancellor, Nassarawa State University and Managing Director, Peugeot Automobile Nigeria) and is supposed to assist the executive management and the board in the
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discharge of their obligations relating to safeguarding assets, risk management, operation of adequate controls and reliability of financial statements and stewardship reporting. The Audit
Committee plays a vital role in financial and operational controls in the whole system of corporate governance, by making
recommendations to the board concerning the appointment and remuneration of external auditors, reviewing auditors' evaluation of the system of internal control and accounting, and considering and making recommendations on the conduct of any aspect of the business of the company which should be brought to the notice of the board, among others. The establishment of an audit committee is a listing requirement of many organizations. Budgetary control is another internal control tool, which involves two levels of activity, namely planning and control. Control is complementary to planning and it involves monitoring actual performance against projected plans. External Auditors Internal auditing functions differ among small, medium and large organizations. Most African listed companies are too small to sustain their own internal audit department. In their circumstances, services provided by third parties may be the only means of obtaining auditing support. The main objective of the external audit is to give a report on the view presented by the financial
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statements prepared by the managers. The detection of fraud and errors are incidental to this main object. The audit may also prevent the commission of fraud and errors by reason of the deterrent and moral check that it imposes. Regulators? reliance on external auditors is premised on the belief that the auditors are public spirited and will act on behalf of either the public or the state, and that auditors are independent of the management. To engender public confidence in the integrity of the external auditor, he must be skilful, careful, diligent, faithful and honest. Such an auditor bolsters the perception of corporate governance. If the external audit firm provides this support then the most critical consideration must be whether the internal audit department is staffed by different personnel from the external audit and also headed by a partner not involved in external audit activities
4.3
Summary of Analysis Through the critical analysis of the data gathered on both case studies; Peugeot Automobile Nigeria and NassarawaStateUniversity it has been realized that; A. The data gathered determines that competent Directors that have the ability to make positive decisions in relation to the organization at hand can influence, to a large extent the successes of an organization. Once the Directors roles and
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responsibilities are clearly defined and applied properly then there will be less conflict with other parties of corporate governance, and decisions will be made at a professional level. B. It was also realized that Management of a firm play a great role in corporate governance, usually there is a conflict of interest between Management and Directors, but once there are clearly defined roles and responsibilities, it regulates the level of conflict, thus improves the level of successes of that organization. C. The analysis shows that creditors have an enormous impact on the value of a firm. It has also been realized that Shareholders tend to shy away from organizations that are associated with too many creditors. Though it has been realized that most organizations can?t survive without
creditors/Banks assistance, therefore it is vital to the survival of most organization. Therefore through proper governance of a firm Organizations can create conducive and healthy relationships with creditors/Banks, which will be more, like a partnership. D. Stakeholders also play a vital role in the extent to which an organization succeeds or fails. Once there is a healthy relationship between the various stakeholders, which include;
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shareholders, employees, distributors, creditors, etc. Once stakeholders are satisfied, by attending to their wants and needs at the corporate level, then to some extent roles and responsibilities of each stakeholder will be utilized well, thus increase in efficiency and effectiveness; therefore an
improvement in the productivity of a firm. E. The analysis has shown that shareholders that participate and show considerable interest in the running and progress of a firm tend to create a „checks and balance? system that makes the decision makers of an organization more alert and serious in running the firm, thus can also improve the productivity of a firm through effective decision making. F. The right board composition is essential for corporate governance best practices. From the analysis made it has been realized that for good governance practices to prevail their should be more „outside Directors then „inside Directors?, this is due to the fact that outside directors are less biased when it comes to decision making that is for the best interest of the stakeholders involved and the company as a whole. Thus for an organization to prevail it needs to make sure that board composition is dominated more by outside directors and few inside directors.
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G.
The board size also determines that level of successes of a firm. This is due to the fact that having a smaller size of board members makes decision making much faster, therefore progress for the firm. It also gives room for better coordination of board activities and less conflict of interest. Therefore organizations should be cautious of the negative implication of a large board size and try to maintain a smaller board size for better and effective decision making that will improve the productivity/successes of a firm.
H.
Finally the final analysis shows that Audit committee of the Board Committee play a vital role in good governance practices. Once an internal and external audit committee is put in place and each play their roles and responsibilities at the board level then good governance will prevail and will help along way in making sure things at the board level are moving smoothly, thus improving the performance of a firm.
From the various analyses made and interpreted above it is safe to say that Corporate Governance practices can affect or improve the productivity of a firm. If Corporate Governance is to have a positive impact on the growth of a firm; then good governance needs to be practiced and sustained, and for good governance to exists then various factors mentioned above are essential.
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CHAPTER 5
SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
5.1 SUMMARY The evidence of the study shows from the combination of the two case studies at hand, that there are certain factors of corporate governance that influence or affect the productivity or value of a firm, whether it be direct or indirect impact of productivity. The findings of the study show how the impact of good governance on the performance of a firm maybe appreciated if we recognizethat growth is positively related not only to the size of investment but by the efficiency of its allocation. The survey looks at how a good practiceof corporate governance ensures that directors and managers of enterprises carry out their duties and responsibilities effectively within a framework of accountability and transparency. The research also studied necessary board structures; which focuses on which committees are vital for a proper board
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structure; how the committee structure permits the board to address key areas in more depth; and how by clearly defining and understanding each committees? responsibilities, so that good governance practices can be established. Further research was made board composition, which focuses on the number of inside and outside directors within a Board; the implications of having more inside directors then outside directors; and what number of inside and outside directors is ideal for good governance practice. The research also looked at the vital nature of an Audit Committee. It looks at the importance of the audit committee, and how it should comprise of outside directors for better results. It further looks at the various functions of an audit committee. We went further to look at various stakeholders of an organization in relation to good governance practices, and how they can positively influence the productivity or value of a firm. It looks at the relevance of good relations with stakeholders; their roles and responsibilities; and ways in which they can affect the value of an organization.
Also analysis was made of Shareholders activism, and how having active shareholders,
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that
know
their
rights
and
responsibilities can bring about better governance practices from the board members. Finally the research was also focused on the various models of corporate governance; there advantage and disadvantage; and which model best suits organizations within Nigerian environment. The benefit is the overall efficiency and competitiveness of an organization will be enhanced thereby boosting investors? confidence in the company. It should be reiterated that good corporate governance is an important step towards building market confidence and encouraging stable, long-term in international investment flows into the country since the business corporation is becoming an increasingly important engine of wealth creation and growth, worldwide, it is imperative that Nigerian companies operate within standards that keep them well focused on their objectives and hold them accountable to shareholders and for their actions. Companies need to be convinced that good corporate governance can add value, and should put in place necessary structures and processes for the implementation of good governance values, such as standards of acceptable conduct,
130
which are communicated throughout such organizations. Nevertheless, it should be stressed that the primary responsibility for ensuring good corporate governance rests with the directors and top management of a firm. It is therefore essential for organizations that want to increase the productivity of their firm, to focus on identifying the key elements of corporate
governance and how each element should be effectively implemented in the organization, which will bring about an increase in value or productivity of that organization. 5.2 CONCLUSION The need for corporate governance arises because of the separation of management and ownership in the modern corporation. In practice, the interest of those who have effective control over a firm can differ from the interests of those who supply the firm with external finance. The „principal -agent? problem is reflected in management pursuing activities which may be detrimental to the interest of the shareholders of the firm. Transparency and disclosure is in many ways the key to good governance. Provided companies are open about their
purposes and the way in which they go about achieving them, they will earn the trust of those on whom they depend for their success. Resources will flow to companies which inspire trust,
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through their approach to governance and through the integrity of those who manage them. Responsible governance is the basis on which trust is established and enterprise encouraged. Corporate Governance is a processes and not a state. The field is continually evolving. Its initial focus was on the way in which individual corporations are directed and controlled. This led to the introduction of national code of best practice. As the wider economic and social significance became more apparent, international guidelines were published to advance its cause more broadly. These guidelines reflected the part which good governance can play in promoting organizational growth and business integrity. Effective corporate governance requires a clear understanding of the respective roles of the board and of senior management and their relationships with others in the corporate structure. The relationships of the board and management with stockholders should be characterized by candor; their relationships with employees should be characterized by fairness; the relationships with the communities in which they operate should be characterized by good citizenship; and their relationships with government should be characterized by a commitment to compliance.
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Corporate governance is concerned with the processes, systems, practices and procedures as well as the formal and informal rules that govern 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. 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 those of other stakeholders, 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 by firms. The quality of governance is of absolute importance to shareholders as it provides them with a level of assurance that the business of the company is being conducted in a manner that adds shareholder value and safeguards its assets. This
133
means that there is less uncertainty associated with the investment - a situation that encourages bankers and lenders to be favorably disposed to the company. Furthermore, the higher the risk, the higher the expected rate of return. If a company adopts and implements good corporate governance practices, shareholders are retained and new investors attracted.
Institutional investors have indicated a willingness to pay a premium for the shares of a well-governed company. Around the world, price: earnings ratios are higher among companies with good disclosure. Hence good corporate Governance is necessary in order to: 1. Attract investors both local and foreign and assure them that their investments will be secure and efficiently managed, and in a transparent and accountable process. 2. Create competitive and efficient companies and business enterprises. 3. Enhance the accountability and performance of those entrusted to manage corporations. 4. Promote efficient and effective use of limited resources. 5.3 RECOMMENDATIONS From the analysis of the two (2) case studies under research on the level of influence of Corporate Governance on the productivity of a firm, these are my recommendations;
134
o Nigerian firms should be enlightened more on the relevance of Good Governance to the value of a firm, and actually apply these methods, processes, and policies, thus attain their organizational goals. o Organizations should realize the necessary ingredients that are relevant to good governance, which include; Director & Management roles and responsibilities; the relationship between Stakeholders and the Organization; Shareholders activism; board structure; and board structure. Once these factors can be applied effectively, this promotes the value of a firm, thus productivity of a firm. o Board of Directors need to realize their necessary roles and responsibilities, and be active in the key strategic decision making processes at the corporate level. This will promote efficiency and effectiveness and boost
confidence of all stakeholders involved. o Management has to understand how they are key players in Corporate Governance, and what are their roles and responsibilities. Management also needs to know when to draw the line when it comes to decision making at the corporate level. o Good governance practice cannot excises if there is an unhealthy relationship These
135
between
Organizations include
and
stakeholders.
stakeholders
customers,
employees, suppliers, distributors, creditors, shareholders, etc. Therefore organization looking to improve the value of their firm need to avoid conflict with all stakeholders and make sure that the needs of each stakeholder is being satisfied. o Shareholders play a vital role in corporate governance. Though it can be nuisance, shareholder activism is essential in keeping board members, as well as top managers on their feet, and more conscious in decision making for the organization. Therefore Organizations should encourage shareholder participation, which will help to improve the productivity of a firm. o Organizations should also be conscious of the
composition of their Board of Directors, and make sure that the ratio of outside, to inside directors should be greater. This is necessary because inside directors usually mix objective decisions to sentimental ones, in relation to their roles as Managers of that organization, thus creating room for conflict and irrational decisions. Once there is a greater number of outside Directors, then more unbiased and rational decisions will be made that will have a positive impact on the organization as a whole. o Organizations should know the options they have when formulating their Board Size, and they should know the
136
advantage and disadvantages of having both a small and large number of board members. They should also understand decisions are made much easier and
operations run much easier with a smaller board size. o Organizations should be disciplined enough to have an Audit Committee both within the organization and out that will allow for proper scrutiny of the organizations activities, thus give room for improvement when
necessary. Once there is presence of an outside Audit it makes key players of the organization to sit up and do their jobs well. o Finally it is recommended for any organization that wants to improve its value or productivity, hat they implement and apply good governance practices to their
organizations. Once good governance can be played from all the key factors mentioned above, then whether it be in the short-run or long-run; directly or indirectly; their will be an improvement in the productivity of that firm, thus an increase in the value of the firm.
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BIBLOGRAPHY 1. ACETEVO, Charity Trustee Networks (2005) “Good Governance: A Code for Voulantry and Community Sector”, First Edition, Latimer Trend & Company Ltd, UK. 2. Al Faki M. (2006), “Corporate Governance: An Essential Ingredient for Value Creation”, Financial Standard. 3. Aniemena U. (2005)” Good Corporate Governance in the Banking System” being paper presented at the 3 rd PAN African forum on Corporate Governance at Dakar, Senegal. 4. Ayogu M.D. (2001), Corporate Governance in Africa: The Record Africa. 5. Banjerea P.K., (2004), “Corporate Governance & Ethics, a Paradigm shift in the New Mellinium. 6. Brennan N. M. (2008); “Corporate Governance and Financial Reporting” (Vols. 1-3) Sage Publications – London. 7. Chorafas D. N. (2006); “IFRS, Fair Value and Corporate Governance: the Impact on Budget, Balance Sheets and Management Accounts” CIMA Publishing – Oxford. 8. Collett P. and Hrasky S. (2005), “Voluntary Disclosure of Corporate Governance
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Policies
for
Good
Governance”,
Economic
Research Papers No. 66 ADB, University of Cape town, South
Practices
by
Listed
Australian
Companies “, Corporate Governance – An International Review. 9. Dallas G. (2005), “Making Corporate Decisions that Work”, being paper presented at the 6th International Conference on Corporate Governance, Governance Services standard and Poor?s, London. 10. Dellaportas S. (2005); “Ethics, Governance & Accountability: a professional perspective” John Wiley & Sons Australia – Milton, Qld. 11. Gilan S.T. (2005)”Recent Developments in Corporate
Governance: An Overview” Department of Finance, W.P. Carey School of Business, Arizona State University. 12. Gilham A. (2004), “Corporate Governance in Ghana”,
Sustainability Works Limited, Accra, Ghana. World Council for Corporate Governance. 13. Hermalin B.E. (2003), “Trends in Corporate Governance”, being a Scholarly Study, University of California. 14. Hilb M. (2005), “New Corporate Governance: from good guidelines to great practice”, Corporate Governance – An International review. 15. Kerr V.L. (2004), Corporate Governance in the Context of Globalization”, Center for Corporate Governance and Competitive Strategy, Jamaica.
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16. Khurshed A, (2003), “Corporate Governance in Emerging Markets: The Significance of Connection, Manchester School of Accounting and Finance, University of Manchester, Manchester. 17. Krambia-Karpadis M. and Psaros J. (2006), “ The Implementation of Corporate Governance Principles in an Emerging Economy: a critique of the situation in Cyprus, Corporate Governance – An International Review. 18. Lee T. A. (2008); “Financial Reporting & Corporate
Governance” John Wiley & Sons – West Sussex. 19. Lilijeblad J. and Svensson M. (2001), “Corporate Governance: Active Ownership in Practice”, Thesis for Graduate Business School, School of Economics and Commercial Law, Goteborg University. 20. Mehra M. (2004), “Corporate Governance Challenges in a Disparate World. 21. Monks R.A.G. (2001), “ Redesigning Corporate Governance Structures and Systems for the Twenty First Century”, Corporate Governance – An International Review. 22. Nmehielle V.O. and Nwauche E.S. (2004), “External-Internal Standards in Corporate Governance in Nigeria” being paper presented at Conference on Corporate Governance and Accountability in Sub-Saharan Africa.
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23. Oyejide T.A. and Soyibo A (2001), “Corporate Governance in Nigeria”, being paper presented at conference on Corporate Governance, Accra, Ghana. 24. Parum E. (2005), “Does Disclosure on Corporate Governance Lead to Openness and Transparency in How Companies are Managed?” Corporate Governance – An International Review. 25. Report of the Committee on Corporate Governance of Public Companies in Nigeria (2003), SEC, Abuja, Nigeria. 26. Robert A. G. (2004); “Corporate Governance” (3rd Edition) Blackwell Publishing – Oxford. 27. Robert A. G. (2008); “Corporate Governance” (4th Edition) John Wiley & Sons – West Sussex. 28. Sanda A. Mikailu A.S. and Garba T. (2001), “Corporate Governance Mechanisms and Firms Financial Performance in Nigeria. 29. Sherman H. (2004), “Corporate Governance Ratings” Corporate Governance – An International Review. 30. Tarantino A. (2008); “Governance, Risk, and Compliance Handbook” John Wiley & Sons – New Jersey 31. The Nigerian Banker (2004), “Corporate Governance in
Financial Services Industry”.
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32. The Nigerian Stock Exchange – Monthly Stock Market Review (2006) 33. Vallabhaneni New Jersey. 34. Yakassai G.A. (2000), “Corporate Governance in a Third World Country”, being paper presented at the 3rd International Conference on Corporate Governance Directors. 35. Zabihollah R. (2009); “Corporate Governance and Ethics” John Wiley & Sons - New Jersey. S. R. (2008); “Corporate Management,
Governance, and Ethics Best Practices” John Wiley & Sons –
WEBSITES: 36. www.business-ethics.com 37. http://cog.kent.edu/libary.html 38. www.corporategovernance Africa.org 39. www.essaytown.com/topics/corporategovernance 40. www.icfaipress.org/books/corporategovernance 41. www.ifc.org/ifcext/corporategovernance.nsf/content/approac h,corporate governance methodology 42. www.ndic-ng.com
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43. www.nigeria stockexchange.com/quoted companies 44. www.nigerianlaw.org, CAMA 45. http;//papers.ssr.com 46. http;//rru.worldbank.org/themes/corporate governance 47. www.sec.ngr.org,sec rules and regulations 48. www.shareholder.com/shared/dynamicdoc 49. www.vojointernational.com, high profile corporate failure. 50. www.wcfcg.net
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doc_364107648.docx
the Impact of Corporate Governance on the Productivity of a Firm
Research Reports on the Impact of Corporate Governance on the Productivity of a Firm
ABSTRACT
The research looks into the relationship between corporate governance and organizational performance., through the processes of research multiple variables are examined; the complex set of relationships between a Corporation and its board of directors, management, shareholders, stakeholders, customers, creditors and how effective Corporate Governance can improve the productivity of a firm. Due to the nature of the research, the methodology used was focused on extensive interview, textbooks, journals and articles. Interview questions were focused on the variables that could affect the performance of a firm; textbooks, journals and articles were used as secondary data to have a past insight on how organizational performance affects a firm. The research demonstrates that high governance risk correlates with lower performance, and robust governance is associated with more sustained performance. Companies with higher standards of governance were discovered to have higher performance). Further findings indicated that one of the more difficult things in assessing the influence of corporate governance upon firm performance is to take into account the impact of changes in the market: at times of rapid expansion many companies will perform well, in times of recession most companies will find it more difficult to perform. Recommendations made focuses on improving the relationship between an organization, as a wholes and shareholders, stakeholders, management, creditors,
1
and customers, through proper Corporate Governance. Once this is achieved to a certain degree, it will positively affect the level of performance of a firm, directly or indirectly.
TABLE OF CONTENT
1.
CHAPTER ONE – INTRODUCTION ……………………………………………………..1 ……………………………………………………..............4 ……………………………………………………..5 ……………………………………………………..6 ……………………………………………………...6 ……………………………………………………………...7 ……………………………………………………………...8
1.1 Background of the Study 1.2 Statement of the Problem 1.3 Objective of the Study 1.4 Significance of the Study 1.5 Scope of the Study 1.6 Definition of Terms 1.7 Plan of Study
2. CHAPTER TWO – LITREATURE REVIEW 2.1 An Overview of Corporate Governance 2.2 Models of Corporate Governance 2.3 Mechanisms of Corporate Governance 2.4 Governance Structure ………………………………...........…...9 ……………………………….................16 ……………………………………..........40
………………………………………………...................42
2.5 Potential Role of Stakeholders in Corporate Governance .................................49 2.6 Board of Directors and Corporate Governance 2.7 Board Organization & Structure …..........………………….....52
…………………………………………..............61
2.8 Corporate Governance Systems in Different Countries ………………...............75 2.9 Quality of Corporate Governance and Firm Performance …………….........79
2
2.10 Corporate Social Responsibility 2.11 Corporate Sustainability 2.12 Corporate Governance in Nigeria 2.13 Benefits of Corporate Governance 2.18 Summary
…………………………………………..............80 …………………………………………………..82 ............................................................83 ……………………………….................86
............………………………………………………………………........88
3. 3.1
CHAPTER THREE – RESEARCH METHODOLOGY Introduction ......………………………………………………………….................90 .....……………………………………………………….........90 …………………………………………….......99
3.2Research Methods 3.3 3.4
Methods of Data Collection Method of Data Analysis
……………………………………………….................104 ……………………………………………….....109
3.5 Justification of Method
4. 4.1 4.2 4.3
CHAPTER FOUR – DATA PRESENTATION, ANALYSIS AND INTERPRETATION Introduction ………………………………………………………………........110 ……………………………………………………….......113
Interpretation of Data
Summary of Analysis ………………………………………………………...................126
5. 5.1 5.2 5.3
CHAPTER FIVE – SUMMARY, CONCLUSION AND RECOMMENDATION Summary Conclusion …………………………………………………………………….........130 …………………………………………………………………...........133 ………………………………………………………….........137
Recommendation
Bibliography
…………………………………………………………….............141
3
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND OF THE STUDY The institutions of governance provide a framework within which the social and economic life of countries is conducted. Corporate governance concerns the exercise of power in corporate entities. Corporate Governance is the key foundation for firms to be more productive and have a long existing product life cycle. The levels of institutional collapse and firm?s failure worldwide from unforeseen circumstances, there have been new concepts or theories on how an organization should effectively run. Through past researches it has been observed that the Management of firm and survival of companies are associated with the type of Management that is in place and the global competitive environment requires sound corporate governance. This research study will examine the effects of healthy corporate governance in an organization. It looks into the factors necessary to achieve successes in relation to the Board of Directors of an
4
organization; Corporate Ethics; Mechanisms of Corporate Governance; Responsibilities of Shareholders; Structure and Responsibilities of a Board; and Organization of Audit. This research focuses on Corporate Governance in the Nigerian Organizations and it looks into ways in which mechanisms in relation to Corporate Governance can be put into place to achieve proper Management, so as to achieve effective productivity. Nigeria is not left out in the campaign for proper Corporate Governance, especially with recent events of Nigerian Banks closing down or Banks being crippled through unprofessional decisions made by those on the Board. This approach not only narrows the dimensions of corporate
governance to a restricted set of interests, as a result it has a very limited view of the dilemmas involved in corporate governance. There are competing corporate governance systems in the market based AngloAmerican system; the European relationship based system; and the relationship based system of the Asia Pacific (Clarke 2007). This diversity of corporate governance systems is based on historical cultural and institutional differences that involve different approaches to the values and objectives of business activity. Furthermore the importance of strategic choice in the determination of governance systems
“Entrepreneurs, investors and corporations need the flexibility to craft governance arrangements that are responsive to unique business
5
contexts so that corporations can respond to incessant changes in technologies, competition, optimal firm organization and vertical networking patterns…To obtain governance diversity, economic
regulations, stock exchange rules and corporate law should support a range of ownership and governance forms”. The OECD provides the most authoritative functional definition of 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 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. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance." However corporate governance has wider implications and is critical to economic and social well being, firstly in providing the incentives and performance measures to achieve business success, and secondly in providing the accountability and transparency to ensure the equitable distribution of the resulting wealth. The significance of corporate governance for the stability and equity of society is captured in the broader definition of the concept offered by Sir Adrian Cadbury (2002):
6
"Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society." It is therefore logical to study the influence of Corporate Governance mechanism on performance of companies. 1.2 STATEMENT OF THE PROBLEM There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large firms such as Enron Corporation and MCI Inc. Bold, broad efforts to reform corporate governance have been driven, in part, by the needs and desires of shareowners to exercise their rights of corporate ownership and to increase the value of their shares and, therefore, wealth. Over the past three decades, corporate directors? duties have expanded greatly beyond their traditional legal
responsibility of duty of loyalty to the corporation and its shareowners. Nevertheless "corporate governance," despite some feeble attempts from various quarters, remains an ambiguous and often misunderstood phrase. For quite some time it was confined only to corporate management. That is not so. It is something much broader, for it must
7
include a fair, efficient and transparent administration and strive to meet certain well defined, written objectives. Corporate governance must go well beyond law. The quantity, quality and frequency of financial and managerial disclosure, the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities, and the commitment to run a transparent organization. Therefore in an attempt to redress Corporate Governance principles and practices, this study looks at ideal ways in which Corporate Governance principles and practices can be executed and used properly, and what factors are necessary, for corporate governance to succeed. Specifically the study shall attempt to establish the relationship between Corporate Governance principles and the productivity of the firm. 1.3 OBJECTIVES OF THE STUDY The objective of the study is; 1. To determine the relationship between Corporate Governance and the productivity of a firm. 2. To identify and understand the factors that hinders good
governance. 3. To appreciate the relevance of Corporate Governance in the Global Market. 4. To determine the proper elements necessary to achieve sound Corporate Governance.
8
1.4
SIGNIFICANCE OF THE STUDY The subject matter; „Corporate Governance and its impact on the Productivity of a firm? is aimed at making the following contributions as stated below: 1. It will enhance firms view on corporate governance and how it can affect the productivity of a firm. 2. It will allow firms to properly restructure their corporate governance so as to improve effectiveness. 3. It will give Organizations insight on the various factors necessary for sound governance practice. 4. It will highlight the role and relevance of stakeholders in a firm. 5. It would emphasis the benefits to be derived if firms could adhere to proper corporate governance.
1.6
SCOPE OF THE STUDY The study is limited by the overall objective view of the surveys and interviews. The study is also limited to Peugeot Automobile Nigeria and Nassarawa State University, being the case study under examination, which although the organizations are very diverse in nature; both firms to an extent practice corporate governance. The extent to which the study will meet the issues raised in the previous section can be curtailed by the realities of data availability in Nigeria. Corporate Governance is a sensitive issue as it focuses on the
9
organizations observance of rules of ethics, social responsibility etc. even in the most advanced opened democracies, companies find it difficult to divulge such issues because they might be considered company secrets; this is even more in Nigeria. Therefore findings of this report will be affected by the quantity quality and reliability of data. 1.6 DEFINITION OF TERMS a. Accountability: the allocation or acceptance of responsibility for actions b. Audit: a systematic check or assessment, especially of the efficiency or effectiveness of an Organization or process, typically carried out by an independent assessor. c. Balance of Power: the distribution of power among two or more group of people, where the pattern of force and dominance among them is balanced in such a way that no single entity has dominance over another. d. Board of Directors: e. CEO – Chief Executive Officer f. Codes of Best practices – These codes are non-binding rules that go beyond the law, taking country-specific conditions into account and often exceeding the standards set by international guidelines.
10
g. Corporate Governance: is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. h. Remuneration: the paying or rewarding of somebody for goods or services or for losses sustained or inconvenience caused. i. Shareholders: somebody who owns one or more shares of a company?s stock. j. Stakeholders: a person or group with direct interest, involvement, or investment in something, e.g. the employees, stockholders, and customers of a business concern. k. Transparency: the quality or state of being transparent
(completely open and frank). 1.7 PLAN OF STUDY This study is divided into five (5) chapters. The first chapter is introduction which includes background of the study, background of the study, statement of the problem, objective of the study, significance of the study, scope of the study, and definition of terms and finally the plan of the study. The second chapter has to do with reviews relevant literature, which covered areas in corporate governance like an overview of corporate governance; models and mechanisms; governance structure, role of stakeholders; board of directors; board organization or structure; regulations; ownership perspective
11
of
corporate
governance;
governance viewed as leadership; governance as a decision making vehicle; business ethics in relation to corporate governance; link between effective corporate governance practices and firm
performance; corporate social responsibility; corporate sustainability; corporate governance reform, benefits and finally a summary. The third chapter is the methodology and it exposes the methods used in obtaining data and technique used in analyzing data as well as justification of methods of data analysis used. The fourth chapter consists of the Data presentation and analysis which covers areas like; Directors and the performance of a firm;
Management and their influence on profitability; stakeholders impact on the performance of an organization; role of shareholders in the management of a corporation; board structure; board composition; board size; creditors influence; and relevance of Audit Committee. Finally the fifth chapter consists of the summary, conclusions and recommendations. The summary is an overview on sound corporate governance and how it affects the level of productivity of a firm. Recommendations cover areas like proper roles and responsibilities of both Directors and Management; shareholders activism; positive influence of stakeholders; relevance of Audit; and proper board composition and structure.
12
CHAPTER 2
LITERATURE REVIEW
2.1 An Overview of Corporate Governance
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large. Corporate governance can also be defined as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders management and other stakeholders, with good by directing and controlling objectivity,
activities
business
savvy,
accountability and integrity. A good corporate governance regime helps to assure that corporations use their capital efficiently. Good corporate
governance helps, to ensure that corporations take into account the interests of a wide range of constituencies, as well as of the communities in which they operate, and that their boards are accountable to the company and to the shareholders. This, in turn helps to assure that corporations operate for the benefit of society as
13
a whole. It helps to maintain the confidence of investors – both foreign and domestic – and to attract more „patient? long-term capital. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. The positive effect of corporate governance on different stakeholders ultimately is a strengthened economy, and hence good corporate governance is a tool for socio-economic development. Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization. Commonly accepted principles of corporate governance include:
?
Rights and equitable treatment of shareholders : Organizations should respect to the rights of shareholders rights. rights They by and can help help
shareholders shareholders
exercise
those their
exercise
effectively
communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.
14
?
Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.
?
Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors.
?
Integrity and ethical behavior: Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.
?
Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of
15
accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information. Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports. Apreda (2008) provides a unifying view of governance as a distinctive field of learning and practice identifying interlinked themes that arise from corporate, public and global governance, and identifies the core of governance in all three domains as: 1. 2. 3. 4. 5. 6. 7. A founding constitution A system of rights and duties Mechanisms for accountability and transparency Monitoring and performance measures Stakeholder rights Good governance standards Independent gatekeeper
16
The Board of Directors meets according to a fixed schedule, set at the beginning of each year, which enables it to properly discharge its duties. As a rule, the Board of Directors meets at least five (5) times a year. Non-executive Directors are required to meet separately from executive members at least once a year. All Directors are expected to be provided with a concise but comprehensive set of information by the Company Secretary in a timely manner, concurrently with the notice of the Board meeting, not lee than fourteen (14) days before each meeting. This set of document is to include; ? An agenda ? Minutes of the prior Board Meeting ? Key performance indicators, by including relevant and financial clear
information
prepared
management,
recommendations for actions. The diversity of corporate governance systems is based on historical cultural and institutional differences that involve different approaches to the values and objectives of a business activity. Furthermore the importance of strategic choice in the determination of governance systems
“Entrepreneurs, investors and corporations need the flexibility to craft governance arrangements that are responsive to unique business contexts so that corporations can respond to incessant changes in technologies,
17
competition, optimal firm organization and vertical networking patterns…To obtain governance diversity, economic regulations, stock exchange rules and corporate law should support a range of ownership and governance forms. Corporate governance is concerned with the processes, systems, practices and procedures as well as the formal and informal rules that govern 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. 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 those of other stakeholders, 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 by firms.
18
2.2
Models of Corporate Governance
2.2.1 The simple finance model 'In the finance view, the central problem in corporate governance is to construct rules and incentives (that is, implicit or explicit 'contracts') to effectively align the behavior of managers (agents) with the desires of principals (owners)', (Hawley & Williams 1996:21). However, the 'rules' and 'incentives' considered, are generally only those within the existing US system of publicly traded firms with unitary boards. The rules and incentives in the finance model refer to those established by the firm rather than to the legal/political/regulatory system and culture of the host economy or the nature of the owners. The finance view represents a sub-section of the political model of corporate governance. The political model interacts with the 'cultural', 'power' and 'cybernetic' models. It is the nature of the owners which exacerbates corporate control problems found in Anglo countries like the US, Canada, UK and Australia. In each of these countries, institutional investors own the majority of the shares in most of the largest publicly traded firms unlike in continental Europe and Japan (Analytical 1992). Institutional investors, such as pension and mutual funds, collectively owned more than 57% of the top US 1,000 firms in 1994 (Hawley & Williams 1996:8). The problem with institutional ownership is that their investment managers are fiduciary agents of the beneficial owners and so the situation is created of agents representing agents. Hence the term
19
'Fiduciary Capitalism' or what Peter Drucker (1976) more provocatively described as 'Pension Fund Socialism'. The problem of agents being responsible to agents is that it compounds the agency costs identified by Jensen &Meckling (1976). A basic assumption is that managers will act opportunistically to further their own interests before shareholders. Jensen and Meckling showed how investors in publicly traded corporations incur costs in monitoring and bonding managers in best serving shareholders. They defined agency costs as being the sum of the cost of: monitoring management (the agent); bonding the agent to the principal (stockholder/'residual claimant'); and residual losses. Their analysis showed amongst other things: why firms use a mixture of debt and equity; why it is rational for managers not to maximise the value of a firm; why it is still possible to raise equity; why accounting reports are provided voluntarily and auditors employed by the company; and why monitoring by security analysts can be productive even if they do not increase portfolio returns to investors. A basic conclusion of agency theory is that the value of a firm cannot be maximized because managers possess discretions which allow them to expropriate value to themselves. In an ideal world, managers would sign a complete contract that specifies exactly what they could do under all states of the world and how profits would be allocated. 'The problem is that most future contingencies are too hard to describe and foresee, and as a result, complete contracts are
20
technologically unfeasible' ( Shleifer&Vishny 1996). As a result, managers obtain the right to make decisions which are not defined or anticipated in the contract under which debt or equity finance is contributed (Grossman & Hart 1986; Hart & Moore 1990). This raises the 'principal's problem' (Ross 1973) and 'agency problem' (Fama& Jensen 1983a,b). How can publicly traded firms with such incomplete contracts with their managers be effective in efficiently raising funds? The 'agency problem' is particularly acute in Anglo cultures with dispersed ownership where corporations do not have a supervisory board or what Monks (1994) describes as a 'relationship investor'. When all shareholders own small minority interests to create diverse ownership it is not rational for any investor to spend time and incur costs to supervise management as this provides a 'free ride' for other investors. In any event, small shareholders may lack the power and influence to extract information which could reveal expropriation or mismanagement. In many Anglo countries, the law may limit the ability of shareholders to become associated together to form a voting block to influence or change management unless they make a public offer to all shareholders. Insider trading laws may also inhibit or prohibit shareholders from obtaining the necessary information to monitor and supervise management. Monks (1996), an Assistant Secretary of Labour in the Reagan Administration, describes how US managers
21
have influenced law making to protect themselves from shareholder interventions. 2.2.2 The stewardship model In the stewardship model, 'managers are good stewards of the corporations and diligently work to attain high levels of corporate profit and shareholders returns' (Donaldson & Davis 1994). Donaldson & Davis note that 'Managers are principally motivated by achievement and responsibility needs' and 'given the needs of managers for responsible, self-directed work; organizations may be better served to free managers from subservience to non-executive director dominated boards'. According to Donaldson & Davis, 'most researchers into boards have had as their prior belief the notion that independent boards are good' and 'so eventually produce the expected findings'. There are influential and powerful sources who recommend the need for independent non-executive directors such as the Council of Institutional Investors in the US, Cadbury (1992) in the UK, Australian Institutional investors (AIMA 1995), existing professional directors, and all those would like to become non-executive directors. However, supporting stewardship theory are the individuals who contribute their own money and other resources to non-profit organizations to become a director. In analyzing the welfare distributed to stakeholders through introducing a division of powers, Persson, Roland &Tabellini (1996) made provision in their equations to
22
include the welfare contributed by controllers. In commenting on stewardship theory, Hawley & Williams (1996:29) state that 'The logical extension is either towards an executivedominated board or towards no board at all'. Donaldson & Davis point out: 'the non-executive board of directors is, by its design, an ineffective control device' and cite evidence to support the view that 'the whole rationale for having a board becomes suspect'.
Brewer(1996) reported that 'One of Canada's best-known business leaders suggested last month that boards of directors should be abolished and replaced by a formal committee of advisors'. This view arose from the businessman in question being sued as a director of an insurance company for over a billion dollars from actions taken by management. Boards can become redundant when there is a dominant active shareholder, especially when the major shareholder is a family or government. One could speculate that some boards are established from cultural habit, blind faith in their efficacy, or to make government or family firms look 'more business like'. However, research by Pfeffer (1972) has shown that the value of external directors is not so much how they influence managers but how they influence constituencies of the firm. He found that the more regulated an industry then the more outsiders were present on the board to reassure the regulators, bankers, and other interest groups. Tricker (1996:29) points out: 'underpinning company law is the
23
requirement that directors show a fiduciary duty towards the shareholders of the company'. Inherent in the idea of directors having a fiduciary duty is that they can be trusted and will act as stewards over the resources of the company. Thus in Anglo law, directors duties are based on stewardship theory. This duty is higher than that of an agent as the person must act as if he or she were the principal rather than a representative. Many writers, and especially the proponents of stewardship and agency theory, see each theory contradicting the other. Donaldson & Davis raise the possibility that there is some deficiency in the methodologies of the numerous studies they cite which provide support for both theories. Some possibilities are that the studies did not separate out the affect of firms being in a regulated industry as analyzed by Pfeffer (1972) or possessing a dominant shareholder acting as a supervisory board or 'relationship investor'. The existence of an influential supervisory investor is not uncommon in Anglo cultures and it is the rule rather than the exception in other cultures (Analytica 1992; Tricker 1994; Turnbull 1995c,d,f). Ghosal& Moran (1996:14) raise the possibility that the assumption of opportunism on which agency theory is based, 'can become a selffulfilling prophecy whereby opportunistic behavior will increase with the sanctions and incentives imposed to curtail it, thus creating the need for even stronger and more elaborate sanctions and incentives'. Likewise, stewardship theory could also become a self-fulling. This
24
would appear to be the situation in firms around Mondragón which have no independent directors. All board members are either executives or stakeholders (Turnbull 1995d). However, each firm and each group of firms in the Mondragón system is controlled by three or more boards/councils or control centers which introduce a division of power with checks and balances. The inclination of individuals to act as stewards or self-seeking agents may be contingent upon the institutional context. If this is the case, then both theories can be valid as indicated by the empirical evidence. Stewardship theory, like agency theory, would then be seen as sub-set of political and other broader models of corporate governance. Psychological analysis supports both theories. Warring (1973), a professor of psychology, states that: 'differences between individuals are significant and important'; the need for money and approval, etc. is 'determined and limited by the necessity of maintaining the organism in a state of dynamic equilibrium'; people stand 'in an interactive cybernetic relationship to his/her community and environment, and is changed as a result of any interaction' and individuals are 'sometimes competitive, sometimes collaborative: usually both'. The inclination of individuals to act as selfless stewards may be culturally contingent. The 'company man' in Japan may place his employer before family. The voluntary resignation of executives is not uncommon when a firm is disgraced and instances of suicide are still
25
reported. 2.2.3 The stakeholder model In defining 'Stakeholder Theory' Clarkson (1994) states: '"The firm" is a system of stake holders operating within the larger system of the host society that provides the necessary legal and market infrastructure for the firm's activities. The purpose of the firm is to create wealth or value for its stake holders by converting their stakes into goods and services'.This view is supported by Blair (1995:322) who proposes:
... the goal of directors and management should be maximizing total wealth creation by the firm. The key to achieving this is to enhance the voice of and provide ownership-like incentives to those participants in the firm who contribute or control critical, specialized inputs (firm specific human capital) and to align the interests of these critical stakeholders with the interests of outside, passive shareholders.
Consistent with this view by Blair to provide 'voice' and 'ownership-like incentives' to 'critical stakeholders', Porter (1992:16-17) recommended to US policy makers that they should 'encourage long-term employee ownership' and 'encourage board representation by significant customers, suppliers, financial advisers, employees, and community representatives'. Porter (1992:17) also recommended that corporations 'seek long-term owners and give them a direct voice in governance' (i.e. relationship investors) and to 'nominate significant owners, customers, suppliers, employees, and community representatives to the board of directors'. All these recommendations would help establish the sort of business alliances, trade related networks and strategic associations which Hollingsworth and Lindberg (1985) noted had not evolved as much in
26
the US as they had in continental Europe and Japan. In other words, Porter is suggesting that competitiveness can be improved by using all four institutional modes for governing transactions rather than just markets and hierarchy. This supports the need to expand the theory of the firm as suggested by Turnbull (1994a). However, the recommendations of Porter to have various stakeholder constituencies appoint representatives to a unitary board would be counter-productive for the reasons identified by Williamson (1985:300), Guthrie & Turnbull (1995) and Turnbull (1994e;1995e). Williamson (1985:308) states: 'Membership of the board, if it occurs at all, should be restricted to informational participation'. Such information
participation is achieved in Japan through a Keiretsu Council and in continental Europe through works council and supervisory boards. These provide the model for establishing 'stakeholder councils' as described by Guthrie & Turnbull (1995) and Turnbull (1994d; 1997c,e,f). Hill & Jones (1992) have built on the work of Jensen &Meckling (1976) to recognize both the implicit and explicit contractual relationships in a firm to develop 'Stakeholder–Agency Theory'. The interdependence between a firm and its strategic stakeholders is recognized by the American Law Institute (1992) which states: 'The modern corporation by its nature creates interdependences with a variety of groups with whom the corporation has a legitimate concern, such as employee, customers, suppliers, and members of the communities in which the corporation operates'.
27
Both stakeholder voice and ownership, as suggested by Porter and Blair, could be provided by 're-inventing' the concept of a firm as proposed by Turnbull (1973, 1975a, 1991a, 1994d, 1997f). The proposal is based on tax incentives providing higher short term profits to investors in exchange for them gradually relinquishing their property rights in favour of strategic stakeholders. Control of the firm is likewise shared between investors and stakeholders through multiple boards to remove conflicts of interest and so agency costs in a manner similar to that found in continental Europe and especially in Mondragón. 2.2.4 The political model The political model recognizes that the allocation of corporate power, privileges and profits between owners, managers and other
stakeholders is determined by how governments favor their various constituencies. The ability of corporate stakeholders to influence allocations between themselves at the micro level is subject to the macro framework, which is interactively subjected to the influence of the corporate sector. According to Hawley & Williams (1996:29): 'the political model of corporate governance has had immense influence on corporate governance developments in the last five to seven years'. However, Hawley & Williams focus their discussion only on the micro aspects of how shareholders can influence firms. Firms have also been influential in molding the US political/legal/regulatory system over the last few centuries. According to Justice Felix Frankfurter of the US Supreme
28
Court, the history of US constitutional law is 'the history of the impact of the modern corporation upon the American scene', quoted in Miller (1968:1). Roe (1994) provides an elaboration of the historical evolution of the political model and like Black (1990) and others, argues that the finance model's nearly exclusive reliance on the market for corporate control, was primarily the result of the political traditions of federalism/decentralization dating back to the American Revolution. However, these traditions have been subject to substantial changes. After the Revolution, there was concern that newly won political freedoms could be lost through foreigners gaining control of corporations (Grossman & Adams 1993:6). As a result, the lives of all corporate charters were limited to 50 years or less up until after the Civil War. Nor did these charters provide limited liability for the owners. Most states adopted a ten year sunset clause for bank charters and sometimes they were as short as three years. 'Early state legislators wrote charter laws and actual charters to limit corporate authority, and to ensure that when a corporation caused harm, they could revoke the charter' (p. 1). However, 'During the late 19th century, corporations subverted state governments' (p:1) and according to Friedman (1973:456), corporations 'bought and sold governments'. In 1886 the US Supreme Court ruled that a private corporation was a natural person under the US constitution, sheltered by the Bill of Rights and the 14th Amendment. 'Led by New Jersey and Delaware,
29
legislators watered down or removed citizen authority clauses. They limited the liability of corporate owners and managers, then started handing out charters that literally lasted forever' (Grossman & Adams 1993:21). 'Political power began flowing to absentee owner?s intent upon dominating people and nature' (p.15). Grossman & Adams (1993:26) went on to say: 'No corporation should exist forever'. As a reaction to the corporate power extant at the end of the 19th century, a number of states introduced cumulative voting to allow minority interests to elect directors (Gordon 1993). Gordon describes how this initiative was subverted by competition between states to attract corporate registrations or what Nader (1976:44) describes as 'charter mongering'. Monks (1996) describes this as 'the race to the bottom' and explains how contemporary corporations are influencing the determination of accounting and legal doctrines and promoting a management friendly political/legal/regulatory environment. Monks (1996) states that 'The hegemony of the BRT (Business Round Table) is not a sustainable basis for corporate governance in America'. During the beginning of the 20th century, at the federal level, laws were introduced in the US to limit bank ownership of corporations and related party transactions between corporations. This forced both the pattern of ownership and control of US firms and the pattern of trading relationships to diverge from that found in continental Europe and Japan. Kester (1992) describes the latter patterns as 'contractual governance' as analyzed by Coase and Williamson while limiting the
30
term corporate governance to the problem of co-ordination and control as analyzed by Jensen &Meckling (1976) and Berle and Means (1932). Hawley & Williams (1996:29) focused on the micro level of the political model as articulated by Gundfest (1990) and Pound. Pound (1993b) defined the 'political model of governance' as an approach, '... in which active investors seek to change corporate policy by developing voting support from dispersed shareholders, rather than by simply purchasing voting power or control...'. Pound (1992:83) states: 'this new form of governance based on politics rather than finance will provide a means of oversight that is both far more effective and far less expensive than the takeovers of the 1980's'. Gundfest (1993) points out that 'an understanding of the political marketplace is essential to appreciate the role that capital-market mechanisms can... play in corporate governance'. For example, Gordon & Pound (1991) showed that corporations with fewer antitakeover provisions in their constitutions out performed those with antitakeover measures in place. While the political form of governance is new to many US scholars, the importance of 'political procedures' (Jensen &Meckling 1979:481) have been recognized in worker-governed firms by Berstein (1980), Turnbull (1978a:100), and many others, with stakeholder-controlled firms analyzed by Turnbull (1995d). While recognizing the cultural and contextual contingencies of the US
31
system, the current political model focuses on contemporary issues such as the US proclivity for market liquidity over institutional control (Coffee 1991). The political model is also concerned with the related issue of trading off investor voice to investment exit, and institutional agents monitoring corporate agent, i.e. Watching the Watchers (Monks &Minow 1996). All these issues are influenced by government laws and regulations and so subject of public policy debate for changes and reform. Black & Coffee (1993) states that:
According to a new 'political' theory of corporate governance, financial institutions in the U.S. are not naturally apathetic, but rather have been regulated into submission by legal rules that—sometimes intentionally, sometimes inadvertently—hobble American institutions and raise the costs of participation in corporate governance.
Bhide (1994) develops details of this position. Hawley & Williams (1996:32) state:
The political model of corporate governance (whether Pound's or Gundfest's version) places severe limits on the traditional economic analysis of the corporate governance problem, and locates the performance-governance issue squarely in a broader political context. Political does not mean necessarily imply a government role merely that it is non-market.
In other words, the analysis of economists needs to be truncated and integrated into the insights of Ben-Porath (1978) and Hollingsworth & Lindberg (1985) to understand how both economic transactions and their co-coordinating institutions are governed. An aspect also neglected by economists is that national income can be distributed without work or welfare by spreading corporate ownership directly to individuals rather than through institutional intermediaries (Kelso &
32
Adler 1958; Kelso &Hetter 1967, 1986; Turnbull 1975a, 1988, 1991b, 1994b).
2.2.5
Other Ways of Analyzing Corporate Governance There are other models of corporate governance to consider based on culture, power and cybernetics. A synthesis of all models may be required if we are to efficiently develop, construct, test and implement new approaches.
2.2.5.1Culture Hollingsworth, Schmitter&Streeck (1994:6) provide an example of a cultural perspective:
...transactions are conducted on the basis of mutual trust and confidence sustained by stable, preferential, particularistic, mutually obligated, and legally non–enforceable relationships. They may be kept together by value consensus or resource dependency—that is, through 'culture' and 'community' - or through dominant units imposing dependence on others.
This statement was made in the context of transactions being governed by networks at the 'meso level (e.g., the intermediate location between the micro level of the firm and the macro level of the whole economy)' rather than of the firm. However, it is also relevant within firms, and in this way it would subsume elements of the stewardship model. Porta, Lopez-de-Silanes, Shleifer, &Vishny, (1997) found that the type of dominant religion in a culture can affect trust and hence the ability of strangers in large organizations to co-operate. In particular, they found that trust in large organizations increases as the proportion of the
33
population
involved
in
hierarchical
religions,
like
Catholicism,
decreases. While Japan showed an above average degree of trust is was not as high as Nordic countries and China. Some scholars have speculated that the Japanese commitment to employee participation and the forming of strategic alliances between firms arises from their embedded belief in the inter-dependency of their many Gods. It might be interesting to research if Christian economists and managers, or other types of monotheists, have an embedded belief in hierarchies rather than alliances and networks. Williamson (1975:38) noted the short-comings of economic analysis in neglecting 'the exchange process itself as an object of value'. He identified the concept of 'atmosphere' to 'raise such systems issues: supplying a satisfying exchange relation is made part of the economic problem, broadly construed'. However, this insight is not mentioned or used in Williamson (1985) or in many of his later writings. The need to consider the cultural context or 'atmosphere' of transactions within and between firms has been analyzed by Maruyama (1991). Mondragón illustrates the importance of culture as it provides 'an environment where there is no perceived threat of opportunism, even from opportunists!', to use the words of Ghoshal and Moran (1996:26) in another context. 'Mondragón makes it clear that market or planning decisions are value decisions' (Morrison 1991:98). This is seen as an advantage by economists Bradley & Gelb (1983:30) from the World Bank. They favorably compare Mondragón
34
with the 'enriched employment relationship extending far beyond the cash nexus' of Japanese firms and X-inefficiency (Leibenstein, 1987) found with 'Western' practices. The importance of culture is evident from the view in Mondragón that social adaptability is the most critical condition in converting a firm owned by an entrepreneur to a co-operative (Whyte & Whyte (1988:86). 'Mondragón is unlikely to undertake a conversion if the prospects of re-socializing managers and workers appear poor.' In this regard, the Catholic influence in Mondragón is at odds with the findings of Portaet. al. (1997). Morrison (1991:111) quotes the founder of Mondragón, Father Arizmendi as saying: 'A company cannot and must not lose any of its efficiency just because human values are considered more important than purely economic or material resources within the company; on the contrary such a consideration should help efficiency and quality'. Contrary to the concerns of Ghoshal& Moran, Williamson (1979:104) accepted that trust can transcend opportunism when he stated: Additional transactions-specific savings can accrue at the interface between supplier and buyer as contracts are successively adapted to unfolding events, and as periodic contract-renewal agreements are reached. Familiarity here permits communication economies to be realized: specialized language develops as experience accumulates and nuances are signaled and received in a sensitive way. Both institutional and personal trust relations evolve.
35
The reference to 'communication economies' will be taken up below. However, there is obviously need to integrate culture into the research calculus of firm structure and performance as undertaken by Berger (1976) in evaluating economic development.
2.2.5.2Power Perspective of Corporate Governance, From this perspective, it is the ability of individuals or groups to take action which is the over-riding concern. The related viewpoint of 'resource dependency' was developed by Pfeffer (1972); Pfeffer& Leong (1977) and Pfeffer&Salancik (1978). However, the explicit use of power seems to be neglected topic. Even when shareholders, directors, management or any other stakeholder have the knowledge and will to act, this is of no avail unless they also possess the power to act. The power of shareholders to act is part of the political model of corporate governance. Hawley & Williams (1996:57-60) identify various inhibitions on the power of shareholders to act arising from security laws, agenda setting by management at general meetings, proxy procedures, voting arrangements and the corporate by-laws. The power of directors to control management is dependent upon there being a sufficient number of directors who also have the knowledge and will to act to form a board majority. Even if independent directors have the knowledge to act, they may not have the will and power to act because they are loyal or obligated to
36
management and/or hold their board position at the grace and favor of management. Directors are unlikely to act against management unless they are supported by shareholders. However, many institutional shareholders lack the will to act. This was found to be a major problem for US firms in a report into their competitiveness by Regan (1993). Hawley & Williams (1996:65) noted that management controlled 'the information that does reach the board. The result can be a board knowing too little, too late and, even if it is willing to act to confront a growing problem or crisis, it is often unable to do so'. An appropriate separation of powers to create checks and balances provides a way to increase the welfare of stakeholders according to Persson, Roland &Tabillini (1996). Persson, Roland &Tabillini make the point that negative welfare may result if the division of power is not 'appropriate'. An analysis of appropriate division of powers has been made by Bernstein (1980) and Turnbull (1978a:100;1993b; 1997c). Calls by reformers for greater disclosure and transparency as a way to control firms are made on the assumption that there are shareholders who possess both the will and power to act. The validity of this implicit assumption is largely ignored. While disclosure is a necessary condition for regulation, self-regulation and self-governance, it is not sufficient unless there also exists both the power and will to act. All suggestions for reform of corporate governance processes need to consider the power of agents to act, or be subject to a veto, when there is a compound board. Pound (1993a) makes the points: 'always
37
have an opposition view' and 'there must be an opposition party and the prospect of insurgency'. However, Pound does not consider the principle of a division of power in his political model of corporate governance, even though he participated as co-chair of the shareholders' committee established at USX for this purpose (Pound 1992). While the power model of the firm may be but a part of the political model, it should never be neglected because without the power to take corrective action, no action can take place. For any action to be appropriate, the actors also need information which is accurate, timely, sufficient and yet manageable. While Pound (1993a) talks about 'feedback' it is from institutional investors who do not, cannot, and should not, have firm specific inside expert information. This leads us to consider the cybernetic approach to corporate governance. 2.2.5.3Cybernetic Analysis Cybernetic analysis in social institutions is concerned with their information and control architecture. As control is dependent upon power, a cybernetic investigation is dependent upon an analysis of power. Cybernetics is based on the mathematics of information theory where the basic unit of analysis is described as a 'bit'. A bit can be thought of as a letter in a language with eight bits creating what can be considered to be word, described as 'byte'. The ability of computers to store, process or transmit information is measured in thousands or
38
millions of bytes described respectively as kilobytes and megabytes. Like computers, humans have physical limitations on their ability to receive, store, process and transmit information. Williamson (1979:99) recognized that 'the efficient processing of information is an important and related concept' to transaction costs and stated in note 4, 'but for the limited ability of human agents to receive, store, retrieve, and process data, interesting economic problems vanish'. Wearing (1973) observed that an individual has 'limited information processing capacity so prefers slow rates of change, i.e. nearly stable systems,' and 'reduces, condenses, summarizes (and thus necessarily loses) information, in addition, an "imperfect" communications network in the environment also restricts and attenuates the flow of information'. Another reason for economizing information is to reduce the problem of 'bounded rationality' which refers to human behavior that is 'intendedly rational but only limitedly so' (Simon, 1961:xxiv). According to Williamson (1975:21), 'Bounded rationality involves neuro-
physiological limits on the one hand and language limits on the others'. Williamson (1975:45-6) notes that 'a change in organizational structure may be indicated' when individuals are exposed to information overload. To undertake tasks which exceed the capacity of one computer, two or more computers can be connected together in the same way humans solve more demanding tasks by working in teams, groups, alliances and networks. Cybernetics considerations cannot be ignored
39
in understanding or designing teams, divisions, the need for one or more boards and their structure, or the architecture of external alliances with stakeholders. The cybernetic perspective provides a basis for evaluating the integrity of corporate governance information and control systems from a number of aspects. Evaluating the integrity of information channels was investigated by Shannon, a founder of information theory. Shannon (1949) showed that reliable information can be obtained from unreliable channels if they are used in parallel. In other words, boards need to obtain information from strategic stakeholders as well as from management to avoid bias, distortion or errors as discussed by Turnbull (1993a; 1997c,e,f). The errors and distortions in management hierarchies have been reported by Downs (1967:116-118), Williamson (1975:122), and Demb&Neubauer (1992b). Another important insight of cybernetics is the 'law of requisite variety' which states that to counter any variable the organization must have matching responses. In other words, complexity can only be managed through complexity (Ashby 1968:202). Complex organizations, and/or those operating in a complex dynamic environment require complex control systems. This might be reflected in a compound board and/or a network of firms (Craven, Piercy & Shipp, 1996) and/or by involving strategic stakeholders in the control of a firm. The cybernetic concept of 'feedback' is a condition precedent for self-regulation or self-governance. If a firm is not to affect adversely its
40
stakeholders through its 'actions or inactions' it will require governance processes which allow its stakeholders to participate in establishing performance standards. Such arrangements are commonly
established in quality assurance programs. However, for stakeholders to have the will to act, they need a power base independent of management to protect them from being treated as whistle blowers. Independently elected Stakeholder Councils would represent the 'opposition party' sought by Pound. As strategic stakeholders would possess inside, expert information, they provide a way to inform management and their monitors, of any operational shortcomings as sought by Pound. The design of such arrangements would require the use of both the power and cybernetic perspective of corporate governance.
2.3 Mechanisms of Corporate Governance 2.3.1Internal corporate governance controls Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals, which include:
?
Monitoring by the board of directors : The board of directors, with its legal authority to hire, fire and compensate top
management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be
41
more independent, they may not always result in more effective corporate governance and may not increase performance.[7] Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.
?
Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting
?
Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose
42
company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.
?
Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.
2.3.2 External corporate governance controls External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include:
? ? ?
competition debt covenants demand for and assessment of performance information (especially financial statements)
? ? ? ?
government regulations managerial labor market media pressure takeovers
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2.4 Corporate Governance Structure 2.4.1Board Composition Board composition has been claimed as a key factor in allowing the board to act as a guardian of the principal?s interests. Inside directors have access to information that is relevant to assessing managerial competence and the strategic desirability of initiatives. In that sense, they are better able to discriminate legitimate or illegitimate causes of organizational misfortune. However, insider directors usually do not make exhaustive evaluation of the strategic decision processes since they are influenced by the CEO. Outside directors are not members of the top management team, their associates, or families; are not employees of the firm or its subsidiaries; and are not members of the immediate top management group. They normally serve as directors on several boards. Between managing their own businesses and serving on multiple boards, outside directors lack firm-specific knowledge and may not be able to understand each business and the complexities of the firm well enough to be truly effective. However it is less likely that t they are controlled by the CEO. Accordingly, outside directors could make exhaustive and profound evaluation of the strategic decision processes and the actions of managers. From the standpoint of agency theory, the interests of insiders are theorized to be aligned with those of the management, while the interests of outsiders are aligned
44
with the principals? interests. 2.4.2Board Leadership CEO duality refers to board structure where one person occupies two positions – a CEO position and a chairperson position of the board of directors. Non-duality implies that the different individuals serve as the CEO and chairperson. Proponents of CEO duality argue that it should lead to superior organizational performance as it permits clear-cut leadership. However, there is a downside to it: CEO duality firmly entrenches a CEO at the top of an organization, challenging a board?s ability to effectively monitor and discipline top management. CEO duality reduces the board?s ability to fulfill its proper governance function as an independent body. It signals the absence of separation of decision management and decision control... the organization suffers in the competition for survival. 2.4.4Board Size Board size has a number of implications. On the one hand, a smaller board is manageable from the CEO?s point of view. A smaller board size is viewed as an indicator of the CEO?s profound influence on proceedings in board meetings. On the other hand a larger board, although potentially unmanageable, may be valuable for the breadth of its services pool of expertise and resources for the organization. From an organizational dynamic perspective, however, a larger board is more likely to develop factions and coalitions that can increase group conflicts. The first step in structuring an effective board is to
45
shrink it, probably because a large board is more difficult to coordinate. A larger board is less likely to become involved effectively in the strategic decision-making process. A smaller board seems to be more effective than a larger board in the sense that it allows the board to support the strategic decisions of managers without frequent interruptions and to take decisive governance actions in a
coordinated fashion. However from an agency theory perspective, previous research has argued that CEOs may easily exert their influence on small boards but find it difficult to influence large ones. In firms with large boards, CEOs would experience greater difficulty to influencing all board members to agree and make decisions, including a decision to implement golden parachutes, than they would in firms with small boards.
2.4.5Executive Compensation Relating to compensation schemes, agency theory suggests that firms can choose between behavior-based and out-come based pay, depending on the difficulties in monitoring job performance. On the one hand, firms operating in context where appropriate managerial behaviors are well understood tend to rely on the behavior-based compensation plans. Under the behavior-based compensation the scheme, the optimal contract pays the agent a fixed wage for taking well-defined actions and penalizes him or her for taking sub-optimal actions are relatively contractible, and, as a result, managerial risk
46
associated with the behavioral-based compensation plans is relatively low. On the other hand, firms operating in a context where appropriate managerial behaviors are not well understood rely on the outcomebased compensation plans that are designed to reward managers for their performance instead of their actions. That is the optimal contract gives the agent a share in the outcome. In addition because the performance, such as stock price, is affected by external factors beyond the agent?s influence, tying compensation to the
performance will increase the agent?s exposure to risk. Since the outcome-based compensation plans create another risk for
managers, higher amount of compensation would be paid to managers; otherwise managers will make overly conservative
decisions. Therefore it is suggested that the outcome-based plans tend to be balanced with greater amounts of compensation.
2.4.6Board Composition and Leadership Boards of directors of large publicly owned corporations vary in size from industry to industry and from corporation to corporation. In determining board size, directors should consider the nature, size, and complexity of the corporation as well as its stage of development. Smaller boards are often more cohesive and work more effectively than larger boards. It is believed that having directors with relevant
47
business and industry experience is beneficial to the board as a whole. Directors with such backgrounds can provide a useful perspective on significant risks and competitive advantages and an understanding of the challenges facing the business. Because the corporation's need for particular backgrounds and experiences may change over time, the board should monitor the mix of skills and experience that directors bring to the board to assess, at each stage in the life of the corporation, whether the board has the necessary tools to perform its oversight function effectively. The board of a publicly owned corporation should have a substantial degree of independence from management. Board independence depends not only on directors' individual relationships – personal, employment or business – but also on the board's overall attitude toward management. Providing objective independent judgment is at the core of the board's oversight function, and the board's composition should reflect these principles; Board independence: A substantial majority of directors of the board of a publicly owned corporation should be independent of
management, both in fact and appearance, as determined by the board. Assessing independence: An independent director should be free of any relationship with the corporation or its management that may impair, or appear to impair, the director's ability to make independent
48
judgments. The listing standards of the major securities markets relating to audit committees provide useful guidance in determining whether a particular director is "independent." These standards focus primarily on familial, employment and business relationships. However, boards of directors should also consider whether other kinds of relationships, such as close personal relationships between potential board members and senior management, may affect a director's actual or perceived independence. Relationships with not-for-profit organizations: Some observers have questioned the independence of directors who have relationships with non-affiliated not-for-profit organizations that receive support from corporations. The Business Roundtable believes that such relationships and their effect on a director's independence should be assessed by the board or its corporate governance committee on a case-by-case basis, taking into account the size of the corporation's contributions to the not-for-profit organization and the nature of the director's relationship to the organization. Independence issues are most likely to arise where a director is an employee of the not-for-profit organization and where a substantial portion of the organization's funding comes from the corporation. By contrast, where a director merely serves on the board of a not-for-profit organization with broad community representation, there may be no meaningful independence issues. Corporations are well served by a structure in which the CEO also serves as chairman of the board. The CEO serves as a bridge between
49
management and the board, ensuring that both act with a common purpose. Some corporations have found it useful to separate the roles of CEO and chairman of the board to provide continuity of leadership in times of transition. Each corporation should make its own determination of what leadership structure works best, given its present and anticipated circumstances. The board should have contingency plans to provide for transitional board leadership if questions arise concerning management's conduct, competence, or integrity or if the CEO dies or is incapacitated. An individual director, a small group of directors, or the chairman of a committee may be selected by the board for this purpose.
2.5
The Potential Role of Stakeholders in Corporate Governance When a corporation is in a serious financial distress, residual claimants include not only shareholders, but also other stakeholders. Thus creditor banks and employees are likely to have particularly strong incentives to monitor firms. Given Asian enterprises? vulnerability to abuses by controlling families, their heavy dependence on banks, and the increasing importance of "knowledge workers," the scope for other stakeholders to play a corporate governance role could be considerable. The actual or potential roles of stakeholders are likely to depend on firms? characteristics in relation to their dependency on bank loans, level and type of technology, and extent of human
50
capital. The survey attempts to evaluate the degree to which firms pay attention to the interests and potential roles of various shareholders. Corporate directors in the countries surveyed seem to view the roles of broader stakeholders rather positively. Banks have certainly
strengthened their monitoring of their corporate clients since the Asian crisis, and companies are interested in having a close, long-term relationship with their creditor banks, particularly in Indonesia and Thailand. The survey results also show a relatively high prevalence of joint labor-management committees (JLMCs) in Indonesia and Korea, although they seem to play only a limited role as a potential governance mechanism. Nevertheless, employees are likely to play a substantial corporate governance role in the future given their fairly high level of education and relatively long tenure along with the prevalence of various complementary mechanisms whereby
employees could play an enhanced role, including shop-floor and financial participation. Corporate directors seem to believe in the rising importance of human capital for corporate success without being overly concerned about the downside of employees having a stronger voice or participating more actively. 2.5.1Role of Stakeholders in General
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Some
people
view
corporate
governance
as
dealing
with
mechanisms whereby the stakeholders of a corporation exercise control over corporate insiders and management in such a way that the stakeholders? interests are protected (Berglöf and von Thadden 1999; John and Senbet 1998). The single-minded pursuit of
shareholders? interests with little regard paid to other stakeholders might be both unfair and inefficient.56 In reality, most managers, even in Anglo- American enterprises, seem to believe that the relationship between stakeholders and the firm is one of the key elements of corporate success, if not the most critical factor. The role of various stakeholders may be even greater in many Asian enterprises, where a key challenge is to prevent the abuse of power by controlling owners. Stakeholders primarily include investors, managers and employees, customers, suppliers and other business partners, and local
communities. Regulatory and supervisory agencies, civil activists, and the media may play an important role in enhancing corporate governance. Securities regulatory bodies and fair trade commissions are directly involved in setting and enforcing the rules on the conduct of business by corporations for the purpose of protecting investors. Media attention can motivate politicians, bureaucrats, controlling families, and managers, who are concerned about damage to their reputations, to adopt more effective corporate governance laws, policies, and practices (Dyke and Zingales 2002a, 2002b).
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2.6
Board of Directors and Corporate Governance The Board of Directors should comprise of a broad range of expertise. Each individual Director should and have experience necessary to knowledge, effectively
qualifications,
expertise
integrity
discharge the duties of the Board of Directors. It is believed in Corporate Governance that experienced Directors with diverse company background are essential for the provision of successful and strategic direction for the Company. The composition, competencies and mix-skills are adequate for its oversight duties and the development of the corporate vision and strategy. The Board of Directors through its Corporate Governance Committee establishes which members are independent and it also recommends the appropriate size of the board. Directors act in good faith with due care and in the best interests of the Company and all its shareholders – and not in the interests of any particular shareholder – on the basis of relevant information. Each Director is expected to attend all Board of Directors meetings and applicable committee meetings. A company can not prohibit its Directors from serving on other Board of Directors. Directors are expected to ensure that other commitments do not interfere in the discharge of their duties. Directors can not divulge or use confidential or insider information about the company.
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It?s the Boards duty to discharge its duties, adopt best practices and principles, some of which include: ? The Chairman should be a non-executive Director. ? To maintain balance of interest and ensure transparency and impartiality, a number of Directors are independent. The independent Directors are those who have no material relationship with the Company beyond their Directorship. ? Directors abstain from action that may lead to conflict of interest and are to ensure they shall comply with the Company?s policy on Related Party Transaction. The remuneration of non-executive Directors is competitive and is comprised of an annual fee and a meeting attendance allowance. The remuneration package shall, however, not jeopardize Directors independence. Executive Directors are not paid fees beyond their executive remuneration package. The Board of Directors shall through its remuneration committee, periodically review the remuneration paid to Directors. The Board undertakes, annually, a formal and rigorous evaluation of its performance and that of its committees and individual Directors. This serves to continuously stimulate a high level of performance, identify the strengths and the weakness of the individual Directors and articulate ways to bridge identified gaps thereby leading to further strengthening of the Board. The result of the evaluation is presented to the whole Board for consideration and adoption.
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Given the accelerated nature of change, innovation and progress in Corporate Governance it is essential to know the principles that guide Board of Directors. These principles should help to guide the continual advancement of corporate governance practices. These guiding principles include; First, the paramount duty of the board of directors of a public corporation is to select a Chief Executive Officer and to oversee the CEO and other senior management in the competent and ethical operation of the corporation on a day-to- day basis. Second, it is the responsibility of management to operate the corporation in an effective and ethical manner in order to produce value for stockholders. Senior management is expected to know how the corporation earns its income and what risks the corporation is undertaking in the course of carrying out its business. Management should never put personal interests ahead of or in conflict with the interests of the corporation. Third, it is the responsibility of management, under the oversight of the board and its audit committee, to produce financial statements that fairly present the financial condition and results of operations of the corporation, and to make the timely disclosures investors need to permit them to assess the financial and business soundness and risks of the corporation. Fourth, it is the responsibility of the board and its audit committee to engage an independent accounting firm to audit the financial
55
statements prepared by management and to issue an opinion on those statements based on Generally Accepted Accounting
Principles. The board, its audit committee and management must be vigilant to ensure that no actions are taken by the corporation or its employees that compromise the independence of the outside auditor. Fifth, it is the responsibility of the independent accounting firm to ensure that it is in fact independent, is without conflicts of interest, employs highly competent staff, and carries out its work in accordance with Generally Accepted Auditing Standards. It is also the responsibility of the independent accounting firm to inform the board, through the audit committee, of any concerns the auditor may have about the appropriateness or quality of significant accounting treatments, business transactions that affect the fair presentation of the corporation's financial condition and results of operations, and weaknesses in internal control systems. The auditor should do so in a forthright manner and on a timely basis, whether or not management has also communicated to the board or the audit committee on these matters. Sixth, the corporation has a responsibility to deal with its employees in a fair and equitable manner. These responsibilities, and others, are critical to the functioning of the modern public corporation and the integrity of the public markets. No law or regulation alone can be a substitute for the voluntary
56
adherence
to
these
principles
by
corporate
directors
and
management. The board's oversight function carries with it a number of specific responsibilities in addition to that of selecting the CEO. These include responsibility for: Planning for management succession.The board should plan for CEO and senior management succession and, when
appropriate, replace the CEO or other members of senior management. Understanding, reviewing and monitoringimplementation of
the corporation's strategic plans. The board has responsibility for overseeing and understanding the corporation's strategic plans from their inception through their development and execution by management. Once the board reviews a strategic plan, the board should regularly monitor implementation of the plan to determine whether it is being implemented effectively and whether changes are needed. Understanding budgets. and reviewing annual operatingplans and
The board has responsibility for overseeing and
understanding the corporation's annual operating plans and for reviewing the annual budgets presented by management. The board should monitor implementation of the annual plans to assess whether they are being implemented effectively and within the
57
limits of approved budgets. Focusing on the integrity and clarity of the Corporation's financial statements and financial reporting. While financial reports are primarily theresponsibility of management, the board and itsaudit committee should take reasonable steps to
becomfortable that the corporation's financial statements and other disclosures accurately presentthe corporation's financial condition and results ofoperations to stockholders, and that they do so in anunderstandable manner. In order to do this,
theboard, through its audit committee, should have abroad understanding of the corporation's financialstatements, including why the accounting principlescritical to the corporation's business were chosen,what key judgments and estimates were made bymanagement, and how the choice of principles, andthe making of such judgments and estimates,impacts the reported financial results of thecorporation. Engaging outside auditors and The board, through its
consideringindependence issues.
auditcommittee, bears responsibility for engaging anoutside auditor to audit the corporation's financialstatements and for ongoing communications withthe outside auditor. through its auditcommittee, should The board, consider
periodically
theindependence and continued tenure of the auditor. Advising management
58
on
significant
issues
facingthe
corporation.
Directors can offer management a wealth of They provide
experience and a wide range of perspectives.
advice and counsel to management in formal board and committee meetings and are available for informal consultation with the CEO and senior management. Reviewing and approving significant corporateactions. As
required by state corporate law, theboard reviews and approves specific corporateactions, such as the election of executive officers,declaration of dividends and appropriate majortransactions. The board and senior management should have a clear understanding of what level or types of decisions require specific board approval. Nominating directors and committee members andoverseeing effective corporate governance. It is theresponsibility of the board and its corporategovernance committee to nominate directors andcommittee members and to oversee
thecomposition, structure, practices and evaluation ofthe board and its committees.
The CEO and Management It is the responsibility of the CEO, and of senior management under the CEO's direction, to operate the corporation in an effective and ethical manner.
59
o The governance model followed by most public corporations in the United States has historically been one of individual, rather than group, leadership. U.S. corporations have traditionally
vested responsibility in the CEO as the leader of management rather than diffusing high-level responsibility among several individuals. o The CEO should be aware of the major risks and issues that the corporation faces and is responsible for supervising the corporation's financial reporting processes. For example, the
CEO is responsible for providing stockholders and others with information that the CEO believes is important to understanding the corporation's business. Of course, the CEO necessarily relies on the expert advice of others on technical questions and legal requirements. As part of its operational responsibility, senior management is charged with: Operating the corporation. The CEO and senior management run the corporation's day-to-day business operations. With a thorough understanding of how the corporation operates and earns its income, they carry out the corporation's strategic objectives within the annual operating plans and budgets reviewed by the board. Strategic planning. The CEO and senior management generally
60
take the lead in strategic planning. They identify and develop strategic plans for the corporation; present those plans to the board; implement the plans once board review is completed; and recommend and carry out changes to the plans as necessary. Annual operating plans and budgets. With the corporation's
overall strategic plans in mind, senior management develops annual operating plans and annual budgets for the corporation, and the CEO presents those plans and budgets to the board. Once board review is completed, the management team implements the annual operating plans and budgets. Selecting qualified management and establishing effective
organizational structure. Management is responsible for selecting qualified management and for implementing an organizational structure that is efficient and appropriate for the corporation's particular circumstances. Identifying and managing risks.Senior Management identifies and manages the risks that the corporation undertakes in the course of carrying out its business. It also manages the corporation’s overall risk profile. Good financial reporting. Senior management is responsible for the integrity of the corporation's financial reporting system. It is senior management's responsibility to put in place and supervise the operation of systems that allow the corporation to produce financial statements that fairly present the corporation's financial
61
condition and thus permit investors to understand the business and financial soundness and risks of the corporation.
2.7
Board Organization (Responsibilities) In general, there are six (6) core areas of board responsibility; failure in any of these activities will have fundamental implications for the performance of the organization. a. Strategic Planning/Implementation b. Risk Management c. Management Evaluation and Succession Planning d. Internal Controls e. Communications corporate policies) f. Organizational Success Virtually all boards of directors of large, publicly owned corporations operate using committees to assist them. A committee structure (formulating and communicating
permits the board to address key areas in more depth than may be possible in a full board meeting. Decisions about committee membership should be made by the full board, based on recommendations from a committee responsible for corporate governance issues. The board should designate the chairmen of the various committees, if this is not done by the committees themselves.
62
Committees should appraise the full board of their activities on a regular basis. Processes should be developed and monitored for keeping the board informed through oral or written reports. The functions generally performed by the audit, compensation and corporate governance committees are central to effective corporate governance. A particular committee structure is essential for all corporations. What is important is that key issues be addressed effectively by the independent members of the board. Thus, the references below to the functions performed by particular committees are not intended to preclude corporations from allocating these
functions differently. Other committees, such as executive or finance committees, also may be used. Some corporations find it useful to establish additional
committees to examine special problems or opportunities in greater depth than would otherwise be feasible. The responsibilities of each committee should be clearly defined and understood. A written charter approved by the board, or a board resolution establishing the committee, is appropriate. All the committees have terms of reference which guides them in the execution of their duties. Each committee reports to the Board of Directors. Each committee provides draft recommendations to the Board on matters that fall within the Boards ambit. Every publicly owned corporation should have an audit committee comprised solely of independent directors.
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2.7.1 Audit Committee Audit Committees typically consist of 3 to 5 members. The listing standards of the major securities markets require audit committees and require that an audit committee have at least 3 members and that all members of the audit committee qualify as independent. Audit committee members should meet minimum financial literacy standards, and at least one of the committee members should have accounting or financial management expertise, as required by the listing standards of the major securities markets. However, more important than financial expertise is the ability of audit committee members, as with all directors, to understand the corporation's business and risk profile, and to apply their business experience and judgment to the issues for which the committee is responsible with an independent and critical eye. The audit committee is responsible for oversight of the corporation's financial reporting process. The primary functions of the audit committee are the following: Risk profile: The audit committee should understand the
corporation's risk profile and oversee the corporation's risk assessment and management practices. Outside Auditors: The audit committee is responsible for
supervising the corporation's relationship with its outside auditor, including recommending to the full board the firm to be engaged
64
as the outside auditor,
evaluating the auditor's performance,
and considering whether it would be appropriate for the outside auditor periodically to rotate senior audit personnel or for the corporation periodically to change its outside auditor. The selection of an outside auditor should involve an annual due diligence process in which the audit committee reviews the qualifications, work product, independence and reputation of the proposed outside auditor. The audit committee should base its decisions about selecting and possibly changing the outside auditor on its assessment of what is likely to lead to more effective audits. Based on its due diligence, the audit committee should make an annual recommendation to the full board about the selection of the outside auditor. Independence: The audit committee should consider the
independence of the outside auditor and should develop policies concerning the provision of non-audit services by the outside auditor. The provision of some types of audit-related and consulting services by the outside auditor may not be inconsistent with independence. Critical accounting judgments and estimates: The audit
committee should review and discuss with management and the outside auditor the corporation's critical accounting policies and the quality of accounting judgments and estimates made by management.
65
Internal controls: The audit committee should understand and be familiar with the corporation's system of internal controls and on a periodic basis should review with both internal and outside auditors the adequacy of this system. Compliance: Unless the full board or another committee does so, the audit committee should review the corporation's procedures addressing compliance with the law and important corporate policies, including the corporation?s code of ethics or code of conduct. Financial statements: The audit committee should review and discuss the corporation's annual financial statements with
management and the outside auditor and, based on these discussions, recommend that the board approve the financial statements for publication and filing. Most audit committees also find it advisable to implement processes for the committee or its designee to review the corporation's quarterly financial
statements prior to release. Internal audit function: The audit committee oversees the corporation's internal audit function, including review of reports submitted by the internal audit staff, and reviews the appointment and replacement of the senior internal auditing executive. Communication: The audit committee should provide a channel of communication to the board for the outside auditor and
66
internal auditors and may also meet with and receive reports from finance officers, compliance officers and the general counsel. Hiring auditor personnel: Under audit committee supervision, some corporations have implemented "revolving door" policies covering the hiring of auditor personnel. For example, these policies may impose "cooling off" periods prohibiting employment by the corporation in senior financial management positions of members of the audit engagement team for some period of time after their work as auditors for the corporation. The audit committee should consider whether to adopt such a policy. Any policy on the hiring of auditor personnel should be flexible enough to allow exceptions, but only when specifically approved by the audit committee. Audit committee meetings should be held frequently enough to allow the committee to appropriately monitor the annual and quarterly financial reports. For many corporations, this means four or more meetings a year. Meetings should be scheduled with enough time to permit and encourage active discussions with management and the internal and outside auditors. The audit committee should meet with the internal and outside auditors, without management present, at every meeting and communicate with them between meetings as necessary. Some audit committees may decide that specific functions, such as quarterly review meetings with the outside auditor or
67
management, can be delegated to the audit committee chairman or other members of the audit committee. 2.7.2 Corporate Governance Committee Every publicly owned corporation should have a committee that addresses corporate governance issues. A corporate governance committee (often combined with, or referred to as, a nominating committee) is central to the effective functioning of the board. Traditionally, the corporate governance/nominating committee's role were to recommend director nominees to the full board and the corporation's stockholders. Over time, the committee's role has expanded so that, today, it typically provides a leadership role in shaping the corporate governance of a corporation. ? A corporate governance committee should be comprised solely of independent directors. While the CEO typically works closely with the corporate governance committee, a committee made up exclusively of independent directors reinforces the idea that the governance processes of the corporation are under the control of the board, as representatives of the stockholders. ? A corporate governance committee performs the core function of recommending nominees to the board. The committee also recommends directors for appointment to committees of the board. These responsibilities include establishing criteria for board and committee membership, considering rotation of committee
68
members, reviewing candidates' qualifications and any potential conflicts with the corporation's interests, assessing the
contributions of current directors in connection with their renomination, and making recommendations to the full board. The committee also should develop a process for considering stockholder suggestions for board nominees. While it is
appropriate for the CEO to meet with potential director nominees, the final responsibility for selecting director nominees rests with the board. ? A corporate governance committee should monitor and safeguard the independence of the board. The important function of corporate governance committee, related to its core function of recommending nominees to the board, is to ensure that a substantial majority of the directors on the board are, in both fact and appearance, independent of management. ? A corporate governance committee should oversee and review the corporation's processes for providing information to the board. A corporate governance committee should assess the reporting channels through which the board receives
information, and the quality and timeliness of information received, so that the board obtains appropriately detailed information in a timely fashion. ? A corporate governance committee should develop and recommend to the board a set of corporate governance
69
principles applicable to the corporation. These principles should be communicated to the corporation's stockholders and should be readily available to prospective investors and other interested persons. ? A committee comprised of independent directors should oversee the evaluation of the board and management. Specifics concerning the evaluation process are discussed below under "Board and Management Evaluation." 2.7.3 Compensation Committee Every publicly owned corporation should have a committee comprised solely of independent directors that addresses has two
compensation
issues:
Compensation
committee
interrelated responsibilities; overseeing the corporation's overall compensation programs, and setting CEO and senior
management compensation. Overall compensation structure: In addition to reviewing and setting compensation for management, a compensation
committee should look more broadly at the overall compensation structure of the enterprise to determine that it establishes appropriate incentives for management and employees at all levels. In doing so, the committee should understand that incentives are industry-dependent and are different for different categories of people. All incentives should further the
corporation's long-term strategic plan and should be consistent
70
with the culture of the corporation and the overall goal of enhancing enduring stockholder value. A diverse mix of compensation for the board and management can foster the right incentives and prevent a short-term focus or a narrow emphasis on particular aspects of the corporation's business. ? Trend toward equity compensation for directors and management: In recent years, many corporations have increasingly moved toward compensating directors and management with stock options and other equity compensation geared to the corporation's stock price. While this trend may align director and management interests with stockholder value, equity compensation should be carefully designed to avoid unintended incentives such as an undue emphasis on short-term market value changes. ? Management Compensation:Management compensation practices will necessarily differ for different corporations. Generally, however, an appropriate compensation package for management includes a carefully determined mix of long- and shortterm incentives. Management compensation packages should be designed to create a commensurate level of
71
risk and opportunity based on business and individual performance. The structure of management compensation should directly link the interests of management, both individually and as a team, to the long-term interests of stockholders. ? Management benefits: A compensation committee should consider whether the benefits provided to senior management, including post-employment benefits, are proportional management. to the contributions made by
2.7.4 Board Operations Serving on a board requires significant time and attention on the part of directors. Directors must participate in board meetings, review relevant materials, serve on board committees, and prepare for meetings and for discussions with management. They must spend the time needed and meet as frequently as necessary to properly discharge their responsibilities. The appropriate number of hours to be spent by a director on his or her duties and the frequency and length of board meetings depend largely on the complexity of the corporation and its operations. Longer meetings may permit directors to explore key issues in depth, whereas shorter but more frequent meetings may help directors stay up-to-date on emerging corporate trends
72
and
business
and
regulatory
developments. When arranging a meeting schedule for the board, each corporation should consider the nature and complexity of its operations and transactions, as well as its business and regulatory environment. Directors should be focused on long-term stockholder value. Including equity as part of directors' compensation helps align the interests of directors with those of the corporation's stockholders. Accordingly, a meaningful portion of a director's compensation should be in the form of long-term equity. Corporations may wish to consider establishing a requirement that, for as long as directors remain on the board; they acquire and hold stock in an amount that is meaningful and appropriate to each director. Service on too many boards can interfere with an individual's ability to perform his or her responsibilities. Before accepting an additional board position, a director should consider whether the acceptance of a new directorship will compromise the ability to perform present responsibilities. It also is good practice for directors to notify each board on which they serve before accepting a seat on the board of another business corporation, in order to avoid potential conflicts. Similarly, the corporation should establish a process to review senior management service on other boards prior to acceptance. Independent directors should have the opportunity to meet outside the presence of the CEO and any other management directors.
73
Many board responsibilities may be delegated to committees to permit directors to address key areas in more depth. Regardless of whether the board grants plenary power to its committees with respect to particular issues or prefers to take recommendations from its committees, committees should keep the full board informed of their activities. Corporations benefit greatly from the collective wisdom of the entire board acting as a deliberative body, and the interaction between committees and the full board should reflect this principle. ? Management presentations should be scheduled to allow for question-and-answer sessions and open discussion of key policies and practices. Board members should have full access to senior management. Generally, the CEO should be advised of significant contacts between board members and senior management. ? The board must have accurate, complete information to do its job; the quality of information received by the board directly affects its ability to perform its oversight function effectively. Directors should be provided with, and review, information from a variety of sources, including management, board committees, outside experts, auditor presentations, and
analyst and media reports. The board should be provided with information before board and committee meetings with
74
sufficient time to review and reflect on key issues and to request supplemental information as necessary. ? Many corporations provide new directors with materials and briefings to permit them to become familiar with the corporation's business, industry and corporate governance practices. The Business Roundtable believes that it is
appropriate for corporations to provide additional educational opportunities to directors on an ongoing basis to enable them to better perform their duties and to recognize and deal appropriately with issues that arise. ? From time to time, it may be appropriate for boards and board committees to seek advice from outside advisors independent of management with respect to matters within their
responsibility. For example, there may be technical aspects of the corporation's business – such as risk assessment and risk management – or conflict of interest situations for which the board or a committee determines that additional expert advice would be useful. Similarly, a compensation committee may find it useful to engage separate compensation
consultants. Access to outside advisors in such cases is an important element of an effective corporate governance system.
2.8
Corporate Governance Systems in Different Countries
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Corporate Governance covers the way of organizing ownership, management, and control of a corporation. The prevailing corporate governance system influences the corporation regarding overall strategy that is the recognition of stakeholders? interest, especially the interest of customers, shareholders, banks, institutional investors, financial community, management and employees. It is necessary to balance the varying interest among the parties involved and the existing asymmetries in information consequently. However the mechanisms of balancing these interests vary across different countries. A number of studies found significant differences in the institutional context, in which corporate governance relationships are embedded. It identifies two general systems of corporate governance. The United States and the UntiedKingdom are characterized by relatively passive shareholders, board of directors that are not always independent of managers, and active markets for corporate control. The system found in Continental Europe and Japan is associated with coalitions of active shareholders, boards of directors that are more independent of management and limited markets for corporate control. These differences are thought to influence greatly the goals and performances of companies. These findings indicate the significant differences across countries due to different corporate governance mechanisms. One of the key differences lies in the orientation towards the shareholders value perspective or the
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stakeholders? value perspective. Japan however does not seem to perfectly fit in to these two systems, hence it is frequently suggested that the countries be divided into three groups, with monistic, dualistic or pluralistic concepts. The monistic concept with the corporate board as the center of power and control of corporation is highly shareholder oriented. The corporation is regarded as the private property of its owners. The primary focus is on shareholders value creation: Cost of capital is decreasing since equity can be raised more easily and with the increase in value of the firm and its creditworthiness the cost of debts is decreasing. Lower cost of capital symbolizes the central argument in favor of this capital market-oriented approach towards corporate governance, which is prevalent in the United States and the United Kingdom. In stakeholder value approach the balancing of interests of various stakeholders (shareholders, employees, banks and so on) is of primary importance. The stakeholder approach is part of the dualistic system of corporate governance. The dualistic system is widely used in Germany, where the corporate governance concept differentiates between the groups of people who are leading the firm, on the one hand and on the other hand the group of people who are exercise control. In this dualistic system power and control are split between those two groups in order to be able to serve better all stakeholders? interests. Another characteristic of the dualistic system prevalent in Germany is
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the principle of cooperative decision making within the board of directors, whereas, in countries like the United States and the United Kingdom, with a monistic system, the principle of directorship dominates, based on the authority of the CEO. The CEO is held responsible and thus his performance is crucial. This principle of directorship is in line with the market-oriented corporate governance approach. The principle of directorship in the monistic system is also evident in terms of remuneration of top management. Especially in European companies, stock options are considered with increasing suspicion. This form of remuneration is considered to represent an incentive for increasing corporate value. However, by using remuneration through stock options it is assumed that the stock prices reflect the actual value created. In the United States management is usually
remunerated to a large extent by stock options. In dualistic system of corporate governance, remuneration of top management is less capital market-oriented. In Germany for instance remuneration usually contains a fixed payment plus a dividend-based amount. In discussing the advantages and disadvantages of the monistic concept over the dualistic there has to be considered a third system; the pluralistic concept. The pluralistic system of corporate governance is prevalent in Japan. The assumption behind the pluralistic approach is that the corporation belongs to all stakeholders, with primary focus on the employees? interests. This system is specific to Japan, where
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long-term relationships dominate business practices. In this pluralistic approach power and control are exercised by numerous interest groups the governance concept is based on the principle of seniority and its long-term relationships. Thus, in terms of management payments, incentives are not directed towards sharing of profits.
2.9
Quality of Corporate Governance and Firm Performance Owners and Managers in corporate organizations create or destroy economic value through choices made regarding ownership and capital structure of firms and in the design and management of internal control processes. A clear structure of transparent decisionmaking and accountability, with independent, powerful supervision and control to hold management accountable for performance and results is therefore a primary requirement of governance. In essence, corporate governance creates a framework of goals and policies to guide an organization?s progress and forms a foundation for assessing board and management performance. There is strong evidence to suggest that corporate performance and to an extent economic stability, is directly impacted by the quality of corporate governance. Studies by the Yale School of Management show that the quality of governance can influence a company?s cost of capital, as well as the size and vibrancy of a country?s capital markets. It was demonstrated that during financial crises, the exchange rates and stock markets of
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countries with poor governance standards crumbled, while those with higher governance standards suffered less. The Enron/Andersen debacle is more recent and prominent examples of corporate governance failure where greed, lax oversight and outright fraud brought down two of America?s largest companies.
2.10 Corporate Social Responsibility Since the origins of industrial capitalism corporations have wrestled with the dilemma of whether their sole purpose is to generate wealth or whether corporations have broader obligations to the communities in which they are situated, and from which they derive not only their fundamental resources, but their license to operate. Bridging the divide between corporate governance and corporate social
responsibility has proved a great challenge to managers for generations. O?Rourke (2008) assesses the benefits and limitations of institutional shareholder activity to persuade corporations towards the exercise of greater responsibility. Though such pressure may be increasingly sophisticated as the voting power and knowledge base of the institutional investors develops, such activism is largely devoted to achieving incremental steps towards the adoption of corporate social responsibility rather than some transformative change. To help clarify the different approaches to corporate social
responsibility, Garriga and Mele (2008) attempt a classification of the main theories and related
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approaches
into
four
groups:
instrumentaltheories, in which the corporation is seen as simply an instrument for wealth creation, and its social activities are only a means to achieve economic results; political theories, concerned with the power of corporations in society and the responsible use of this power in the political arena; integrative theories, concerned with the corporation?s responsibility to meet social demands; and ethical theories, based on ethical responsibilities of corporations to society. These theories represent four dimensions of corporate activity related to profits, political performance, social demands and ethical values. How to integrate these four dimensions remains a vital task in resolving the relationship of business and society. Beltratti (2008) takes issue with the failure of the financial sector to appreciate the significance of corporate social responsibility, and the negative externalities inflicted on the economy as a whole by failures in socially responsible business behavior. Corporate governance and corporate social responsibility may reinforce each other in the search for a vision of the firm as an institution which may create value while having regard for the welfare of stakeholders.
2.11 Corporate Sustainability What is emerging as the most important – and fragile – relationship of all, is that between corporate activity and the ecology. This has become the most critical issue for both corporate governance and
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corporate social responsibility to address - if corporations and economies are to achieve sustainability, they can only do so through creating a greater balance with the natural environment (Hawken et al 1999; Hancock 2005). Cogan (2008) illuminates in detail the connection between corporate governance and climate change in comprehensive examination of how the world?s largest corporations are positioning themselves in a carbon-constrained world. Investors are increasingly assigning value to companies responding to the business challenges and opportunities posed by climate change, and will assign more risk to companies that are slow to do this. Corporate effectiveness in combating climate change will increasingly be measured in terms of board oversight, management execution, public disclosure, emissions accounting and strategic planning for emissions reduction. Stern (2008) considers the challenges of building and sustaining frameworks for international collective action on climate change with important initiatives coming from both national
governments and corporations. The various dimensions of action required to reduce the risks of climate change are considered: both for mitigation (including through carbon prices and markets,
interventions to support low-carbon investment and technology diffusion, cooperation on technology development and deployment, and action to reverse deforestation), and for adaptation. These dimensions of remedial action are interdependent: a carbon price is essential to provide incentives
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for
investment
in
low-carbon
technology around the world, and can be strongly complemented by international co-operation to bring down the costs of new low carbon technologies. The success of international co-operation on mitigation will determine the scale of action required for adaptation, which is how we learn to cope with climate change. An overview of existing international co-operation on climate change indicates the immense scale of the problem, and the huge global effort that will be required to resolve this. Responsible corporate governance will be essential to securing a sustainable balance between business, society and the environment.
2.12 Corporate Governance in Nigeria For a developing country such as Nigeria, corporate governance is of critical importance. In its recent history, that lack of corporate governance has led to economic upheavals. Two examples illustrate the point being made. In the late 1980?s and early 1990?s the country witnessed a near collapse of the financial sector through the phenomenon of failed banks and other financial institutions. In consequence, the failed Banks and financial malpractice in Bank act was promulgated to facilitate the prosecution of those who contribute to the failure of Banks and to recover the debt owed to the failed banks. Secondly, privatization and commercialization program of the Nigerian Government was a reaction to the failure of corporate governance in state owned enterprises. The privatization functions lies
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with the Bureau of public Enterprises (Vincent O. Nmehielle and Eyinna S. Nwauche, 2004). Other corporate governance failures in Nigeria include: ? In the Bank loans case, capital market operators were charged, accused of sale of forged certificates and were required to buy back. ? A number of publicly quoted companies have gone into oblivion for reasons bordering on ineffective and non existent systems e.g. NASCOM Plc. ? Falsification of accounts by the then directors/management of Lever Brothers Plc, where over-valuation of stocks running into millions of naira discovered, and African Petroleum Plc where about N24 billion credit facilities were not disclosed, in spite of the due diligence review carried out by the core investors and reporting accountants. It is noteworthy that the last AGM before privatization AP still paid N3 as dividend and a section of shareholders Association praised then to high heaven. In the last five years, corporate governance has become one of the most debated corporate issues in Nigeria. In 2001 the securities and Exchange Commission (SEC) of Nigeria set up a committee that came up with a code of best practices for pu blic companies in Nigeria (“The Code” in 2003) in 2005 the institute of Director of Nigeria set up a center for corporate governance to champion the cause of good
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corporate governance amongst its members. In 2006 the Central bank of Nigeria issued post-consolidation corporate guidelines for all banks operating in Nigeria. The Nigerian code of Corporate Governance is primarily aimed at ensuring that managers and investors of companies carry out their duties within a framework of accountability and transparency. This should ensure that the interest of all stakeholders are recognized and protected as much as possible. The code of Best practices for Public Companies in Nigeria (“The Code”) is voluntary even though it is recommended that all Nigerian public companies comply with the code and are required to state reason for non-compliance. Corporate Governance simply put, is ensuring good business behavior. It is about the way in which boards oversee the running of a company by its managers, and how board members are in turn accountable to shareholders and the company. This has implications for the company behavior towards employees, shareholders, customers, and other stakeholders. Poor corporate governance can weaken a company?s potential and can pave way fro financial difficulties and even fraud. In the case of Nigeria, the need is for good business behavior is even more important, in view of the country?s image of corruption and lawlessness.
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2.13 Benefits of Corporate Governance When fully implemented, good corporate governance ensures that large corporations are well-run institutions that earn the confidence of investors and lenders. The process ensures safeguards against corruption and mismanagement, while promoting fundamental values of a market economy in a democratic society. These are quite critical for the transitional African economies that are struggling to attract foreign direct investment. In a globalized economy, the
implementation or otherwise of good corporate governance will increasingly determine the fate of individual companies and entire economies. The quality of governance is of absolute importance to shareholders as it provides them with a level of assurance that the business of the company is being conducted in a manner that adds shareholder value and safeguards its assets. This means that there is less uncertainty associated with the investment - a situation that encourages bankers and lenders to be favorably disposed to the company. Furthermore, the higher the risk, the higher the expected rate of return. If a company adopts and implements good corporate governance practices, shareholders are retained and new investors attracted. Institutional investors have indicated a willingness to pay a premium for the shares of a well-governed company. Around the world, price: earnings ratios are higher among companies with good disclosure.
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Hence good corporate Governance is necessary in order to: 1. Attract investors both local and foreign and assure them that their investments will be secure and efficiently managed, and in a transparent and accountable process. 2. Create competitive and efficient companies and business enterprises. 3. Enhance the accountability and performance of those entrusted to manage corporations. 4. Promote efficient and effective use of limited resources. Corporate governance enhances the performance and ensures the conformance of corporations. Its principles stimulate the performance of corporations by creating and maintaining a business environment that motivates managers and entrepreneurs to maximize firms' operational efficiency, returns on investment and long –term
productivity growth. They ensure corporate conformance with investors' and society's interests and expectations by limiting the abuse of power, the siphoning–off of assets, the moral hazard, and the wastage of corporate-controlled resources (so–called "agency
problems"). Simultaneously, they establish the means to monitor managers' behavior to ensure corporate accountability and provide for the cost–effective protection of investors' and society's interests vis – ?–vis corporate insiders.
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2.14 Summary In conclusion, it can be said that most corporate governance failures can be traced to ineffective service provided by Board Advisors and inadequate controls on governance processes. This is true for large and small corporations alike. In climate of increased focus on
corporate governance, Board themselves need to ensure that fundamental governance practices and processes are in place at their companies. Having a sound Corporate Governance program in place is a corporate imperative in today?s regulatory climate, both from an internal as well as external perspective. The practices above are just some of the fundamental processes that directors should expect from their companies and are in use by Corporate Secretaries at many companies. Directors need to know that they are getting what they need to make their decisions, that minutes are being drafted to reflect their deliberations, and that appropriate records of those meetings are being kept. Externally, regulators expect their requirements to be met. Finally, with a strong governance program in place the company?s reputation with investors, creditors, insurers, and other stakeholders will be enhanced. Therefore companies with sound governance programs may perform better.
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CHAPTER 3
RESEARCH METHODOLOGY
3.1 INTRODUCTION The research design used for this study involves the collection of data from the institutions involved with corporate governance, such as Peugeot Automobile Nigeria and NassarawaStateUniversity. Automobile Nigeria The and
representative
sample,
Peugeot
NassarawaStateUniversity showed the extent of corporate governance application in the two organizations in the past one year was chosen as variables. Data collected were analyzed using content analysis which yielded the extent of corporate governance in the two organizations. 3.2 RESEARCH METHODS This study will take both explorative and descriptive approach. The choice of method to be used depends on the purpose of the study, the problem and the hypothesis to be tested. In many cases more than one is used jointly. The methods include; ? Basic Research ? Applied Research ? Historical Research ? Experimental Research ? Social Research ? Education Research
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? Descriptive Research 3.2.1 Basic Research This is also referred to as pure or fundamental research and is concerned with theoretical aspect of science and only indirectly interested in the practical application which the finding may have. It is aimed at discovering more about the laws of nature. It may also be interested in discovering or conforming basic truths or principles.
3.2.2 Applied Research This is also referred to as field research to participant observation and case studies. It has to do with our ability to observe what is happening and trying to understand it. It is therefore, not only a data collecting activity but, theory generating activity. It involves observation, development of tentative general conclusions for observations, and revisions of conclusions to reflect what was observed. 3.2.3 Historical Research Historical research is concerned with what was and uses it to compare with what is and uses the knowledge to predict the future. In it the researcher examines available records in order to arrive at conclusions on how far events affected or influenced the behavior of past generations. He may use written documents, oral traditions or interviews for research. Its main aim is to use historical facts to
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solve problems in the field in which research is conducted. 3.2.4 Social Research This category of research is broad and includes studies in the field of sociology, anthropology, psychology, etc. it involves studying human beings and how they behave at different situations. 3.2.5 Education Research This is a systematic and scholarly application of the scientific method, interpreted in the broad sense to the solution of educational problems. It is aimed at providing educationist with effective means of attaining worth with educational goals. 3.2.6 Market Research This is useful in business for the promotion of sales and assist of manufacturers to survive in a world of competition. It involves surveys or opinion polls using sales agents as enumerators. During the surveys, sample or specimen products can be distributed to potential customers to test the market 3.2.7 Descriptive Research This consists of the following: ? Experimental ? Correlation ? Observation ? Survey
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? Case Study a) Experimental This method is one in which a researcher manipulates a variable under highly controlled conditions to see if this produces any changes in second variable. The variable or variables, that the researcher manipulates is called the independent variable while the second variable, the one measured for changes, is called the dependent variable. Independent variables are sometimes referred o as
antecedent conditions. All scientific disciplines use this method because they are interested in understanding the laws of nature. The power of the experimental method derives from the fact that it allows researchers to detect cause-and-effect relationships. In order to see cause-and-effect relationships the researcher must be sure that his manipulations are the only variables having an effect on the dependent variable. He does this by holding all other variables, variables that might also affect the dependent variables, constant. Only by this highly controlled procedure can the researcher be sure that the observed changes in the dependent variable were in fact caused by his manipulations. Experimental studies, therefore, are used when the researcher is interested in determining
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cause-and effect relationships. Also this method can be used when it is appropriate, both practically and ethically, to manipulate the variables. However, a major limitation is that this method can only be used when it is practical and ethical for the researcher to manipulate the antecedent conditions. A second limitation to this method is that experimental studies are usually done in the highly controlled setting o the laboratory. These conditions are artificial and may not reflect what really happens in the less controlled and infinitely more complex world. b) Correlation Correlation is classified as a descriptive method. The reason for that is because variables are not directly manipulated as they are in the experimental method. Although correlation is often described as a method of research in its own right, it is really more of a mathematical technique for summarizing data, it is a statistical tool. A correlation study is one designed to determine the degree and direction of relationship between two or more variables or measures of behavior. The strength of this method lies in the fact that it can be used to determine if there is a relationship between two variables without having to
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directly
manipulate
those
variables.
In
other
words
correlation can be used when it is impractical and/or unethical to manipulate the variables. Correlation can also be used as a basis for prediction. The greatest limitation of correlation, one that is often forgotten, is that it does not tell researchers whether or not the relationship is casual. In other words, correlation does not prove causation. It only shows that two variables are related in a systematic way, but it does not prove nor disprove that the relationship is a cause-and-effect relationship. Only the experimental method can do that. c) Observation The observation is a type of study classified under the broader category of field studies; non-experimental
approaches used in the field or in real-life settings. In the naturalistic observation method the researcher very carefully observes and records some behavior or phenomenon, sometimes over a prolonged period, it its natural setting. The subject or phenomenon is not directly interfered with in any way. In the social sciences this usually involves observing humans or animals as they go about their activities in real life stetting. In the natural sciences this may involve observing an animal or groups
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of
animals
or
some
physical
phenomena. The major strength of this method is that it allows researchers to observe behavior in the setting in which it normally occurs rather that the artificial and limited setting of the laboratory. Further uses might include studying nature for it own sake or using nature to validate some laboratory findings or theoretical concept. The limitations of this method are many. First and foremost this is a descriptive method, not an explanatory one. That is without the controlled conditions of the laboratory, conclusions about causes-and-effect
relationships cannot be drawn. Behavior can only be described, not explained. This method can also take a great amount to time. Researchers may have to wait for sometime to observe the behavior or phenomenon of interest. Further limitations include the difficulty of observing behavior without disrupting it and the difficulty of coding results in a manner appropriate for statistical analysis. d) Survey The survey, another type of non-experimental, descriptive study, does not involve direct observation by a researcher. Rather, inferences about behavior are made from data collected via interviews or questionnaires. Interviews or questionnaires commonly include an assortment of forcedchoice questions (e.g. true or false) or open-ended
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questions (e.g. short answer essays) to which subjects are asked to respond. This sort of data collection is sometimes referred to as a self-report. Once again, this is a non experimental, descriptive approach. Surveys are particularly useful when researchers are
interested in collecting data on aspects of behavior that are difficult to observe directly and when it is desirable to sample a large number of subjects. Surveys are used extensively in the social and natural sciences to assess attitudes and opinions on a variety of subjects, from political views facility usage etc. The major limitation of the survey method is that it relies on a self-report method of data collection. Intentional deception, poor memory, or misunderstanding of the question can all contribute to inaccuracies in the data. Furthermore, this method is descriptive, not explanatory, and, therefore, cannot offer any insights into cause-and-effect relationships. e) Case Study This method is also a non-experimental, descriptive type of study. It involves an in-depth descriptive record, kept by an outside observer, of an individual or group of individuals. In the social sciences this often involves collecting and examining various observations and records of an
individual?s experiences and/or behaviors. Typical data
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collected
might
include
biographical
data,
medical
records, family history, observations, interviews, and the results of various psychological tests. In the natural sciences case studies might involve in-depth studies of a particular animal or group of animals or some detailed investigation of a particular physical phenomenon. Case studies are particularly useful when researchers want to get a detailed contextual view of an individual?s life or of a particular phenomenon. In the social sciences they are often used to help understand the social and familial factors that might be part of the development of some form of deviant behavior in an individual. Cases studies are also useful when researchers cannot, for practical or ethical reasons, do experimental studies. First and foremost this is a descriptive method, not an explanatory one. That is without the controlled conditions of the laboratory, conclusions about cause-and-effect
relationships cannot de drawn. Behavior can only be described, not explained. Case studies also involve only a single individual or just a few and therefore may not be representative of the general group or population. In the social sciences case studies often rely on descriptive information provided by different people. This leaves room for important details to be left out. Also, much of the
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information collected is retrospective data, recollections of past events, and is therefore subject to the problems inherent to memory.
3.3 METHODS OF DATA COLLECTION
3.3.1 POPULATION OF THE STUDY Peugeot Automobile Nigeria and NassarawaStateUniversity which are both diverse in types of industries have been duly selected for the research. The research shall appraise the level of awareness of corporate governance in each firm; to what extent does each firm apply corporate governance practices; and to what extent has the level of corporate governance best practices affected their
productivity or achieving organizational goals.
3.3.2 SAMPLING TECHNIQUES Peugeot Automobile Nigeria and NassarawaStateUniversity were carefully studied to investigate and assess their performance in relation to the level of extent of corporate governance best practices. The aforementioned organizations are expected to practice a level of corporate governance. The degree of each firms performance or achievements are determined in relation to the extent in which corporate governance was applied to the firm.
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The researcher intends to utilize clusters and stratified sampling technique for selecting the sample of Peugeot Automobile Nigeria and NassarawaStateUniversity to be covered in the project.
3.3.3 DATA COLLECTION TECHNIQUES Data collection techniques allow us to systematically collect
information about our objects of study (people, objects, phenomena) and about the settings in which they occur. In the collection of data we have to be systematic. If data are collected haphazardly, it will be difficult to answer our research questions in a conclusive way. Various data collection techniques can be used such as; ? Documentation Review ? Observation ? Interviewing (face-to-face) ? Focus group discussion ? Case studies
3.3.3.1 Documentation Review Usually there is a large amount of data that has been collected by others, although it may not necessarily have been analyzed or published. Locating these sources and retrieving the information is a good starting point in any data collection effort. Information routinely collected from unpublished reports and
publications in archives and libraries or in offices at the various sources
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may be a study in itself. Usually, however, it forms part of a study in which other data collection techniques are also used. Other sources of available data are newspapers and published case histories. The advantage of using existing data is that collection is inexpensive, information exist, doesn?t interrupt program or client?s routine in program provide comprehensive and historical information. However, it is sometimes difficult to gain access to the records or reports required. 3.3.3.2 Observation Observation is a technique that involves systematically selecting, watching and recording behavior and characteristics of living beings, objects or phenomena. It is a much-used data collection technique and can be undertaken in different ways, either by participant observation (the observer takes part in the situation he or she
observes), or by Non-participant observation (the observer watches the situation, openly or concealed, but does not participate. 3.3.3.3 Interview An interview is a data-collection technique that involves oral questioning of respondents, either individually or as a group. Answers to the questions posed during an interview can be recorded by writing them down (either during the interview itself or immediately after the interview) or by tape-recording the responses, or by a combination of both.
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Interviews can be conducted with varying degrees of flexibility i.e. high and low degree of flexibility. A flexible method of interviewing is useful if a researcher has as yet little understanding of the problem or situation he is investigating, or if the topic is sensitive. It is frequently applied in exploratory studies. The instrument used may be called an interview guide or interview schedule. Less flexible methods of interviewing are useful when the researcher is relatively
knowledgeable about expected answers or when the number of respondents being interviewed is relatively large. Then questionnaires may be used with a fixed list of questions in a standard sequence, which have mainly fixed or per-categorized answers. The advantage here is that it permits clarification of questions thereby providing full range and depth of information. 3.3.3.4Focused Group Discussion A focus group discussion allows a group of 8-12 informants to freely discuss a certain subject with the guidance of a facilitator or reporter. Two sources of data were used in this study, which are primary and secondary sources. Primary sources include first hand collection of information through surveys (interview) and participant observation. This method is best suited in cases where organizations views are essential to the outcome and conclusions of the research. Secondary sources include documentation review i.e. data from documentation – published and unpublished such as, book journals, official bulletin
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and electronic publications. Often both primary and secondary information supplement each other. This is the situation with this research; secondary materials provided the main source for this research, which include annual reports, presented papers, journals, books, etc. 3.3.3.5Case Studies This is used in order to fully understand or depict clients? experiences in a program, and conduct comprehensive examination through cross comparison of cases. It represents depth of information, rather than breadth, but is usually time consuming to collect, organize and describe.
3.4 METHODS OF DATA ANALYSIS The choice of statistical method depends mainly on the level of measurement of the two variables, and how much detail versus summarization is desired. There are two types of data analysis namely Descriptive and inferential analysis. 3.4.1 Descriptive Analysis Descriptive analysis deals with the study of the variables off study (in relation to subjects) such as profiles of respondents, organizations, groups or any other subject. Descriptive analysis can either be qualitative or quantitative. Qualitative analysis is used to verbally summarize the information gathered in the research. Quantitative
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descriptive analysis is used to summarize mass information generated in the study, so that appropriate analytical methods could be used to further discover relationship between variables. It includes frequency distribution, measures of central tendency, measures off dispersion and content analysis. Content analysis is a research tool used to determine the presence of certain words or concepts within texts or set of texts. Texts can be defined broadly as books, book chapters, essays, interviews,
discussions, newspaper, headlines and articles, historical documents, speeches, conversations, advertising and theater, informal
conversation, or really any occurrences. To conduct a content analysis on any such text, the is coded, or broken down, into manageable categories on a variety of levels word, word sense, phrase, sentence, or theme and then examined using one of content analysis? basic methods: conceptual analysis or relational analysis. In conceptual analysis, a concept is chosen for examination, and analysis involves quantifying and tallying its presence. Conceptual analysis begins with identifying research questions and choosing a sample or samples. Once chosen, the text must be coded into manageable content categories. Relational analysis begins with the act of identifying concepts present in a given text or set of texts. However, relational analysis seeks to go beyond presence by exploring the relationships between the concepts identified. In other words, the focus of relational analysis is to look for
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semantic, or meaningful, relationships, individual concepts, in and of themselves, are viewed as having no inherent meaning. Rather, meaning is a product of the relationships among concepts in a text.
3.4.2 Inferential Analysis Inferential distribution includes some of the following, Chi-square, T test Correlation regression and General linear model, which are briefly discussed below: ? Chi-Square – The chi-square tests for independence used in situations where you have two categorical variables. A
categorical variable is a qualitative variable in which cases are classified in one and only one of the possible levels. ? T Test – The test is a useful technique for comparing mean values of two sets of numbers. The comparison will provide you with a statistic for evaluating whether the differences between two means are statistically significant. T test can be used either to compare two independent groups or to compare observations from two measurement occasions for the same group. To conduct a t test, your data should be a sample drawn from a continuous underlying distribution. If you are using the t test to compare two groups, the groups should be randomly drawn from normally distributed and independent populations.
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? Correlation – Correlation is one of the most common forms of data analysis both because it can provide an analysis that stands on its own, and also because in underlies many other analyses, and can be a good way to support conclusion after primary analyses have been completed. Correlation are a measure of the linear relationship between two variables. A correlation
coefficient has a value ranging from -1 to 1. Values that are closer to the absolute value of 1 indicate that there is a strong relationship between the variables being correlated whereas values closer to 0 indicate that there is little or no linear relationship. The sign of a correlation coefficient describes the type of relationship between the variables being correlated. A positive correlation coefficient indicates that there is a positive linear relationship between the variables: as one variable increases in value, so does the other. A negative value indicates a negative linear relationship between variables: as one variable increases in value, the other variable decreases in value. ? Regression – Regression is a technique that can be used to investigate the effect of one or more predictor variables on an outcome variable. Regression allows you to make statements about how well one or more independent variables will predict the value of a dependent variable. ? General linear Model – The majority of procedures used for conducting analysis of variance in Statistical Package for Social
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Sciences (SPSS) can be found under the General Linear Model (GLM) menu item in the Analyze menu. Analysis of variance can be used in many situations to determine whether there are differences between groups on the basis of one or more outcome variables or if a continuous variable is a good predictor of one or more dependent variables. There are three varieties of the general linear model this include, univariate, bivariate, and multivariate. o Univariate Analysis: This is done by examining one variable at a time. The basic format here would be by reporting all individual cases i.e. reporting the attributes describing each case under study in terms of variable in question. The information is presented in frequency distribution and percentages, beyond this data can be presented in the form of summary averages or measures of central tendency (Mean Median or Mode). Although this type of analysis is said to be elementary, it can be made interesting by presenting the data in histogram or polygon graph. o Bivariate Analysis:This is used when tow variables are being used together i.e. concerned with the relationships
between pairs of variables (X,Y) in a data set. It is the process of describing the relationship between each pair of variables. Specifically it refers to the cross tabulation of
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responses to two questionnaire items or two variables simultaneously. o Multivariate Analysis:This means the manipulation of two, three or more independent variable at a time. Here tables are used to present data in order to take care of the complexity often experienced in the analysis of more than two independent variables. Data here is collected by the use of questionnaires and presented in tabular form.
3.5 JUSTIFICATION OF METHOD Ability of the method to manage the interrelation among variables. Also it usually relies on inductive reasoning processes to interpret the structure the meanings that can be derived from data. The ability to uncover historical knowledge and recent performance of
organizations. They also can allow for both quantitative and qualitative operations, provides valuable historical/cultural insights overtime
through analysis of texts, can be used to interpret texts for purposes such as the development of expert systems (since knowledge and rules can both be coded in terms of explicit statements about the relationships among concepts), is an unobtrusive means of analyzing interactions.
3.6 Summary The data are from primary and secondary sources. The secondary data
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were through existing body of knowledge such as books, newspapers, journals, bulletins etc. Data collected from the sample size Peugeot Automobile Nigeria and Nassarawa State University, were analyzed using descriptive qualitative technique. The technique of data collection used here largely involved
concentrated amount of desk research. The secondary data were subjected to qualitative analysis to test the hypothesis and to find out the extent of the impact of corporate governance on the value of a firm.
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CHAPTER 4
DATA PRESENTATION, ANALYSIS, AND INTERPRETATION
4.1 Introduction As the scale and activity of corporations has increased
immeasurably, the governance of these entities has assumed considerable importance. Business corporations have an enduring impact upon societies and economies, and “how corporations are governed - their ownership and control, the objectives they pursue, the rights they respect, the responsibilities they recognize, and how effective governing influences the performance of a firm – has become a matter of the greatest significance, not simply for their directors and shareholders, but for the wider communities they serve. This study attempts to access the various factors that can affect the performance of a firm in relation to Good Corporate Governance practices. Through the course of study on Corporate Governance and its impact on the performance of a firm, the research indicated that better corporate governance leads to better corporate
performance. Good governance means little expropriation of corporate resources contributes by to managers better or controlling of shareholders, and which better
allocation
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resources
performance. As investors and lenders will be more willing to put their money in firms with good governance, they will face lower costs of capital, another source of better firm performance. Other stakeholders, including employees and suppliers, will also want to be associated with and enter into business relationships with such firms, as the relationships are likely to be more prosperous, fairer, and longer lasting than those with firms with less effective governance. This can be done by; ? Directors of a Board fully complying with their roles, duties and responsibilities. ? Management conforming to their roles, duties and responsibilities towards the Board. ? Management sensitivity to Creditors, and realizing their function towards the successes of the organization. ? Stakeholder?s ability to positively influence the performance of the firm. ? Controlling the level of Shareholders Activism in the decision making of an organization. ? Having an ideal state of Board Composition ? Knowing The Board Size necessary for effective decision making. ? Boards having an effective Audit Committee
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In this course of study it was discovered that various factors of Corporate Governance influenced the level of performance of a firm. The study survey revealed that organizations could perform much better if there was a level of degree of good corporate governance practices. Focus was given to factors like directors roles and responsibilities; management roles and responsibilities; relationship between an organization and its stakeholders;
shareholders activism; board composition; board structures; and corporate governance models. The research revealed that if these factors of corporate governance that are mentioned above were to be adapted effectively, then it could directly or indirectly improve the performance of a firm. However some factors (like corporate governance models, board composition, management roles and responsibilities; shareholders activism) tend to influence firm performance more then other factors mentioned above. Below are some of the findings from the study. In this research the case study was focused on two diverse organizations; Peugeot Automobile Nigeria, which is an international-private organization, based in Kaduna state; and NassarawaStateUniversity, which is a government owned organization, based in NassarawaState, Keffi local government. 4.2 Interpretation of Data
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4.2.1 Directors and the Performance of a Firm The findings showed that board of Directors in both Peugeot Automobile Nigeria and NassarawaStateUniversity, play a critical role in the performance of any company. From the research conducted it was established that there are general roles, responsibilities and duties necessary upon Directors that bring about a better performance in these organizations. These roles, responsibilities and duties include; ? To provide purposeful and strategic direction and to manage the company. ? To ensure compliance with the memorandum and Articles of Association of the company. ? To act at all times, in the best interests of the company, including shareholders, employees and other stakeholders. ? To report regularly and fully on their stewardship to the owners of the company. ? To act as trustees in respect to the companies assets. ? To exercise the best degree of skill and care, depending upon their personal knowledge and experience. ? To declare all and any interests and to act honestly and reasonably, particularly where their own interests may be in conflict with the interests of the company. ? To ensure compliance with the provision of the law, including the code of conduct provision.
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? To ensure that the financial records and reports of the company are prepared in accordance with legal and accounting requirements. Once these roles, responsibilities and duties are followed then it will go a long way in improving the general performance of a firm. Organizations that do not practice these roles, responsibilities and duties tend to lack high tendency of performance or even fail. 4.2.2 Management and their Influence on Profitability Management is responsible for the day-to-day running of an organization. In respect to the research on Peugeot Automobile Nigeria and NassarawaStateUniversity, in both cases Top
Management are appointed by the Board of Directors to participate in direction and policy setting, and in articulating and managing the strategic direction of the organisation. The Management team of Peugeot Automobile Nigeria, appointed consists of the Managing Director, Chief Operating Officer, and a few General Managers. In the case of Nassarawa State University the Management team appointed are made up of the Vice Chancellor, both Deputy Vice Chancellors (Administration and Academics) and Deans of a few faculties. In both scenarios Management play a big role in all decision making and are responsible in leading organizations. The boards of both organizations limit their involvement to the appointment of
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top-level
Managers,
assessment
of
their
performance
and
termination of unsatisfactory managers in the event of low level of performance. Therefore Top Management of Peugeot Automobile Nigeria and Nassarawa State University need to posses the requisite standards
4.2.3Creditors Impact on the Performance of an Organization. The central hypothesis is that creditors play an important role in corporate governance even outside of states of payment default or bankruptcy. Looking at both case studies it was realised that
NassarawaStateUniversity is a government based organization, therefore are not associated with creditors. Peugeot Automobile Nigeria on the other hand is a profit-private based organization, therefore are highly associated with creditors. From the analysis made it was observed that increased creditor control might lead to declines in the value of the borrowing firm. It was further observed that creditors play an active role in the governance of corporations; the analysis of Peugeot Automobile Nigeria showed that violations are followed immediately with an increase in CEO turnover; an increase in the incidence of corporate restructuring and hiring of turnaround specialists; a decline in acquisitions and capital expenditures; and a sharp reduction in leverage and shareholder payouts.
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It was further observed that changes in the investment and financing behaviour of violating firms coincide with amended credit agreements that contain stronger restrictions on firm decision-making. In addition, changes in the management of violating firms suggest that creditors exert considerable behind-thescenes influence on governance in addition to contractual control. We also show that firm operating and stock price performance improve following a violation, suggesting that actions taken by creditors benefit shareholders skills and competencies for effective organizational performance. 4.2.4 Stakeholders Influence on the Productivity of a Firm Besides the principal owner and management, organizations like Peugeot Automobile Nigeria, and Nassarawa State University must deal with many other stakeholders like staff, banks, customers, local communities, investors, suppliers local and federal government, network dealers, business partners; all these make up the network of these organizations. Each stakeholder plays their role by making sure that the management of the organization is being monitored; that there is a certain level of discipline at all levels of the organization; motivation is accelerated to help boost
management degree of activity. If all these functions are fully utilized by stakeholders, it will bring about a drastic improvement in the productivity both Peugeot
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Automobile Nigeria and NassarawaStateUniversity. Two forms of behaviors have been identified during the course of the research, which can be distinguished in corporate governance issues related to other stakeholders: stakeholder management and social issue participation. For the first category, firms like Peugeot Automobile Nigeria and NassarawaStateUniversity has no choice but to behave "responsibly" to stakeholders: they are input factors without which the firm cannot operate; and these stakeholders face alternative opportunities if Peugeot Automobile Nigeria or NassarawaStateUniversity does not treat them well. typically for example if Peugeot Automobile Nigeria decides to treat its staff unfairly then they could decide to go on strike which will affect level of production of cars, thus have a negative impact on the performance of a firm; like wise if Nassarawa State University decides to treat its staff unfairly, this could lead to a strike action by staff, thus all school activities seizes and students become dormant, thus affect the reputation of Nassarawa State University. Acting responsibly towards each of these stakeholders is thus necessary for both organizations. Collectively, a high degree of corporate responsibility can ensure good relationships with all the firm's stakeholders and thereby improve the overall performance of both Peugeot Automobile Nigeria and NassarawaStateUniversity.
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4.2.5 The Role of Shareholders Activism in the Management of a Corporation Shareholders are the owners of the firm and, although their primary concern is value maximization for their investments, they have a critical responsibility to ensure that an appropriate governance structure is put in place in their organization. In the course of the research it was discovered that though NassarawaStateUniversity is a government owned par status. The government tends to play the role of shareholders, Peugeot Automobile Nigeria is typically owned by private individual shareholders. The shareholders in both organizations have general key roles that are necessary in effectively managing both organizations. These roles include; o Election of Board (Members) of Directors o Delegation of authority as owners to elected Directors. o Appointment of Auditors to give an independent report on financial performance to the shareholders. These activities are strongly present in both organizations. In the case of Peugeot Automobile activities are Nigeria performed by and the
NassarawaStateUniversity,
shareholders (private individuals and government) in general meetings, Peugeot Automobile once
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Nigeria year.
usually In the
holds instants
their of
shareholders
meeting
a
NassarawaStateUniversity
government
(shareholders)
convene
extra-ordinary meetings to respond to/resolve issues that require immediate attention. For both organizations shareholders appoint and delegate
responsibility and authority to a Board of Directors to act on their behalf within the defined governance arrangements. The Boards of Directors assume delegated authority and give account of their stewardship at least once every year or special circumstances to the shareholders. Typically, Peugeot Automobile Nigeria?s shareholder power is proportional to the number of shares held in the company or voting power. In the case of NassarawaStateUniversity, it is owned by NassarawaState government (representing the people of
NassarawaState). Therefore exert a fair amount of influence on the organization through the Board of Directors. 4.2.6 Board Composition and its impact on the Performance of a firm Through the research conducted on Peugeot Automobile Nigeria and NassarawaStateUniversity, the studies show how board membership and structure can have an impact on firm performance. During the course of the interview conducted it was concluded that there would be better performance for both Peugeot Automobile Nigeria and NassarawaStateUniversity, if Boards of
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Directors were dominated by outsiders. Boards dominated by insiders are not expected to play their role as effective monitors and supervisors of management. This is particularly so when the board chairperson is also the firm?s CEO. While outside directors bring a breadth of knowledge and expertise to the firm, they may have a limited understanding of the firm's business, which would impede their ability to guide and supervise the management and could even stifle strategic action and result in excessive monitoring. It was also realized that outside Directors of both organizations under research provides these firms with windows or links to the outside world, thereby helping to secure critical resources and expand networking. They normally serve as Directors of several Boards. Between managing their own business and serving on multiple Boards, outside Directors lack firm-specific knowledge and may not be able to understand each business and the complexities of the firm well enough to be truly effective. However it is less likely that they are controlled by the Managing Director (MD) or Vice Chancellor that and (VC) is the Inside relevant strategic Directors to have access to
information competence
assessing of
managerial initiatives.
desirability
However, insider Directors usually do not make exhaustive evaluation of the strategic decision processes since they are influenced by the Managing Director (MD) or Vice Chancellor
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(VC). Therefore it is concluded that their should be a greater level of independence that will allow outside Directors to fulfill their monitoring duties more effectively, which in turn will bring about an improvement on firm performance. Through the course of the survey it was perceived Institutional investors typically view a well-governed company as one that has a majority of outside directors with no management ties to its board, undertakes formal evaluations of directors, and is responsive to requests from investors for information on governance issues. Directors should also hold significant
shareholdings in the company, and a large part of their pay should come in the form of stock options. . The independence of directors and boards of state enterprises, in their various forms, in many emerging and transition economies, especially those in Africa, remains a challenge–not only for the directors themselves but also for those with whom such enterprises contract. There is a particular problem associated with the shortage of skills and lack of familiarity with board functions and fiduciary responsibilities. The lack of enforcement of existing regulatory measures, whether outdated or not, has contributed to poor corporate governance practices. Many corporate board members in Africa, especially of state-owned companies,
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some private companies and management committee of cooperatives have limited understanding of their roles, and are usually open to manipulation by management, chairmen, or principal shareholders. Some are outright incompetent. Nonexecutive directors in Africa need to play any meaningful role in the governance of business enterprises. However many simply act as rubber stamps for decisions taken outside the board. 4.2.7 The Effect of Board Size on the Performance of the Firm From the research conducted on both Peugeot Automobile Nigeria and NassarawaStateUniversity it was realized that board size has a number of implications. On one hand, a smaller board is manageable from the Managing Director's (MD) or Vice
Chancellor's point of view. A smaller board size is viewed as an indicator of the CEO's profound influence on proceedings in board meetings. On the other hand, a larger board, although potentially unmanageable, may be valuable for the breadth of its services. A larger board has been shown to provide an increased pool of expertise and resources for the organization. From an organizational dynamic point of view, however, a larger board is more likely to develop factions and coalitions that can increase group conflicts. Therefore it was observed that for both Peugeot Automobile Nigeria and NassarawaStateUniversity, the first step in structuring an
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effective board is to shrink it, probably because a larger board is more difficult to coordinate. It was further observed that a larger board is less likely to become involved effectively in the strategic decision making process. a smaller board seems to be more effective than larger board in the sense that it allows the board to support the strategic decisions of Managers without frequent interruptions and to take a decisive governance actions in a coordinated fashion. However further research revealed that Managing Director and Vice Chancellor can easily exert their influence on small boards but find it difficult to influence large ones. It is very likely that, if both Peugeot Automobile Nigeria and NassarawaStateUniversity were to have a large board size, the Managing Director and Vice Chancellor, would experience greater difficulty influencing all board members to agree and make decisions.
4.2.8 The Relevance of Audit Committee in a Board Structure Internal Accounting and Financial Audit The internal audit is an integral element of corporate governance and is carried out by an internal auditor who reports to the chief executive officer (Vice Chancellor, Nassarawa State University and Managing Director, Peugeot Automobile Nigeria) and is supposed to assist the executive management and the board in the
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discharge of their obligations relating to safeguarding assets, risk management, operation of adequate controls and reliability of financial statements and stewardship reporting. The Audit
Committee plays a vital role in financial and operational controls in the whole system of corporate governance, by making
recommendations to the board concerning the appointment and remuneration of external auditors, reviewing auditors' evaluation of the system of internal control and accounting, and considering and making recommendations on the conduct of any aspect of the business of the company which should be brought to the notice of the board, among others. The establishment of an audit committee is a listing requirement of many organizations. Budgetary control is another internal control tool, which involves two levels of activity, namely planning and control. Control is complementary to planning and it involves monitoring actual performance against projected plans. External Auditors Internal auditing functions differ among small, medium and large organizations. Most African listed companies are too small to sustain their own internal audit department. In their circumstances, services provided by third parties may be the only means of obtaining auditing support. The main objective of the external audit is to give a report on the view presented by the financial
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statements prepared by the managers. The detection of fraud and errors are incidental to this main object. The audit may also prevent the commission of fraud and errors by reason of the deterrent and moral check that it imposes. Regulators? reliance on external auditors is premised on the belief that the auditors are public spirited and will act on behalf of either the public or the state, and that auditors are independent of the management. To engender public confidence in the integrity of the external auditor, he must be skilful, careful, diligent, faithful and honest. Such an auditor bolsters the perception of corporate governance. If the external audit firm provides this support then the most critical consideration must be whether the internal audit department is staffed by different personnel from the external audit and also headed by a partner not involved in external audit activities
4.3
Summary of Analysis Through the critical analysis of the data gathered on both case studies; Peugeot Automobile Nigeria and NassarawaStateUniversity it has been realized that; A. The data gathered determines that competent Directors that have the ability to make positive decisions in relation to the organization at hand can influence, to a large extent the successes of an organization. Once the Directors roles and
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responsibilities are clearly defined and applied properly then there will be less conflict with other parties of corporate governance, and decisions will be made at a professional level. B. It was also realized that Management of a firm play a great role in corporate governance, usually there is a conflict of interest between Management and Directors, but once there are clearly defined roles and responsibilities, it regulates the level of conflict, thus improves the level of successes of that organization. C. The analysis shows that creditors have an enormous impact on the value of a firm. It has also been realized that Shareholders tend to shy away from organizations that are associated with too many creditors. Though it has been realized that most organizations can?t survive without
creditors/Banks assistance, therefore it is vital to the survival of most organization. Therefore through proper governance of a firm Organizations can create conducive and healthy relationships with creditors/Banks, which will be more, like a partnership. D. Stakeholders also play a vital role in the extent to which an organization succeeds or fails. Once there is a healthy relationship between the various stakeholders, which include;
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shareholders, employees, distributors, creditors, etc. Once stakeholders are satisfied, by attending to their wants and needs at the corporate level, then to some extent roles and responsibilities of each stakeholder will be utilized well, thus increase in efficiency and effectiveness; therefore an
improvement in the productivity of a firm. E. The analysis has shown that shareholders that participate and show considerable interest in the running and progress of a firm tend to create a „checks and balance? system that makes the decision makers of an organization more alert and serious in running the firm, thus can also improve the productivity of a firm through effective decision making. F. The right board composition is essential for corporate governance best practices. From the analysis made it has been realized that for good governance practices to prevail their should be more „outside Directors then „inside Directors?, this is due to the fact that outside directors are less biased when it comes to decision making that is for the best interest of the stakeholders involved and the company as a whole. Thus for an organization to prevail it needs to make sure that board composition is dominated more by outside directors and few inside directors.
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G.
The board size also determines that level of successes of a firm. This is due to the fact that having a smaller size of board members makes decision making much faster, therefore progress for the firm. It also gives room for better coordination of board activities and less conflict of interest. Therefore organizations should be cautious of the negative implication of a large board size and try to maintain a smaller board size for better and effective decision making that will improve the productivity/successes of a firm.
H.
Finally the final analysis shows that Audit committee of the Board Committee play a vital role in good governance practices. Once an internal and external audit committee is put in place and each play their roles and responsibilities at the board level then good governance will prevail and will help along way in making sure things at the board level are moving smoothly, thus improving the performance of a firm.
From the various analyses made and interpreted above it is safe to say that Corporate Governance practices can affect or improve the productivity of a firm. If Corporate Governance is to have a positive impact on the growth of a firm; then good governance needs to be practiced and sustained, and for good governance to exists then various factors mentioned above are essential.
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CHAPTER 5
SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
5.1 SUMMARY The evidence of the study shows from the combination of the two case studies at hand, that there are certain factors of corporate governance that influence or affect the productivity or value of a firm, whether it be direct or indirect impact of productivity. The findings of the study show how the impact of good governance on the performance of a firm maybe appreciated if we recognizethat growth is positively related not only to the size of investment but by the efficiency of its allocation. The survey looks at how a good practiceof corporate governance ensures that directors and managers of enterprises carry out their duties and responsibilities effectively within a framework of accountability and transparency. The research also studied necessary board structures; which focuses on which committees are vital for a proper board
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structure; how the committee structure permits the board to address key areas in more depth; and how by clearly defining and understanding each committees? responsibilities, so that good governance practices can be established. Further research was made board composition, which focuses on the number of inside and outside directors within a Board; the implications of having more inside directors then outside directors; and what number of inside and outside directors is ideal for good governance practice. The research also looked at the vital nature of an Audit Committee. It looks at the importance of the audit committee, and how it should comprise of outside directors for better results. It further looks at the various functions of an audit committee. We went further to look at various stakeholders of an organization in relation to good governance practices, and how they can positively influence the productivity or value of a firm. It looks at the relevance of good relations with stakeholders; their roles and responsibilities; and ways in which they can affect the value of an organization.
Also analysis was made of Shareholders activism, and how having active shareholders,
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that
know
their
rights
and
responsibilities can bring about better governance practices from the board members. Finally the research was also focused on the various models of corporate governance; there advantage and disadvantage; and which model best suits organizations within Nigerian environment. The benefit is the overall efficiency and competitiveness of an organization will be enhanced thereby boosting investors? confidence in the company. It should be reiterated that good corporate governance is an important step towards building market confidence and encouraging stable, long-term in international investment flows into the country since the business corporation is becoming an increasingly important engine of wealth creation and growth, worldwide, it is imperative that Nigerian companies operate within standards that keep them well focused on their objectives and hold them accountable to shareholders and for their actions. Companies need to be convinced that good corporate governance can add value, and should put in place necessary structures and processes for the implementation of good governance values, such as standards of acceptable conduct,
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which are communicated throughout such organizations. Nevertheless, it should be stressed that the primary responsibility for ensuring good corporate governance rests with the directors and top management of a firm. It is therefore essential for organizations that want to increase the productivity of their firm, to focus on identifying the key elements of corporate
governance and how each element should be effectively implemented in the organization, which will bring about an increase in value or productivity of that organization. 5.2 CONCLUSION The need for corporate governance arises because of the separation of management and ownership in the modern corporation. In practice, the interest of those who have effective control over a firm can differ from the interests of those who supply the firm with external finance. The „principal -agent? problem is reflected in management pursuing activities which may be detrimental to the interest of the shareholders of the firm. Transparency and disclosure is in many ways the key to good governance. Provided companies are open about their
purposes and the way in which they go about achieving them, they will earn the trust of those on whom they depend for their success. Resources will flow to companies which inspire trust,
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through their approach to governance and through the integrity of those who manage them. Responsible governance is the basis on which trust is established and enterprise encouraged. Corporate Governance is a processes and not a state. The field is continually evolving. Its initial focus was on the way in which individual corporations are directed and controlled. This led to the introduction of national code of best practice. As the wider economic and social significance became more apparent, international guidelines were published to advance its cause more broadly. These guidelines reflected the part which good governance can play in promoting organizational growth and business integrity. Effective corporate governance requires a clear understanding of the respective roles of the board and of senior management and their relationships with others in the corporate structure. The relationships of the board and management with stockholders should be characterized by candor; their relationships with employees should be characterized by fairness; the relationships with the communities in which they operate should be characterized by good citizenship; and their relationships with government should be characterized by a commitment to compliance.
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Corporate governance is concerned with the processes, systems, practices and procedures as well as the formal and informal rules that govern 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. 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 those of other stakeholders, 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 by firms. The quality of governance is of absolute importance to shareholders as it provides them with a level of assurance that the business of the company is being conducted in a manner that adds shareholder value and safeguards its assets. This
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means that there is less uncertainty associated with the investment - a situation that encourages bankers and lenders to be favorably disposed to the company. Furthermore, the higher the risk, the higher the expected rate of return. If a company adopts and implements good corporate governance practices, shareholders are retained and new investors attracted.
Institutional investors have indicated a willingness to pay a premium for the shares of a well-governed company. Around the world, price: earnings ratios are higher among companies with good disclosure. Hence good corporate Governance is necessary in order to: 1. Attract investors both local and foreign and assure them that their investments will be secure and efficiently managed, and in a transparent and accountable process. 2. Create competitive and efficient companies and business enterprises. 3. Enhance the accountability and performance of those entrusted to manage corporations. 4. Promote efficient and effective use of limited resources. 5.3 RECOMMENDATIONS From the analysis of the two (2) case studies under research on the level of influence of Corporate Governance on the productivity of a firm, these are my recommendations;
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o Nigerian firms should be enlightened more on the relevance of Good Governance to the value of a firm, and actually apply these methods, processes, and policies, thus attain their organizational goals. o Organizations should realize the necessary ingredients that are relevant to good governance, which include; Director & Management roles and responsibilities; the relationship between Stakeholders and the Organization; Shareholders activism; board structure; and board structure. Once these factors can be applied effectively, this promotes the value of a firm, thus productivity of a firm. o Board of Directors need to realize their necessary roles and responsibilities, and be active in the key strategic decision making processes at the corporate level. This will promote efficiency and effectiveness and boost
confidence of all stakeholders involved. o Management has to understand how they are key players in Corporate Governance, and what are their roles and responsibilities. Management also needs to know when to draw the line when it comes to decision making at the corporate level. o Good governance practice cannot excises if there is an unhealthy relationship These
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between
Organizations include
and
stakeholders.
stakeholders
customers,
employees, suppliers, distributors, creditors, shareholders, etc. Therefore organization looking to improve the value of their firm need to avoid conflict with all stakeholders and make sure that the needs of each stakeholder is being satisfied. o Shareholders play a vital role in corporate governance. Though it can be nuisance, shareholder activism is essential in keeping board members, as well as top managers on their feet, and more conscious in decision making for the organization. Therefore Organizations should encourage shareholder participation, which will help to improve the productivity of a firm. o Organizations should also be conscious of the
composition of their Board of Directors, and make sure that the ratio of outside, to inside directors should be greater. This is necessary because inside directors usually mix objective decisions to sentimental ones, in relation to their roles as Managers of that organization, thus creating room for conflict and irrational decisions. Once there is a greater number of outside Directors, then more unbiased and rational decisions will be made that will have a positive impact on the organization as a whole. o Organizations should know the options they have when formulating their Board Size, and they should know the
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advantage and disadvantages of having both a small and large number of board members. They should also understand decisions are made much easier and
operations run much easier with a smaller board size. o Organizations should be disciplined enough to have an Audit Committee both within the organization and out that will allow for proper scrutiny of the organizations activities, thus give room for improvement when
necessary. Once there is presence of an outside Audit it makes key players of the organization to sit up and do their jobs well. o Finally it is recommended for any organization that wants to improve its value or productivity, hat they implement and apply good governance practices to their
organizations. Once good governance can be played from all the key factors mentioned above, then whether it be in the short-run or long-run; directly or indirectly; their will be an improvement in the productivity of that firm, thus an increase in the value of the firm.
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