CHAPTER ONE
- BACKGROUND OF THE STUDY
Financial outrage the world and the recent collapse of foremost corporate institution in the united states of America, south East Asia, Europe and Nigeria such as Enron corporation, world com, Arthur Anderson, lever brothers and Cadbury have shaken investors faith in the capital markets and usefulness of prevailing corporate governance practices in promoting transparency and accountability.
This has brought to the front again the need for the practise of good governance.
- STATEMENT OF RESEARCH PROBLEM
According to Al-fakir (2006), the relationship of the board and management should be attributed by transparency to shareholders and fairness to other stakeholders. These will in effect moderation of the agency cost as projected by Jensen and Macklin (1976).
The observed gap in this study is the collapse of most organisation in Nigeria due to their poor corporate governance which led to loss of confidence in our industry. This giving rise to the following question.
- How does board composition affect the firm performance?
- How does board size affect the performance of the firm?
- Does audit committee affect the firm performance?
- Does CEO duality affect the firm’s performance?
- OBJECTIVE OF THE STUDY
Given the overall objective of examining the relationship between corporate governance mechanisms.
Which are:
- Board size
- Board composition
- Audit committee
- CEO duality and firm’s performance
In relevance to this study, one of the corporate governance mechanism is used to determine the specific objective which is the examining of the audit committee and the firm’s performance.
While others can be, using the board composition to influence the firm’s performance.
Knowing the relationship between board size and firm’ performance.
- RESEARCH HYPOTHESIS
For the purpose of handling this study, the following hypothesis is formulated.
Hi: there is positive relationship between return on capital employed and board composition
H2: there is a positive relationship between board composition and return on Asset management
H3: there is a positive relationship between board composition and return on Equity.
H4 there is a significant relationship between board composition and earnings per share.
- SCOPE OF STUDY
This is aimed at appraising the relationship between the corporate governance mechanism and firms performance (ROCE, ROE and EPS).
This study will focus on five (5) firms quoted in the Nigeria stock exchange and will be from 2006 to 2010.
- RESEARCH METHODOLOGY
For the nature and purpose of study, the secondary data will be employed for empirical analysis, the secondary data will include information gotten from stock exchange fact book, annual report the firms from 2006-2010.
- SIGNIFICANE OF THE STUDY
This study aims to provide additional insights into the relationship between governance mechanism and firm performance in Nigeria. Our focus is on the measurement of corporate governance, abstract from other dimension such as incentive scheme.
It is hoped that the evidence would serve as important quantitative information into the cauldron of policy as well as add to the existing body of empirical literature from a developing stock exchange such as that of Nigeria.
The need for a study of this kind is characterised by growing all for effective corporate governance particularly for public liability companies.
At the level of firm, it offers the promise of a fair return on capital invested through improved efficiency. It also has some implication for the on-going privatization that the government of Nigeria is currently undertaken Grass-field (2002) citing the works of other scholars, indicated that the effectiveness of privatisation is greater.When corporate governance works well, moreover by helping to promote firm performance and the protection of stakeholder’s interest, corporate governance encourages investment and stock market development. Dimirgue-kunt and Levine (1996) have associated with improved micro-economic growth. Further recent evidence in the works of klappers and love (2002)suggest that the firm level corporate governance provisions matters more in countries with weak legal (regulatory) environments implying that the firm can partially compensate for ineffectivelaws and enforcement by establishing good corporate governance and providing credible investor protection.
- NEED TO COMPLY WITH CHARACTERISTICS OF
- GOOD GOVERNANCE
In the literature, good governance is measured by its adherence to the following outstanding universal attributes: must be participatory, consensus oriented, accountable transparent, responsive, effective and efficient, equitable and inclusive and follows the rule of law.
Compliance to these attributes raises the profile of a company and its goodwill in the market place with positive impact on its share prices, indeed, it is established that higher share price and lower cost of capital are directly linked to good corporate governance. Hence the global clamour for compliance.
by firms to good corporate governance . To adhere to them is to set the company on the part of prosperity.
If shareholders are cleverly precluded from participating in the governance of their companies. One of the aforementioned principles, the system would not only be defective and unacceptable, but also, it would produce sub-optimal results.
To be acceptable therefore, it must be equitable and inclusive by which mean that shareholders must not be disenfranchised by directors by holding AGMs at places not easily accessible to the shareholders, by dispatching notices of meeting late, by seeking to postpone AGMs to dates that are not convenient, etc, ideally, the shareholders have the right to know how their companies are governed. They reserved the right to change the focus and polices of the company through the board and at Annual general meetings (AGMs). Ultimately, they carry the risks. Whether we like it or not, the boards are merely acting as agents of the shareholders and cannot usurp the powers. The exercise of fiduciary powers by the board cannot confer on it the power to supplant the visions of the shareholders, however fragmented.
According to Akinsulire( 2006) good corporate governance aims at the following.
- Directors imbibing in the culture of pursing the best interest of shareholders.
- Reviewing of audit regulation, corporate disclosure framework and shareholders participation for accountability and transparency.
- Ensures compliance with regulatory requirement and performance of the company’s internal audit function and audit committee assisting the board of directors in supervision of financial statements.
- Ensure that provider of finance get their return on investment etc.
Thus,Good corporate governance tends to reduce the control right confer by shareholders and creditors on managers and sustain positive corporate governance.
According to Cadbury report, corporate governance is the system by which companies are directed and controlled (kensey, et al, 2005)
Furthermore, Cadbury recognised that a system of good corporate governance allows board of directors to be free to drive their companies forward but exercise that freedom within a framework of effective accountability.
The corporate governance structure enumerates the disposal of rights and responsibility among different participants in the corporation such as the board managers, shareholders and stakeholders.
Corporate governance structures spells out the rules and procedures for making decisions on corporate affairs and provide the arrangement through which the companies objectives are set and the means of obtaining those objectives.
Corporate governance is an important hypothesis that relates to the manners in which financial resources available to an organisation or companies are cautiously utilise to achieves the general corporate objectives of an organisation.
- LIMITATION OF THE STUDY
This study is empirical in nature and will utilise data of five non-financial firms listed on the Nigeria stock exchanges between 2006 to 2010. This present quoted from financial statement that was observed.
Through there are some shortcomings that was accredited during the phase of writing the research works and can be attributed to money and time available for the research which are constrain for the research work of retrieving relevant information.
