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AN ASSESSMENT OF THE EFFECT OF CORPORATE GOVERNANCE ON FIRMS PERFORMANCE IN NIGERIA
ABSTRACT
This research paper reviews the conceptual framework of corporate governance and Organizational Performance in Banking Industry in Nigeria and seeks to understanding current best practice, the challenges, the failure and offered recommendations for efficient implementation of corporate governance best practice in the Nigerian banking sector. Recent global events concerning high-profile corporate failures have put back on the policy agenda and intensified debate on the efficacy of corporate governance mechanisms as a means of increasing firm financial performance. This study attempts to address this question using Spearman’s Ranking Correlation Coefficient and SPSS for a sample of 15 banks for the period 1985-210. Data collected from 70 respondents. The results are consistent with existing literature; it was found that there is a strong and positive relationship between the dimensions of Corporate Governance and Organizational Performance. We but there is need to err on the side of caution in any attempt to generalize the findings as the sample selection was determined by the availability of data. We concluded that without governance mechanisms in place-in particular, a board to direct and control managers might ‘run away with the profits’. Understood in this way, good governance minimizes the possibility of poor organizational performance. Good governance can make to improved organizational performance by highlighting the strategic role of the board. Legal compliance, ongoing financial scrutiny and control, and fulfilling accountability and transparency requirements, as these are and fundamental features of good corporate governance. Our recommendations include that banks management should know that they are accountable to all stakeholders not just the shareholders. E.g. their customers so that they don’t lose them. They must ensure transparency in their dealings with all stakeholders. This will help them retain their customers, which will in turn increase their profitability, they must ensure adherence to polices on accountability and transparency in information disclosure so as to retain and improve their market share, they must improve on accountability and transparency, so that they can be trusted by stakeholders for the realization of large market share, they must ensure excellent relationship between the board, the management, the shareholders and other stakeholders.
TABLES OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Context of the Problem 1-3
1.2 Statement of the Problem 3-4
1.3 Purpose and Objective of the Study 4-5
1.4 Research questions 5
1.5 Conceptual framework 6-7
1.6 Research Hypotheses 7-8
1.7 Significance of the study 8
1.8 Scope of the study 9
1.9 limitation of the study 9-10
1.10 definition of terms 9-11
1.11 Organization of the study 11
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.0 Introduction 14
2.1 concept of corporate governance 14-18
2.1.1 code of corporate governance 18-20
2.2 dimensions of corporate governance 20-21
2.2.1 Accountability 21-24
2.2.2 Transparency 24-26
2.3 Concept of organizational performance 26-31
2.4 Measures of organizational performance 31-34
2.4.1 Profitability 34-35
2.4.2 Market share 35
2.5 empirical evidence between corporate governance
and organizational performance 35-27
2.5.1 relationship between accountability and
Organizational performance 37-39
2.5.2 relationship between transparency and
Organizational Performance 40-42
2.6 Contextual factors organizational culture and size
Organization 42
2.6.1 Organizational culture 42-43
2.6.2 size of organization 44-45
2.7 organizational culture as a moderating factor
Influencing the relationship between corporate governance
and organizational performance 46-52
2.8 organizational size as a moderating factor influencing
The relationship between corporate governance and
Organizational performance 52-54
2.9 Summary 55-56
CHAPTER THREE- RESEARCH METHODOLOGY
3.0 Introduction 62
3.1 Research Design 63
3.2 population of the study and sampling procedure 64
3.3 sample size determination 64-65
3.4 sources of research data 65
3.5 operational measures of study variables 66-69
3.6 Test of validity and reliability of the variables 69
3.7 instrument design 70
3.8 Data analysis techniques 70-71
3.9 analytical design 71
CHAPTER FOUR-DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.0 Introduction 73
4.1 Questionnaire distribution and collection 73-74
4.2 Analysis of general characteristics of respondents 74-82
4.4 Hypotheses testing 82-92
CHAPTER FIVE: DISCUSSION OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.0 Introduction 73
5.1 Discussion of findings 94-102
5.2 Recommendations 102-104
5.3 Conclusion 104-105
5.4 Implication of the study 105-106
5.5 Suggestion for further study 106
Reference
Bibliography
Appendix 1
LIST OF TABLES
Table 4.1: Questionnaire distribution and collection
Table 4.2: Position in the company of respondents
Table 4.3: Gender of respondents
Table 4.4: Ages of respondents
Table 4.5: Duration of company of respondents
Table 4.6: Martial status of respondents
Table 4.7: Educational qualification of respondents
Table 4.8: Extent to which accountability affect profitability
Table 4.9: Extent to which transparency affects profitability
Table 4.10: Extent to which accountability affects market share
Table 4.11: Extent to which transparency in the disclosure of information affect market share
Table 4.12: Extent to which organizational culture moderate between corporate governance and organizational performance.
Table 4.13: Extent to which size of the organization influence the relationship between corporate governance and organizational performance.
Table 4.14: Table 4.19 SPSS and Spearman’s Ranking correlation Coefficient hypotheses testing.
LIST OF FIGURES
Figure 1: Conceptual Framework
Figure 2: Levels of organizational culture
Figure 3: Flat organic structure
Figure4: Conceptual framework operationalized
CHAPTER ONE
INTRODUCTION
- CONTEXT OF THE PROBLEM
Success in the effective and efficient management of organization resources is in part a function of good corporate governance practices. Corporate governance according to OECD (1999) is a principle which involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives and monitoring performance are determined (Nicholson and Kiel 2004). Soludo (2001) opined that good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interest of the company and its shareholders and should facilitate effective monitoring.
Corporate governance as a concept can be viewed from two perspectives: the narrow and the broad view. A narrow view, in which it is viewed merely as being concerned with structure, which corporate entity or enterprise receives its basic orientation and direction. The broad perspective, is regarded as being the heart of both a market economy and democratic society. The narrow view perceive corporate governance in terms of issues relating to shareholders protection, suppliers of finance of corporations, management, the popular agency problems of economic theory; roles of board of directors, the independence of external auditors, audit committee, corporate meeting etc (Oyejide and Soyibo, 2001). For the purpose of this study, it will be restricted to the narrow perspective. However, the economic development of a nation depends largely on the state of health of corporations and the process in which decisions are implemented within the private sector. (Skelcher, 2004).
Corporate governance has succeeded in attracting a great deal of public interest as a result of its apparent importance in economic growth and in the management of organization resources. Hence this study is intended to examine Corporate Governance and Organizational Performance. According to a review of finance literature, Soludo (2001) says that government in its effort to ensure good corporate governance enacted the Company and Allied Matter Act (CAMA) of 1990 as well as other regulatory bodies such as Security Exchange Commission. This is to ensure that companies are managed properly. Corporate governance is the “system by which companies are directed and controlled” (Cadbury Committee, 1992).
However, previous studies in corporate governance have focused on financial management, auditing and methodology, although not much has been done in the area of services sector such as banks and organization performance. Thus, there is a lack of research on how corporate governance affects or influence organization’s performance in the banking sector in Nigeria. This is the focus of this study.
I recommend, for further findings, dimensions of corporate governance like Nature of board policy, corporate external auditors’ role etc and measures of organizational performance like sales volume, shareholders value, on investment, sales volume, productivity, quality of service etc to be looked into. Also, areas like Corporate Governance and Employee relations should be looked into. This is my suggestion for further findings.
- STATEMENTS OF THE PROBLEM
Quality management practices in any organization globally, constitute much on the growth and success of its operations. A critical observation on the total management of most organizations or corporate such as banks and other financial institutions reveals that, owing to the technical incompetence of board management, inadequate management capacity, wrong disclosure of vital information or annual statement of account and misappropriation of funds, bank are losing customers and profit day by day due to its inability in meeting the needs (cash demands) of customers and this has led to the collapse of a number of banks (Bhagat, Sanjai & Black, Bernad, 2002). The researcher opined that this problem may have resulted due to lack of effective corporate governance practices that emails total control of firms or organization’s resources.
Therefore, if organization performance must be optimal, there is need to address or effectively employ or install corporate governance principles that will enhance the management of organization resources in order to attain its objective or goal (Heinrich and Laurence, 2001).
Based on this, the study seeks to identify the effect of Accountability on profitability, the influence of Accountability of Market Share, the relationship between Transparency and Profitability, the association between Transparency and Market Share and the Contextual factors like Culture and Size as they moderate the relationship between Corporate Governance and Organizational Performance. This is our point of departure.
- PURPOSE AND OBJECTIVES OF THE STUDY
The purpose of this study is to determine the effect of corporate governance on organizational performance of Banks in Banking Industry. Thus, the specific objectives of the study are:
(a) To examine the influence of accountability on profitability
(b) To investigate the effect of transparency on profitability
(c) To ascertain the effect of accountability on market share.
(d) To assess the influence of transparency on market share.
(e) To investigate into how organizational culture moderate the relationship between corporate governance and organizational performance.
(f) To examine into how size of organization moderates the relationship between corporate governance and organizational performance.
1.4 RESEARCH QUESTIONS
Going by the specific of the study, the following research questions were addressed.
(a) To what extent does accountability influence organizational profitability in your bank?
(b) To what extent does transparency influence organizational profitability in your bank?
(c) To what extent dos accountability influence market share in your bank?
(d) To what extent does transparency influence market share in your bank? To what extent does organizational culture influence the relationship between corporate governance and organizational performance in your bank?
(e) To what extent does organizational size influence the relationship between corporate governance and organizational performance in your bank?
1.5 CONCEPTUAL FRAMEWORK FOR THE STUDY
According to Brown and Caylor, (2004) the absence of a strategic framework for corporate governance from which to define success is one major reason for the disappointing results of many corporate governance principles. Coles, McWilliams and Sen, (2001) opined that conceptual framework and theory are typically based on combination of previous literature, common sense and experience. However, the conceptual framework for this study emerges from the review of related literature on corporate governance and organizational performance and observation/studies from banks related activities.
The above conceptual framework seeks to examine the interactive relationship of the dimensions of the independent variable and the measures of the dependent variables. The independent variable is corporate governance, which has Accountability and Transparency as its dimensions. The dependent variable is organizational performance (performance of banks), and its measures are profitability and market share.
Figure 1: Conceptual Framework
Researcher’s Conceptual Model, 2011
Source: Review of related literature (2011)
1.6 RESEARCH HYPOTHESES
Using the conceptual framework as the keystone of this study, the following hypotheses were formulated.
H01: There is no is significant relationship between Accountability and Organizational Profitability.
H02: There is no significant relationship between Transparency and Organizational Profitability.
H03: There is no significant relationship between Accountability and Market Share.
H04: There is no significant relationship between Transparency and Market Share.
H05: Organizational culture does not significantly influence the relationship between Corporate Governance and Organizational Performance.
H06: Size of organization does not significantly influence the relationship between Corporate Governance and Organizational Performance.
1.7 SIGNIFICANCE OF THE STUDY
The study will be significant to the management and owners of any establishment in both the public and the private sector of the Nigerian economy. The study will be of immense benefits to managers, investors, students and lecturers in the field of business policy and strategic management.
The study will be useful on issues regarding corporate governance and organizational performance.
It will create awareness about the components of corporate governance and organizational performance for owners of business.
The study will also useful and add new information to the already existing body of knowledge. It will stimulate thoughts in creative minds for the execution of further studies.
1.8 SCOPE OF THE STUDY
This study investigate the effect of corporate governance on organizational performance in the banking sector in Nigeria. It will specifically investigate the activities of the fifteen (15) major banks in Nigeria that have no issue with the Central Bank of Nigeria. They are; Access Bank, Citibank, Diamond Bank, Ecobank Nigeria, Fidelity Bank Nigeria, First Bank of Nigeria, Guaranty Trust Bank, Skye Bank, Stanbic IBTC Bank Nigeria Limited, Standard Chartered Bank, Sterling Bank, United Bank for Africa, Unity Bank Plc., Wema Bank, Zenith Bank. The respondents are the bank managers of the banks who are regarded as information of the organization (and they constitute the Branch managers operations managers, Marketing managers, Human Resources Managers, Customer Service managers and Information technology manager) of each of these banks. The study focuses on the activities of these banks in terms of corporate governance and organizational performance from 1985 to 2010.
1.9 LIMITATION OF THE STUDY
The researcher encountered some limitations in the course of executing this research. Firstly, the study was meant to cover all the banks in Nigeria so as to have more facts on the subject matter; however this intended scope could not be achieved due to cost of collecting data.
Secondly, a lot of managers who were administered questionnaire did not complete them because of fear of giving out valuable information and business secrets to competitors.
Thirdly, most manages are unable to attend to questionnaire administered due to their tight schedules.
Fourthly, the findings of this study were used as a generalization of the other parts not covered in this study.
1.10 DEFINITIONS OF TERMS
To avoid possible confusion, the key terms that relate to the subject matter will be operationally define thus.
Bank: Is an organization that receives demand deposit and honour instruments. (Crest, 2002).
Corporate: an organization
Corporate Governance: The system by which companies are directed and controlled (Bebchuk, Lucian, Cohen and Allen, 2004).
Performance: The achievement of set results. (Bhagat, Dennis and Charles, 1999)
Organization: A company or firm with people who work collectively for common goals.
1.11 ORGANIZATION OF THE STUDY
The study will be prepared in five chapters ranging from chapters one to five.
Chapter one will provide the introductory aspects which will include context of the problem, statement of the problem, purpose of the study and research questions. Others are, conceptual framework, research hypotheses, scope and limitations of the study, significance of the study, definition of terms and organization of the study.
Chapter two focuses on the literature review which will provide useful information on the attributes of the study which is “Corporate governance and organizational performance”.
Chapter three focuses on the research methodology, which will cover issues on the research design, sampling procedure and sample size determination; population of the study, sources of research data, operational measures of variables, test of validity test of reliability, instrumentation and data analysis techniques.
Chapter four will provide details of the presentation and analysis of data for the study. And chapter five will focus on the discussion of findings, conclusion and recommendations as well as the suggestions for further studies.
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