IMPACT OF CORPORATE GOVERNANCE ON ORGANIZATIONAL PERFORMANCE

CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

Corporate governance has in recent years become a topical issue both in business and academic circles. The concern in business arose out of the perceived importance that a tradition should be developed that supports moral and ethical conduct in business affairs which will create a general climate (both legal and social environment) that will promote good governance of firms. In the academic world, it is established that business decisions are not made in a vacuum. Business decision makers have objectives outside the firms’ objectives, for example managers are interested in their own personal satisfaction, in their employees’ welfare, as well as in the good of the community (society) at large and these objectives impact on shareholders wealth adversely (Akeem, 2014).

The genesis of Corporate Governance lies in business scams and failures. The Watergate scandal, the junk bond fiasco in USA and the failure of Maxwell, BCCI and Polypeck in UK resulted into setting up of the Treadway committee in USA and the Cadbury committee in UK on corporate governance.

The guiding principle of good corporate governance is “transparency and ethics” should govern corporate world. Increasing strategic importance of professional management probably constitutes the most important aspect of changing profile of corporate governance. Given the global challenges, the only choice left with business and economic enterprises is to follow the corporate governance practices – the path for living, working, surviving, successing and the excelling in the future (Bansal and Bansal, 2014).

Directors without corporate enforcement mechanism may paint misleading pictures of financial performance of their organisations to lure unsuspecting investors. However, the effect of these actions on some corporations is devastating. There is the collapse of the energy corporation Enron in 2001 in US, WorldCom, Global Crossing, and Rank Xerox, most of which filed for bankruptcy after adjusting their accounts. Between 2002 and 2005, several international corporations failed, including Mutual Risk Management Ltd, Equitable Life Assurance Society UK collapsed in year 2000 because directors of the companies unlawfully used money met for guaranteed annuity rate policies to subsidize current annuity rate policies. Lion of Africa Insurance in Nigeria also liquidated because of board crisis it liabilities outweighed the assets and could not recapitalize in 2007 (Momoh and Ukpong, 2013).

The increasing incidence of corporate fraud relating to exaggerated and overstated accounts have informed renewed global emphasis on the need for good corporate governance. According to Nwachukwu (2007), there is a growing consensus that good corporate governance has a positive link to national economic growth and development. Checks and balances in an organization are strengthened through good corporate governance.