OWNERSHIP STRUCTURE AND CORPORATE GOVERNANCE AND ITS EFFECTS ON PERFORMANCE

ABSTRACT

This study explored ownership structure and corporate governance and its effects on performance of firms in Nigeria with reference to banks. The study revealed that there was no significant difference between type of ownership and financial performance, and between banks ownership structure and corporate governance practices. Further results revealed that there was significant difference between corporate governance and financial performance of banks. However, foreign-owned banks had slightly better performance than domestically-owned banks. This study recommends that corporate entities should promote corporate governance to send a positive signal to potential investors. The Central Bank of Nigeria (CBK) should continue enforcing and encouraging firms to adhere to good corporate governance for financial institutions for efficiency and effectiveness. Finally, regulatory agencies including the government should promote and socialise corporate governance and its relationship to firm performance across industries. The empirical results indicate that firm performance is in negative and significant relation to board size, CEO duality, stock pledge ratio and deviation between voting right and cash flow right. On the other hand, firm performance is in positive and significant relation to board independence and insider ownership. 

CHAPTER ONE

1.0 INTRODUCTION

Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and includes the rules and procedures for making decisions in corporate affairs. Corporate governance includes the processes through which corporations’ objectives are set and pursued in the context of the social, regulatory and market environment. Governance mechanisms include monitoring the actions, policies, practices, and decisions of corporations, their agents, and affected stakeholders. Corporate governance practices are affected by attempts to align the interests of stakeholders. Interest in the corporate governance practices of modern corporations, particularly in relation to accountability, increased following the high-profile collapses of a number of large corporations during 2001–2002, most of which involved accounting fraud; and then again after the recent financial crisis in 2008. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms.

Since 2001, Enron Xerox, WorldCom had been caught of getting involved in accounting scandals, which leads to the credibility of corporate financial reports under suspicion, furthermore, shocking investors’ confidence. Consequently, corporate governance mechanism has been a crucial issue discussed again. Sarbanes-Oxley Act was enacted in 2002 to enhance corporate government mechanism which is viewed as the priority of financial revolution, in the expectation that governance mechanism may be reinforced, public confidence retrieved, accuracy and reliability of financial information assured.

Berle and Means (1932) set forth that ownership dispersion implies management is distinguished from ownership, which, as Jensen and Meckling (1976) emphasize, may contribute to agency problems between managers and shareholders or shareholders and debtors. On the other hand, Shleifer and Vishny (1986) and Morck, Shleifer and Vishny (1988) detect the phenomenon of ownership concentration. La Porta et al. (1999) and Claessens et al. (2000) usher in the conception of ultimate controller; they define firm ownership as voting rights, unearthing that many controlling shareholders of listed firms predominate firms by means of pyramid structure and cross holding, which could result in central agency problem.