Project Materials

AN ASSESSMENT OF CORPORATE GOVERNANCE AND FIRM PERFORMANCE: EMPIRICAL EVIDENCE FROM SELECTED LISTED COMPANIES IN NIGERIA

Chapter one

INTRODUCTION

1.1 Background of the Study.

The phrase “Corporate Governance” is understood to mean different things to different people. According to Magdi and Nadereh (2002), corporate governance is concerned with ensuring that businesses run smoothly and that investors receive a fair return. OECD (1999) offers a broader definition of corporate governance.

It defines corporate governance as the process by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the corporation’s various participants, such as the board, managers, shareholders, and other stakeholders, as well as the rules and procedures for making corporate decisions.

This also provides the structure for setting the company’s objectives, as well as the means to achieve those objectives and monitor performance. This definition is consistent with the submissions of Wolfensohn (1999), Uche (2004), and Akinsulire (2006).

Financial scandals around the world, as well as the recent collapse of major corporate institutions in the United States, South East Asia, Europe, and Nigeria, such as Adelphia, Enron, World Com, Commerce Bank, and, most recently, XL Holidays, have shaken investors’ confidence in the capital markets and the efficacy of existing corporate governance practices in promoting transparency and accountability. This has once again highlighted the importance of good corporate governance.

Effective corporate governance reduces the “control rights” that shareholders and creditors confer on managers, increasing the likelihood that managers will invest in projects with a positive net present value (Shleifer and Vishny 1997).

According to Al- Faki (2006), board-management relationships should be characterised by transparency to shareholders and fairness to other stakeholders. This will effectively reduce the agency cost, as predicted by Jensen and Meckling (1976).

Corporate performance is an important concept that refers to the way and manner in which an organization’s financial resources are wisely used to achieve its overall corporate goal; it keeps the organisation in business and creates a better prospect for future opportunities.