OWNERSHIP STRUCTURE AND CORPORATE GOVERNANCE AND ITS EFFECTS ON PERFORMANCE
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OWNERSHIP STRUCTURE AND CORPORATE GOVERNANCE AND ITS EFFECTS ON PERFORMANCE
Chapter one
1.0 Introduction
Corporate governance encompasses the structures, processes, and relationships through which corporations are controlled and directed. Governance structures and principles define the distribution of rights and responsibilities among the corporation’s various participants (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders), as well as the rules and procedures for making corporate decisions.
Corporate governance refers to the methods by which organisations establish and pursue their objectives in the context of the social, regulatory, and commercial environments.
Monitoring corporations’ actions, policies, procedures, and choices, as well as their agents and affected stakeholders, are examples of governance tools. Efforts to align stakeholders’ interests influence corporate governance processes.
Interest in modern corporations’ corporate governance practices, particularly in terms of accountability, grew following the high-profile collapses of a number of large corporations in 2001-2002, the majority of which involved accounting fraud, and then again after the 2008 financial crisis.
Corporate scandals in various kinds have kept the public and political interest in corporate governance regulation alive. In the United States, examples include Enr
n and MCI Inc. (previously WorldCom). Their collapse is linked to the US federal government implementing the Sarbanes-Oxley Act in 2002, which aimed to restore public trust in corporate governance. Comparable failures in Australia (HIH, One.Tel) coincided with the eventual approval of the CLERP 9 legislation.
Since 2001, Enron, Xerox, and WorldCom have been caught up in accounting scandals, casting doubt on the veracity of company financial reporting and shattering investor confidence. As a result, the corporate governance system has once again become a hot topic of discussion.
The Sarbanes-Oxley Act was enacted in 2002 to improve corporate governance mechanisms, which are regarded as a priority of the financial revolution, with the goal of reinforcing governance mechanisms, restoring public confidence, and ensuring the accuracy and dependability of financial information.
Berle and Means (1932) stated that ownership dispersion means that management is distinct from ownership, which, as Jensen and Meckling (1976) point out, may contribute to agency issues between managers and shareholders or shareholders and debtors.
On the other hand, Shleifer and Vishny (1986) and Morck, Shleifer, and Vishny (1988) identify the phenomena of ownership concentration. La Porta et al. (1999) and Claessens et al. (2000) introduce the concept of ultimate controller;
they define firm ownership as voting rights, revealing that many controlling shareholders of listed firms dominate firms through pyramid structure and cross holding, potentially resulting in a central agency problem.
1.1 Background of the Research
According to Tandelilin et al. (2007), the key focus in most literature, discussion analysis, and research on corporate governance issues around the world has been the importance of ownership structure as a corporate governance tool. Concerns have been raised about the importance of ownership structure and its consequences for corporate governance (Tandelilin et al., 2007).
A lot of attention has focused on the relationship between ownership structure and corporation performance. For instance, La Porta et al. (2000) affirm that when the legal structure does not offer sufficient protection for outside investors and entrepreneurs, original owners are forced to maintain large positions in their companies, resulting in a concentrated form of ownership.
On the other hand, according to Shirley and Walsh (2001), the majority of evidence indicates that privately held enterprises are more efficient and lucrative than publicly held firms, while the data differs on the relative value of each private owner.
Jensen and Meckling presented the findings of their research on ownership structure and firm performance in 1976, categorising shareholders as internal investors with management rights and external shareholders with no voting rights.
Their research concluded that the value of the corporation is determined by the internal shareholder’s share, a concept known as the ownership structure.
Nigeria’s financial reforms have attracted foreign banks to come and extend their operations in the country. Kamau (2009) states that overseas banks are more efficient than domestic banks. She relates this to the fact that international banks focus mostly on major cities and target corporate customers, whereas huge local banks expand their operations over the country.
Foreign banks so avoid retail banking in order to focus on corporate products, whereas huge domestic banks have a less discriminatory business model. She points out that these various operating modalities have an impact on efficiency and profitability.
Studies on the corporate governance issue have primarily been conducted in developed economies, particularly the United Kingdom and the United States of America, with a few exceptions in Africa, namely Nigeria.
However, the concept of governance is now increasingly being embraced in Nigeria, knowing that it leads to sustainable growth, especially since Nigeria has had a history of poor governance system in the banking industry, attributed to weak corporate governance practices, lack of internal controls, weaknesses in regulatory and supervisory systems, insider lending, and conflict of interest
which led to the collapse of many financial institutions with others going under recei Institutions such as the Central Bank of Nigeria, the Capital Markets Authority, and the Centre for Corporate Governance have implemented measures to promote good corporate governance. However, despite these efforts, the issue of corporate governance remains unresolved.
Given the foregoing, the purpose of this study was to investigate ownership structure and corporate governance, as well as their effects on performance in Nigeria’s banking industry.
1.2 Statement of Research Problem
Global events involving high-profile company failures have resurfaced the policy agenda and fueled debate about the efficacy of corporate governance frameworks in improving firm performance (Sanda et al., 2005).
Since the beginning of the twenty-first century, severe financial crises and numerous incidents of corporate mismanagement have drawn increased attention to corporate governance, which is closely related to business ethics issues.
Corporate governance is now widely recognised as a vital aspect in economic development and financial market stability, according to scholars (Sanda et al., 2005).
Despite a strict regulatory framework, Nigeria’s corporate governance remains weak. Much needs to be done to clean up this mess; else, we can expect more corporate failures and malfunctions in the region. There has been growing interest in corporate governance issues in Nigeria, although relevant empirical evidence remains scarce.
This has always resulted in a limited awareness of corporate governance issues. Firm performance in recent years has been relatively dismal, with financial results falling short of expectations.
Aside from that, corporate governance has been distinguished by extremely concentrated ownership, a low ownership share of foreign owners, significant ownership and decision-making power in the hands of state-owned entities, and comparatively low ownership shares in the hands of insiders. Thus, certain investors lacked the clout to have a meaningful impact on corporate governance.
So, how do ownership structure and corporate governance affect performance? On this basis, the study tried to determine the implications of ownership structure and corporate governance on performance.
How do ownership structure and corporate governance connect to firm performance, and what impact does ownership structure have on a firm’s corporate governance and performance?
1.3 GOALS OF THE STUDY
The primary goal of this research is to assess the influence and consequences of corporate governance and ownership structures on bank performance.
Furthermore, this research will reveal potential methods in which government may improve the performance and operation of banks in our state and across the country.
1.4 Significance of the Study
The study will be significant in many ways to various parties, as shown below:
It will clearly demonstrate the importance and impact of ownership structure and corporate governance on an organization’s performance.
The research findings, as well as suggestions and recommendations based on the findings, will serve as a good guide for the organization’s future administration and governance. The findings of the study will assist them broaden their perspectives on resource allocation and control.
The research paper will also be useful as reference material for accounting students, particularly those with a focus on management accounting.
The research will also benefit the researcher. This is because the study will expose the researcher to a wide range of related topics while conducting his research.
This will increase the researcher’s expertise, knowledge, and understanding of ownership structure, corporate governance, and their impact on performance.
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