Full Research Project – EVALUATION OF CORPORATE GOVERNANCE ON PERFORMANCE OF SELECTED COMMERCIAL BANKS IN NIGERIA

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CHAPTER TWO

LITERATURE REVIEW

2.1   Introduction   

The literature review presents the framework of the study in addition to a review of empirical studies on Evaluation of Corporate Governance on Performance of Selected Commercial Banks in Nigeria.

2.2  Conceptual   Framework

Corporate governance involves a system by which governing institutions and all other organizations relate to their communities and stakeholders to improve their quality of life (Ato, 2002). Corporate governance is therefore important to ensure transparency, accountability and fairness in corporate reporting. In this regard, corporate governance is not only concerned with corporate efficiency, it relates to company strategy and life cycle development (Mayer, 2007). It is also concerned with the ways parties interested in the wellbeing of firms (stake holders) ensure that managers and other insiders adopt mechanism to safeguard the interest of the shareholders (Ahmadu and Tukur, 2005). Corporate governance is based on the level of corporate responsibility a company exhibits with regard to accountability, transparency and ethical values. The management has multiple objective functions to optimize which might conflict with those of the shareholders. In the search for valid objective functions to resolve these conflicts, management often focus on short term result and lose sight of ethical issues such as effective corporate management. Inadequate consideration for ethical values and good governance hinders company’s performance as experienced in the recent corporate failures. The impact of good governance on firms’ reputation cannot be over emphasized. Good corporate governance promotes goodwill and confidence in the financial system. Numerous recent studies emanating from academic research shows that good corporate governance lead to increase valuation, higher profit, higher sales growth and lower capital expenditure (Wolfgang, 2003). Sound corporate governance, therefore, enhances corporate performance and provides meaningful and reliable financial report on firms operations. Given this background, this study examines the efficacy of corporate governance with a view to determine it impact on firms’ performance and providing measures to enhance corporate financial performance and sound business practices. The experience of business failure and financial scandals around the world brought about the need for good governance practices. The United States of America, Brazil, Canada, Germany, France, England, Nigeria and so on, all witnessed financial failures. Bell and Pain (2000) supported this view that the last 20 years have witnessed several bank failures throughout the world. Financial distress in most of these countries were attributed to high incidence of non-performing loans, capital deficiencies, weak management, poor credit policy and governance system. In the view of Bollard (2003), the weaknesses in some of the ailing banks reflected poor management of conflicts of interest, inadequate understanding of banking risks and poor oversight by boards of the risk management system and internal audit arrangements. These problems were further compounded by poor quality of financial disclosure and ineffective external audit. The banking institution occupies vital position in the stability of the nation’s economy. It plays essential roles on fund mobilization, credit allocation, payment and settlement system as well as monetary policy implementation. Management is expected to exhibit good governance practices to ensure achievement of it objectives and avoid the consequences of failure resulting from weak governance practices. In this regard, Oluyemi (2005) considers corporate governance to be of special importance in ensuring stability of the economy and successful achievement of banks’ strategy. Corporate governance is an important framework for effective development of equity market, research and development, entrepreneurship and economic growth. (Maher and Anderson, 1999). Agusto (2007) views that effective corporate governance improves economic efficiency, access to domestic and foreign capital, human resources productivity and development of market economy. Hence, creating an effective corporate governance framework is desirable in order to enhance efficiency and transparency in the Nigerian financial system. The different national system of corporate governance reflected major differences in ownership structure of firms in different countries and particularly, differences in ownership concentration (Shleifer and Vishney. 1997). This resulted from the variation in country’s legal, regulatory, institutional, historical and cultural factors that separate ownership from control of firms (agency function). Corporate governance was therefore practised throughout the world depending upon the relative power of owners, managers and providers of capital (Craig, 2005). Rwegasira (2000) posits that corporate governance is a structure within which corporate entity or enterprise receive it basic orientation and direction. The commitment to the rights and equitable treatment of shareholders depict good quality of governance practices in the banking sector. Chide (2007) opines that shareholders ( especially, the minority shareholders ) should position themselves as a major organ by which corporate governance principles can be implemented and monitored for the overall interest of the organization. Banks should respect the right of shareholders (especially, the minority interest and foreign shareholders) and they should be assisted in exercising these rights through a court system that will strengthen their expertise and capacity to adjudicate corporate governance dispute efficiently and impartially (Oluyemi, 2005).  The quality of information provided by banks is fundamental in promoting sound governance practices. Adequate disclosure and transparency safeguard the integrity of bank’s financial reports. CBN (2006) in the code of corporate governance for banks identified industrial transparency, due process, data integrity and disclosure requirement as the core attribute of good governance practices in banks. Hence, timely and detail disclosure of material financial information is desirable in assessing the viability and financial performance of banks

 

2.2   Theoretical Framework of the study

The fundamental theories in corporate governance began with the agency theory, expanded into stewardship theory and stakeholder theory and evolved to resource dependency theory, transaction cost theory, political theory and ethics related theories such as business ethics theory, virtue ethics theory, feminists ethics …

Agent Theory

Fundamental Theories of corporate governance rooted in agency theory were developed in the early 70s American literature. The theory refers to the relationships established between the owners of a company and its directors, relationships embodied in a mandate (agent) contract which consists in one first part (the principal) that engages the other part (the agent) to perform some services on their behalf. Agency theory has been developed from the theory of the firm, stated by Alchian and Demsetz (1972) and further developed by Jensen and Meckling (1976). Fundamentals of agent theory can be found even in the writings of Adam Smith (1976): “You can not expect those who manage other people’s money to be as careful and caring as it would belong to them. Waste and negligence are present, always, more or less, in the management of every business.” Although the development of agency theory is found only in the 70s, the idea of separating the control government has been highlighted since the 30s by Berle and Means (1932). According to studies of these authors, the divergence between ownership and control is a potential conflict between shareholders and management. Under the agency theory, shareholders (the principal) are expecting from the directors (the agents) to lead and make decisions in their interest, and of those who have mandated. On the other hand, the agent can not only adopt the decisions that pursue only the interests of the principal. (Padilla, 2000). Such a conflict of interests between owners and managers was first highlighted by Berle & Means (1932) and Adam Smith (1976) followed by Ross (1973) and then expanded by Meckling (1976).

 

Hazard Moral Theory

The conflict of interest determined by the separation between power and control (on which agency theory is founded) can cause opportunistic behaviour of the managers (as agents) which is not necessarily converged with the shareholders interest (as principals), that of maximizing shareholders wealth. (Demsetz et al., 1985, Bonazzi et. al.,2007; Lan et al.,2010; Abdullah,2009; Smith,2011) Thus, managers are prone to moral hazard and opportunistic behaviour guided by their own interests. The theory of moral hazard is central within agency theory and also refers to hidden actions or opportunistic behaviour of managers (Hendrik, 2003). Hidden action arises as a consequence of asymmetric information held by counterparties. (Arrow,1968), Eisenhardt ,1989) and opportunistic actions occur as human inclination. (Jensen 1994) Hendrik (2003) and Smith (2011) identify moral hazard as being determined by two issues: the conflict of interests of the counterparties (principal and agent), hidden actions and opportunistic behaviour as a result of asymmetric information. The result can only be extremely dramatic such as decreasing performance and even business failure. Dinga (2009) considers moral hazard to be a result of a high degree of insurance against risk in the context of the financial crisis which began in 2007, when banks were launched in loans because they expected the government to intervene in restoring liquidity (for example, by relaxing the requirements minimal legal reserve). Therefore, the hazard moral theory is strongly connected to the remuneration manager policy. The concerns to define the managers’ remuneration policy according to the need to develop a common interest between manager and shareholders (to mitigate moral hazard) are current and they are the subject of  various economic, financial and management researches.

 

Regarding the managers remuneration policy, Corporate Governance Code issued by the Bucharest Stock Exchange in 2008 states that (in art. VI, Recommendation 21): „The board should establish a remuneration committee among its members to assist in formulating a remuneration policy for directors and managers and it should define the committee’s internal regulations. Until a remuneration committee has been set up, the board should deal with these tasks and responsibilities at least once a year. The remuneration policy shall be subject to AGM approval.”

 

In conclusion, the way of expressing the moral hazard may result in the managers’ remuneration policy (the bonuses system) and the in use of various actions such as handling financial communications in order to increase their prestige and  management reputation or adopting risky decision.

 

Stewardship Theory

Stewardship theory describes the role of management leadership in maintaining and developing the organization’s value, although it works temporarily therein. Stewardship theory has its origins in the psychology and sociology areas and from this perspective this theory assumes that managers are faith, responsive and effective people and therefore, they are good administrators of the resources entrusted. According to this theory Schoorman & Donaldson (1997) state that “an administrator protects and maximizes shareholders’ wealth, thus, the shareholder’s utility functions are maximized. From this perspective, directors and managers work for shareholders ensuring the growth of shareholders’ wealth.

 

In comparison with agency theory, where the managers are tempted to take decisions for their own advantage, not for the owners, the steward theory assumes that managers act not in their own interests, but in a given conflict of interest situation they put the company’s interests in front of the personal ones. The conceptual foundation of the theory is related to the development of work motivation theories by McGragor in the ‘60s and more specifically to the Y Theory that assumes that managers are rational beings, so there isn’t any need to excessively monitor their behaviour as the agency theory assumes. (Nicholson & Kiel 2007) According to Fulop (2011), because steward theory considers as an important factor the board director structure, it must be composed of company intern members because they know best the company’s problems and can react accordingly.

 

If the board of directors is composed only of external members, they don’t react as promptly to the daily problems of the company. As Solomon (2007) highlights, the outside directors (outsiders directors) can monitor the maximizing of the business performance only on a short-term becausetheir knowledge about the work activities is less compared to the directors coming from inside the company (the insiders) who closely know the daily company’s problems. Steward theory model could be represented in graphical form as it follows:

 

 

 

Stakeholders Theory

As a development of the agency theory the stakeholder theory rises up. The term “stakeholders” refers to all persons, groups or organizations that have an impact on the company’s activity or are influenced by the company. It’s about: the owners, shareholders, investors, employees, customers, suppliers, business partners, competitors, the government, local government, NGOs, pressure groups, communities, media and so on. Each of these parts somehow interacts and influences the business of a company. In the years 1980 -1990, Stakeholder Theory has changed the shareholders paradigm of Milton Friedman (1970) who considers that maximizing the financial results for shareholders is the highest concern of a company. Stakeholder theory was developed by Freeman (1984) and it is focused on the corporate responsibility’s view related to various categories of stakeholders.

 

This theory of corporate governance based on maximizing the interests of all stakeholders has proved to be the most efficient in history, not only because it conducts to the economic success of the company, but also because it works to achieve a competitive advantage due to gain people’s trust and consequently a goodwill on the market. (European Commission, 2005)

 

Transaction Cost Theory

Unlike agency theory, transaction cost theory explicitly uses the concept of corporate governance. (Fulop, 2011) This theory states that the company is a relatively efficient hierarchical structure that serves as framework to run the contractual relationships. The main concern in transaction cost theory is “to explain the transactions conducted in terms of efficiency of governance structures.” (Wieland 2005). The fatherhood of “transaction costs” was attributed to Ronald Coase, who in his famous article The Nature of the Firm, in 1937, has built the judgment regarding the firm’s existence without using, explicitly, the concept of “transaction costs” but that of “cost of using the price mechanism” (Coase, 1988). Coase substantiates his argument about the nature of the firm by emphasising that organizing the production through the market channels (contracting by market) involves some costs. So, by creating an organization which has the responsibility for resources  allocation, some expenditure can be avoided. Going forward, transaction cost theory is developed by Kenneth Arrow who defines transaction costs as “operating costs of the economic system.” (Arrow, 1969) Later, Williamson, founder of the transaction cost economics, believes that “the study of governance include: identifying, explaining and combating all types of risky contracts” (Williamson, 1996).

 

Certainly, in addition to transaction costs, agency costs resulting from divergent relationship between manager and shareholder’s interests and information asymmetry, must be taken into consideration, costs which are based on two sources (Fulop, 2011): the costs inherent due to an agent’s use (e.g., the risk that agencies use the company’s resources for their own purpose) and costs involved by protecting against the risks associated with the use of an agent (e.g., the costs of preparing the financial statements or costs consisting in the use of Stock-options techniques to align the managers and shareholders’ interests.) Therefore, as Abdoullah & Valentine (2009) notice, Transaction Cost Theory faces a complex theory incorporating interdisciplinary issues related to organizational economics and legal sciences

 

Resource Dependency Theory

Resource dependency is an explanatory model of organization activities that emphasizes the fact that they are open systems and the environment in which they operate and the social relations are the basis in decision making about resources allocation. In this context, Pfeffer and Salancik (1978) highlighting the resource dependence perspective on inter-organizational behaviour, argue that: “To understand the organization behaviour you must understand the context in which that behaviour occurs this is understandable from the perspective that organizations’ activity is inevitably linked with the environmental conditions in which they operate.” Hillman, Canella and Paetzold (2000) argue that the resource dependence theory focuses on the role that managers play in providing essential resources for the organization in relation to the external environment. According to studies conducted by Hillman, Canella and Paetzold (2000), in the decision making process, the managers contribute with information resources, skills, access to key business partners of an organization such as suppliers, creditors, government, social groups, etc.

 

According to Abdoullah & Valentine (2009), the managers responsible for leading a business are classified into four categories: a) “insiders”, meaning the current and former managers of the company offering expertise in specific areas of the company and finance law; b)“business experts”, meaning the managers of big companies who provide expertise in business strategy, decision-making and solving economic problems facing the company; „support specialists” represented by lawyers, bankers and insurance companies, public relations experts and all those experts who provide specialised support in their individual specialization area; d)”community influential”, meaning political leaders, academic leaders, religious leaders or social and community organization leaders. From the point of view of allocated internal resources the power engaged in the process of allocated resources can be stronger or weaker and it depends on the extent to which managers belong to one of the four categories listed above. The resource dependency theory emphasizes the complex character of “network” concept underlying the corporate governance concept.

 

Political Theory

There are other areas and theories that could explain corporate governance. One such area would be the law, based on the idea that many of the corporate governance practices are based on laws. For these reasons, many definitions of corporate governance encapsulated the political impact of corporate governance mechanisms. For example, Cosma (2012) defines corporate governance as the “branch of economics that studies how businesses can become more efficient by using the institutional structures such as constituted act, organizational chart and legal framework.” Political Theory refers to political influence in the governance structure of companies, evidenced by the participation of the government in the capital of companies or laws adopted by political structures which have a significant influence on corporate governance. The political model emphasizes the governmental favours on corporate decision making activities related to the distribution of corporate power, profits or various benefits. (Abdoullah & Valentine, 2009) Regarding dividend policy, for example, there may be legal rules that give special importance of dividends as a potential tool for solving possible agency problems related to hold shares. In this respect, countries such as Brazil, Chile, Columbia, Greece and Venezuela make mandatory dividend provisions. In other countries, the role of legal environment is more subtle. Thus, in the UK there have been formed several boards that make recommendations for improving corporate governance practices used by the board  of director. (Ileana, 2008)

 

The political model of corporate governance can have a huge influence on the development of corporate governance. We can mention the case of the communist or the former-communist countries which are still struggling to emerge from political influence. The case of Romania is an illustrative example in this regard. Although being a former communist country for more than 20 years, it still faces major problems related to government shareholding in the governance structures of the Romanian companies. Mark Mobius, executive chairman of Templeton Emerging Markets Group recently stated (September 2012) that the reason for investors not coming in Romania is the jam in profitability recorded by the companies with government companies, stressing the need that the government should bring more companies on the market.

 

Further, Mobius stressed that these companies will become attractive to local and foreign investors only if a change will be produced in the governance system and new governance models will be imposed. Political manifestation of corporate governance structures concerned the governments from many countries towards drawing the framework of the separation between power and control.. Studia Universitatis “Vasile Goldiş” Arad Economics Series Vol 23 Issue 1/2013 125 In this regard, extensive research conducted by various authors (Roe, 1994; Thomsen, 2008) has shown that the policies adopted by the countries’ governments have had a growing importance in explaining the development of corporate governance national systems and it is also being closely related to sociological issues such as culture or religion specific to that country.

 

Ethics Theories

In addition to fundamental theories of corporate governance such as agency theory, steward theory, hazard theory, stakeholder theory, resource dependence theory, transaction cost theory or political theory, the authors have identified the ethical theories that can be closely associated with corporate governance. These relate to business ethics theory, virtue theory, feminist theory and discourse ethics theory or post modern ethics theory. (Abdoullah & Valentine, 2009).

 

Theory of Information Asymmetry

Information asymmetry theory is based on the study of Akerlof (1970) in which the behaviour of buyers and sellers of used goods is analysed by abandoning the hypothesis of perfect information on the market and assuming the contrary, the uncertainty of regarding the quality of products purchased.” (Raimbourg, 1997) The arguments of Akerlof result by analysing the market place of some product where the seller has more information about the quality of products than the buyer. He analyses second-hand cars market which is called “lemon” market. The conclusions of Akerlof show that hypothetical information difficulties can lead either to the collapse of the entire market, or to its transformation by adverse selection, being chosen the poor quality products instead of the higher quality ones. Initially, the theory of asymmetry information marked the first research in the field of buyer behaviour (Spence, 1977; Leland, 1979, Heinkel, 1981; Allen, 1984) and the advertising one ((Nelson, 1970, 1974 and 1978) but then rapidly expanded in financial theory and considerably affected the classical theories of the firm. (Robu & Sandu, 2006). The hypothesis concerning the informational asymmetry is closely related to the agency theory and to the existence of agency relationships. Dividend or financing policies adopted by directors can be characterized by different interests between the directors and shareholders.

 

In the context of this theory, an explanation for dividends paid to shareholders is provided, although it is known that they will pay an additional tax for this additional income. An answer in the “signalling” theory area is that dividends can be a good sign for future investments, the investor pay more for a share because, on the market, a big level of dividend is interpreted as a good sign which will mean a higher price for the shares. Likewise, “signals” of a strong company can be emitted through debt policy because it is considered that a strong company is one which can afford a high rate of indebtedness in order to finance ambitious investment projects. (Stancu, 2006)

In conclusion, effective corporate governance will determine the reduction of informational asymmetry effect and prevent the manifestation of unfair actions of the managers to gain prestige and reputation but affecting the company’s growth.

 

Theory of Efficient Markets

In connection with the informational asymmetry theory it is the efficient markets

theory which focuses on the investors, as the main stakeholders. In the context of corporate governance, as its mechanisms it will be stronger and more effective, ensuring a transparency of internal processes of governance, as market will reflect the stock value closer to the real (economical) value of the company. (Credit Lyonnaise Securities Asia –CLSA, 2001; McKinsey 2001; Standard & Poor’s, 2002; Klapper & Love, 2004; Stiglbauer, 2010). In summary, related to the efficient markets hypothesis, all information available at a given time is included in the share’ price and reflect the real value of the company. The results consist in decreasing risks and uncertainties for investors.

Concept of Corporate Governance

According to Baker (1991) Good governance seeks to promote Efficient, effective and sustainable corporations that contribute to the welfare of society by creating wealth, employment and solutions to emerging challenges, Responsive and accountability corporations, Legitimate corporations that are managed with integrity, probity and transparency, Recognition and protection of stakeholder’ rights, All inclusive approach based on democratic ideals, legitimate representation and participation.

Baker (1991) concluded that, corporate Governance, therefore, refers to the manner in which the power of a corporation is exercised in the stewardship of the corporation’s total portfolio of assets and resources with the objective of maintaining and increasing shareholder value and the satisfaction of other stakeholders in the context of its corporate mission.

It is concerned with creating a balance between economic and social goals accountability in the use of power and, as far as possible, to align the interests of on individuals, corporations and society. Thus, it is about promoting:

1. Fair, efficient and transparent administration of corporations to meet well-defined objectives;
2. Systems and structures of operating and controlling corporations with a view to achieving long-term strategic goals that satisfy the owners, suppliers, customers and financiers while complying with legal regulatory requirements and meeting environmental and society needs;
3. An efficient process of value-creating and value-adding; and, in that connection, ensuring that:

The Board has set strategic objectives and plans and put in place proper management structures [organization, systems and people] to achieve those objectives and plans;

The structures put in place function to maintain corporate integrity, reputation and responsibility towards all stakeholders;

The Board acts as catalyst, initiating, influencing, evaluating and monitoring strategic decisions and actions of Management and holds Management accountable;

The Board is not a mere formality which takes a back seat, leaving Management to make all strategic decisions;

The Board has established and put in place mechanisms to ensure that the corporation operates within the objects established by shareholders and the mandate given to it by society, utilizes the resources entrusted to it efficiently and effectively in pursuit of the stated mandate, and meets the legitimate expectations of its various stakeholders;

There are established mechanisms, processes and systems to constantly ensure that:

1. Governance practices are effective and appropriate;
2. There is transparency and accountability to the various stakeholders;
3. The corporation complies with legal and regulatory requirements;
4. There is disclosure of all pertinent information to stakeholders;
5. There is effective monitoring and management of risk, innovation and change;
6. The corporation remains relevant, legitimate and competitive; and
7. The corporation is viable, solvent and sustainable.

Corporate governance is a broad theory concerned with the alignment of management and shareholder interest (Grant, 2003). Governance refers to the way in which something is governed and to the function of governing. According to Cadbury Report (1992); ‘Corporate governance is the system by which companies are directed and controlled’.  A system of corporate governance is needed to ensure that the businesses are running properly (Tricker, 1984)  for the realization of the organizational goals (Hemraj, 2002; Bohen, 1995 as quoted in Taylor, 1984). Company needs to be based on guidelines and constraints in achieving its objective such as to maximize wealth of it shareholders and with regard to other group that have interest in company. Guidelines and constraints including behaving in an ethical way and in compliance it laws and regulation. Here, the concept of accountability sets in (Bacchus, 2003 as quoted in Tricker, 1984).

Firm Performance

Performance of a firm is a very important area in the workplace. It determine the firm increase and utilize the capacity of the human resources it has. It translates into good service delivery and interaction in which affects every area of the organization. To achieve this organization need to make polices that will encourage performance. An employee’s job performance depends on or is a consequence of some combination of ability, effort, and opportunity. But, the measurements can be done in terms of outcomes or results produced (Ferris et al., 1998). Performance is defined as the record of outcomes produced on a specified job function or activity during a specified time period. (Azeem & Akhtar, 2014). According to this definition performance is set of outcomes produced during a certain time period. It also refers to “achievement of targets of the tasks assigned to employees within particular period of time”. Performance is not only related to the action but also involves judgment and evaluation process.

Performance is a crucial point in any establishment  while  every policy are tailored  towards increasing the employee’s productivity.  For organisations to remain on top, the management are oblige  to improve their employee’s  productivity  through  an improving work life balance. In a situation where proper  implementation of wok life balance  is  not attainable by the employees  and employers  of labour,  employee’s productivity is  likely to jeopardise as  the  case  may be.

Employee’s performance refers to the overall effort of an employee in consideration of the ratio of the value of his/her output to the cost of input. It implies how efficient an organisation or employee uses its resources, representing its ability to do more with less. Employee’s productivity is a critical factor in measuring socio-economic development as it determines standard of living of people (Obisi, 2004). Employee’s Performance encompasses the actual output or results of an organization as measured against its intended outputs (or goals and objectives). According to Richard (2012), Employee’s productivity comprises three specific areas of firm outcomes:

• Financial performance (profits, return on assets, return on investment, etc.)
• (ii) Product and market performance (sales, market share, etc.) and
• Shareholder return (total shareholder return, economic value added, etc.).

Nwachukwu (2006) sees Performance as a measure of how well resources are brought together in organizations and harnessed for maximum effectiveness. Ogbunbamowo (2000) and Ohinmorin (2003) see productivity as the relationship between output generated by the production of manufacturing  and input provided to increase this output.

Performance is the (often measurable) ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without waste.  In more mathematical or scientific terms, it is a measure of the extent to which input is well used for an intended task or function (output). It often specifically comprises the capability of a specific application of effort to produce a specific outcome with a minimum amount or quantity of waste, expense, or unnecessary effort. Efficiency, of course, refers to very different inputs and outputs in different fields and industries.

Efficiency is very often confused with effectiveness. In general, efficiency is a measurable concept, quantitatively determined by the ratio of useful output to total input. Effectiveness is the simpler concept of being able to achieve a desired result, which can be expressed quantitatively but doesn’t usually require more complicated mathematics than addition. Efficiency can often be expressed as a percentage of the result that could ideally be expected, for example if no energy were lost due to friction or other causes, in which case 100% of fuel or other input would be used to produce the desired result. This does not always apply, not even in all cases in which efficiency can be assigned a numerical value, e.g. not for specific impulse.

A common but confusing way of distinguishing between efficiency and effectiveness is the saying “Efficiency is doing things right, while effectiveness is doing the right things.” This saying indirectly emphasizes that the selection of objectives of a production process is just as important as the quality of that process. This saying popular in business however obscures the more common sense of “effectiveness”, which would/should produce the following mnemonic: “Efficiency is doing things right; effectiveness is getting things done.” This makes it clear that effectiveness, for example large production numbers, can also be achieved through inefficient processes if, for example, workers are willing or used to working longer hours or with greater physical effort than in other companies or countries or if they can be forced to do so. Similarly, a company can achieve effectiveness, for example large production numbers, through inefficient processes if it can afford to use more energy per product, for example if energy prices or labor costs or both are lower than for its competitors.

Efficiency is often measured as the ratio of useful output to total input, which can be expressed with the mathematical formula r=P/C, where P is the amount of useful output (“product”) produced per the amount C (“cost”) of resources consumed. This may correspond to a percentage if products and consumables are quantified in compatible units, and if consumables are transformed into products via a conservative process. For example, in the analysis of the energy conversion efficiency of heat engines in thermodynamics, the product P may be the amount of useful work output, while the consumable C is the amount of high-temperature heat input. Due to the conservation of energy, P can never be greater than C, and so the efficiency r is never greater than 100% (and in fact must be even less at finite temperatures)

Workers efficiency refers to the overall performance of an employee in consideration of the ratio of the value of his/her output to the cost of input. It implies how efficient an organization or employee uses its resources, representing its ability to do more with less.

Workers efficiency is a critical factor in measuring socio-economic development as it determines standard of living of citizens. Kunje (2002) noted that loss of esteem coupled with infrequent training and retraining programmes causes the inability of workers to satisfy the basic needs, thus motivating a feeling of apathy and antagonism which stifle workers’ commitment to the profession, resulting in low productivity.

Organizational efficiency encompasses the actual output or results of an organization as measured against its intended outputs (or goals and objectives). According to Richard (2008), organizational efficiency comprises three specific areas of firm outcomes: (i) financial performance (profits, return on assets, return on investment, etc.) (ii) Product and market performance (sales, market share, etc.) and (iii) Shareholder return (total shareholder return, economic value added, etc.). The term Organizational effectiveness is broader. Most of the studies are concerned with organizational performance including strategic planners, operations, finance, legal, and organizational development ( Paul, nd). Many organizations in recent years have attempted to manage organizational performance using the balanced scorecard methodology where performance is tracked and measured in multiple dimensions such as (Paul, 2008):

1. financial performance (e.g. shareholder return)
2. customer manufacturing

iii.       social responsibility (e.g. corporate citizenship, community outreach)

1. employee stewardship Present study seeks to measure organizational performance using financial performance i.e shareholder’s satisfaction.

Nwachukwu (2006) sees efficiency as a measure of how well resources are brought together in organizations and harnessed for maximum efficiency. Ogbunbamowo (2000) and Ohinmorin (2003) see efficiency as the relationship between output generated by the production of manufacturing  and input provided to increase this output. The manufacturing  industry is a several billion industry globally that mostly depends on the available of leisure time and disposable income. A manufacturing  unit such as restaurant, hotel, amusement etc carries out facility maintenance, direct operations, bartenders and their effective functioning depends mostly on management, marketing and human resources. Therefore, it is pertinent to say that human resource training and development is a core aspect of guaranteeing organizational survival and better customer satisfaction.

2.3   Empirical Review

As Oghojafor, (2010) explain, the banking industry plays a major intermediation role in an economy by mobilising savings from surplus units and channelling these funds to the deficit units, in particular private enterprises, for the purpose of expanding their production capacities. However, according to Mitchell and Sikka (2005) corporate power, which has gone unchecked, including that of the banking industry, has failed to provide social and corporate benefits:

The Economic and Financial Crimes Commission (EFCC), the Independent Corrupt Practices and other related Offences Commission (ICPC), the Central Bank of Nigeria (CBN), the Nigerian Deposit Insurance Corporation (NDIC). ‘Unchecked corporate power has failed to produce economic regeneration, good governance, full employment, freedom from scandals, a cleaner environment, ethical behaviour or corporate responsibility. Mission statements proclaim high ideals, but practice is all too often shabby with massaged financial statements, fleeced customers, exploitation, job shedding and the high prices’. The implication and culpability of corporate executives in unethical practices and conflicts of interest have long been documented by critical scholars both in developed and developing countries. The spate of fraudulent practices and other malpractices in the banking industry, and the apparent failure of the law enforcement agencies to successfully track down and prosecute the perpetrators has attracted the increasing attention of policy-makers and scholars  observed that ‘the core banking practices have been traded off and those who benefit most are the CEOs and their loyalists’.

In relation to the above failures in the Nigerian banking system  and  non banking in Nigeria, the CBN affirmed that the management of the failed banks had clearly acted in a manner ‘detrimental to the interests of their depositor and creditors’ (Tell, 31 August 2009; The Guardian, 30 August 2009).  The five banks were said to be responsible for 39.9 per cent of the loans in the banking industry. As at May 2009, Oceanic Bank Plc had the highest nonperforming loan of N278.2 billion; Intercontinental Bank, N201.9 billion; Afribank, N141.9 billion; Union Bank, N73.6 billion; and FinBank, N42.4 billion. The audit conducted in 2009 showed that the five banks had a total of loan portfolio of N2.8 trillion, with margin loans granted for investment in the capital market contributing N456.3 billion. Loan exposure  to the oil and gas sector was N487 billion. Aggregate non-performing loans stood at N1.14 trillion, representing 40.81 per cent of the total loans (The News, 7 September 2009; Tell, 31 August 2009).

Benefits of Corporate Governance

When fully implemented, good corporate governance ensures that large corporations are well-run institutions that earn the confidence of investors and lenders. The process ensures safeguards against corruption and mismanagement, while promoting fundamental values of a market economy in a democratic society (CIPE, 2002). These are quite critical for the transitional African economies that are struggling to attract foreign direct investment. In a globalized economy, the implementation or otherwise of good corporate governance will increasingly determine the fate of individual companies and entire economies.

The quality of governance is of absolute importance to shareholders as it provides them with a level of assurance that the business of the company is being conducted in a manner that adds shareholder value and safeguards its assets. This means that there is less uncertainty associated with the investment – a situation that encourages bankers and lenders to be favourably disposed to the company. Furthermore, the higher the risk, the higher the expected rate of return. If a company adopts and implements good corporate governance practices, shareholders are retained and new investors attracted. Institutional investors have indicated a willingness to pay a premium for the shares of a well-governed company. Around the world, price: earnings ratios are higher among companies with good disclosure. Hence good corporate Governance is necessary in order to:

(1) Attract investors both local and foreign and assure them that their investments will be secure and efficiently managed, and in a transparent and accountable process.

(2) Create competitive and efficient companies and business enterprises.

(3) Enhance the accountability and performance of those entrusted to manage corporations.

(4) Promote efficient and effective use of limited resources. Corporate governance enhances the performance and ensures the conformance of corporations. Its principles stimulate the performance of corporations by creating and maintaining a business environment that motivates managers and entrepreneurs to maximise firms’ operational efficiency, returns on investment and long–term productivity growth. They ensure corporate conformance with investors’ and society’s interests and expectations by limiting the abuse of power, the siphoning–off of assets, the moral hazard, and the wastage of corporate-controlled resources (so–called “agency problems”).

Simultaneously, they establish the means to monitor managers’ behaviour to ensure corporate accountability and provide for the cost–effective protection of investors’ and society’s interests vis–а–vis corporate insiders. Good corporate governance, therefore, becomes a prerequisite for national economic development.

The issue, problems and challenges with Corporate Governance in Nigeria

The governance issues, problems and challenges can be broken down into seven distinct topics and evaluated: Board of Directors and committees

The commonest challenges with the board include poor information depth amongst the board members and the very powerful Chairman / CEOs. Board meetings have typically consisted of routine rituals through which members are led by a chair/CEO that is equipped with information, inside knowledge, and staff support so that they can and generally do control the agenda absolutely. So while boards have the legal authority, it is the CEOs who have the effective power. Combining the offices of board chair and CEO in one person virtually guarantees that the board will be ineffectual. A board can only be as independent and effective as its chair wants it to be and is capable of making it.  The commonest issues include ambiguous laws with poorly defined boundaries. The regulators are inconsistent with application of policies to all businesses and high level of corruption amongst the regulators thus lead to generation poor strategic value. Also the non-sanctions of those that violate stipulations in CAMA are a very problematic challenge. Corporate Affairs Commissions (CAC) must be structured such that the provisions of CAMA are enforced Business practices and ethics The minimum expectation is that ‘The company’s code of conduct, in combination with policies and procedures sets clear expectations and guidelines for acceptable and unacceptable behaviour’ every one from the CEO on down must be held accountable. This is far from the case in both Government and Privately owned organisations in Nigeria. Many CEO’s in the banks have been involved with money laundering and other financial and economic crimes that were not disclosed to their banks. Between 2005 & 6, banks including Fountain and Bond banks were involved with financial crimes / fraud that involved the bank employees and Mr. Tara Blowgun , the Inspector General of Police Disclosure and Transparency.

In Nigeria, there generally are systems in place to provide laws (rights and obligations), processes (conduct of business) and penalties for violations. Yet the problem of the supervision and enforcement of such laws and processes still remains. Judicial means of supervision, including, the courts have failed in this regard. Extra-judicial systems for supervision including the registrar of companies and shareholders’ associations, who  bring pressure to bear on directors, have also proved ineffective. A study conducted by the Development Policy Centre to evaluate the standard of corporate governance in Nigeria, was based on 20 out of 31 questionnaires distributed, which were scored using the OECD corporate governance Assessment Instrument. The states surveyed were Abia, Bauchi, Kano, Lagos, Plateau and Rivers. The results showed that, to a large extent, the legal and institutional framework for effective corporate governance exists in Nigeria by virtue of laws such as those related to Companies and Allied Matters Decree of 1990 and the stock exchange rules for listed companies, among others. The problem, however, lies with compliance and enforcement, which appear to be weak or non-existent. Recommendations made by DPC following the study include a strengthening of the enforcement mechanism of regulatory institutions and the judicial system, to restore shareholder confidence in the rule of law (CIPE, 2001). In Ghana, constraints facing corporate governance include an inadequate legal framework, mainly dominated by the Companies Code of 1969. The Institute of Directors in the country, hence recommends the development of laws that demand more transparency, clarify governance roles and responsibilities, the enactment of competition and solvency laws and strengthening of enforcement mechanisms. Other setbacks in Ghana include government interference in the operations of state-owned enterprises, inadequate management information systems, ignorance on the part of shareholders, and lack of enforcement of relevant laws. In Kenya, the Registry of Companies does not have the resources, technology or capacity to effectively monitor the more than 20,000 companies registered (Gatamah, 2001) Some of the constraints in implementing good governance policies include the following factors:

Lack of political will on the part of governments

This can manifest itself in two ways. First, and most directly, the level of political will can be measured by the governments’ commitment to monitoring process – time and money. Secondly, the alignment of governments with the interests of multinational companies (MNCs). This is reflected in either a reluctance to hold the MNCs to account or support for MNCs which become embroiled in allegations of corruption. The close connection between economic power and political influence is generally recognized. The successful resistance of public enterprises to privatization programs is an example that has been encountered over a wide spectrum of cultural and economic environments, ranging from Ghana to Nigeria and Kenya.

 

 Position of companies operating in Africa

Companies operating in Africa are in a difficult position – even if they want to do the right thing and publish what they pay in bribes to SSA governments officials, they face immediate reprisals from those with a vested interest in the status quo. The announcement of a policy of transparency by British Petroleum operating in Angola brought a spirited response from the Angolan State oil company, Sonangol, in a confidential letter published by Global Witness (2002) which shows Sonangol’s apparent contempt for the issue. It is clear that a single company cannot make such a move alone, support is needed from a broad international coalition.

Link Between Good Corporate Governance and Performance

Firm Capability, Corporate Governance, and Firm Competitive Behavior are also inter-related. A Multi−Theoretic Framework by Jinyu HeJoseph T. Mahoney. The Hong Kong University of Science and Technology University of Illinois at Urbana. The paper identifies firm−level competitive activity, one of the key units of  analysis in competitive dynamics research, as the fundamental mediation between corporate governance and firm−level financial performance. By employing the “Motivation−Capability” logic embodied in the competitive dynamics research literature, we reclassify various practices of corporate governance into motivational mechanisms (“motivation”) and resource acquisition and securing mechanisms (“capability”). Based on this reclassification, the current paper developed a multi−theoretic framework for studying the relationships among firm−level capability, corporate governance, and firm−level competitive behavior (which are characterized both by the level and variety of firm−level competitive activity.

Also Rhode [2002] said that, there is strong evidence to suggest that corporate performance and to an extent economic stability, is directly impacted by the quality of corporate governance.  Studies by Yale School Of management [1990] showed that the quality of governance can influences a company’s cost of capital, as well as the size and vibrancy of a country’s capital markets. [It was demonstrated standards crumbled – Indonesia, Czech republic – While those with higher governance standards suffered less – Poland, Chile].

The Enron/ Andersen debacle is a more recent and prominent example of corporate governance failure where greed, Lax oversight and outright and outright fraud brought down two of America’s largest companies.

According to Jackling [2002] other example of corporate of corporate failure stemming from inadequate corporate governance are illustrated below:

[a]       Polly Peck

Perry [2002] said that, Polly peck, a small English textile company, transformed through, growth, acquisition, and diversification during the eighties was the world’s best performing share of the decade, multiplying its value by thirteen hundred times and worth £ 1. 7bn at its peak. The Company received the ultimate accolade of being admitted to the financial Times 100 Share Index in 1989.

However, Polly peck collapsed in 1990 as a result of being unable to recover hundreds of million of pounds of debt from a subsidiary in Cyprus.

Where Polly peck went under in 1990 it was one of Britain’s 100 companies – a booming conglomerate moving everything from fruit to electronics. But when the company came under the spotlight of the serious fraud Office, chairman and CEO, Asil Nadir was charged with theft and false accounting. Nadir, £England for Northern Cyprus, a non-extradition treaty country. The firm was later place in administration [bankruptcy].

On administration Polly peck was found have an almost complete lack of internal controls at its London office, Allowing Nadir to transfer massive sums from the company’s London bank account without question.  Polly peck’s auditor, Story Hayward, was also fined the sum of £75, 000 plus cost of£ 250,000, in addition to a £25m out-of-court settlement paid to liquidators in 1998, for failing to sport or assess the extent of Polly peck’s financial problems.

2.4       Corporate Governance and Bank Performance in Nigeria

Given the nature of banking business and the antecedents of the operators such as unrecoverable loans, unethical bank practices, illiquidity, etc of Nigeria banks, corporate governance is fundamental to the nation’s financial stability Afrinvest, (2010). Shleifer and Vishny (1997) opined that effective corporate governance reduces control rights, shareholders and creditors confer on managers, increasing the probability that managers invest in positive net present value projects. Thus, the relationship of the board and management, according to Al-faki (2006), should be characterized by transparency to shareholders, and fairness to other stakeholders.

The word governance is synonymous with the exercise of authority, direction and control. Zingales (1998) defined corporate governance as a group of mechanism that stakeholders use to guarantee that directors effectively manage corporate resources, a task that include the way in which quassi rents are developed and distributed. Metrick and Ishil (2002) see corporate governance from the investors’ perspective as “both the promise to repay a fair return on capital invested and the commitment to operate a firm, efficiently given investments.” Grevning and Bratonovic (1999) stress the partnership approach to corporate governance in which each player has a defined accountability for specific dimension of every responsibility area. This extends to identification and allocation of task as part of corporate governance process. They identify six key players in the corporate governance to include the market regulations/supervisors, shareholders, board of directors, executive managements, audit committee, external auditors and the public/ consumers.

The importance of a vibrant, transparent and healthy banking system in the mobilization and intermediation of fund, for the growth and development of the economy need not be over-emphasised. Worthy of is the fact that the level of functioning of the financial sector depend on the perception and patronage of the citizens towards its services (Al- Faki, 2006). The situation where the public losses confidence in the financial institutions, can result in panic and consequential financial and economic woes. The absence of confidence in any organisation is attributable to opaque management practices with deleterious effect on its performance. The measure of performance in this case is not limited to the financials (turnover and profit) but also customer satisfaction, employee welfare, social corporate responsibility, indeed, the whole gamut of balanced score card.

There are many ways of defining corporate governance, ranging from narrow definitions that focus on companies and their shareholders, to broader definitions that incorporate the accountability of companies to many other groups of people, or ‘stakeholders’. The Cadbury Report (1992) was set up by the Committee on the Financial Aspects of Corporate Governance, known as the Cadbury Committee in May 1991 by the Financial Reporting Council, the London Stock Exchange, and the accountancy profession. The report made far reaching recommendations on corporate governance concerning the way in which companies are directed and controlled. The central components of the voluntary code of corporate practice are: that there be a clear division of responsibilities at the top, primarily that the position of Chairman of the Board be separated from that of Chief Executive, or that there be a strong independent element on the board; that the majority of the Board be comprised of outside directors; that remuneration committees for Board members be made up in the majority of non-executive directors; and that the Board should appoint an Audit Committee including at least three non-executive directors.

Corporate performance is an important concept that relates to the way and manner in which financial, material and human resources available to an organization are judiciously used to achieve the overall corporate objective of an organization. It keeps the organization in business and creates a greater prospect for future opportunities. The overall effect of good corporate governance should be the strengthening of investor’s confidence in the economy of our country. Corporate governance is therefore about building credibility, ensuring transparency and accountability as well maintaining an effective channel of information disclosure that would foster good corporate performance. It is therefore crucial that banking sector observe a strong corporate governance ethos.

Massive corporate collapses resulting from weak systems of corporate governance have highlighted the need to improve and reform corporate governance at an international level. The Enron in the USA, Cadbury in Nigeria and other similar cases around the world have led to enactment of the Sarbanes–Oxley Act in July 2002 in the USA, the Higgs Report and the Smith Reports in 2003 in the UK and the st-code for corporate governance for banks in Nigeria which became operational in 2006 amongst others.Corporate governance is the system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity (Solomon and Solomon, 2004).

The Nigerian banking system has undergone remarkable changes over the years in terms of the number of institution, ownership structure and the depth and breadth of the operations. These changes have been influenced largely by the opportunities presented by the deregulation of the financial sector, globalization of operations, technological advancements, impact of global economic downturn and the adoption of regulatory guidelines that conform to international standards. The developments in the Nigerian banking industry show that absence of good corporate governance was mainly responsible for the dismal performance of the industry as a catalyst for economic growth. In 1992, Bank of Credit and Commerce International (including its Nigerian affiliate) went bust and lost billions of dollars for its depositors, shareholders and employees. Another company, Polly Peck, reported healthy profits in 1992 while declaring bankruptcy the next year.

Yermack (1996), in a review of the earlier work of Monks and Mino (1995), argues that large boardrooms tend to be slow in making decisions, and hence can be an obstacle to change. A second reason for the support for small board size is that directors rarely criticize the policies of top managers and this problem tends to increase with the number of directors. Aksu and Kosedag (2006) examines the relation between board size and firm performance, concluding that the smaller the board size the better the performance, and proposing an optimal board size of ten or fewer. John and Senbet (1998) maintain that the findings of Yermack have important implications, not least because they may call for the need to depend on forces outside the market system in order to determine the size of the board.

2.5   Summary of Review

 

Magdi and Nadereh (2002) views corporate governance as the processes, structures and relationships through which the board of directors oversees what the executives do. He further says that it is what the executives do to define and achieve the objectives of the company. Anghel (2002) posits that corporate governance is the way and manner in which the affairs of companies are conducted by those charged with that duty. In Nigeria, the governance of a limited liability company is the responsibility of its board of directors. Beltratti and Stulz, (2010) believes that corporate governance is characterized by transparency, accountability, probity and the protection of stakeholders‟ rights. He further observes that corporate governance refers to the manner in which the power of a corporation is exercised in the management of its total portfolio of economic and socio resources with the aim of increasing shareholders‟ value and safeguarding the interest of other stakeholders in the context of its corporate mission. According to Akindele (2005), corporate governance thus requires that all things done in organizations must be aimed at achieving the organizational.

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