EFFECT OF CORPORATE GOVERNANCE ON FIRM PRODUCTIVITY

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EFFECT OF CORPORATE GOVERNANCE ON FIRM PRODUCTIVITY

(A study of Peugeot Automobile Nigeria and Nasarawa State University)

ABSTRACT

The research looks into the relationship between corporate governance and organizational performance, through the processes of research multiple variables are examined; the complex set of relationships between a Corporation and its board of directors, management, shareholders, stakeholders, customers, creditors and how effective Corporate Governance can improve the productivity of a firm. Due to the nature of the research, the methodology used was focused on extensive interview, textbooks, journals and articles. Interview questions were focused on the variables that could affect the performance of a firm; textbooks, journals and articles were used as secondary data to have a past insight on how organizational performance affects a firm. The research demonstrates that high governance risk correlates with lower performance, and robust governance is associated with more sustained performance. Companies with higher standards of governance were discovered to have higher performance). Further findings indicated that one of the more difficult things in assessing the influence of corporate governance upon firm performance is to take into account the impact of changes in the market: at times of rapid expansion many companies will perform well, in times of recession most companies will find it more difficult to perform. Recommendations made focuses on improving the relationship between an organization, as a wholes and shareholders, stakeholders, management, creditors, and customers, through proper Corporate Governance. Once this is achieved to a certain degree, it will positively affect the level of performance of a firm, directly or indirectly.

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The institutions of governance provide a framework within which the social and economic life of countries is conducted. Corporate governance concerns the exercise of power in corporate entities.

Corporate Governance is the key foundation for firms to be more productive and have a long existing product life cycle. The levels of institutional collapse and firm’s failure worldwide from unforeseen circumstances, there have been new concepts or theories on how an organization should effectively run.

Through past researches it has been observed that the Management of firm and survival of companies are associated with the type of Management that is in place and the global competitive environment requires sound corporate governance.

This research study will examine the effects of healthy corporate governance in an organization. It looks into the factors necessary to achieve successes in relation to the Board of Directors of an organization; Corporate Ethics; Mechanisms of Corporate Governance; Responsibilities of Shareholders; Structure and Responsibilities of a Board; and Organization of Audit.

This research focuses on Corporate Governance in the Nigerian Organizations and it looks into ways in which mechanisms in relation to Corporate Governance can be put into place to achieve proper Management, so as to achieve effective productivity. 

Nigeria is not left out in the campaign for proper Corporate Governance, especially with recent events of Nigerian Banks closing down or Banks being crippled through unprofessional decisions made by those on the Board.

This approach not only narrows the dimensions of corporate governance to a restricted set of interests, as a result it has a very limited view of the dilemmas involved in corporate governance. There are competing corporate governance systems in the market based Anglo-American system; the European relationship based system; and the relationship based system of the Asia Pacific (Clarke 2007). This diversity of corporate governance systems is based on historical cultural and institutional differences that involve different approaches to the values and objectives of business activity. Furthermore the importance of strategic choice in the determination of governance systems “Entrepreneurs, investors and corporations need the flexibility to craft governance arrangements that are responsive to unique business contexts so that corporations can respond to incessant changes in technologies, competition, optimal firm organization and vertical networking patterns…To obtain governance diversity, economic regulations, stock exchange rules and corporate law should support a range of ownership and governance forms”.

The OECD provides the most authoritative functional definition of corporate governance:

“Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.”

However corporate governance has wider implications and is critical to economic and social wellbeing, firstly in providing the incentives and performance measures to achieve business success, and secondly in providing the accountability and transparency to ensure the equitable distribution of the resulting wealth. The significance of corporate governance for the stability and equity of society is captured in the broader definition of the concept offered by Sir Adrian Cadbury (2002): “Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.” It is therefore logical to study the influence of Corporate Governance mechanism on performance of companies.

 1.2   STATEMENT OF THE PROBLEM

There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large firms such as Enron Corporation and MCI Inc.

Bold, broad efforts to reform corporate governance have been driven, in part, by the needs and desires of shareowners to exercise their rights of corporate ownership and to increase the value of their shares and, therefore, wealth. Over the past three decades, corporate directors’ duties have expanded greatly beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareowners.

Nevertheless “corporate governance,” despite some feeble attempts from various quarters, remains an ambiguous and often misunderstood phrase. For quite some time it was confined only to corporate management. That is not so. It is something much broader, for it must include a fair, efficient and transparent administration and strive to meet certain well defined, written objectives. Corporate governance must go well beyond law. The quantity, quality and frequency of financial and managerial disclosure, the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities, and the commitment to run a transparent organization.

Therefore in an attempt to redress Corporate Governance principles and practices, this study looks at ideal ways in which Corporate Governance principles and practices can be executed and used properly, and what factors are necessary, for corporate governance to succeed. Specifically the study shall attempt to establish the relationship between Corporate Governance principles and the productivity of the firm.

1.3   OBJECTIVES OF THE STUDY

The objective of the study is;

1. To determine the relationship between Corporate Governance and the productivity of a firm.
   1. To identify and understand the factors that hinders good governance.
   1. To appreciate the relevance of Corporate Governance in the Global Market.
   1. To determine the proper elements necessary to achieve sound Corporate Governance.

1.4    SIGNIFICANCE OF THE STUDY

The subject matter; ‘Corporate Governance and its impact on the Productivity of a firm’ is aimed at making the following contributions as stated below:

1. It will enhance firms view on corporate governance and how it can affect the productivity of a firm.
2. It will allow firms to properly restructure their corporate governance so as to improve effectiveness.
3. It will give Organizations insight on the various factors necessary for sound governance practice.
4. It will highlight the role and relevance of stakeholders in a firm.
5. It would emphasis the benefits to be derived if firms could adhere to proper corporate governance.

1.5    SCOPE OF THE STUDY

The study is limited by the overall objective view of the surveys and interviews. The study is also limited to Peugeot Automobile Nigeria and Nasarawa State University, being the case study under examination, which although the organizations are very diverse in nature; both firms to an extent practice corporate governance. 

The extent to which the study will meet the issues raised in the previous section can be curtailed by the realities of data availability in Nigeria. Corporate Governance is a sensitive issue as it focuses on the organizations observance of rules of ethics, social responsibility etc. even in the most advanced opened democracies, companies find it difficult to divulge such issues because they might be considered company secrets; this is even more in Nigeria. Therefore findings of this report will be affected by the quantity, quality and reliability of data.

1.6   DEFINITION OF TERMS

1. Accountability: the allocation or acceptance of responsibility for actions
2. Audit: a systematic check or assessment, especially of the efficiency or effectiveness of an Organization or process, typically carried out by an independent assessor.
3. Balance of Power: the distribution of power among two or more group of people, where the pattern of force and dominance among them is balanced in such a way that no single entity has dominance over another.
4. Board of Directors:
5. CEO – Chief Executive Officer
6. Codes of Best practices – These codes are non-binding rules that go beyond the law, taking country-specific conditions into account and often exceeding the standards set by international guidelines.
7. Corporate Governance: is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled.
8. Remuneration: the paying or rewarding of somebody for goods or services or for losses sustained or inconvenience caused.
9. Shareholders: somebody who owns one or more shares of a company’s stock.
10. Stakeholders: a person or group with direct interest, involvement, or investment in something, e.g. the employees, stockholders, and customers of a business concern.
11. Transparency: the quality or state of being transparent (completely open and frank).

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