THE EFFECT OF CORPORATE BOARD STRUCTURES ON ORGANIZATION PERFORMANCE IN NIGERIA

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THE EFFECT OF CORPORATE BOARD STRUCTURES ON ORGANIZATION PERFORMANCE IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Corporate board structures is regarded as the key foundation for effective organizational performance and for organizations to be more productive, governed and controlled. The level of collapse of institutions and failure of firms across the world has also emphasized the need to study the ways by which organizations are governed and controlled. Lee (2008) defined corporate board structures as a system by which business corporations are directed and controlled. The corporate board structures 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 provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.” It has been reported that the survival of firms is associated with the type of corporate board structures and management followed in the organization.

Corporate board structures also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. In contemporary business corporations, the main external stakeholder groups are shareholders, debt holders, trade creditors, suppliers, customer and communities affected by the corporation’s activities. Informal stakeholders are the board of directors, executives and other employees. It guarantees that an enterprise is directed and controlled in a responsible, professional, and transparent manner with the purpose of safeguarding its long-term success which is intended to increase the confidence of shareholders and capital market investors. The World Bank (2009) states that corporate board structures comprises two mechanisms, internal and external corporate board structures. Internal corporate board structures, giving priority to shareholder’s interest, operated on the board of directors to monitor top management. On the other hand, external corporate board structures monitors and controls manager’s behaviours by means of external regulations and force, in which many parties, such as suppliers, debtors (stakeholders), accountants, lawyers, and providers of credit and investment bank. In the past, so many corporate organizations have been caught of getting involved in unethical practices, for example the discovery of financial scam by the Central Bank of Nigeria after the consolidation exercise, involving seven top bank executives in Nigeria, which puts the credibility of their corporate image under suspicion, which further shocking investors’ confidence.

Consequently, corporate board structures mechanism has been a crucial issue in organizational performance. It is on this background that the researcher sees the subject matter and intend to study the effect of cooperate governance on organizational performance in Nigeria.

Corporate governance therefore refers to the processes and structures by which the business and affairs of institutions are directed and managed, in order to improve long term share holders’ value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders (Jenkinson and Mayer, 1992). Corporate governance is therefore, about building credibility, ensuring transparency and accountability as well as maintaining an effective channel of information disclosure that will foster good corporate performance.

Jensen and Meckling (1976) acknowledged that the principal-agent theory which was also adopted in this study is generally considered as the starting point for any debate on the issue of corporate governance. A number of corporate governance mechanisms have been proposed to ameliorate the principal-agent problem between managers and their shareholders. These governance mechanisms as identified in agency theory include board size, board composition, CEO pay performance sensitivity, directors’ ownership and share holder right (Gomper, Ishii and Metrick, 2003). They further suggest that changing these governance mechanisms would cause managers to better align their interests with that of the shareholders thereby resulting in higher firm value.

Although corporate governance in developing economies has recently received a lot of attention in the literature (Lin (2000); Goswami (2001); Oman (2001); Malherbe and Segal (2001); Carter, Colin and Lorsch (2004); Staikouras, Maria-Eleni, Agoraki, Manthos and Panagiotis (2007); McConnell, Servaes and Lins (2008) and Bebchuk, Cohen and Ferrell (2009), yet corporate governance of organizations in developing economies as it relates to their financial performance has almost been ignored by researchers (Caprio and Levine (2002); Ntim (2009).

1.2 Statement of the Problem

The few studies on organization corporate governance narrowly focused on a single aspect of governance, such as the role of directors or that of stock holders, while omitting other factors and interactions that may be important within the governance framework. Feasible among these few studies is the one by Adams and Mehran (2002) for a sample of US companies, where they examined the effects of board size and composition on value. Another weakness is that such research is often limited to the largest, actively traded organizations- many of which show little variation in their ownership, management and board structure and also measure performance as market value.

In Nigeria, among the few empirically feasible studies on corporate governance are the studies by Sanda and Mukailu and Garba (2005) and Ogbechie (2006) that studied the corporate governance mechanisms and firms’ performance

1.3 Objectives of The Study

The main objective of this study is to ascertain the effect of corporate board structures on organization performance in Nigeria. Other specific objectives are as follows:-

To investigate the governing structures of the selected banks.

To ascertain the extent which corporate board independence affects the performance of an organization.

To determine how corporate board sizes affect organizational performance.

To determine the relationship between corporate board structures and performance of organizations.

To ascertain how CEO-Duality of an organization affect the performance of a firm.

1.4 Research Questions

The researched posed the following questions in order to gather relevant responses and to effectively investigate the effect of corporate board structures on performance of organization. These questions are as follows:-

What is the structure of the governance in most organizations?

To what extent does corporate governing board independence affect the performance of an organization?

To what extent does corporate board size affect organizational performance?

What is the relationship between corporate board structures and performance of an organization?

What extent does a firm CEO- duality affect organizational performance?

1.5 Research Hypotheses

The following hypothesis was used to test the responses of the respondents to the research question posed.

H01: there are no significant corporate board structures in most organizations.

H02: corporate governing board independence has no significant effect on the performance of an organization.

H03: corporate board size has no significant effect on the performance of an organization.

H04: there is significant relationship between corporate board structures and performance of a organizations.

H05: an organization CEO-duality has no significant effect on organizational performance.

1.6 Significance of the Study

The study will be of great benefit to banking organization and other corporate organization who what to increase their performance in order to enhance the image of their organization and at the same enhances the growth of their organizations. The study will also be of benefit to any who want to embark on establishing an organization that will in one way or the other contribute to the society and that the same time earning a living from it. It will serves as a source of material and reference for other fellow researchers who will want to research on the effect of corporate board structures on performance of organization.

1.7 Scope of the Study

The scopes of the study covers the effect of corporate board structures on performance of an organization using GSK (Glaxosmithkline) case study.

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