Ownership Structure And Corporate Governance And Its Effects On Performance

Project and Seminar Material for Business Administration and Management BAM

Project and Seminar Material for Business Administration and Management BAM


This study explored ownership structure and corporate governance and its effects on performance of firms in Nigeria with reference to banks. The study revealed that there was no significant difference between type of ownership and financial performance, and between banks ownership structure and corporate governance practices. Further results revealed that there was significant difference between corporate governance and financial performance of banks. However, foreign-owned banks had slightly better performance than domestically-owned banks. This study recommends that corporate entities should promote corporate governance to send a positive signal to potential investors. The Central Bank of Nigeria (CBK) should continue enforcing and encouraging firms to adhere to good corporate governance for financial institutions for efficiency and effectiveness. Finally, regulatory agencies including the government should promote and socialise corporate governance and its relationship to firm performance across industries. The empirical results indicate that firm performance is in negative and significant relation to board size, CEO duality, stock pledge ratio and deviation between voting right and cash flow right. On the other hand, firm performance is in positive and significant relation to board independence and insider ownership.

Chapter One

1.0 Introduction

Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and includes the rules and procedures for making decisions in corporate affairs. Corporate governance includes the processes through which corporations’ objectives are set and pursued in the context of the social, regulatory and market environment. Governance mechanisms include monitoring the actions, policies, practices, and decisions of corporations, their agents, and affected stakeholders. Corporate governance practices are affected by attempts to align the interests of stakeholders. Interest in the corporate governance practices of modern corporations, particularly in relation to accountability, increased following the high-profile collapses of a number of large corporations during 2001–2002, most of which involved accounting fraud; and then again after the recent financial crisis in 2008. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms.

Since 2001, Enron Xerox, WorldCom had been caught of getting involved in accounting scandals, which leads to the credibility of corporate financial reports under suspicion, furthermore, shocking investors’ confidence. Consequently, corporate governance mechanism has been a crucial issue discussed again. Sarbanes-Oxley Act was enacted in 2002 to enhance corporate government mechanism which is viewed as the priority of financial revolution, in the expectation that governance mechanism may be reinforced, public confidence retrieved, accuracy and reliability of financial information assured.

Berle and Means (1932) set forth that ownership dispersion implies management is distinguished from ownership, which, as Jensen and Meckling (1976) emphasize, may contribute to agency problems between managers and shareholders or shareholders and debtors. On the other hand, Shleifer and Vishny (1986) and Morck, Shleifer and Vishny (1988) detect the phenomenon of ownership concentration. La Porta et al. (1999) and Claessens et al. (2000) usher in the conception of ultimate controller; they define firm ownership as voting rights, unearthing that many controlling shareholders of listed firms predominate firms by means of pyramid structure and cross holding, which could result in central agency problem.

1.1 Background Of The Research

Tandelilin et al., (2007) asserts that the central focus in most literature around, discussion analysis in research all over the world on matters to do with corporate governance has been the role of ownership structure as a corporate governance mechanism. Whether the kind of ownership structure matters and what are its implications for corporate governance are areas that raise some concern (Tandelilin et al., 2007). A lot of attention has focused on the relationship between ownership structure and corporation performance for instance a rich research agenda on the implications of ownership structure on corporate governance by 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 which result in a concentrated form of ownership thus having implications on ownership structure. On the other hand, bulk of the evidence according to Shirley and Walsh (2001) indicates that privately held firms are more efficient and more profitable than publicly held ones although the evidence differs on the relative merit of the identity of each private owner.

In 1976, Jensen and Meckling provided results of their researches on ownership structure and firm performance by dividing shareholders into internal investors with management right and external shareholders who are investors without ballot right. The conclusion of their research was that value of the firm depends on the internal shareholder’s share, which is called ownership structure.

In Nigeria, financial reforms have encouraged foreign banks to enter and expand banking operations in the country. Kamau (2009) affirm that foreign banks are more efficient than local banks. She attributes this to the fact that foreign banks concentrate mainly in major towns and target corporate customers, whereas large local banks spread their activities more widely across the country. Foreign banks therefore refrain from retail banking to specialise in corporate products, while large domestic banks are less discriminatory in their business strategy. These different operational modalities affect efficiency and profitability she notes.

Studies with regard to corporate governance theme have mainly been carried out in developed economies mostly in the United Kingdom and the United States of America with few afore mentioned being done in Africa and specifically Nigeria. However, the concept of governance in Nigeria is now increasingly being embraced knowing that it leads to sustainable growth and more so, 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 receivership (Centre for Corporate Governance (CCG), 2004). Measures have been put in place by institutions such as Central Bank of Nigeria, Capital Markets Authority and Centre for Corporate Governance to champion the cause of good corporate governance. However, despite all these measures, the problem of corporate governance still remains unresolved. It is in the light of the above, that this study therefore sought to study ownership structure and corporate governance and its effects on performance in the banking industry in Nigeria.

1.2 Statement Of Research Problem

Global events concerning high-profile corporate failures have put back on the policy agenda and intensified debate on the efficacy of corporate governance mechanisms as a means of increasing firm performance (Sanda et al., 2005). Since the beginning of the 21st century, serious financial scandals and many cases of corporate mismanagement brought about an increasing attention to corporate governance, in a close relation with business ethics issues. In academic literature, as well as in public policy debates, corporate governance is nowadays acknowledged as a critical factor in economic development and financial markets stability the researchers affirm (Sanda et al., 2005).

Despite tight regulatory framework, corporate governance continues to weaken in Nigeria. Much needs to be done to sort out this mess otherwise we are likely to see more corporate failures and malfunctions in the region. There has been renewed interest concerning issues of corporate governance in Nigeria, however, relevant data from empirical studies are still few and far between. This has invariably led to limitations in the depth of our understanding of corporate governance issues. Performance of firms in the recent past has witnessed relatively poor results for example, financial results falling below desired targets. Besides that, corporate governance has been characterized by highly concentrated ownership, low ownership share of foreign owners, high ownership and decision making power in the hands of the state owned and relatively low ownership shares in the hands of insiders. Thus, some investors lacked clout to make significant impact on corporate governance. Hence, what are the effects of ownership structure and corporate governance on performance? It is on this basis that the study sought to establish the effects of ownership structure and corporate governance on performance. How does ownership structure and corporate governance relate to firm performance and what effects does ownership structure have on corporate governance and performance of a firm?

1.3 Objectives Of The Study

The main objective of this research work is to evaluate the impact and effects of corporate governance and ownership structure on banks performance.

Also, this research work will highlight the possible ways at which governance can efficiently increase the performance and operation of the banks in our state and the nation at large.

1.4 Significance Of The Study

The study will be significant in various ways to various parties, as will be seen below;

It will present in a precise manner, the importance and the effect of ownership structure and corporate governance effect performance of an organization.

To the corporate and owners of organization, the findings of the research, suggestion and recommendations based on the findings will be a good guide for future management and governance to the organization. The outcome of the study will help widen their horizons on resource allocation and control.

The research report will also serve as a reference material to students of accounting, especially those with a bias in management accounting.

The research will also be beneficial to the researcher. This is because the study will expose the researcher to so many related areas in the course of carrying out his research. This will enhance the researcher’s experience, knowledge and understanding on ownership structure and corporate governance and its effect to performance.

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