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THE
EFFECTS OF COOPERATE GOVERNANCE ON BUSINESS
FAILURE
CHAPTER
ONE
INTRODUCTION
BACKGROUND
OF THE STUDY
Corporate governance has become a global concern
because of the rising frequency and widespread pattern of deliberate accounting
deceits and frauds, as well as growing number of consequent corporate failures.
Companies break the most basic rules of accounting, the worst being rebooking
income that was earn and had earlier been taken to profit. The corporate
failures that followed the discoveries were unprecedented magnitude of such
unimaginable, unethical and outright unprofessional conduct that warranted public
outcry and disbelief. The essence of good corporate governance is to bring
companies to respect the rule of law, play by the rules guiding their business
and hold ethics and professionalism in the highest esteem. Emanating from these
would be a high sense of social responsibility. These boil down to the quality
and reliability of accounting and other information that companies make
available to their shareholders. Following good corporate governance closely in
the growth and corporate performance matrix is transparency and accountability.
They are at times treated as components of corporate governance. Accountability
arises from the agency theory that recognizes the management of business
organization on one hand and the shareholders on the other hand. A perfect
system of corporate governance would give the right incentives to make value
maximizing investment and financial decisions and would assure that cash is
paid out to investors when the company runs out of viable projects, that is,
investment with positive NPVs. Statutory control of corporate governance has
been with us for a long time and has increased overtime. While it is impossible
to have a crime free society, the need to spell out the “rules of the game”
cannot be overemphasized. Irrespective of the nature of the entity we are
dealing with, the key issues of governance revolve around:
1. how things get done (or not done)
2. authority
3. leadership
4. the decision making process
5. accountability
STATEMENT
OF RESEARCH PROBLEM
In Nigeria
like most countries, the failures of companies can be due to internal or
external factors or in rare cases, the combination of both. However in most
cases, usually, it has to do with internal cases such as poor corporate
governance. In such cases, such development can be likened to a Giant Iroko
tree felled by termites that did a lot of damages within the trunk of the tree.
The issues of good corporate have attracted a global consensus by which
countries now use in the measurement of their own economic indices. Corporate
governance is therefore taking a gradual but central attraction after highly
rated international companies like Enron, Pamalat, Barynx Bank and WorldCom
failed, an indication that failure of corporate governance can bring down any institution
no matter how long or old it is. What then is the link between corporate
governance and business failure?
OBJECTIVES
OF THE STUDY
1. To find out the extent to
which governance has contributed to business failure in Nigeria.
2. To ascertain how effective
board membership can translate to good corporate governance.
3. To proffer solution to
corporate collapse through good and effective corporate governance.
SCOPE OF
THE STUDY
This study is not directed at
explaining or providing solutions to all corporate failures in Nigeria because
some failures are actually outside the organizations frontiers. It is narrowed
down to these failures that could be averted if organization would embrace
corporate codes and play by the rules. The companies examined are basically
those quoted on the Nigeria Stock Exchange.
RELEVANCE
OF THE STUDY
1. This study will provide empirical evidence that
business failure is caused by bad governance.
2. It
will help policy makers to design both legal and administrative framework for
corporate institutions.
3. It
will alert the shareholders that all may not be well with their investments.
4. The
study will provide measures for dealing with failures.
5. It
will provide ways for dealing with board wrangling.
STATEMENT
OF THE RESEARCH HYPOTHESES
Hypothesis
1
Ho: there is no significant
relationship between corporate governance and business failure.
Hi: there is a significant
relationship between corporate governance and business failure.
Hypothesis
2
Ho: the integrity of board
members does not have effect on corporate governance.
Hi: the integrity of board
members has effect on corporate governance.
DEFINITION
OF TERMS
BUSINESS:
The various activities of commerce- the winning and
using of the product of the earth, or multiplying the products of the earth and
selling them or manufacturing them and purchase and sales of commodities or the
offering of services for reward. Fry V. Burma Corporation Ltd (1930).
CONTROL: Any process in which a person or group of persons
or organization of persons determines i.e. intentionally affects, what another
person or group or organization will do. Tenmenbaum (1982)
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 stakeholders and spells out the rules and
procedures for making decisions on corporate affairs. By doing this, it also
provide the structure through which the company objectives are set and the
means of attaining those objectives and monitory performance OECD April 1999.
FAILURE: It is a situation in which a company finds itself
unable to generate enough funds both internally and from outside sources to
finance its operations. Osazee and Anao (1997).
STAKEHOLDERS: Those groups without whose support the
organization will cease to exist. Freeman (1984).
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