CORPORATE GOVERNANCE AS A CATALYST FOR ORGANIZATIONAL EFFECTIVENESS
- BACKGROUND TO THE STUDY
Considerable attention given to the issues of corporate governance as a veritable tools for organizational effectiveness in recent years shows that when corporate governance mechanisms are strong, managers find less time to deceive and this consequently increases the quality and reliability of their financial reporting.
Academic researches show that the weaker the corporate governance mechanism, the higher the profit management; and this ultimately indicate low earnings quality. Researches also revealed that weak corporate governance mechanism is connected with weak financial managements and high cheating levels.
In today’s global economy, the success of the national economy depends on the crucial role of organisations’ competitiveness, transparency and governance structure which operate within her territory, since organisations are the entities that create economic value (ICAN, 2009).
Indeed, the need for trust and transparency in the governance of corporate organizations has been one of concern for standard setters all over the world. This need has obviously spurred renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability and economic performance (ibid). The position above could not be separated from prior submission where Nwachukwu (2007) emphasize the growing consensus that good corporate governance has positive link to national economic growth and development. The degree of trust accorded to the managers of companies by its owners is strengthened through corporate governance. Directors without corporate governance mechanism may paint misleading pictures of financial and economic performance of their company to lure unsuspecting investors.
A corporation is a ‘congregation’ of various stakeholders, namely, customers, employees, investors, vendor-partners, government and society. The relationship between shareholders and corporate managers is fraught with ‘conflicting’ interests that arise due to the separation of ownership and control, divergent management and shareholder objectives, and information ‘asymmetry’ between managers and shareholders. Due to these conflicting interests, managers have the incentives and ability to maximize their own utility at the expense of corporate shareholders. As a result, corporate governance structures evolve that help in mitigating these agency conflicts (Dey 2008). Simply stated, “Corporate governance (henceforth Corporate Governance) is the system by which businesses are directed and controlled.” In fact, Corporate Governance deals with conducting the affairs of a corporation in such a way that there is ‘fairness’ to all stakeholders and that its actions benefit the ‘greatest’ number of stakeholders.
Corporate Governance is the acceptance by management of the inalienable rights of shareholders as the ‘true’ owners of the corporation, and of their own role as ‘trustees’ on behalf of the shareholders. This has become imperative in today’s globalized business world where corporations need to access ‘global’ pools of capital, need to attract and retain the ‘best’ human capital from various parts of the world, need to ‘partner’ with vendors on mega collaborations, and finally, need to live in ‘harmony’ with the community.
Corporate Governance is the system of rules and norms, either institutional or market, within which arise or are pursued various categories of stakeholders, shareholders, management, public administration, personnel, customers, suppliers, etc.. This definition should be completed with the expressly stated objective supplemented by the „Principles of Corporate Governance” issued by OECD (1999), i.e. „providing company’s strategic direction, effective control management of the board members, trust and loyalty of the shareholders”. Systems of governance have in fact two main objectives: ensuring the integrity of the management and to guide it to maximize the value created for shareholders. In the pioneer countries in Corporate Governance, such as the U.K. and U.S., public regulations follow the private ones. Continental European countries, notably in Italy and France, market regulation and companies’ management is prevalent public, this difference having a substantial meaning – the „origin” public intervention is inserted in a context less receptive and exposed to many environmental adverse conditions.
Corporate Governance mechanisms generally include shareholders and their ownership structure, board members and their composition, and management of the company which is driven by the managing director or chief executive and other stakeholders that may affect the company’s movement, and it against this reasons, that this study tends to investigates the effect of corporate governance mechanisms on organizational effectiveness.
1.2. STATEMENT OF PROBLEM
The increasing incidence of corporate fraud relating to exaggerated and fleeting reports have reinforced the renewed global emphasis on the need for effective corporate governance. CBN (2006) reported that despite the significance of good corporate governance to national economic development and growth, corporate governance was still at rudimentary stage as only 40% of publicly quoted companies, including banks had recognised corporate governance in place.
The separation of ownership from the management of business organisations spurs a divergence of interest amongst the parties. The divergence of the interests of the management and its owners has undermined investors’ confidence in the Board. Hence, investors are interested about the level of accountability displayed by the Board of directors. The outcry of investors and other stakeholders as a result of mismanagement and inadequate financial disclosures given by the management has deemed it necessary for the institution of sound corporate governance procedures .
Furthermore, many country leaders all over the world has increased concern over corporate governance due to the increase of reported cases of frauds, inside trading, agency conflicts among other corporations saga (Enobakhare, 2010). Corporate failure has recently witnessed in both developed and developing countries with the reported cases of the collapse of Enron in 2001 and WorldCom in 2002, (Inyang, 2009) and theongoing economic financial in Nigeria 2015/2016.
The crises emanated from the poor governance practices from the financial sector (the mortgage market). Since mortgage market was the mother of the crisis, this has triggered the world leaders to enact some laws, which increase banks governance. This is supported by Ahmad (2006) who argued that a sound financial system in any organisation requires appropriate infrastructure to support efficient conduct of such business operating environment, governance and regulatory framework at domestic as well as international levels in order to reduce the financial crisis and inversely improve organizational efficiency.