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).