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EFFECTS OF CORPORATE GOVERNANCE ON ORGANIZATIONAL PERFORMANCE IN NIGERIA’S INSURANCE INDUSTRY
1.1 Background to the Study
Corporate governance has in recent years become a topical issue both in business and academic circles. The concern in business arose out of the perceived importance that a tradition should be developed that supports moral and ethical conduct in business affairs which will create a general climate (both legal and social environment) that will promote good governance of firms. In the academic world, it is established that business decisions are not made in a vacuum. Business decision makers have objectives outside the firms’ objectives, for example managers are interested in their own personal satisfaction, in their employees’ welfare, as well as in the good of the community (society) at large and these objectives impact on shareholders wealth adversely (Sheifer and Vishny, 1997, Akeem, 2014). The genesis of Corporate Governance lies in business scams and failures. The Watergate scandal, the junk bond fiasco in USA and the failure of Maxwell, BCCI and Polypeck in UK resulted into setting up of the Treadway committee in USA and the Cadbury committee in UK on corporate governance (Bansal and Bansal, 2014).
The guiding principle of corporate governance is “transparency and ethics” should govern corporate world. Increasing strategic importance of professional management probably constitutes the most important aspect of changing profile of corporate governance. Given the global challenges, the only choice left with business and economic enterprises is to follow the corporate governance practices – the path for living, working, surviving, successing and the excelling in the future (Bansal and Bansal, 2014). Directors without corporate enforcement mechanism may paint misleading pictures of financial performance of their company to lure unsuspecting investors. However, the effect of these actions on some corporations is devastating. There is the collapse of the energy corporation Enron in 2001 in US, WorldCom, Global Crossing, and Rank Xerox, most of which filed for bankruptcy after adjusting their accounts. Between 2002 and 2005, several international non-life insurers and reinsurers failed, including Mutual Risk Management Ltd, Equitable Life Assurance Society, UK collapsed in year 2000 because directors of the company unlawfully used money met for guaranteed annuity rate policies to subsidize current annuity rate policies. Lion of Africa Insurance, Nigeria also liquidated because of board crisis it liabilities outweighed the assets and could not recapitalize in 2007 (Momoh and Ukpong, 2013).
The increasing incidence of corporate fraud relating to exaggerated and overstated accounts have informed renewed global emphasis on the need for corporate governance. According to Nwachukwu (2007), there is a growing consensus that good corporate governance has a positive link to national economic growth and development. Checks and balances in an organization are strengthened through corporate governance. By definition, corporate governance is a system or an arrangement that comprises of a wide range of practices (accounting standards, rules concerning financial disclosure, executive compensation, size and composition of corporate boards) and institutions (legal, economic and social) that protect the interest of corporation’s owners. According to Laporta et al (2000) “corporate governance is to a certain extent a set of mechanism through which outside investors protect themselves against expropriation by the insiders.” Insiders are defined as both managers and controlling shareholders.
To this end, adherence to good corporate governance is inevitable especially in the Nigerian insurance industry considering the critical role of the sector to financial market stability, investment and economic growth. The presence of an effective corporate governance system helps to provide a degree of confidence that is necessary for the proper functioning of the market economy and hence organisatiomal performance (Momoh and Ukpong, 2013). There is also a widely held view that better corporate governance is associated with better firms’ performance, but the evidence is not sufficiently available in the Nigeria context. As such, providing an additional empirical evidence of the relationship between corporate governance and organizational performances in the insurance industry is urgently needed.
1.2 Statement of the Problem
Incorporation may mean that the owners of the organization are not necessarily the managers and this may create agency issues which include managers acting for their own selfish interest at the expense of other stakeholders. Despite tight regulatory framework corporate governance continues to weaken in Nigeria (Momoh and Ukpong, 2013). Many companies have been characterized by scandals. Directors have acted illegally or in bad faith towards their shareholders. Corporate governance which is hitherto seen as the foundation for good corporate performance has received lack-luster attention from corporate bodies globally for a considerable length of time (Ejiofor, 2009). This attitude which bordered on neglect of corporate strategies may have eventually led to the recent global high profile corporate failures. Notable among such failed corporate bodies are HIH Insurance and One-Tel both in Australia, Maxwell Communications Corporation, and Bank of Credit and Commerce International (BCCI) both in the United Kingdom; Enron and Worldcom both in the United States and Parmalat in Italy. All these failures have been attributed to poor corporate governance (Tennyson, 2010). In Nigeria, the story is not different. There has been several corporate failures and large-scale misappropriation of funds in the recent past in Nigeria, involving both public and private organizations such as Lion of Africa Insurance, AVOP Oil, Anambra State Motor Manufacturing Company, African Petroleum Nigeria Limited, and many others.
The consequences of institutional failure (considering the multiplier effect of financial institutional failure on the real sector of the economy) are unacceptably costly to a developing country like Nigeria. This affects the level of confidence the public has in various corporate establishments. The consequences of ineffective governance systems leading to corporate failure will not only affect the shareholders but also, the employees, suppliers, consumers and the nation as a whole. Thus, a governance system that will promote ethical value, professionalism and transparent application of best practices is desirable. In Nigeria majority of the studies on corporate governance often focus on the banking sector. Researches oncorporate governance and performance of the insurance industry are very few. This study will therefore fill a gap in the literature by examining the nexus between corporate governance and organizational performance in the insurance industry with a special reference being made to Niger Insurance Plc.
1.3 Objectives of the Study
The major objective of the study is to examine the effect of corporate governance on organizational performance in the insurance industry. Other specific objectives are as follows:
i. To explore the relationship between corporate governance and organizational performance.
ii. To find out the effect of corporate fraud on organizational survivability
iii. To investigate the effect of corporate dividend policy on shareholders’ interest
iv. To identify the role of Corporate Regulatory Agencies in ensuring transparency and ethics in the Nigerian insurance industry.
1.4 Research Questions
The undertaking of this research project will beam a searchlight on the following research questions;
i. What is the relationship between corporate governance and organizational performance?
ii. Is corporate fraud a significant predictor of organizational survivability?
iii. To what extent does corporate dividend policy impact on shareholders’ interest?
1.5 Research Hypotheses
The researcher intends to test the following hypotheses;
Ho1:There is no significant relationship between corporate governance and organizational performance
Ho2: Corporate fraud is not a significant predictor of organizational survivability
Ho3: There is no significant relationship between corporate divid
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