EXTERNAL GOVERNANCE MECHANISMS AND PERFORMANCE OF FIRMS IN NIGERIA

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EXTERNAL GOVERNANCE MECHANISMS AND PERFORMANCE OF FIRMS IN NIGERIA

CHAPTER ONE:

INTRODUCTION

1.1 Background to the Study

External governance is concerned with ways in which all parties interested in the well-being of the firm (the stakeholders) attempt to ensure that managers and other insiders take measures or adopt mechanisms that safeguard the interests of the stakeholders. Such measures are necessitated by the separation of ownership from management, an increasingly vital feature of the modern firm. A typical firm is characterized by numerous owners having no management function, and managers with no equity interest in the firm. Shareholders, or owners of equity, are generally large in number, and an average shareholder controls a minute proportion of the shares of the firm. This gives rise to the tendency for such a shareholder to take no interest in the monitoring of managers, who, left to themselves, may pursue interests different from those of the owners of equity. For example, the managers might take steps to increase the size of the firm and, often, their pay, although that may not necessarily raise the firm’s profit, the major concern of the shareholder.

External governance issues in both the private and public sectors have become a popular discussion in recent time. There have been some legislative changes and provisions imposed by governments on public and private organizations around the world to improve on their governance arrangements. Telecommunication sector in Nigeria have been one of the ‘interests caught up in the national surge in governance of organizations’

Particularly in Nigeria, governance issues such as size and composition of board of directors and their roles, responsibilities and relationships have been discussed in several Government business policy reports for more than a decade.

External governance can simply be defined as the system by which companies are directed and controlled which focuses on the “hygiene” and “housekeeping” aspects of running a business. As such, external governance can be seen as a set of relationships between a company’s management, its board, its shareholders and other stakeholders that provides a structure through which the objectives of the company are set and the means of attaining those objectives and monitoring performance are determined.

External governance issues are as old as companies themselves. At its broadest, it concerns the question of who should own and control the company and at the narrowest; it concerns the relationship between the shareholders and directors.

Many a research has been carried out world over to unearth the impact of the external governance on listed firms as well as correct and good practice of external governance in developing countries.

However Nigeria have been faced with a myriad of issues, ranging from “underdeveloped and illiquid stock markets, economic uncertainties, weak legal controls and investor protection, and frequent government intervention and coupled with poor economic performance, a predominance of concentrated shareholding and controlling ownership Therefore, Nigeria demand higher levels of effective external governance practices.

However, until quite recently the issue of external governance has received minimal attention in Nigeria. This is the reason why, many corporate organizations have been caught of getting involved in unethical practices. For example, seven top Bank executives in Nigeria that were discovered to be involved in one of the highest financial scam in the nation’s banking industry, after the CBN consolidation exercise ; which has put the credibility of their corporate image under suspicion, and threatening investors’ confidence.

Therefore an important theme of external governance in this regard is the nature and extent of accountability of people in the business and mechanisms that try to decrease the principal agent problem. Consequently, external governance mechanism has been a crucial issue under discussion with vested interest. It is against this background that the researchers see the subject matter; external governance and its impact on the management of Mobile Telecommunication Nig. Ltd Main Branch as an issue worthy of being investigated.

1.2 Statement of Problem

There has been considerable discussion in the academic literature of external governance especially managerial agency problems that arise from the separation of ownership and control. For example, Jensen and Meckling (2006) opined that a number of external governance mechanisms have been proposed to ameliorate this agency problem between managers and their shareholders. The proposed governance mechanisms include, for example, CEO incentive compensation, managerial ownership, monitoring by large shareholders, board size and independence, and stronger shareholder rights. Many studies have found a positive contemporaneous correlation between firm performance and good governance, which has led to numerous attempts to reform governance by institutional investors, stock exchanges and Congress in so many countries in order to increase accountability in corporate organizations.

But in spite of this, there is, however, little evidence on whether changing a firm’s governance structure leads to subsequent firm performance, as such doubt is expressed by previous studies whether firms can improve their longer term performance by implementing changes to their governance structure. It is against this gap that the researcher intend to take a survey into the subject matter:external governance and its impact on the management of MTN mobile communication By attempting to address an important limitation of past studies which has failed to address this gap. As such, this study aims to provide additional insights into the relationship between governance mechanisms and firm financial performance in Nigeria. The need for a study of this kind is even more important in an environment like Nigeria’s, which is characterized by growing calls for effective external governance, particularly for public limited liability companies. This call is understandable in view of the importance of effective governance at both microeconomic and economy-wide levels

1.3 Objective of the Study

The main objective of the study is to examine the external governance and its impact on the management of MTN. other specific objectives are to:

i) assess the effect of external governance on the performance of Telecommunication companies.

ii) examine the internal and external external governance control mechanism in Telecommunication companies.

iii) identify the systemic problems of external governance in Telecommunication companies.

1.4 Significance of the Study

This study adds a significant practical importance, because its results support the application of appropriate regulatory agencies such as central, stock exchange as well as Nigeria security and Exchange commission and financial organization in their various policy formulations as regard external governance . As such the study will be significant to these organinisations and regulatory Agencies especially as they utilize the findings of this research in enhancing policy formulation as regard external governance in their organization. This study is important as it provides new insights into governance and performance of organization in private sector.

The study will also add to the existing knowledge as well as making an original contribution to the study of external governance, since it is a comprehensive investigation into the comparative roles of governance in affecting performance of organizations in Nigeria and elsewhere in the world.

The study will also be a reference material for further research on external governance. As such, it will be a springboard to students intending to carryout similar research.

1.5 Research Questions

The central research question is: What is the impact of external governance on the management of MTN Mobile Communication? The specific questions are:

i) how does external governance affect the performance of MTN?

ii) what are the internal and external external governance control mechanism in place in MTN?

iii) what are the systemic problems militating against external governance in MTN?

iv) what are the solutions to such problems?

1.6 Scope of the Study

The study covers the examination of the impact of external governance in the telecommunication industry with reference to MTN Mobile Communication. The collection of empirical data is limited to MTN Kaduna main office. The study covers a time from 2001 – 2011.

1.7 Definition of Terms

In this section we define the various proxy variables we use to capture changes in external governance.

External governance: This is a set of the structure through which the objective of the firm and set and the means of obtaining these objectives and monitoring performance are determined.

Corporation: This refers to corporate entity or a body by means of which capital is acquired and used for investing in assets producing goods and services.

Shareholder rights: Our first measure of shareholder rights is the G-Index used by Gompers, Ishii, and Metrick (2003). As in Gompers et al., we use the incidence of governance rules to construct the G-Index. Firms with low G-Index values have the strongest shareholder rights and firms with high values of the G-Index have the weakest shareholder rights.

Insider Ownership: Consistent with Himmelberg, Hubbard, and Palia (1999) we calculate the ratio of insiders’ holdings of common shares over total shares outstanding. Morck, Shleifer, and Vishny (1988) find a non-monotonic relationship between insider ownership and firm value and show two inflection points at 5% and 25% respectively.

Shareholders: People who have invested in a company through subscribing to the company’s stock.

Board Structure: Management at the top comprising of board of directors.

Ownership Structure: Shareholders and directors.

CEO: Acronym for Chief Executive Officer.

MTN: Mobile Telecommunication Nigeria

AGM: Annual General Meeting

BOFID: Banks and Other Financial Institution Decree

CAC :Corporate Affairs Commission

CAMD: Company and Allied Matters Decree

CBN: Central Bank of Nigeria

DPC :Development Policy Centre

FOS: Federal Office of Statistics