CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

The term "Corporate Governance" has been identified to mean different things to different people. Magdi and Nadereh (2002) stress that corporate governance is about ensuring that the business is run well and investors receive a fair return. OECD (1999) provides a more encompassing definition of corporate governance. It defines corporate governance as the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company’s objectives are set and the means of attaining those objectives and monitoring performance. This definition is in line with the submissions of, Wolfensohn (1999) Uche (2004) and Akinsulire (2006).

Financial scandals around the world and the recent collapse of major corporate institutions in the USA, South East Asia, Europe and Nigeria such as Adelphia, Enron, World Com, Commerce Bank and recently XL Holidays have shaken investors’ faith in the capital markets and the efficacy of existing corporate governance practices in promoting transparency and accountability. This has brought to the fore once again the need for the practice of good corporate governance.

Effective corporate governance reduces "control rights" shareholders and creditors confer on managers, increasing the probability that managers invest in positive net present value projects (Shleifer and Vishny, 1997). Thus, the relationships of the board and management, according to Al- Faki (2006), should be characterized by transparency to shareholders, and fairness to other stakeholders. This will in effect mitigate the agency cost as predicted by Jensen and Meckling (1976).

Corporate performance is an important concept that relates to the way and manner in which financial resources available to an organization are judiciously used to achieve the overall corporate objective of an organization, it keeps the organization in business and creates a greater prospect for future opportunities.

1.2   Statement of the Study

Many researchers have been carried out their studies to identify corporate governance, focus on what are its characteristics and how these characteristics impact the performance of the entire firm. Studies found many answers related to researchers queries via providing a clear definition of good corporate governance and their ethics and procedures used in order to perform, manage and monitor a business. The majority of these studies were to examine the relation among corporate governance mechanisms and performance measures. After the collapse of Enron and the corporate scandals that started in October 2001 till present day, the confidence of the shareholders begins to shake in the marketplace. Thus, several investors, board of directors and government regulators have encouraged businesses to emphasis on corporate governance from different sides such as accounting and finance, economies, law and management. Furthermore, countries and economies differ regarding on what governance mechanisms are used. There are few studies which examine the effect of corporate governance on performance measures on the GCC business environment and this study may be the first one to do so in Nigeria.

1.3   Objectives of the Study

The main objectives in this study are presented as follows:

i.     To determine a line to distinguish between good and bad corporate governance;

ii.        To demonstrate the effect of corporate governance practices on firm’s performance in the financial sector;

iii.        To increase the awareness on agency theory and its relative costs; and

iv.   To illustrate the Bahraini market generally and the Nigerian Stock Exchange specifically.

1.4   Significance of the Study

This study is a contribution to the ongoing debate on the examination of the relationship that exists between corporate governance mechanisms and firm performance. Mixed and tenuous findings have been made from previous studies especially those ones that were conducted in the developed nations, particularly USA, UK, Japan, Germany and France.

More so, few studies (see Adenikinju and Ayorinde, 2001 and Sanda, Mikailu and Garba, 2005) have been conducted so far on the Nigerian business environment; hence the study intends to reduce the knowledge gap.

1.5  Scope of the Study

This work is empirical in nature and will utilize data of 20 non- financial firms listed on the Nigerian Stock Exchange between 2000 and 2006. This represents 140 firm- year observations.