Impact of Corporate Governance on Financial Management Decisions (a Case Study of Guarantee Trust Bank Plc)

Impact of Corporate Governance on Financial Management Decisions (a Case Study of Guarantee Trust Bank Plc)

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Chapter One of Impact of Corporate Governance on Financial Management Decisions (a Case Study of Guarantee Trust Bank Plc)

INTRODUCTION

Background to the Study

In the economic world, organisations are known as the economic pillar of societies in wealth creation, employment, and investment attraction (Ameer, 2010, and Dastgir and Honarmand, 2014). Protecting the rights of shareholders, providing information transparency, and accepting corporate social responsibilities are among the major factors that have attracted attentions more than before. Corporate governance rules are a set of regulations among firms’ shareholders, managers, and auditors that guarantee the establishment of a control system to protect the rights of minor shareholders and the shareholders community, and prevent social abuse. Today, protecting the public interest and the rights of shareholders, promoting information transparency, and requiring firms to assume social responsibilities are among highest goals, which require strict criteria and appropriate executive mechanisms; the most important of which is corporate governance system.

Main objectives of businesses include short-term profitability and long-term weal creation for owners. This is realized by making logical decisions in investment processes. Financial management decisions proxies include areas related to income, investments, and corporate performance management (Panayiotis et al, 2014). One of the major aspects of financial management is to make decisions on investments. Investing should be made in relation to the investments of the majority of shareholders. Managers should seek short-term investments. Taking corporate governance mechanisms into account, this research discussed the way such indices affect financial management decisions proxies in the listed firms in Tehran Stock Exchange by presenting detailed data and statistics. By doing so, more relevant guidelines are provided to planners and policy makers to make correct and timely decisions through a detailed understanding of various aspects of corporate governance mechanisms and executive policies relative to the respective corporate financial performance management (Kim et al, 2013).

Corporate Governance is mainly about how organizations are being directed and controlled. It is a set of relationships between company directors, shareholders and other stakeholder’s as it addresses the powers of directors and of controlling shareholders over minority interest, the rights of employees, rights of creditors and other stakeholders (Muriithi, 2009). Corporate Governance is also defined as an internal system encompassing policies, processes and people, which serve the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, accountability and integrity (Mangunyi, 2011). Corporate governance has, in more recent years, become one of the most commonly used terms in the modern corporation.

The management of good corporate governance has become an important prerequisite for any organisation to be effectively managed in the globalize market. The word “corporate governance” is a new terminology that has just been incorporated in both public and academic debates. However, the issues it addresses have been around for donkey years. Over the last two decades, corporate governance issues have become an essential issue in the academic literature as well as in public policy debates. During this period, corporate governance has been identified with takeovers, financial restructuring and control, and institutional investors’ activism Ross, Shleifer and Vishny (1973) defined corporate governance by stating that it deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.

Corporate governance mechanisms gives an assurrance to the investors in organisations that they will receive adequate returns on their investments (Shleifer and Vishny, 1997). Failure of these mechanisms to exist or function properly will lead outside investors not lend to firms or buy their equity securities. As thus, businesses would be forced to rely entirely on their own internally generated cash flows and accumulated financial resources to finance ongoing operations as well as profitable investment opportunities. Therefore the overall economic performance likely would suffer because many good business opportunities would be missed and financial distress at individual firms would spread quickly to other firms, employees, and consumers. This research examines whether there is a significant relationship between corporate governance mechanisms and financial management decisions proxies.

Statement of the Problem

Good Corporate Governance improves the financial managements of public and private organizations. The same can be said for the banking sector, good corporate governance in banking sector improves financial management in banking sector particularly at Guarantee Trust Bank in Nigeria. In recent time, lack of funds has often been attributed as the major problem which had hindered effective and successful execution and completion of many public projects at the constituencies. However, experience has shown the contrary, that poor finance management, rather than inadequate finance is the bane of local governments’ inability to achieve substantial development in their domain (Drury, 2001).

Banking sector in Nigeria have been faced by poor financial management this has been demonstrated by the many complaints from various stake holders. For instant citizen have complain that corruption is very high, bank managers have been accussed of mismanaging funds in several banks and the merging among banks have been another issue.

Local studies related to corporate governance and financial management was conducted by Owalla (2006) and the study however failed to underscore the effect of corporate governance on effective financial management Mohamed (2012) conducted a study on service delivery through stakeholder engagement and a citizen centric approach. However the above studies did not touch the relationship between corporate governance and financial management decisions in the banking sector. Certainly, this is what this study aims to look into by using Guarantee Trust Bank as a case study.

Research Objectives

The general objective or main objective of this study is to examine the impact of corporate governance on financial management decisions by using Guarantee Trust Bank as a case study. The specific objectives are:

i)            To determine the influence of corpoarte governance on financial performance in the Nigerian banking sector.

ii)          To investigate how the corpoarte governance are interpreted in the banking sector.

iii)        To examine the importance of the corporate governance for investment purposes in the banking sector.

Research Questions

The following are some of the questions which this study intends to answer:

i)            What is the influence of corpoarte governance on financial performance in the Nigerian banking sector?

ii)          What are the ways in which corpoarte governance are interpreted in the banking sector?

iii)        What is the importance of corporate governance for investment purposes in the banking sector?

Research Hypotheses

 The followings are the research hypotheses that will be tested for this study:

i)            There is a significant relationship between corporate governance and firm’s performance.

ii)          There is a significant relationship between corporate governance and firm’s growth.

Significance of the Study

This research aimed at investigating the relationship between corporate governance and the financial management decision of Guarantee Trust Bank in Nigeria. The study would be invaluable to the various stakeholders in the Nigerian economy.

The treasury would identify how various aspects of corporate governance practices affect the operations of various firms in Nigeria as well as determine the extent to which this and other factors affect operations of firms. They would also identify the impediments that face firms in approaching various corporate governance practices that affect their financial performance.

The policy makers would obtain knowledge of the various firm dynamics and the responses that are appropriate; they will therefore obtain guidance from this study in designing appropriate practices that would regulate the shareholders participation in affecting the financial performance of the firms in Nigeria.

The study will enable the future researchers and academicians to identify gaps which have never been covered by the previous researchers.

Scope of the Study

As the research topic would suggest at a glance, the scope of this, is essentially focused on the evaluation the impact of corporate governance on financial management decisions by using Guarantee Trust Bank as a case study. This study will look into the influence of corporate governance on financial performance. Therefore, the study will be carried out among the staff, management and various stakeholders at Guarantee Trust Bank headquarters in Victoria Island, Lagos State.

Limitations of the Study

This study was faced with some limitations that almost made it impossible to carry out. One of them was Literature Review – Getting materials for literature review was difficult.  An extensive search for literature took over one year. The cost incurred in obtaining the relevant materials was also enormous. Time Limitation: There are two types of time limitation faced during the study. The study was done for a period of three weeks. Hence the results would reflect the impact of the time constraint. The insights of the employees were observed during the period of study. A more extensive study conducted over a larger time period or during a special period of time like when there were higher numbers of issues, can include insights from employees over a broader time period and can bring in further depth into the research.

Definition of Terms

The following terms were used during the cause of the study.

Banking sector: is the section of the economy devoted to the holding of financial assets for others, investing those financial assets as leverage to create more wealth and the regulation of those activities by government agencies

Financial performance: Performance evaluation measure is based on accounting models, especially accounting earnings or earnings per share model. Understanding the important criteria for evaluating the performance and its indicators is useful for managers and using them they can start to measure and evaluate the present situation of strategic plans of the organization which is considered as independent variables in this study and include the following criteria.

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