THE IMPACT OF CORPORATE GOVERNANCE ON THE SHAREHOLDERS FUNDS OF LISTED INSURANCE FIRM IN NIGERIA

1.1 Introduction

Corporate governance (CG) safeguards shareholders’ portfolios and ensures optimal returns in terms of dividend policy (DPs) on investment. The association between CG and DPs could be significant in relation to risk exposure, operational and financing activities across firms and sectors. Corporate Governance is basically 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 are always taking appropriate measures or adopt mechanisms that safeguard the interests of the stakeholders. Such measures are necessitated because of the separation of ownership from management, an increasingly vital feature of the modern corporations.

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.

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1.2 Background of Study

Corporate governance has become a concern in developing economies since the financial crises in the past, which have resulted in demands for improved corporate governance practices. Good corporate governance has become essential for improving firm performance, ensuring investor rights, enhancing the investment atmosphere and encouraging economic development (Braga-Alves & Shastri, 2011; Price, Roman & Rountree, 2010). Corporate Governance is defined as the process and structure used to direct and manage business affairs of the Company towards enhancing prosperity and corporate accounting with the ultimate objective of realizing shareholder long term value while taking into account the interest of other stakeholders (CMA Act, 2002).

In today's world governance has assumed critical importance in the socio-economic and political systems. A typical firm is characterized by numerous owners having no management role, and with managers with no equity interest in the firm. Shareholders, or owners' 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. The compatibility of corporate governance practices with global standards has also become an important part of corporate success.

Corporate Governance is the system by which organizations are directed and controlled. It’s 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 practice of good corporate governance has therefore become a necessary prerequisite for any corporation to be manage effectively in the globalize market. The term “corporate governance” is relatively new terminology used in both public and academic debates, although the issues it addresses have been around for much longer. In the last two decades, however, corporate governance issues have become important not only in the academic literature, but also in public policy debates. During this period, corporate governance has been identified with takeovers, financial restructuring, and institutional investors' activism Ross, Shleifer and Vishny (1973) define 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 assure investors in corporations that they will receive adequate returns on their investments (Shleifer and Vishny, 1997). If these mechanisms did not exist or did not function properly, outside investors would 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.

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Impact of Corporate Governance on the Shareholders Funds of Listed Insurance Firm in Nigeria.

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1.3 Statement of Problems

Investigation revealed that due to the peculiarity of dividend problems around the world, few studies in developed countries that have tried to assess the Impact of Corporate Governance on the Shareholders Funds of Listed Insurance Firm in Nigeria. Although attention has been given to corporate governance in developing countries, many of these countries still suffer from a lack of appropriate governance (Ekanaakey, Perera & Perera, 2010).

Nigeria as an emerging economy differs from those developed countries and inadequacy of data on this research area stimulates a gap in the literature which needs to be filled. This study employed the corporate governance framework to investigate the relationship between corporate governance and dividend policy. On one hand, it is important to take dividend decisions by financial managers, and on the other hand, it is important for corporate investors to understand the firm’s dividend policy. These facts stimulated the researcher to investigate this relationship between corporate governance and dividend policy of quoted Conglomerates in Nigeria.

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1.4 Aim and Objectives of Study

The aim of the study is to examine the Impact of Corporate Governance on the Shareholders Funds of Listed Insurance Firm in Nigeria. In achieving this aim, the following specific objectives were laid out as follows:

1. To examine the effect of corporate governance on the shareholders funds of listed insurance company
2. To ascertain if there is any relationship between corporate governance and dividend policy of listed insurance companies
3. To examine the effect of board size on shareholders’ funds dividend payout ratio
4. To proffer suggested solutions to the challenges of dividend policy and corporate governance in insurance sector.

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1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Is there any relationship between corporate governance and dividend policy of listed insurance companies?
• Is there any significant effect of board size on shareholders’ funds dividend payout ratio?
• What is the effect of corporate governance on the shareholders funds of listed insurance company?

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1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: There is no significant relationship between corporate governance and dividend policy on the Shareholders Funds of listed insurance companies
• H1: There is a significant relationship between corporate governance and dividend policy on the Shareholders Funds of listed insurance companies

Hypothesis Two

• H0: Corporate governance does not have any effect on the Shareholders Funds of listed insurance company
• H1: Corporate governance does have an effect on the Shareholders Funds of listed insurance company

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1.7 Significance of Study

This study is hoped that the evidence would serve as important quantitative information into the cauldron of policy as well as add to the existing body of empirical literature from a developing stock exchange such as that of Nigeria. The need for a study of this kind is characterized by growing all for effective corporate governance particularly for public liability companies.

This study will be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.

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1.8 Scope of Study

The study focuses on the Impact of Corporate Governance on the Shareholders Funds of Listed Insurance Firm in Nigeria.

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1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Research material: availability of research material is a major setback to the scope of the study.
3. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
4. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

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1.10 Definition of Terms

Corporate Governance: Corporate Governance is defined as the process and structure used to direct and manage business affairs of the Company towards enhancing prosperity and corporate accounting with the ultimate objective of realizing shareholder long term value while taking into account the interest of other stakeholders (CMA Act, 2002).

Management: Management (or managing) is the administration of an organization, whether it is a business, a not-for-profit organization, or government body.