2.1 Theoretical Frame Work
This chapter aims at reviewing the theoretical frame work to the study. The purpose of this chapter therefore would be look into what other people have written in the subject for the purpose of building on then for others to continue. Any discussion of indigenous business in Nigeria is essentially a discussion of small mediums scale business. This is because most indigenous business in Nigeria falls into this category. It is, therefore necessary to define the scope of small and medium sale business for the purpose of this study since the definition varies among different instruction and from one country to another. Some define it in terms of the number of employees; other by annual turn over or capital invested, while others to define it.
This chapter aims at reviewing the theoretical frame work to the study. The purpose of this chapter therefore would be look into what other people have written in the subject for the purpose of building on then for others to continue. Any discussion of indigenous business in Nigeria is essentially a discussion of small mediums scale business. This is because most indigenous business in Nigeria falls into this category. It is, therefore necessary to define the scope of small and medium sale business for the purpose of this study since the definition varies among different instruction and from one country to another. Some define it in terms of the number of employees; other by annual turn over or capital invested, while others to define it.
However, different government
department in Nigeria provide different definitions of small companies. The
central bank of Nigeria (CBN) in its own 1987 monetary policy guidelines
regarded small enterprises as those companies with annual turn over not
exceeding N500,000 (CBN) in the Federal ministry of commerce and industry and industry’s
guideline to the Nigeria Bank of commerce and industry (NBCL) in 1981/1982
“small scale business were defined as those companies with a total investment
of not more than N500,000 excluding the cost of land but including working
capital”. On the other hand, the NBCI in reaching an agreement with the world
bank concerning technical and financial assistance for small and medium scale
Enterprises (SMEs) defined SMEs as those with capital cost per project not exceeding N 1 million
(including working capital but excluding the cost of land). The NBCI has thus
decided that it’s own official definition for the 1985-1990 period should
correspond with this later definition. (Taiwo 1992)
In the 1989 industrial policy of
Nigeria, small and medium industries were defined as those with investment of
between N1,000,000 and N2 million, exclusive of land but including working
capital. Industries with investment cost exceeding N100,000 including working
capital but exclusive of land are regarded as micro/cottage industries. =
(industrial policy of Nigeria 1988). This upward revision was said to be in the
light of structural adjustment program (SAP) economic realities. Apparently the
historical development of small and medium scale enterprises in Nigeria economy
within the past one decade and the social-cultural regulations and practices
that impinge on business processes create the need for a working definition
that sets realistic limits in the scale categorization of business
organizations employing more than 10 persons but fewer than 200 persons
(exchanging causal laborers) and whose annual turnover is not more than N 1
million. Furthermore, these small-sale enterprises are assumed to be capable of
adopting formalized procedures in their operations and posses the capacity to
absorb institutional facilities when they are made available” (Ukaoha 1989).
Our foregoing discussions presuppose the small businesses are easier to define.
It was in recognition of this that Bolton Report (1971) as quoted in Burns and
Dewhurst (1989), as early as 1971, described a small business as follows:
(a) In
economic terms, a small firm is one that has a relatively small share of its
market;
(b) It is
managed by its owners or part owners in a personalized way, and not through the
medium of a formalized management structure.
(c) It is
dependent in the sense that it does not from part of a large enterprise and
that the owners managers should be free from outside control in taking their
principal decisions.
The characteristics of a small (firm’s share of market
is that it is not large enough to enable it to influence the price or
quantities of foods sold to any significant extent. Personalized management is,
perhaps the most characteristic factor for all it implies that the owner
actively participates in all aspects of the management of the business and in
all majority decision making processes. There is little devolution or
delegation of authority. In dependence from outside control rules out those
small subsidiaries, which though in many ways fairly autonomous, nevertheless,
have to refer major decisions (for example, on capital investment) to higher
authority? Of course, there are other characteristic of small business that may
be added to the list, perhaps the most obvious is the severe limitation of
resources faced by small firms, both in terms of management and manpower as
well as money.
Again, the same Bolton committee
made several definitions of small firms. Recognizing that one single definition
would not cover industries as divergent as manufacturing and firm’s to over
£50,000 turnovers for retailing and up to five vehicles or less for road
transports. The committee said further that any definition based on turnover or
indeed any other measure of size expressed in financial terms suffers from
terrible inherent disadvantages in times of inflation.
Obviously, statistical definitions
of small firms vary widely from one country to another and as such have not
provided the needed solution of small business definitional problem some use
number of employees, some turnover, some capital employed and some a
combination of all three.
Apparently, a business is viewed as
a small business when it has few employees, limited capital investment low
sales volume; is self initiated; is closely self-managed” is of a relatively
small size when compared with its peers in the industry, its management is
independent, capital is furnished by an individual or a small group and the
area of operation is local-employees and owners reside in one home or
community, although, the market served need not be local (Burns and Dewhrust
1989).
There are at present few interesting
texts on Agency relationship and management control system in Nigeria but non
of these has particularly dealt in the implications of Agency as a subject,
since the concept is a phenomenon in the management parastatals not only in
Nigeria but the world at large.
However, there are papers presented
by eminent scholars and speakers at seminars, symposia, conferences etc. as
well as writings in newspapers and magazine on the subject. In this chapter
implication of agency is look at frame concept. The Nigeria situation, its
aims, benefits and prospects, just as each interest group advocates it own
interest and ensures it stands at an advantageous position in relation to the
firm.
Agency theory provides the necessary
frame work for the discussion of agency relationships that exist within the
firm, conflict of interest that might arise from such relationships and the
possible actions and events that could mitigate such conflict. Two major
relationships are relevant in the context of the discussion share holders and
managers, creditors and shareholders.
In the share holders and managers
relationship there is bound to be conflict of interest in the areas of capital
investment, gearing, diversification by top management, take-over bids and so
on. Shareholders can however design relevant schemes to reduce the conflict.
Also it is possible to have conflict of interest between creditors and
shareholders in the areas of selection of ricky projects and raising of
additional debt finance.
In this case, however, there are in
built controls, in the actions of the shareholders which tend to make them to
want to be creditors friendly most of the time.
2.2
Agent
An agent is some one who brings
another person, called the principal into contractual relationship with third
parties to an agent.
Agents may be classified generally
into general and special agent. The general agent is one who has authority to
act for his principal in all matters covering a particular trade or business of
a particular nature or to do some act in the ordinary course of his trade
profession or business on behalf of his principal e.g. a director is a general
agent to his company. On the other hand the special agent is one who is
authorized to conduct a single transaction or a service of transaction not
involving continuity of service: e.g for owner a dealer of goods taken on hire
purchase is an agent.
Agent may also be classified either
from the nature of liability imposed in the agent or frame the particular
functions performed by the agent.
2.3
Creation of Agency
Agency may arise from mutual
agreement as by express appointment in writing or orally or by deed e.g by a
power of attorney; If may also arise by implication of law such as where the
law inters the conduct of the parties and other surrounding circumstances of
the case. It may also arise by estoppels such as where a principal hold out
some one as having authority to act for him.
An agency by ratification is where
the agent had no authority originally from the principal or be exceeded him by
the principal but the latter later ratifies and adopts the transaction. It may
also arise by operation of law such as agency of necessity. However, where an
agent is appointed to execute a contract under seal, he must be appointed by
deed, power of attorney, unless he is executing in the principal’s presence and
in the case of conveyance of land he must be appointed at least in writing.
2.4 Agency Relationship
Agency relationships exist when one
person (or a group of persona) called the principal appoints another person
called the agent to perform some work in its behalf and gives the appropriate
decision – making authority. In the context of strategic financial management,
such relationships occur, among others between:
(a)
Shareholders and managers; and (b) Creditors and shareholders.
It
is natural that where such relationship exists there is bound to be conflict of
interest which creates a problem known as agency problem. The reason
underlining the conflict in the case of shareholders- managers relationship is
the separation of ownership and control.
2.5
Shareholders Versus Managers
This
may arise in the following situations:
A.
Choice of projects Appraisal Technique:
In pursuit of their self-interests managers may prefer projects with short
lives as against those with long lives. They may therefore, want to use payback
technique instead of the superior Net present value technique.
B.
Appraisal of Risky Projects: Financial
managers may not want to undertake projects which bring substantial benefits to
the owners; but are highly risky, because of the negative impact of this risk
on their own financial position. However, this risk has presumably been well diversified
away by the shareholders.
C.
Gearing; financial managers may not
want the company’s debt to be unduly large in relation to equities so as to
reduce the financial risk of the company. Financial managers may however, by
doing this, not be taking advantage of tax – deductible interest cost, where
interest is treated by the tax authorities as a charge against profits.
D.
Diversification through acquisition:
this is where a company acquires the shares of another company for the reason
that it wants to diversity their investments, financial managers will
only be adding value if they can obtain greater return than what the
shareholders themselves would have gotten.
E.
Take over bids: when a company is
compulsorily taking over another company, this target company’s directors may
be resisting such action in order to protect their own jobs, even though it
will bring greater wealth to the existing shareholders.
F.
Leveraged Buy- Out: in a leveraged
buy- out the company’s management borrows funds to purchase the outstanding
shares of the company via a tender offer (an offer to buy the share of a
company directly from the shareholders).there is the possibility that managers
might try to drive down the price of the company’s share just before the tender
offer’s so that they can buy the shares at a bargain price.
G.
Dividend policy: this is where
financial managers are pursuing an unduly conservative dividend policy. That is
trying to keep dividends at a level which is much lower than the normal level,
given the industry norms. The question, however, is can the finds not
distributed be utilized better by the shareholders themselves, if received as
dividends?
H.
Disclosure of information in the financial statements: this is where financial managers ‘paint’ the financial
condition of the company, via its balance sheet, rosier than what it really is.
This is known as ‘Window dressing’ or in mild form, ‘Creative accounting’. It
is made possible by the open-ended nature of the choice of accounting policies,
when directors prepare financial statements. For example, directors it want to
defer certain type of expenditure (e.g advertising) and capitalize it or put
value on intangibles such as patents.
I.
Ethics: top management might display
certain unethical practices when it makes some decisions on operations. Typical
examples of such practice are the degradation of the environment through
pollution and testing of products on human beings.
2.5.1
Possible solution
Shareholders need to ensure that
there is “Goal congruence” Goal congruence means convergence of the interest of
different groups such that the overall goal of the company can be achieved.
Here, it means the need for shareholders to ensure that managers take actions
in accordance with their expectations and in their best interest. The actions
necessary to achieve goal congruence are as follows:
A. Monitoring
The ‘company’ needs to monitor every action of
management. However, some costs known as agency costs would be incurred. This
is an expensive way of ensuring goal congruence; agency costs would include
expenditure that is necessary to physically monitor the manager and expenditure
to re-structure the organization so that bad elements within the system are
removed. They also include opportunity costs arising from profits lost when
managers take decisions as agents instead of as owner- managers decision-
making is slow in the framer but fast in the latter.
B.
Compensation via allocation of
shares in the company:
In this case costs might not be too prohibitive as managers
would gear their efforts toward profitability and capital appreciation via
cutting down operational cost including shares and fringe benefits and raking
less time off duty. In between the above two extreme positions are the
following:
I. Threat of dismissal:
This may not be effective as
ownership in many big companies (where separated) is widely dispersed and
shareholders often find it difficult to speak with one voice. Few shareholders
attend the annual general meetings and, in case directors usually ensure they
get enough proxies to support them at meeting. It should be noted, however,
that presence of institutional investors could weaken the directors’ strength.
ii) Exposure to take – over bid this could
deter managers from taking actions that share price maximization. If the
company‘s earnings potentials are being knowingly or unknowingly suppressed
through bad policies and the share is consequently undervalued, in relation to
its true value. It may be expressed to hostile – take – over bid. The result is
that some top managers might lose their jobs and the authorities of these
remaining might be drastically reduced.
iii) Executive share option scheme this is a
performance based scheme that allows top managers to buy the share of the
company in future, at a price determined now. The belief is that this will
motivate the managers to continually takes actions that I will be pushing up
the share price : the option only has values if the price of the share
increases above the originally fixed option purchase price. It should be noted
however that this scheme may not be beneficial to managers in a period of
market down form
(iv) Performance shares
These are shares given to top managers and linked to
the company’s performance as mirrored by its fundamentals – earnings per share,
return on capital employed, return on equity divid end per share and so in this
scheme are valuable to the extent that it is not affected by vagaries of the
stock market.
2
.6 Creditors Versus Share Holders
The
agency problem of creditors and shareholders (with managers as agents) arises
from two situations.
a. Capital Investment
Creditors would not like a situation where the
acceptance of a project will add greater business risk than is expected by them
. if this happens, they will increase their required rate of return and the
value of their out standing debt will fall. The major concern of creditors have
is that if risking project succeeds, Creditors will only receive a fixed amount
(interest income ) and shareholders take all the benefits’ whereas if the
project fails they will share the losses with the owners.
B. Gearing
Where
the company increase it gearing (debt / equity ) ratio to a level that increase
its financial risk to more than expected, the value of the existing debt will
fall because the earnings and assets backing available for this debt will
diminish as a result of the new issue of debt
in built solution shareholders do try as much as possible not to exploit
creditors as such action may attract punitive high interest rates, restrictive
covenants restricted access to capital market all of which may result in a fall
in the long – term value of the company’s share. Shareholders would, therefore,
went a continue to maintain good and cordial relationship with their creditors,
as it is by doing so, that their wealth will be maximized.
2.6.1 Relation
Between the Principal and Third Parties
Where the principal is name by the
agent or at least ascertainable from available, agent drop off, and both
principal and third party can sue and be sued on the contract.
The Undisclosed Principal
Where an agent did not disclose at the time of the
contract that he was acting for a
principal, subject to certain conditions the undisclosed principal can sue or
be sued on the contract.
1. Where the agent contracts as agent for an unnamed Principal, that is, he
disclose the existence, but not the name of the principal. Here, the agent
cannot be personally liable on the contract since he expressly contracts as
agent.
2. Where the agent contracts as agent for
an undisclosed principal that is, the agent disclose neither the existence nor
the identity of the principal but simple contract with third party as if he
were the principal. For instance, where the wards used by the agent in the contract
are sufficiently ambiguous as to designate the agent as having an disclosed
principal, the I will not be accepted e.g. where the contract involves the
personal skill or confidence of the agent as where a third party lent money to
the agent on the letters own standing another person whose ability he does not
trust will not be allowed to come in as principal.
Where the third party made the
contract with agent to obtain the benefit of a set-off where the Undisclosed
Principal is allow to intervene, he can be met with any defence which was
available to the third party against the agent before the third party
discovered the existence of the principal.
2.6.2 Duties of the Principal
1. To
indemnity the agent for acts lawfully done and liabilities incurred in the
execution of his authority. But he will not be indemnified if he acts beyond
his authority or he was negligent in discharging his duty.
2. To pay
the agent the commission or other remuneration agreed. An agent earns his
commission only when he has achieved the acquired purpose and where they has
been the effective means of achieving it.
2.7 Management
Management in all business and organization activities
is the act of getting people together to accomplish desired goals and
objectives using available resources efficiently and effectively. Management
comprises planning. Organizing staffing, leading or directing,(a group of one
or more people or entities) or effort for the purpose of accomplishing a goal.
Re-sourcing encompasses the development and manipulation of human resources,
financial resources, technological resources and natural resources. Because
organization can be viewed as system, management can also defined human as action, include design to facilitate
the product the useful out come from a system. This view opens the opportunity
to (manager oneself, perquisite to attempting to manage others, management can
also refer to the person or people who perform act(s) of management.
2.7.1
Why Management Control Fail
A control
system is necessity in any organization in which the activities of different
division, departments, section, and so on need to be coordinated and
controlled. Most systems are past action oriented and consequently are in
efficient of fail. For example, there is little an employee can do today to
correct the result of action completed two weeks ago. Sterling controls on the
other hand are future- oriented and allow adjustments to be made to get back on
course before control period ends. They therefore establish a more motivating
climate for the employee. What’s more or do many standards or control are
simple estimate of what should occur if certain assumptions are correct, the
take on precision in today control systems that leaves little or no margin for
error. Managers would be betters off establishing be range rather than precise
number and change standard as and passes and assumption prove erroneous. This would be fairer and would positively
motivate employees. There are three fundamental beliefs identifying most
successful control systems.
a.
First, planning and control are two most closely internet tad management
functions.
b. Secondly
the human side of the control process needs to be stressed as much as, if not
more than, the tasks or number coaching side.
c. Finally
evaluating, coaching, and rewarding and more effective in long term measuring
comparing, and pressuring or penalizing.
2.8
The System and Process of
Controlling
The managerial function of controlling is the
measurement and correction of the performance of activities of subordinate in
order to make sure that all levels of objectives and the plans devised to
action them are being accomplished. It is thus the function of every manager
from provident to supervisor. Some managers, particular at lower levels forget
that the primary responsibility for the exercise of control rests in very
manager charged with the execution of plans. As Heni Fayol so clearly
recognized decade ago” in an undertaking control consist in verifying whether
everything occurs in conformity with the plan adopted. the instructions issue
and principles established. It has for object for point out weaknesses and
errors in order rectify then and prevented occurrences. It operate on
everything, things, people, actions” or as Billy F.Goetz put it in his
pioneering analysis, managerial planning seeks consistent, integrated and
articulated programs” while management
control seek to compel events to conform to plans”.
2.8.1
Two Prerequisites of Control Systems
Two major prerequisites must exist before any manager
can devise or maintain a system of controls. Yet we occasionally find people
concentrating on control techniques and systems without having made sure that
the prerequisites have been met.
1.
Controls Require Plans:
It is obvious that before a control technique can be
used or a system devised controls must be based on plans, and that the clearer,
more complete, and more integrated plans are, the more effective controls can
be. It is simple as this; there is no way that manages can determine whether
their organization unit is accomplishing what is desired and expected unless
they first know what is expected.
a.
Control are the reverse side of the coin of planning. First, managers’ plan,
the plans become the standards by which desired actions are measured. This
simple truth means several things in practice. One is that meaningful control
techniques are, in the first instance is that it is fruit less to try to design
control without first taking into account plans and how well they are made.
ii.
Controls Require Clear Organization Structure
Since
the purpose of control is to measure activities and takes action to ensure that
plans are being accomplished, we must also know where in an enterprise the
responsibility for deviating from plans and taking action to make corrections
lies. Controls system of activities operates through people. But we cannot know
where the responsibility for deviations and need action is unless
organizational responsibility is clear and definite. Therefore, a major
prerequisite of control is the existence of organization structure, and, as in
the case of plans, the clearer, more complete, and more integrated this
situation is the more effective control action can be.
One of the most frustrating
situations managers can find themselves in is knowing that something is going
wrong in their company, agency, or department and not know exactly where the
responsibility for the trouble lies. It costs are too high, a promised contract
is late, or inventory is beyond desired limits, but managers do not know where
the responsibility for the deviation lies those in charge of an operation are
powerless to anything about the situation. In one company, for example, reports
showed that inventory was million of dollars above the level deemed necessary.
When inquiry was make about who was responsible for inventory planning and
control, it was disclosed that no one below the president of the company had
this responsibility and that because of his other demanding duties, his could
not personally control inventories.