The
notion of corporate performance is vague since different tests are needed to
measure performance. But, in this section we shall adopt the narrow conception
of the profitability of business. Corporate
governance structures encompass the ownership structure, the composition of the
board of directors, the size of the board and the independence of the board
among others.[1]
A
firm’s ownership structure can be defined along two main dimensions. First, the
degree of ownership concentration; firms may differ because their ownership is
more or less dispersed. Secondly, the nature of the owners; that is firms may
be private, government-owned (state owned) and mutual (mixed owned)[2]. Literature
on corporate governance recognizes the board structure to encompass the board
size,[3] board
composition,[4]
and board independence.[5]
The
central focus in most literature around, discussion analysis in research all
over the world on matters to do with corporate governance has been the role of
ownership structure as a corporate governance mechanism.[6]
Lorino
states that performance is what contributes to the improvement of the couple
cost-value, and not only what contributes to the diminution of cost or increase
of value. This approach concerns three directions of action for the public
sector entities; implementation of strategies allotted to the entities by political
authorities, value infusion for the public, users whom the entity addresses to
and control of resources that were allotted in order to accomplish their
mission. From managerial perspective, performance, the attribute of managerial
control is defined upon the effectiveness and efficiency relationship.
Effectiveness focuses on achieving outputs within clear stated objectives, and efficiency
shows the best management of means and capacities in relation with the output.[7] Accordingly, performance is the competitive
state of the entity, achieved on the basis of its two components, effectiveness
and efficiency, elements ensuring for the entity a sustainable presence on the
market.[8]
A lot
of attention has focused on the relationship between ownership structure and
corporation performance for instance a rich research agenda on the implications
of ownership structure on corporate governance by La Porta et al[9]
affirm that when the legal structure does not offer sufficient protection for
outside investors and entrepreneurs, original owners are forced to maintain
large positions in their companies which
result in a concentrated form of ownership thus having implications on
ownership structure. On the other hand, bulk of the evidence according to
Shirley and Walsh[10]
(2001) indicates that privately held firms are more efficient and more
profitable than publicly held ones although the evidence differs on the
relative merit of the identity of each private owner. In 1976, Jensen and
Meckling[11]
provided results of their researches on ownership structure and firm
performance by dividing shareholders into internal investors with management
right and external shareholders who are investors without ballot right. The
conclusion of their research was that value of the firm depends on the internal
shareholder’s share, which is called ownership structure.
Blair
goes on to state that ‘ownership of private property is the central mechanism
by which incentives are created for the efficient use of resources in a free
market economy’[12].
Although numerous individuals from suppliers to employees have a stake in the
success of companies, the strategic decisions are made by the Corporate
Executives. Thus, the main puzzle in corporate governance is how do you make
these executives accountable to the shareholders whose investment is at risk,
while still giving them the freedom, the incentives and the control over the
resources they need to create and seize investment opportunities and to be
tough competitors.[13]
Zhuang
(1999) argue that ownership structure is one of the most important factors in
shaping the corporate governance system of any country. This is because it
determines the nature of the agency problem. That is, whether the dominant conflict
is between managers and shareholders, or between controlling and minority
shareholders. Zhuang identified two important aspects of corporate ownership
structure as concentration and composition. According to him, the degree of ownership
concentration in a firm determines how power is distributed between its
shareholders and managers. When ownership is dispersed, shareholding control
tends to be weak because of poor shareholder monitoring the author affirms. If all
small shareholders behave this way, then no monitoring of managerial efforts
would take place. Zhuang further argues that when ownership of a company is
concentrated, large shareholders would play an important role to monitor the management.
However, he says that the only problem with this form of ownership is how
minority shareholders would be protected from exploitation by controlling
shareholders who may act in their own interests at their expense. Secondly, ownership
composition tries to define who the shareholders are and who among them belongs
to the controlling groups.[14]
According
to Tandelilin et al., managers and owners of banks showing efforts and
intention to implement good corporate governance increase market credibility
and subsequently collect funds at lower cost and risk. It can be argued that
better corporate governance will lead to high performance.[15]
This is supported by an empirical study done by La Porta et al on firms’
performance from 27 developed countries Evidence from their findings showed
that there is higher valuation of firms in countries with better protection of
minority shareholders.[16]
In an
attempt to shed more light on the link between corporate governance and firm
performance, Coleman (2007) did a study in Africa targeting 103 listed firms on
Ghanaian, Nigerian, Kenyan and South African stock exchanges. The findings of
the study indicate that large and independent boards enhance firm value and
that when a CEO serves as board chair, it has negative effect on performance
and such firms employ less debt. He also found that a CEO’s tenure in office
enhances firms’ profitability while board activity intensity has a negative
effect on firm profitability. The study also revealed that while larger boards
employ more debts, the independence of a board has a significant negative
relationship with short-term debt.[17]
Kamau
affirm that foreign banks are more efficient than local banks. She attributes
this to the fact that foreign banks concentrate mainly in major towns and
target corporate customers, whereas large local banks spread their activities
more widely across the country. Foreign banks therefore refrain from retail
banking to specialize in corporate products, while large domestic banks are
less discriminatory in their business strategy. These different operational
modalities affect efficiency and profitability she affirms.[18]
In
Kenya, irrespective of type of ownership, each institution tries very hard to
outperform its competitor in the industry hence recording good results. There
was also no significant difference between banks ownership structure and
financial performance[19]
The
positive relationship between dispersed ownership and liquid stock market is
undisputed. Though stock exchanges do not play a capital formation function,
there is a growing body of research suggesting that an active securities market
is an engine for economic growth.[20]
Some scholars suggest that diffuse ownership induces better corporate
performance since dispersed small shareholders who have a small percentage of
their personal wealth tied up in the company will let managers undertake
projects that are worth exploiting. Such a hypothesis is maintained by
contrasting this possibility to risk-averse block-holders who will tend to
discourage risk-taking and avoid potentially lucrative business opportunities.
To borrow the expression of Berle and Means, the rise in separation of
ownership and control is giving rise to the “ownership of wealth without
appreciable control and control of wealth without appreciable ownership.”[21]
Bank
risk increases with ownership concentration at low levels of concentration, due
to effective monitoring by shareholders, decreases at intermediate levels of
concentration, due to expropriation of minority shareholders or less managerial
discretion, and increases at high levels of concentration, due to the high costs to expropriate.[22]
According
to Shleifer and Vishny,[23]
“large investors represent their own interests, which need not coincide with
the interests of other investors in the firm, or with the interests of
employees and managers. In the process of using his control rights to maximize
his own welfare, the large investor can therefore redistribute wealth ⎯in both efficient and inefficient
ways⎯ from others.” Consistent with
this view, recent studies on the value of voting rights of large block trades
and dual-class firms report significant control premiums, indicating high
private benefits of control. Other empirical research finds that the extraction
of private benefits, mainly shaped by the legal environment, can be costly to
controlling shareholders and firms in terms of raising equity finance and firm
value[24]
(Durnev and Kim, 2005
Consistent
with Shleifer and Vishny’s conjecture above, Boubakri, Cosset, and Guedhami
(2005), who examine the relationships among ownership concentration, legal
protection, and firm performance after privatization provide evidence that
strong investor protection is associated with lower ownership concentration.[25]
In another contemporaneous study by Atanasov,[26]
it was found that in the absence of legal institutions that protect minority
shareholders and constrain majority owners, privatization in Bulgaria leads to
concentrated ownership and significant control premiums being paid by
controlling shareholders who extract more than 85 percent of firm value as
private benefits. Importantly, the large private benefits of control that
accompany high ownership concentration are an artefact of poor external
corporate governance according to this and prior research.[27]
[1] Ehikioya IB (2007). Corporate governance structure and firm
performance in developing economies: evidence from Nigeria. 9(3): 231-243
[2] Lannotta et al.,
2006)
[3] Dalton DR, Johnson JL, Ellstrand AE (1999). Number of Directors and
Financial Performance: A meta- analysis. Acad. Manage. J., 42 (6): 674-686
[4] Baysinger et al., (1991 ). Corporate
governance and the board of directors: Performance effects of changes in board
composition. J. Law, Econ. Organ., 1: 101-24
[5] Fama EF, Jensen MC (1983). Separation of Ownership and Control. J.
Law and Econ., 26p.
[6] Tandelilin et al., (2007) Corporate governance, risk management and
bank performance: Does Type of Ownership matter? EADN Working Paper No. 34.
[7] Immaculate Tusiime, Stephen K. Nkundabanyanga* and Isaac N. Nkote (2 Journal of Public Administration and Policy
Research Vol. 3(9), pp. 250-260, November 2011. Available online http://www.academicjournals.org/jpapr
DOI: 10.5897/JPAPR10.00011) Corporate governance: Ownership structure, board
structure and performance of public sector entities.
[8] Immaculate Tusiime (2011),
supra.
[9] La Porta et al. (2000). “Investor Protection and Corporate
Valuation”, Journal of Finance, Vol. 57, pp. 1147-1170. doi:10.1111/1540-6261.00457,
http://dx.doi.org/10.1111/1540-6261.00457
[10] Shirley, M. and Walsh, P. (2001). Public vs. Private Ownership.
World Bank Policy Research Working Paper No. 2420. Washington, D.C.: USA.
[11] Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial
behavior, agency costs and ownership structure. Journal of Financial Economics,
3, pp.305-360. doi:10.1016/0304-405X(76)90026-X,
http://dx.doi.org/10.1016/0304-405X(76)90026-X
[12] Blair, M. (1995). Ownership and Control: Rethinking Corporate
Governance for the twenty-first century. The Brookings Institution.
[13] Nambiro, C. A. (2007). Relationship between level of implementation
of CMA guidelines on corporate governance and profitability of companies listed
at the Nairobi Stock Exchange. University of Nairobi Press – Nairobi.
[14] Zhuang, J. (1999). Some conceptual issues of corporate governance.
EDRC Briefing Notes Number 13 [Online] Available:
ww.adb.org/Documents/Books/Corporate_Governance/Vol1/chapter2.pdf.
[15] Tandelilin et al. (2007) Supra.
[16] La Porta, R., Lopez-de-Silanes F., Shleifer A., and Vishny R.,
(2002). “Investor Protection and Corporate Governance”, Journal of Financial
Economics, Vol. 58, pp. 3-27. doi:10.1016/S0304-405X(00)00065-9
http://dx.doi.org/10.1016/S0304-405X(00)00065-9
[17] Coleman, A. K. (2007). Relationship between corporate governance
and firm performance: an African perspective. [Online] University of
Stellenbosch-South Africa. Available: http://etd.sun.ac.za/handle/10019/664
[18] Kamau, A. (2009). Efficiency and Productivity of the Banking Sector
in Kenya: An Empirical Investigation. University of Nairobi.
[19] Eric Ernest Mang’unyi (2011) Ownership Structure and Corporate
Governance and Its Effects on Performance: A Case of Selected Banks in
Kenya. International Journal of Business
Administration Vol. 2, No. 3; August 2011. Available at: www.sciedu.ca/ijba
[20] John D. Coffee (2001), “The Rise of Dispersed Ownership: The Role
of law and State in the Separation of Ownership and Control,” The Yale Law
Journal, 111 # 1, p.3.
[21] Adolf Berle and Gardner Means (1933), The Modern Corporation and
Private Property (New York: The Macmillan Company).
[22] Eric Ernest Mang’unyi (2011)
Supra
[23] Shleifer, A., and R. Vishny. 1997. “A survey of corporate
governance.” Journal of Finance 52: 737-783.
[24] Claessens et al., (2002)
“Disentangling the incentive and entrenchment effects of large shareholdings.”
Journal of Finance 57: 2741-2771.
[25] Boubakri, N., O. Guedhami, and O. Sy. 2005. “The legal and
extra-legal determinants of expropriation.” Working paper.
[26] Atanasov, V. 2005. “How much value can blockholders tunnel?
Evidence from the Bulgarian
mass privatization auctions.” Journal
of Financial Economics 76: 191-234.
[27] Bebchuk, L. 1999. “A rent-protection theory of corporate ownership
and control.” Working Paper: Harvard Law School