CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Corporate governance is regarded as the key foundation for effective organizational performance and for organizations to be more productive, governed and controlled. The level of collapse of institutions and failure of firms across the world has also emphasized the need to study the ways by which organizations are governed and controlled. Lee (2008) defined corporate governance as a 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 provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.” It has been reported that the survival of firms is associated with the type of corporate governance and management followed in the organization.

Corporate Governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. In contemporary business corporations, the main external stakeholder groups are shareholders, debt holders, trade creditors, suppliers, customer and communities affected by the corporation’s activities. Informal stakeholders are the board of directors, executives and other employees. It guarantees that an enterprise is directed and controlled in a responsible, professional, and transparent manner with the purpose of safeguarding its long-term success which is intended to increase the confidence of shareholders and capital market investors. The World Bank (2009) states that corporate governance comprises two mechanisms, internal and external corporate governance. Internal corporate governance, giving priority to shareholder’s interest, operated on the board of directors to monitor top management.

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