CHAPTER ONE

INTRODUCTION

1.1. Background of the Study

Value concerns and challenges have become prominent in modern society because of the increasing size and complexity of PLCs. The debates on shareholder value aspects have been sparked by the rate of poverty increase every day. One of the main reasons why many people are still poor is the credit gap of financial institutions which impedes the active poor from financial access to soft loans and other assets which can accelerate development (Chakrabarty, 2014). For half a century, maximizing shareholder value has been the overriding objective of corporate governance, especially in the United States and the United Kingdom (Pistor, 2024). In 1999 the OECD issued a document, The OECD Principles of Corporate Governance, that emphasizes that corporations should be run, first and foremost, in the interests of shareholders (OECD 1999).The decade long boom in the US stock market and the more recent boom in the US economy have impressed European and Japanese corporate executives with the potential of shareholder value as a principle of corporate governance, while American institutional investors, investment bankers and management consultants have incessantly promoted the virtues of the approach in Europe and Japan (Lazonick & O’Sullivan, 2000). When CG is able to stimulate a firm’s management to engage in strategies and operating decisions that add to the firm’s overall cash generating ability, more value will be created for its shareholders (Huyghebaert & Wang, 2017).

The contemporary ideology of shareholder value maximization originated from an article by Milton Friedman in 1970. Friedman argued that a company’s primary obligation is to serve its shareholders, emphasizing that company managers work for them rather than the organization itself. As a result, he claimed that shareholders are the true decision-makers, rather than managers or directors. According to Friedman, a company’s main social responsibility is to generate profits, which in turn creates jobs, stimulates economies, and offers products. He believed that companies should refrain from engaging in social responsibility initiatives, as using shareholders’ funds for purposes other than profit maximization would be a misuse of their money. Moreover, he maintained that a company’s social responsibility culminates in making “as much money as possible while adhering to the fundamental rules of society” (Milton, 1970).

During the years 1980–1982 the attention for shareholder value in the Wall Street Journal increased, and both the meaning and the context of the expression changed. Shareholder value was no longer defined in terms of dividend, but, instead, in terms of actual or potential market value of the company. This change took place in the context of “hostile takeovers,” which put management under pressure, while shareholders were becoming more actively and prominently involved in business affairs. The first article in 1980 is revealing in this respect. It discussed a book called Financial Strategy (1979), written by the business scholar William E. Fruhan Jr., who was affiliated with Harvard Business School. Fruhan was alledgedly one of the first to focus on the business aspects of shareholder value. His study discusses how shareholder value can be established in terms of market value and cash flow, and how these can be increased by the executive board. It is quite telling that although the meaning of the notion of shareholder value was changing, management continued to be the primary actor of the news coverage. In the years from 1983 through 1986 the use of the term shareholder value increased rapidly. The uses of the notion of shareholder value thus seem clearly related to a struggle over the reorientation of corporate strategy. In addition to management, corporate raisers now appear as the second most important actor, well before other groups. The structuring principle of the debate over shareholder value thus appears to be the opposition between managers and raiders.

The primary objective of shareholders investing their wealth in a company‟s shares is to see their investment appreciate in value. However, due to information asymmetry and lack of intellectual capacity to manage the daily affairs of the company to achieve their objective, the shareholders typically employ the services of a manager (or a management team) to help them achieve their goal. The process leads to an agency contract. When this association is well figured out, the organisation performs well. Unfortunately sometimes the parties have different interests which may mar the relationship; this gives rise to what is termed an agency problem. The agency problem mostly occurs where the owners of the company are different from the managers (Jensen & Meckling, 1976).

 Board of directors are aimed at protecting the shareholders’ value and making sure that management respect their contract to act on behalf of the interest of shareholders (Shleifer & Vishny, 1997). . corporate governance mechanism as stated by the agency theory consists of; board size, board composition, board independence, ceo pay performance servicivity, directors ownership and shareholder right. The success or failure of corporations may be attributed to the measures enforced by the board because of the leading role in mapping out the vision and monitoring the corporation’s progress (Ouma & Webi, 2017). The issue of shareholder value became more prominent in recent years as a result of corporate scandals and misconduct of executives (Dibra, 2016). In addition to the scandals, nowadays, we can see that the financial crises have brought attention for today’s debate on shareholder value issues as well. The occurrence of corporate failures and significant scandals has sparked substantial interest in the scholarly literature regarding boards of directors, aimed at improving corporate performance, ensuring survival, and maximizing shareholder value (Sanda et al, 2011)

A series of these scandals include the fall of Enron, Tyco international, WorldCom which further drew global attention to transparency and effectiveness of corporate governance (el Mahdy, 2019). The collapse of Steinhoff in SA, Lehman brothers, Parmalat, Batam ,bank of credit and commerce international, Guinness, Barings Bank and of recent Wirecard  are equally not left out .In Nigeria, the Cadbury ( Nig) PLC scandal has remained a reference point for fraudulent financial reporting. Other incidences of fraudulent financial reporting in Nigeria include the fraud at Afribank Plc and Lever brothers(Nig) Plc (Ajayi ,2006).A series of corporate scandals have equally occurred in Kenya such as the Goldenberg ,Anglo Leasing and most recently the Imperial bank scandal of 2015. As noted by authors like Fotabong et al. (2016), regarding institutions in Cameroon, significant issues with liquidation and delinquency have resulted in the failure of several MFIs, including Dominion Finance, Raven Green Finance, Global Finance, and COFINEST, which was once one of the largest micro finance institutions in the country. The collapse of SONARA, CAMAIRCO, BICEC bank are equally not left out. This collapse has adversely impacted the shareholders of MFIs in Cameroon due to a loss of trust between the micro finance sector and investors. Board characteristics and value creation has drawn more attention recently. However, companies face some challenges in optimizing value creation. According to a report by the World Bank, only 30% of board members in Cameroon have training. Reports indicate that weak corporate governance bringing about ineffective oversight on unskilled executive management, weak capacity management and unethical activities by board members, led to the failing of the first batch of MFBs in Nigeria in 2010 (CBN 2018,Okeke et al 2019).

In recent decades, the impact of boards on company performance and shareholder value has typically been assessed through various factors related to their formal makeup and structure. However, these evaluations have often failed to establish a significant connection between these aspects and shareholder value (Dalton & Dalton, 2011). Additionally, the link between the characteristics of boards of directors and shareholder value remains a mystery, as it has not been clearly resolved in academic discussions (Rebeiz, 2015). Many studies and discussions have been carried out on the effect of shareholders‟ value by the usefulness of the accounting measures. These measures include the Earnings per share, return on assets and return on equity. In Kenya, Osiga & Kimutai (2023) conducted a study on the insurance companies listed in the Nairobi Securities Exchange and found out that board size, board independence, board diversity, and board expertise significantly enhances shareholder value creation. The study suggested the prioritization of the board expertise to boost shareholder value creation, the optimization of board sizes depending on company needs and the inclusion of more women on boards. Similarly, in Ghana, Akpaloo (2017) reported that CEO duality had a negative relationship with MVA and was significant but had a positive effect on EVA. CEO tenure had an inverse relation with both MVA and EVA, while board size had a positive nexus with EVA.

 As a result, empirical studies on the topic have been inconclusive and fragmented due to ontological, methodological, and behavioural complexities. The challenges and controversies surrounding the agency problem have attracted the attention of policymakers, researchers, investors, and regulatory bodies seeking to enhance shareholder value. This focus is partly due to incidents where firms, board members, and executives have faced legal actions related to undisclosed debt, inflated profits, tax avoidance, fund mismanagement, and violations of fiduciary responsibilities (Fallatah & Dickins, 2012). In some instances, non-shareholders have been prioritized over shareholders (Brigham & Ehrhardt, 2013). These issues have prompted investigations into board director attributes, such as independence, size, and gender, and their effects on companies across various dimensions.

1.2. Problem Statement

Pioneer scholars starting from Berle & Means (1932), Ross (1973), Jensen & Meckling (1976), and Shleifer & Vishny (1997) ,have been concerned as to how to address the principal-agent problem, which arises from the separation of ownership and control. This challenge is rising in modern society because of the increasing size and complexity of firms driving the need for increased separation between ownership and control, and millions of investors (shareholders) have been harmed in recent years by unusual and criminal behavior by those who were entrusted to protect the value of their owners (Picard, 2005.However, companies face challenges which are largely associated to poor financial performance. Researchers studying micro finance institutions (MFIs) in Cameroon, including Fotabong, Ndenka, and Tasoh (2016), have noted substantial issues with liquidation and default that have led to the failure of MFIs such as Dominion Finance, Raven Green Finance, Global Finance, and COFINEST one of the largest micro finance institutions in Cameroon. This crisis has adversely affected shareholders of these MFIs due to a loss of trust in the sector. It is not certain whether the board of directors is a bridge to this gap.

Reviewing existing literature, Regarding board characteristics, Chenwi (2021) ,studied board of directors and shareholder value creation of MFIs in Cameroon, specifically Fako chapter and found out that BOD independence and the presence of institutional directors in the BOD had a positive effect on shareholder value while BOD diversity had no effect and  BOD had a negative effect. George et al examined corporate governance practices and financial performance of MFIs in Rwanda, case of Inkingi ltd and the results showed that board size, gender diversity had a significant effect on financial performance . Ehugbo (2021),studied the effect of corporate governance board characteristics on the performance of MFBs in Nigeria and concluded that there exists a sustainable and positive correlation between board independence and ROA  of MFBs and board gender diversity negatively influenced the profitability of assets of MFBs. Dachi investigated corporate governance strategies and surviavability of MFBs in Nigeria and found out that corporate governance strategies had a significant effect on surviavability. Mutisya (2016), studied the effect of board characteristics on financial performance among deposit taking MFIs in Nairobi country and resulted that board characteristics had a significant effect on financial performance. Wokwen et al. (2023), studied board features their effect on financial performance: evidence from MFIs in Cameroon and concluded that board size had no significant effect on financial performance and board competence, presence of female representatives in the board positively and significantly influenced financial performance. Chenwi (2021), focused only on MFIs within the Fako chapter of CAMCULL credit unions and used a limited time frame to conduct this research. George et al focused on specifically Inkingi ltd in Rwanda and was limited to financial performance. Dachi used the qualitative approach to carry out this research and limited the study to selected states in Nigeria. Wokwen et al (2023) focused only on category one MFIs in Cameroon and was limited to financial performance.

Studies of corporate governance, and more specifically, of the characteristics of boards in developing countries have been numerous. However, they have focused mostly on the financial performance of micro finance institutions, using secondary data and mostly time series. Looking at the Existing literature above and the different gaps in knowledge mentioned we discover that empirical studies have concentrated on developed economies, with limited attention to PLCs in developing countries like Cameroon particular Northwest Region, Centre and Littoral context.

The central issue at hand is that the priorities of managers, and potentially board members, have shifted from focusing on maximizing shareholder interests and returns to prioritizing their own personal gains. Managers have often mismanaged and exploited shareholder investments, while boards have colluded with top executives in fraudulent activities that benefit themselves without considering the profitability of investors. This troubling trend is evident in various financial scandals over the years. For example, the Enron scandal resulted in shareholders losing over $74 billion as the company’s share price plummeted from approximately $90 to under $1 in just one year. Similarly, in 2008, Bernie Madoff deceived investors out of more than $64.8 billion. Such incidents raise concerns about the effectiveness of boards in overseeing management and enhancing shareholder value. The WorldCom scandal led to the loss of over 30,000 jobs and more than $180 billion in investor losses, while Steinhoff International admitted accounting irregularities that inflated profits for years, causing an 80% drop in its share price and massive losses for shareholders (Fourie ,2020). These severe financial losses raise doubts among potential investors and the public regarding executives’ commitment to prioritizing shareholder interests.

Microfinance institutions (MFIs) play a crucial role in society, particularly in reducing unemployment, and their failure is unacceptable. For instance, liquidity issues within MFIs in Cameroon frequently make headlines, revealing that organizations designed to alleviate poverty are often trapping the poor in it. Microfinance has become a target for exploitation by key stakeholders who advocate poverty alleviation (Fotabong, 2011). Investors seek to put their money into financially sound companies, recognizing that their funds represent hard-earned income that must be well-managed to deliver optimal returns. This need for sound governance led to the issuance of “The OECD Principles of Corporate Governance” in 1999, which stated that corporations should primarily serve the interests of shareholders.

Unfortunately, this is not the prevailing situation in many regions, particularly in Africa, where there is often a lack of focus on shareholder value and managers act out of self-interest. The challenges presented by these recent scandals have prompted the implementation of measures such as the Sarbanes-Oxley Act of 2002 to enhance corporate governance standards. National and international regulators contend that these corporate scandals stem from inadequate board management and poor corporate practices, which ultimately harm firm performance and shareholder value. Such board inefficiency exacerbates agency problems, tarnishing the organization’s reputation and making it less appealing to customers, investors, and suppliers.

Therefore, this leads to the bone of contention of this study which is answering the research question of what effect board characteristics   has on shareholder value creation within public limited companies  in Northwest , Centre and Littoral Regions considering board size, board diversity , board independence and board expertise.

1.3. Research Questions

1.3.1. Main Research Question

What is the effect of board characteristics  on shareholder value creation within public limited companies (PLCs) in the Northwest, Littoral and Centre regions?

1.3.2. Specific Research Questions

– What is the effect of board size on value creation within PLCs in the Northwest, Littoral and Centre regions?

– What is the effect of board independence on value creation within PLCs in the Northwest, Littoral and Centre regions?

– What is the effect of board gender diversity on value creation within PLCs in the Northwest, Littoral and Centre regions?

– what is the effect of board expertise on value creation within PLCs in the Northwest,Littoral and Centre regions of Cameroon?

1.4. Research objectives

1.4.1. Main research objective

To examine the effect of board characteristics  on shareholder value creation within PLCs in the Northwest, Littoral and Centre regions.

1.4.2. Specific Research Objectives

1. To analyse the effect of board size on shareholder value creation within PLCs in the Northwest , Littoral and Centre regions of Cameroon .
2. To examine the effect of board independence on shareholder value creation within PLCs in the Northwest, Littoral and Centre regions of Cameroon .
3. To evaluate the effect of board gender diversity on shareholder value creation within PLCs in the Northwest, Littoral and Centre regions of Cameroon .
4. To examine the effect of board expertise on shareholder value creation within PLCs in the Northwest,Littoral and Centre regions of Cameroon.