CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Shareholder value concerns and challenges are rising in modern society because of the
increasing size and complexity of firms. This has driven the need for increased separation
between ownership and control, and millions of shareholders have been harmed in recent
years by unusual and criminal behaviour in large companies (Silva, 2015). The issue of
shareholder value became more prominent in recent years as a result of corporate scandals
and misconduct of executives (Dibra, 2016).
Firms across the world such as Enron and Parmalat became well-known because of huge
failures and collapse (Dibra, 2016). Also the fall of Steinhoff in South Africa was a shock.
According to some authors in the field of MFIs in Cameroon such as Fotabong, Ndenka
and Tasoh (2016), there has been high liquidation and delinquency problems which has
led to the collapse of MFIs in Cameroon such as those of Dominion finance, Raven
green finance, Global finance and COFINEST which was one of the biggest
microfinance institutions in Cameroon have also gone bankrupt and this negatively
affected shareholders of Microfinance institutions in Cameroon because of a break in trust
between the microfinance sector and the investors (shareholders). It is not certain whether
the board of directors is a bridge to this gap.
In addition, 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).
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Financial analysts claim that the introduction of microfinance banking to ease financial
preduction. However, for microfinance to bridge the credit gap, the institutions have to be
structural, operational and functionally sound and show prospects of safeguarding
shareholders value. No one intends to invest if he/she is not guaranteed of his/her interest
being protected.
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. 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 failures and massive corporate scandals have aroused considerable interest in
the literature and research on the board of directors with a view to enhancing corporate
performance, survival and maximization of shareholder value (Sanda, Garba, & Mikailu,
2011).
There has been a lot of debate on the board of directors starting with the debate initiated
by Berle and Means (1932) on the particular organizational form of firms’ management,
and also the agency theory which suggests that managers may not always act to maximize
shareholder value (Jensen and Meckling, 1976). It is based on the agency problem
highlighted by Jensen and Meckling that this study was developed. According to them,
there exists an agency relationship which is a contract under which one party (the
principal) engages another party (the agent) to perform some service on their behalf. As
part of this, the principal (in this case shareholder) will delegate some decision-making
authority to the agent (managers). These agency problems arise because there exist
asymmetric information between the principal (shareholder) and the agent (manager) as
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the agent has greater knowledge than the other party. This asymmetric information has the
consequence of adverse selection and moral hazard.
Adverse selection comes in where one party (manager) in a deal has more accurate
information than the other party (shareholder). The shareholder is at a disadvantage to the
manager in this instance. This will promulgate criminal acts by the manager to maximize
their own interest and not the value of the shareholders. The aspect of moral hazard occurs
when the management who has agreed to a contract provides misleading information or
changes their behaviour because they believe that they won’t have to face any
consequences for their actions. The managers may also attempt to take unusual risks in a
desperate attempt to earn a profit before the contract settles. Arising from these problems
is how to induce the agent (manager) to act in the best interests of the principal
(shareholder).
The owners of Microfinance institutions (shareholders) have taken risk in the investment
of their resources. It is nevertheless practically impossible for them to be involved in the
day to day running of the organization and involving themselves in company
administrations. Therefore, Microfinance institutions are resorting to the idea of creating a
board known as Board of Directors to stem the agency problem, and are in turn
responsible for company’s important management decisions and safeguarding of the
shareholder investment. The role of the Board of Directors therefore constitutes an
important element in the implementation of corporate governance (Ogege & Boloupremo,
2014). The board monitors the management of the organisation, and is in fact the primary
and dominant internal corporate governance mechanism within the organisation (Marn &
Romuald, 2012). The board of directors attempt to resolve the agency problem based on
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the different motives of the principal and the agent. It therefore becomes of paramount
importance to study the attributes of the board of directors in order to attempt resolutions
to the agency problems first disclosed by Berle and Means and later by Jensen and
Meckling.
“In past decades, boards influence on firm performance and shareholder value has
normally been analysed using variables linked to their formal composition and structure,
but such analyses have usually failed to identify any substantive relationship between
these factors and shareholder value” (Dalton & Dalton, 2011). Moreover, the relationship
between boards of directors’ attributes and shareholder value is a conundrum, as it
remains unresolved in the academic literature (Rebeiz, 2015). Owing to this, empirical
researches on the subject matter have been inconclusive and fragmented as accounted by
Ontological, Methodological and Behavioural complexities. The difficulties and debates
related to the agency problem have drawn the attention of policy makers, researchers,
investors and regulatory institutions in order for them to maximize shareholder value.
This is because firms, board members, and executives have been subject to criminal and
civil actions over hidden debt, inflated earnings, tax evasion, misuse of funds, and
breaches of fiduciary duties (Fallatah & Dickins, 2012). Sometimes, non-shareholders are
favoured at the shareholder’s expenses (Brigham & Ehrhardt, 2013). All these have led to
the study of board director attributes such as BOD independence, BOD size, BOD gender
etc and how it affects companies in different dimensions.
Imagine a three-legged stool with each leg representing the structural, operational and
functional components; all three legs must be working individually and collectively for
the stool to be sturdy and achieve balance. In like manner, the structure of microfinance
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institutions depends on the Board of Directors (BOD) to provide guidance and oversight,
management to implement the vision of the organization, and support staff to make it
happen. However, the very nature of microfinance institutions, most of which are
managed as an extension of the household, preclude them from having robust structures
spearheaded by BODs with optimal effectiveness. This is one apparent weakness which
has hampered the microfinance sector from empowering the society (Ademu, 2012).