CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The potential success of a business depends on the performance of the organization, which means its ability to effectively implement strategies to achieve organizational goals (Almatrooshi et al., 2016). The performance of any organization depends largely on the level of expertise that its leaders have when it comes to implementing strategies. According to the research of Almatrooshi et al describe the essence of leadership as a conditional relationship between a manager and his follower. Because there are always obstacles to achieving organizational goals, it is important that the techniques used by leaders are flexible enough to adapat to change. The performance of the organization also depends on its employees who are an integral part of the organization and form a team that works towards achieving the goals of the Organizations perform various activities to achieve their organizational goals. Quantitative repeatable activities help to leverage processes for organizational success to determine performance levels of management to make informed decisions where in the process, when needed, to improve performance Goal achievement is one of the basic criteria for determining organizational performance (Tan et al., 2021). Application of corporate governance values may improve the performance of a firm as well as positively impact on the internal efficiency of the firm (Arilyn & Kharismar, 2018).

However, the emergence of notable to corporate failures due to top management’s and leadership’s unethical practices, most jurisdictions introduced compulsory guidelines and norms to reinforce corporate governance mechanisms in corporations (Goel, 2018). Most notable events that have greatly influenced corporate governance in the world include the United States’ (US) Sarbanes Oxley (SOX) Act in 2002 and the United Kingdom’s (UK) Cadbury Committee report in1992. These were later followed by regulations and codes on corporate governance in various countries around the globe (Sayari & Marcum, 2018). These frameworks, regulations and codes have become a key aspect in putting pressure on various entities in a country.

Corporate governance represents “the system by which companies are directed and controlled” (Cadbury Report, 1992). It is “the distribution of rights and responsibilities among the different participants in the organization, such as the board, managers, shareholders and stakeholders, and lays down the rules and procedures for decision-making” (OECD, 2004). Corporate governance has become a popular topic of discussion in the international scene and a number of factors have contributed to increase the focus on this subject: the collapse of a number of corporations, the hostile takeovers, the antisocial behavior of some companies. The widespread belief that corporate governance is able to affect firm performance and increase shareholders protection has therefore led to increasing global attention. The recent financial scandals involving Enron, Parmalat, Tyco, and WorldCom have brought renewed attention to the critical relationship between corporate governance and corporate performance. As Rezaee (2009) notes, these scandals have underscored the importance of effective corporate governance practices for the economic health of companies and their broader impact on society. Numerous empirical studies have demonstrated the positive link between strong corporate governance and improved financial performance. For instance, a comprehensive meta-analysis by Wahba (2015) examined over 60 studies spanning various countries and time periods. The results showed a significant positive correlation between robust governance mechanisms, such as board independence, auditing practices,  and executive compensation policies, and measures of corporate performance, including profitability, market valuation, and operational efficiency.

Additionally, these can be seen in the recently financial failure of Silicon Valley Bank, Signature Bank, and Silvergate Bank in March 2023, in USA due to poor risk assessment and failure of compliance, and in Cameroon; Cofinest and FIFFA bank collapsed is a perfect example of the consequences of lapses in corporate governance which can cause the fortunes and ultimately collapse of financial institutions. In fact, the very mundane activities of financial institutions in Cameroon have been updated to now include internal controls and risk assessment, reliability of financial information, the purpose to ensure efficiency and effectiveness of operational activities, compliance with applicable rules and regulations as well as sustainable business growth. Nevertheless, this has not completely eliminated the chances of failure in the financial institutions.

Furthermore, the current financial crisis and an increasingly competitive business environment have made corporate governance having significant implications for the financial stability and performance of companies. There has been much research on the relationship between corporate governance and financial performance. Referring to the literature on the role of corporate governance, we can cite the work of Shleifer and Vishny (1997) who consider corporate governance as the set of mechanisms by which capital providers guarantee shareholder profitability. Denis and McConnell (2003) have emphasized the importance of distinguishing between the notion of internal and external mechanisms of governance and their importance for the providers of funds on all points of value creation.

The study of the relationship between governance expressed by the corporate governance score and the improvement of the performance of the latter remains a vast field of study and research that has inspired researchers in the field of accounting, finance, and taxation (Louizi 2007).The existence of such a relationship has led us to wonder about the factors that can impact this relationship in a direct or indirect way. Considering this fact, we note that managers who behave in a discretionary manner will exert a major influence on the fate of the accounting and tax manipulation of companies and will try to increase their discretionary power. Within this framework, agency theory has explained this behavior by focusing on the interests of the funders and decision makers in a way that reflects the interest of each party (Jensen and Meckling 1976).

From an accounting perspective, the manager often has the power to manipulate earnings while using the accounting estimates and manipulation techniques available to him (Ahadiat and Hefzi 2013). The practices of corporate governance have not stopped evolving. This is presented via the succession of guides to good governance practices that seek to counter the failures detected over time and which manifest themselves at the level of financial scandals, sometimes inducing a harmful imbalance for the global economic fabric. Based on the “FTSE 350 corporate governance review (2013), for the UK, the evolution of good governance guidelines as well as institutions in the field of corporate governance has developed to respond to the panoply of problems that may be directly related to corporate governance.

In the same context, it is important to emphasize that the study of corporate governance must take into account the specificity of each sector of activity since each sector has its own regulations, key success factors, and compliance rules. In studies that have introduced corporate governance as a main variable, two main areas have been examined. The first seeks to address governance from a shareholder and capital structure perspective, the second seeks to address the composition of boards of directors and the improvement of the quality of governance mechanisms to improve financial performance. Among the research that has emphasized the importance of accounting, finance, and taxation (Louizi 2007).The existence of such a relationship has led us to wonder about the factors that can impact this relationship in a direct or indirect way. Considering this fact, we note that managers who behave in a discretionary manner will exert a major influence on the fate of the accounting and tax manipulation of companies and will try to increase their discretionary power. Within this framework, agency theory has explained this behavior by focusing on the interests of the funders and decision makers in a way that reflects the interest of each party (Jensen and Meckling 1976).

From an accounting perspective, the manager often has the power to manipulate earnings while using the accounting estimates and manipulation techniques available to him (Ahadiat and Hefzi 2013). The practices of corporate governance have not stopped evolving. This is presented via the succession of guides to good governance practices that seek to counter the failures detected over time and which manifest themselves at the level of financial scandals, sometimes inducing a harmful imbalance for the global economic fabric. Based on the “FTSE 350 corporate governance review (2013), for the UK, the evolution of good governance guidelines as well as institutions in the field of corporate governance has developed to respond to the panoply of problems that may be directly related to corporate governance.

In the same context, it is important to emphasize that the study of corporate governance must take into account the specificity of each sector of activity since each sector has its own regulations, key success factors, and compliance rules. In studies that have introduced corporate governance as a main variable, two main areas have been examined. The first seeks to address governance from a shareholder and capital structure perspective, the second seeks to address the composition of boards of directors and the improvement of the quality of governance mechanisms to improve financial performance. Among the research that has emphasized the importance of

capital structure, we can cite McConnell and Servaes (1990), Nesbitt (1994), Smith (1996), Del Guercio and Hawkins (1999), and Hartzell and Starks (2003), who found that the presence of institutional shareholders positively affects management behavior.

Regarding the research that has dealt with the functioning of boards of directors, we can cite Brickley et al. (1994), Lee et al. (1999) who have emphasized the importance of independent or outside directors in improving the level of governance quality. In addition, Jensen (1993) has shown that dual directorships increase the discretion of the director so that the director can influence the financial outcome. For Dechow and Sloan (1991), the introduction of the CEO’s age as a variable makes it possible to reflect the difference between executives and their behaviors throughout their career and especially in the last year of service. During the last two decades, institutional theory has contributed greatly to the understanding of the behavioral aspect and the explanation of the reaction of the different stakeholders toward corporate governance (Aguilera and Jackson 2003; Judge et al. 2008). It must be said that this theory has contributed enormously to the study of the interaction between the governance mechanism and the institutional framework in which any firm operates. Several studies tried to examine closely the main characteristics of corporate governance to show if there is a possible explanation of the relationship between corporate governance and fiscal management in a perspective of improving financial performance. While Armstrong et al. (2015) and Seidman and Stomberg (2017) found a significant relationship between the latter two variables, Blaylock (2016) did not find any relationship between these two concepts.

1.2 Statement of the Problem

The problems of organizational performance have been perceived during the last decades as an important element in managing organizations and evaluating process outcomes. Nowadays, all high performance organizations are interested in developing effective performance measurement systems and the concept appears early as a categorical imperative in almost all the human spheres of activity. In the field of organization, the slogan today is incisive: you get what you measure and you can’t really manage a project unless you measure it. Consequently, firms must measure their performance in order to make good business decisions and ultimately, to give life to their mission, vision and strategy, and to increase their competitive advantage in the era of globalization. Insofar as a psychic representation makes possible a perception of reality (such as quality, effectiveness, efficiency, productivity), the performance measurement terminology has a subjective dimension. This undoubtedly explains the fruitfulness and richness of the critical reflections on this concept, and the increasing variety of a certain number of tools and instruments which propose to measure it.

In financial institutions defaults on most loans, including mortgages, automobile loans, and personal loans, further reduce bank liquidity an as a detriment to the organizational health of financial institutions. As depository institutions, with considerable dependence on loan interest income, banks are particularly vulnerable to the economic disruption of a pandemic or economic crisis (Goodell 2020; Sivaprasad and Mathew 2021). Could banks cope with this disruption? Only if they have transparency about losses in loan income, rising default rates, deficits in net income, and reductions in retained earnings, respectively, followed by corrective actions authorized by the board, and implemented by management. Given the loss of revenue from defaults on loans and deposit drains of savings, management must find innovative ways of reducing cash outflows and increasing cash inflows.

The recent financial scandals have shown that the risks of accounting fraud can be opaque in any type of economic system. In this context, information transparency is an indispensable component of market competitiveness and the effective operation of corporate governance systems, especially control systems. All of these must be appropriate in legislation in terms of external information. Nevertheless, the problem of weak corporate governance mechanisms is the focal point whereby financial statement that is presented to the firm in a deplorable financial condition. That is, the information asymmetry between the managers and shareholders led to an increase in the gap between what is expected by users and what is reported and the internal operations are ineffective. That is why, Ngok Evina (2010) emphasised that the corporate governance mechanism is insufficient and corrupt in Cameroon because more than 76% of companies have BOD,S while 19% of these companies have executive boards. Also, Mfoupon & Feudjo, (2013) emphasised on the technical heterogeneity of socio professional influence of the effectiveness of the board of directors and the internal control system. However, Nkengateh and Dongmo (2022) stated that more basic explanations that account for the collapse of organization in Cameroon is as a result of bad strategy, recklessly and whose failures were accounted for by the mismanagement of funds due to the lack of transparency in the management system of these institutions and companies in Cameroon.

Corporate governance mechanisms play a crucial role in ensuring the effective management, oversight, and long-term success of organizations, including credit unions. Given the importance of credit unions in providing financial services and promoting economic development within the Buea community, it is imperative to examine the impact of corporate governance practices on their overall organizational performance. A comprehensive understanding of this relationship can provide valuable insights for enhancing the governance frameworks of credit unions, mitigating risks, and fostering sustainable growth and profitability. Ultimately, strengthening corporate governance mechanisms within credit unions in Buea can contribute to their financial stability, operational efficiency, and ability to better serve the financial needs of their members and the broader community.

1.3 Research Question

1.3.1 Main Research Question

The main research question is;

What is the effect of corporate governance mechanism on the organization performance of Credit Union in Buea?

1.3.2 Specific Research Questions

Our specific research questions include;

• How does the internal corporate governance mechanism affect organization performance?
• What are the effects of external corporate governance mechanisms on organization performance?

1.4 Research Objective

1.4.1 Main Research Objective

The main research objective is; To determine what is the effects of corporate governance mechanisms on the organization performance of Credit Union Buea.

1.3.2 Specific Research Objectives

Our specific research objectives include:

• To investigate how internal corporate governance mechanisms affect organisation performance.
• To assess the relationship between external corporate governance mechanisms and organisation performance.