J. I. OSUOHA
There comes a point where further enlargement of the financial
system can reduce real growth. Financial sector growth is found
to be a drag on productivity growth. The authors believe that
the reason for this is that financial sector competes with the rest
of the economy for scarce resources so that financial booms are
not, in general growth-enhancing.
However, while this may be true for already developed
ec
Role of Corporate Governance in Financial
Strong, effectissential to the
fu
several definitions, let’s con-
si
992) defined Corporate governance as
th
corpora-
tio
that the foreign currency hedg-
in
onomies with well developed financial market, it cannot be
said of Nigeria and other developing economies. Financial de-
velopment should be growth-enhancing for Nigeria. The growth
and consolidation of Nigeria banks and the stock market has
provided both short term and long term finance to support in-
dustries, firms, governments, infrastructures development and
business initiatives which in turn produce growth. The devel-
opment of derivatives market should have positive impact on
economic development of Nigeria. Derivatives market should
bring about increased liquidity, increased capital flow, in-
creased market depth, increased confidence in the basic markets,
predictable cash flows from oil, protection of foreign reserves,
enhanced price discovery to mention but a few.
Engineering and Derivatives
Market Development
ve corporate governance is e
nctioning of derivatives market (ISDA, 2002). What is cor-
porate governance? The definition of corporate governance
depends on one’s view of the world (Gillan, 2006). The model
of corporate governance has been differently defined and the
best way to look at the concept is to list a few of the different
definitions instead of mentioning one (Maw & Cring-Cooper
1994). These definitions vary across countries/region being
contingent on different legal, political, economic, cultural, reli-
gious and ethical underpinning.
Before examining some of the
der the origin of the word “governance”. According to Tricker
(1984), the origin of the word governance can be found in the
Latin word “gubernare” meaning “to rule” or “to steer” and the
greek word, “kybernetikos” which means steering. Nobert
Wiener used the Greek root as the basis for cybernetics. Cy-
bernetics is the science of control in man and machine. The idea
of the steer man is a particularly helpful insight into the reality
of governance. Also Rwegasira (2000) opined that governance
in a cybernetic concept, referring cy bernetics speci fically to the
feedback and control mechanism by which a system, and any
system for that matter, keeps itself oriented towards the goals
for which it was created. Let’s now examine some definitions
of corporate governance.
Demb and Neubauer (1
e process by which Corporations are made responsive to the
rights and wishes of shareholders. To Cadbury (1992), “Cor-
porate governance is the system by which companies are di-
rected and controlled”. According to Blair (1995) Corporate
governance is about “the whole set of Legal, cultural, and In-
stitutional arrangements that determine what publicly traded
corporations can do, who controls them, how that control is
exercised, and how the risks and returns from the activities they
undertake are allocated”. According to Shleifer and Vishny
(1997) “Corporate governance deals with the ways in which
suppliers of finance to corporations assure themselves of get-
ting a return on their investment”. Kensey and Wright (1997),
explain that corporate governance is the “entire network of
formal and informal relations involving the corporate sector
and society in general”. According to Garrett (2000) corporate
governance “concerns the appropriate board structures, proc-
esses and values to drive the enterprise forward to achieve the
organization’s purpose whiles keeping it under prudent con-
trol”. To Cadbury (2003) in its broadest sense, corporate gov-
ernance is concerned with holding the balance between eco-
nomic and social goals and between individual and communal
goals. The governance framework is there to encourage the
efficient use of resources and equally to require accountability
for the stewardship of those resources. The aim is to align as
nearly as possible the interest of individuals, of corporations,
and of society. To OECD (2004) “Corporate governance in-
volves a set of relationship between a company’s management,
its board, its shareholders and other stakeholders”.
Good corporate governance shows why and how a
n should be managed. Corporate governance is all about a
system that demands integrity, openness, straightforwardness,
fairness, timely reporting from management of the firm. It also
includes compliance with relevant laws guiding the operations
of the firm. It also requires adequate disclosures, reporting,
truthfulness in structuring derivatives and other financial prod-
ucts. Financial engineering and derivatives are like electricity
which can be beneficial and destructive if not properly used.
Derivatives can also be related to a two edged sword that must
be handled very carefully. The nature of financial engineering
and derivatives—their complexity, “two-edged sword” charac-
teristics, demand the need to ensure a sound system of internal
controls and governance in firms and Institutions that issue or
use financially engineered products. This will help ensure
greater internal oversight over the activities of derivatives han-
dlers in such institutions. The misuse/misapplication of finan-
cial engineering and its products can be very devastating and
therefore, there is need for a good system of corporate govern-
ance to guide the use of financial engineering products. Hull
(2006) highlighted cases of derivatives mishaps resulting from
the wrong application of derivatives instruments. Some of the
misapplication resulted from lack of internal controls and sound
corporate governance. Instituting sound internal controls and
corporate governance practices in the firms that use derivatives
and other financially engineered products will help to moderate
the risk of mis-use. According to Al-shboul and Alison (2009),
corporate governance can provide mechanism to effectively
monitor the use of derivatives.
Allayannis et al. (2004) find
g premium is statistically significant and economically large
only for firms that have strong internal and external corporate
governance. Corporate governance can provide mechanism to
effectively monitor the use of derivatives (Al-Shboul & Alison,
2009). Corporate governance is necessary for participants in the
financial market to trust the people, place, product, processes,
price and promotion offered by the market and its players.
Since the derivatives market in itself is considered risky, its
modus oparandi must be characterized by transparency and
good governance. While some people have blamed the Global
Financial Crises (GFC) on derivatives, the real issue with GFC
seems to be corporate governance and regulatory problems. The
report of the Financial Crises Inquiry Commission (FCIC) re-
leased on January 27th 2011, identified the causes of the GFC to
include: widespread failure in financial regulation; dramatic
breakdowns in corporate governance including too many finan-
Open Access 63