corporate governance and profitability
TRANSCRIPT
CORPORATE GOVERNANCE AND PROFITABILITY
A CASE STUDY OF TOYOTA UGANDA LIMITED
BY
OWEMBABAZI VICTOR
05/U/9509/EXT
SUPERVISED BY
MR. NZIBONERA ERIC
A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN
PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD
OF A DEGREE OF BACHELOR OF COMMERCE OF MAKERERE
UNIVERSITY
DECLARATION
I Owembabazi Victor hereby declare that this research report is my original work resulting
from the efforts and any independent investigation that it has never been submitted any
where else for other or similar award.
Signed: ......................................................................................... Date: ...............
Owembabazi Victor
APPROVAL
I certify that Owembabazi Victor carried out this research project under my close supervision
and have seen it worth for the ward of Bachelors in Commerce of Makerere University.
……………………. ……………
NZIBONERA ERIC Date
(SUPERVISOR)
DEDICATION
This book is dedicated to the almighty God who has given knowledge and good health to
do everything.
[It is further dedicated to my brother Waninda Fred who has offered me all
parental assistance towards my education and thank him for that heart.
My wife Gudra, Joan, friend Wilbroad, Martin are also recognized and may the Lord bless
them abundantly.
ACKNOWLEDGEMENT
I do express my most sincere gratitude to all the people who have helped me in this report
and it is impossible to mention each by name but I am very grateful for any assistance they
gave me.
Special acknowledgment goes to my supervisor Mr. Nzibonera Eric for the support, advice
and good heart he rendered to me.
Extraordinary recognition also goes to my all family members, friends for the keen interests
in supporting me both materially, socially and merally special thanks also goes to staff
members of Toyota Uganda Limited for the assistance rendered to me during this research
especially during data collection.
Above all I thank the almighty God for the good health, life, knowledge and unceasing
providence to me.
TABLE OF CONTENTS
DECLARATION ......................................................................................
.APPROVAL .............................................................................................
DEDICATION .........................................................................................
ACKNOWLEDGMENT ........................................................................
TABLE OF CONTENT ...........................................................................
LIST OF TABLES ..................................................................................
LIST OF FIGURES ...............................................................................
LIST OF ACRONYMS ..........................................................................
ABSTRACT ............................................................................................
CHAPTER ONE ......................................................................................
i
ii
iii
iv
V
vi
vii
viii
X
I
1.0 Introduction ........................................................................................ 1
1.1 Background of the study ................................................................ 1
1.2 Statement of the problem .............................................................. 3
1.3 Purpose of the study ........................................................................ 4
1.4 Objectives of the study ................................................................... 4
1.5 Research questions ............................................................................ 4
1.0 Scope of study ................................................................................. 4
1.6.1 Geographical scope ........................................................................... 4
1.6.2 Content of the scope......................................................................... 4
1.7 Significance of the study ................................................................ 5
CHAPTER TW0 ...................................................................................... 6
LITERATURE REVIEW .............................................................................. 6
2.0 Introduction ................................................................................. ….. 6
2.1 Definitions of corporate governance ...................................................... 6
2.2 Origins of corporate governance ........................................................... 6
2.21 How corporate governance works .......................................................... 7
2.2.2 Objectives of corporate governance ……………………………………. 9
2.3 Profitability ........................................................................................... 1 l
2.3.1 Determinants of profitability .......................................................... …… 12
2.3.2 Relationship between corporate governance and
social responsibility ................................................................................. 13
CHAPTER THREE ......................................................................................... 18
Methodology ..................................................................................................... 18
3.0 Introduct ion ................................................................................... …….18
3.1 Research designs ..................................................................................... 18
3.2 Survey population ................................................................................... 18
3.3 Sample size ............................................................................................ 18
3.4 Sources of data .......................................................................................19
3.5 Data collection instrument ......................................................................19
3.6 Methods of data collection ......................................................................19
3.7 Data processing and analysis ...................................................................19
3.7.1 Data presentation .....................................................................................2U
3.8 Limitations and solutions ........................................................................20
CHAPTER FOUR .............................................................................................. 21
4.0 Introduction ................................................................................................... 21
4.1 Demographic Characteristics of the Respondents .................................. 21
4.1.1 Response by sex ..................................................................................... 21
4.1.2 Response on age distribution any employees ............................................ 22
4.1.3 Hard of mental status ................................................................................... 22
4.1.4 Responses on the duration work of employees in Toyota Uganda
Limited ................................................................................................... 23
4.2 Findings an corporate governance in Toyota Uganda Limited ................ 23
4.2.2 Findings on a string board in place that governs Toyota Uganda Limited... 24
4.2.3 Responses on whether employees are satisfied with the
existing leadership styles ......................................................................... 24
4.2.4 Responses on influence of top managers in decision making .................... 25
4.2.5 Responses on whether there is a strong working team among
to management and the lower employees .............................................. 25
4.2.6 Responses on whether managers delegate duties ...................................... 26
4.3.0 Findings on profitability ........................................................................... 27
4.3.1 Findings on whether Toyota Uganda Limited has
Improved its profitability ........................................................................28
4.3.2 Responses on whether profitability targets are mainly met by
Toyota Uganda Limited .......................................................................... 27
4.3.3 Responses on whether profits are mainly balanced .................................. 28
4.3.4 Responses on whether board of directors has an influence in
the profitability of Toyota Uganda Limited ............................................ 28
4.3.5 Responses on how to rate the performance of Toyata Uganda Limited ........ 29
4.3.6 Findings on the relationship between corporate governance
and profitability of an organization ......................................................... 30
CHAPTER FIVE ............................................................................................ 32
5.0 Summary, Conclusion and recommendations ........................................ 32
S.1 Introduction ......................................................................................... 32
5.2 Summary of findings ............................................................................ 32
5.3 Conclusion ...........................................................................................
5.4 Recommendations ................................................................................. 33
5.5 Suggested areas for further Research .................................................... 33
References ............................................................................................. 34
Appendix I .............................................................................................. 35
Questionnaire to staff and management of Toyota Uganda Limited ...... 36
ABSTRACT
This was the research report on corporate governance and Profitability taking the Study of
Toyota Uganda Limited.
The study had three objectives namely;
To determine the effectiveness of corporate governance in Toyota Uganda Limited.
To establish the level of profitability police in Toyota Uganda and Limited. To establish
the relationship between corporate governance and profitability
The study aimed at establishing the effects of corporate governance on profitability in Toyota
Uganda Limited by highlighting the nature of services and products provided to
the community and how corporate governance in the company influences the
performance of profitability.
Corporate governance as defined in the organization of economic Corporation and
Development (OECD) principles, concerns primarily the relationship between company's
management, its board, its shareholders and its other stakeholders. In the main, these
relationships involve the governance of a corporation for gain. However, in the reference to
`other stakeholders" introduces the issues of corporate responsibility, in that this terms
refers to other groups of persons interested in the operation of a corporation from its investors,
namely employees, contractors, trade unions, customers and customer groups and the general
public at large. In deed, the OECD principles assert, in the preamble, that `factors such as
business ethics and corporate awareness of the environmental and societal interests of the
communities I which it operates can also have an impact on the reputation and the long-term
success of that company"
The study concluded that there is need for comprehensive and well planned schemes as well as
effort of all stakeholders and top management and the government should put a policy arguing
companies to prioritize corporate governance as part of their activities
CHAPTER ONE
1.0 Introduction
This chapter covers the back ground of the study, the statement of the problem,
research objectives, and the purpose of the study, research questions, scope and
significances of the study.
1.1 Back ground of the study
Corporate governance issues are receiving greater attention in both developing and
developed countries as the result of increasing recognition that a firm's corporate
governance affects both its economic performance and its ability to access long term, low
cost investment capital (OCED, 2004). Corporate governance is a multi-dimensional
construct comprised of company leadership board size and composition, brand rules,
balance of power, disclosure and compliance with the laws and the best practices (Larker and
Richardson, 2005)
Corporate governance is the system by which businesses and corporation are directed
and controlled, and it is concerned with the distribution of rights and responsibilities
among different participants in the management of corporations (OCED, 2004). Corporate
governance spells out the rules and procedures for decision making, the basis for setting
corporate objectives, means of attaining the objectives and performance monitoring.
It provides for the development maintenance, monitoring and control of monitoring and
control of monitoring and control of corporate structures and procedures to ensure
accountability and transparency in corporate decision making (Ogule, 2005).
Corporate governance refers to the manner in which the power of a corporation's total
portfolio of assets and resources with the objectives of maintaining and increasing
shareholder's value with satisfaction of other stakeholders in the context of its corporate
mission (PSCGT, 1999). The committee on the financial aspect of corporate governance
defines it as the system by which companies are directed and controlled.
Corporate governance is a bout building credibility assuring transparency and accountability as
well as monitoring an effective channel of information disclosure that would foster good
corporate performance. It also have to build trust and sustain confidence among the various
interest group that make upon organization, indeed the outcome of a survey by Mickinsey in
June 2000 collaboration with the world bank in .June 2000 attested to the strong link between
corporate governance and stakeholders confidence (Mark:, 2000).
Corporate governance is the system by which companies, organizations and other entities
are directed and controlled (Wood, 1995).
The Cardburry report (1992) inquiry into corporate governance defines it as a system by
which firms are defined and controlled, normally corporate governance can also be defined
as the relationship between company and its stakeholders or more broadly as its relation to the
society thus corporate governance in the or (Organization influences a lot towards profitability
of the organization, infect it influences the profitability of' tile organization.
Profitability refers to the ability of the organization to make a protected return on equity,
return on sales of an asset as in form of sales margin (Nash, 2005).
Although many scholars have found out that different companies in different countries tend to
emphasize on different objectives, some suggest that financial profitability, growth, and
corporate governance is a measure of organizational performance.
Nash (19930) states that profitability is the best indicator to identify whether the company is
doing things in right way and hence profitability can be used as the primary measure of
performance in western companies and Toyota Uganda is the sister company to Toyota which
is located in the united States of America.
Toyota Uganda limited is the leader of the Automobile industry with about 45`%) of the market
share according to the Uganda motor industry magazine 2005, it sales modern cars with good
facilities, easy to maintain in terms of fuel consumption and spare parts (Business magazine
volume 2, 2008).
Toyota Uganda limited is located on the first street industrial area, and it has branches in Gulu
situated at Kabalega road, Layibi division, Gulu Municipality.
Toyota Uganda has a corporate body comprising of shareholders, board of directors, chief
executive officers (CEO) among others and as a corporate body, the company has policies
among which profitability policies is included, corporate bill board magazine volume 2 2008.
Therefore it is this view that researcher decide to base his study on corporate governance and
profitability of an organization in Uganda using Toyota Uganda as a case study.
1.2 statement of the problem
Toyota is the leading supplier of automobile in the whole world which is luxurious with lots
of extras but currently
facing the problem of defects with sticking gas, floor mats spin`,
accelerators and faulty brakes programming evidence by (YURIKAGEY AMA AP 2009)
business writer.
This has prompted measures such as recalling back 8.5 million vehicles globally for the past
four months and the company is putting customers first in a renewed effort to salvage
its reputation said (Sasaki, 2009) at Toyota Tokyo office. Despite all the measures Tokyo has
tried to put in place still they may recall more than a million units again which is a very bi`~
negative effect said Endo at Toyota office in Tokyo. Kosi Endo the managing director at
advanced research Japan said that the corolla
problem if they expand into a recall, it would bring another major problem that will be beyond
Toyota, and if it continues, Toyota is going to face a decline in its profitability. And all this
is attached to corporate governance. Hence the need to investigate the relationship
between corporate governance and profitability of an organization.
1.3 purpose of the study
The purpose of the study is to establish the relationship between corporate and profitability of
Toyota Uganda limited.
1.4 Objectives of the study
1. To establish the effectiveness of corporate governance in Toyota Uganda limited. 2.
To establish the level of profitability of Toyota Uganda Limited.
3 I o examine the relationship between corporate governance and profitability o1
Toyota Uganda limited.
1.5 Research questions
1. What is the role of corporate governance in Toyota Uganda limited?
2. What is the level of profitability of Toyota Uganda limited'?
3. What is the relationship between corporate governance and profitability of
Toyota Uganda limited'?
1.6 Scope of the study
1.6.1 Geographical scope
The study was carried out at Toyota Uganda limited first street industrial area Kampala
district because that is where the head offices are located.
1.6.1 Content of the scope
The study focused on the relationship between corporate governance as an independent
variable and profitability as dependant variable.
The study will view the period "between" December 2005 to December 2009 because it is
the period when Toyota limited began implementing serious corporate governance and
profitability.
1.7 Significance of the study
The study will help the researcher to find out the relationship between corporate governance
and profitability and why companies should also apply corporate governance systems and
thus will help me to gain skills of carrying out research and at the same time it is my partial
fulfillment of the requirement for the award of the degree of commerce of Makerere University.
The study will also help the management and other stakeholders of an organization assessing
the importance of corporate governance in relation to Profitability.
The study will help other scholars to understand the relationship between corporate
governance and profitability of an organization and other scholars will benefit by gathering
literature review further research findings in a related research.
CHAPTER TWO
2.0 Introduction
This chapter reviews available literature about the concepts of corporate governance and
profitability in organizations. It gives what others have done in the two areas in detail and
explains how corporate governance has affected profitability in organizations.
2.1 Definition of corporate governance
Corporate governance is the system in which companies, organizations and entities are
directed and controlled, Cadbury report, (1992).
According to the report, the above is a generally accepted definition of corporate governance
developed by the academician, directors, auditors and other independent bodies.
The Kenyan private sector initiative for corporate governance as the manner in which the
power of corporation is exercised in the stewardship of the corporation's total portfolio of
asset which the objective of maintaining and increasing the shareholders value and
satisfaction of other stakeholders in a context of its corporate mission. This definition
emphasizes the power of corporate and good stewardship of the organization.
2.2 Origins of corporate governance
Corporate governance was derived from the fact that business entities are either body sole or
body corporate, Richwood, (1992).
Basing on the key feature, law recognizes business entities as being a legal entity separate
from its members or owners.
According to Richwood, (1992) companies are owned by shareholders, however, do not
have a right to take part in their management but can appoint directors to manage the
company on their behalf and accountable to them.
Management and governance of companies involve board of directors, shareholders,
employees, auditors, the government and other regulators working together.
The corporation interaction and team work of the above players in directing and
controlling the affairs of' the company are what are known as corporate governance (Pandv.
2005) in the 1980's there was the collapse of major international firm including Max\-ti ell,
Polly peck and Adersan and recent the world experienced other major cases especially the
collapse of the Enroll of USA (2004) Paramilitary o(' Italy (2004). Following the collapse of
these multinational firms an audit relating to corporate governance is increasingly becoming
typical.
Corporate governance has emerged as a key issue in the economic wellbeing of countries and
companies. Africa 11 12004 posted a brilliant growth rate and projected brighter times ahead
because some countries affected some regularly reforms and maintained good corporate
governance (National Information at 11 wed 25-31 may 2005). Globalization information and
co1t1numication technology and financial reporting requirement have driven corporate
governance to a greater stage.
2.2.1 How corporate governance works.
The Cadbury report (1992) explains that corporate governance works by pointing the role
and code of financial statements. These roles include directors and management being
responsible for corporate governance and should have full responsibility of any decision and
policies made by the company.
The report shows that shareholders with an external objectives check that is how management
has achieved its external objectives and policies of winch profitability involved.
The codes of practice required are; directors should state whether the report policies and
accounts comply with the code and give any reason in case of non- compliance. All
relevant parties involved ensuring companies objectives and policies should bring pressure to
ensure compliance with code.
The committee in the report argued that the adherence to corporate governance policies of
which profitability policy can lead to better performance and perpetual succession of
organization and institution of which Toyota Uganda limited is to put into consideration. It
is as a result of the above that some scholars, bodies and directors have advanced several
reasons in form of corporate governance as below. Avian (2004) pointed at that good
corporate governance facilitates compliance which sends commerce principles and
legislations governing the operation of institutions. In this case there should be good
relationship created and promoted with relevant policies in the system.
Apart by the institute of corporate governance of Uganda (ICGU, 2004) emphasized the head
of the effective corporate is the going concern aspect of companies and institution. This point
came in line light because of the closure of man} companies in the 1990s to date. It is to the
above that organization, financial institution embraces and promotes good corporate
governance practices and policies.
.Ijoti (2003) emphasized that disclosure by accompany of its governance policies publicly
declares the company's support for laws and good practices affecting its operation. This is
argued that it has the potential to enhance the standards of the company in the eyes of' its shore
holders and stakeholders and the public and consequently thus can add value to the company's
shares.
Sir Adrian Cadbury's (1992) definition emphasized proper balance between economic and
social goals and between individual and communal goals. The governance frame work is
therefore to encourage the efficient use of resources and equally to acquire accountability for
stewardship of those resources. The main aim is to a high as nearly as possible the interests of
individual’s corporations and society.
According to common wealth Association governance (CWAG report 2003) it would not be
appropriate to prescribe a one size fit far all corporate governance statement to be
rigidly followed since institutions are unique in various perspectives. The emphasis
however is that the code adopted should in general include provisions that are based on
principles of corporate governance universally accepted and any departure from which
should be documented and approved by relevant authority and such departure should fit
with in acceptable limit and should be for the good of the organization anti its operations.
2.2.2 Objective Of corporate governance
Leonard Awatwe (1998), in a paper delivered at one of the corporate governance siminan in
Ghana defined the concept saying that "it is a process and structure used to direct and
manage the business affairs of accompany with the objective of enhancing long term valet fur
shareholders and financial viability of the business". He went onto emphasis that corporate
governance to exist, there is need to introduce the principle of probity transparency and
accountability to shareholders and the external community.
Globalization of the market place with in the context has issued in an era where traditional
dimensions of corporate governance defined with in the local laws regulations and national
priorities Geoffrey Bares. Chief Executive at the common wealth association for
corporate (2000) while delivering a paper entitled" Trends and changes ill corporate
governance" and he noticed that corporate governance is major focal point in the world,
where we are becoming increasingly challenged by circumstances and events that have an
impact. He quoted that the Edinburgh common wealth economic declation which endorsed
that capacity should be established in all, common wealth countries to create or reinforce
institution to promote best practices. In particular codes of practice establishing standards of
behaviors in the public and prig ate sector should be agreed to secure greater transparency' and
to reduce corruption.
Principal weakness of corporate governance today is the excessive concentration of power
in the hands of top management (Andrei and Robert, 2003) rebalancing or equalizing the
power is a prerequisite far controlling management fraud and promoting financial report.
According to (Emanuel. 2004) companies like Enron and world torn ltd had problems
because of poor imbalances in favor of few individuals in top management and neglect others.
Good corporate governance to day involves external parties; these are mainly regularly
agencies, society who spell out the laws to be abided and disclosures to be made (Bavly,
1999).
The executive management and corporate governance bodies must ensure that
appropriate corporate ethics and values arc established and enforced at the executive level
and effectively installed throughout the entire organization. If ' this "done at the top" is not
successfully established, the entire system of internal control can be easily
undermined and will be susceptible to fraud and inaccurate financial reporting. Organizations
are vulnerable to dishonest and over ambitious employees. It is therefore important that the
institution clearly defines ethical standards and expectations (Nathan, 2003). Acode of Ethics
should be developed through out the organization and kept fresh in every one's mind. It should
also address personal conduct. conflict of' interest and confidentiality matters. Therefore
organizations should clarify and make publicly known the rules and responsibility of the
board and management to provide shareholders and external stakeholders with accountability
(Mark, 2004)
A system of corporate governance also need a good level of disclosure to transmit information
between all pat-ties in order to balance the powers of corporate stakeholders, the community
they operate in and be accountable for their action( Brown Bridoe, 2002).
The Cadbury report titled Financial Aspect of corporate governance is a part of
committee that was chaired by Adrian Cadbury which set out recommendations on the
arrangement of company boards and accounting system to mitigate corporate governance
risks and failures. Published in 1992, the report recommendations have been widely adopted
and used by the European union the united states and the world bank the report an corporate
governance infant set president and is not used and referenced the world ever where it recorded
to exert pressure and reduce the inefficiencies that arise from moral behaviors and choices
made by the different corporate stakeholders, especially the directors and management
for example to maintain manage(the auditors) is added to attest to the accuracy of
information provided by the managers to investors thus
it pointed at that corporation must have both internal and external controls if it is to increase
its performances in terms of profitability.
2.3 Profitability
Profitability is a basic yardstick which the successes of a business can he Measured. It is what
remains after all costs of a business have been accounted for and it indicates how well the
business is performing.
(Alexander and Britton, 1994) say that a profit is unequivocal measure of operational
efficiency serving a common basis of comparison that be applied to companies divisions
and products.
He further goes onto say that profit is a reward for their investment in the firm normally in form
of dividends or capital gains for stockholders or owners.
Profitability refers to the ability of lending institution to make protected different from the
loan given out and the associated credit process expenses. This can be achieved when loan
payments which refer to the capacity` and the creditors' ability to
(Nash, 1993) claimed that profitability is the best indicator to identity Whether an organization is
doing things right and hence profitability can be used as the primary measure of organisation
success.
Further, (Doyle, 1994) pointed profitability as the most common measure of performance in
companies.
Business whether big or small Lure operated with the intention of making profits.
Profits are ascertained as a result of maintaining accounts records of the rep revenue, income,
costs and expenses of the business (Olivia, 1998).
Therefore profitability is the ability for a business to earn a return on investment, proportion
of asset used or of sales in order to determine the level of profitability, business use ratio
analysis, cost benefit analysis and working capital analysis.
Profit margin, return on asset, return on equity, return on saps are considered to he the common
measure of financial profitability (Robinson 1982 Galbraith and schendel
1983, Abu Kassim el al 1989 found sales, sale growth, net profit and growth profit were
among the financial measures preferred by the Malaysia manufacturing firm.
In order to succeed in the promotion economic interest of their members, lending
institution must recognize their responsibility to the aim at sustainability. Mc cord 1998
observed that profitability trend can be achieved by changing interest rates that cures costs
growing (, higher \ plumes of clients and constantly reviewing " and financial costs. This
requires a business altitude regardless of whether the organization are non-
governmental or public company.
Measuring firm profitability using accounting ratios in the corporate governance
literature.
Demalt/ and Lehn ( 1980, Angel el 2000). In particular. return on capital employed, return on
assets, and return on equity. Similarly, economic value added cabe as an alternative to purely
accounting- based methods to determine shareholder value by evaluating the profitability of a
firm after the total cost of capital, both debt and equity are taken into account (Copeland el
a1,1995). Other measures of profitability include capital adequacy, asset quality, earnings and
liquidity which are commonly known as CAMEL model.
DETERMINANTS OF PROFITABILITY
According to Parldy,( 1995) profit is a function of a variety of factors and can be affected
by the following selling price, this is directly related to profit, the higher the selling price
0ivcn other cost of production constant.
Volume is also directly to profit, the more the volume of goods produced the higher the profits.
Variable costs, which are cost, that changes with the increase in production and is inversely
related to profitability of accompany.
Fixed cost, these are costs that do not change regardless of the volume of production and
inversely related to profits.
2.2.3 Relationship between corporate governance and profitability
Companies like Toyota practice governance which involves policies that support
profitability. Mallen Baker the development director for business (tnallen Baker.net) says
that companies implement their corporate strategies in order to respond to the agenda of
corporate citizenship. The growing need to manage issues, that affect t heir business
reputation and to respect the growing needs and concerns of arrange o[' different stake holders
and the community.
External control and profitability. Shareholders are depicted as wealth maximazisers whose
primary concern is to maximize the market value of their stock holdings. !Managers are
depicted as utility- maximisers whose utility function includes power, security and status, a
well as wealth. Satisfying stockholders claims requires the pursuit of strate-ies consistent with
maximilin`.; the long-term prolitahility of the firm . Satisfying management desires has been
urged to require the pursuit of strategics consistent with maximizing the size and diversity of
the firm (Baumol, 1959).
This study examines how ownership structure and conf licts of interest among
shareholders under a poor corporate governance system affected firm performance before the
crisis. l_ sing 5.829 Korean firms subject to outside auditing during 199'-1997, the paper finds
that firms profitability, controlling for firm and industry characteristics. Controlling
shareholders expiated firth resource even when their ownership concentration was small.
When a business group transferred resources from subsidiary to another they often wasted.
Suggesting that "tunneling" occurred. In addition, the negative effects of control ownership
disparity and internal capital markets inefficiency were stronger in publicly traded (fans than
in privately held ones.
(Hicks.Z001), explains that collapse of organisations in the early 90s was a question of, who
were the directors, auditors, shareholders and lawyers of those companies? And how were
they operating in the environment they worked in? he observes that all the efforts accompany
puts into ensuring good governance are reflected in its profits performance and share price.
Organisations that adequate mix of executives and non- executive directors have also been
found to register good performance. Other studies hay e shoe n that representation of owners on
the Board of Directors, a practice of good governance tends to improve performance, and
firms with stronger shareholder rights have higher firm value, higher profits, higher sales
growth, low capital expenditure and few corporation acquisitions. Investors who bought firms
with the strongest domestic rights and sold those with the weakest ri1,1hts would have earned
abnormal returns.
Companies that repeatedly fall out with their shareholders over executi\c pay and boardroom
structure perform less well than those whose corporate governance practices are supported
by investors, according to research published today by a leading shareholder body.
The Association of British Insurers asserts that companies with the best corporate governance
records produce returns 18`%O higher than those with poor governance over a four-scar period.
It provides Northern Rock as an example where worries about corporate governance were
reflected in poor performance. The ABI alerted shareholders to concerns about the size of
bonuses of executives at the bank for four consecutive years before its business model
imploded and led to its nationalization.
Peter Monta(_,non, head of investment affairs at the ABI, said: "It seemed like an overgenerous
approach to bonuses." With hindsight, he added, it demonstrated that the balance of power on
the board between the executives and the non-executives was "not quite right". The ABI
issued four consecutive "amber-top" warnings over Northern Rock's annual report for the
financial years 2003, 2004, 2005 and 200E to alert
shareholders.
The ABI, whose members control about 20% of the stock market was reluctant to provide
other specific examples to illustrate that its research, justifies the importance of corporate
governance to company performance. Montanon admitted that if the detailed research had
found no link between corporate governance and performance "it would have caused us to stop
to ask what we were doing.
"Our members' interest in governance has always been driven by their desire to generate value
for policyholders over time. The results confirm our belief that good governance produces
better returns with less volatility - something that lorry.;-term savers need." he added.
The analysis covers 241 companies with the best and worse corporate governance records.
The ABI used data compiled by its institutional voting information service, which analyses
company reports and scores them in three ways: red top, to show its highest level of concerns;
amber top, for serious concerns, and blue to give the all clear.
The research established that governance drives performance rather than the other wav round,
and found lags of' two to three years in the relationship between poor governance and inferior
performance. Montagnon pointed out that the research shows that the balance between non-
executives and executives is important. More non-executives improve performance, although
American-style boards, where there are considerably more nonexecutives than executives,
are linked to poor profitability.
Companies that hay e breached rules on pre-emption rights. which require shares to be offered
to existing investors during nnew share issues, show, a negative impact on their performance.
The ABI research highlights an annual decrease of three percentage points
of return on assets, on an industry-adjusted basis.
The number of red-top alerts received by the company during the period is "strongly and
negatively correlated with its performance". For each additional year the company receives a
red top, its return on assets falls by about one percentage point a year.
Proving a link between good corporate governance and performance has exercised
professionals and executives. The ABI acknowledges that empirical evidence has been
mixed in the past, but argues that its results are more conclusive because its measures of
corporate governance are more comprehensive than those used in other surveys.
Corporate Governance is considered as the basic pillar for the lone term existence and stability
of the fines. Recent falls of one of the biggest corporations in world like Enron and World
Call sparked the debate on the importance and practical application of better governance
mechanisms in the corporations. The literature has been comprehensively added with the
experiences of different industrial countries and the recent collapse of sub prime mortgage
and subsequent bankruptcies of numerous banks and corporations including Lehman Brothers
and mortgage giants like Fannie Mac in USA. In Pakistan, Code of Corporate Governance 2002
~~as a major milestone and different studies have been conducted. This research covers 9
industries and 22 firms including banks, insurance, engineering, cement, fertilizers and
chemicals. The focus on the research is to establish a significant relationship between the
compensation paid for the mechanisms of Corporate Governance i.e. Directors, CEO and
Senior Executives. The compensation data is tested for significant relationship wish
company performance variables including Sales, .Assets, Pre Tax Profit. Operating Cash
Flows, Selling and Administratic Expenses. Profit as percentage of Sales and Return on Assets.
The relationships signify the fact that companies pay the governance bodies in the firm based
upon the firms' performance. Different variables are used as indicator of performance in
different companies and industries and differences also exists within industries. This study is
statistically significant for the time period of 2003-2007. These results can be used to improve
the corporate pernance compensation paid and profitability generated by the firms. The
research confirms the significant relationships between different stakeholders compensation
in the organization and performance indicators. Different industries pay according to their
own business cycles and also different companies compensate respectively in the same
industry as well. Thus compensation management is the solution
to Principle Agent Problem in the Corporate Governance framework and understanding it
will help companies solve it.
Conclusion
From different views, people have advanced different opinion on corporate governance and
profitability. Much as some groups stood in support of two variables, most of the writing does
not express the extent to which companies with good corporate governance is being
corresponded with high profits. Methodological approach therefore needs to be designed, that
which will result into practical findings of the study in chapter four.
CHAPTER THREE
METHODOLOGY
Introduction
This chapter covers the description of the methods and tools that will be employed in the
study to collect data from Toyota Uganda limited on first street industrial Area in Kampala
district. It looks at the research design ofthe study-- population sample size, selection of'
instruments, data collection procedures, data presentation and analysis and expected
limitation of the study.
Research design
The study took a descriptive survey design basing on the results to be obtained from the
questionnaires to describe the application of corporate governance and
profitability of Toyota Uganda Limited.
Survey population
The targeted respondents were Toyota Uganda limited staff members. These included
managers, Head of sales, sales representative, internal auditors, and accountants of
Toyota Uganda limited
3.3 Sampling designs.
The research used both stratified sampling because it helped to give a defined category of
sample size.
Sample size
The table 1 showing the sample size of the target respondents
Particulars Frequencies
managers 6
Head of sales 1
Sales representative 16
Internal Auditors
Accountants 3
Total 31
Internal Auditors
Source: Primary source
Sources of data
Both primary and secondary data sources were used.
3.4.1 Primary data
Primary data provided the first hand data directly from respondents through
questionnaires and much of the conclusion based on this source.
3.4.2 Secondary data
Secondary data was used as supplementary data source and it was mainly in a
documented and use of relevant records from text books, journals, magazines in order to
make the researcher to draw conclusion and recommendations.
3.5 Data collection instruments
Questionnaires
Closed ended questionnaire was set and administered upon by officers. This was used
as an anticipation that they are literates and therefore able to read, understand, and
interpret the questions with in a questionnaire and therefore tilling in their ideas easily.
Again this method could not interfere with their working schedules since there were
given ample time to fill them during their free tim
3.6 Data processing, Analysis and presentation
Data processing
Collected data from the questionnaires was edited, coded, and tabulated to ensure
accuracy, unfo1~nity and competences. This helped to make singular classification Of'
responses easier and getting meaningful relationships and usual impression.
Data analysis
Data was analyzed manually using frequency tables and percentages.
Regression anal sis model was also used to establish the relationship between corporate
governance and profitability}' of Toyota Uganda Limited.
Data presentation
Data collection was presented in tabular form in percentages for singular classifications
of responses. This helped the researcher to snake conclusions and recommendations.
Limitations
The researcher faced the problem of limited data or even failure to get data because of
confidentiality.
The researcher faced the problem of limited time because of semester activities like exams and
lectures were going on.
CHAPTER FOUR
PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS.
4.0 Introduction.
This chapter covers the findings, presentation and analysis of- data collected From the field.
These findings were mainly obtained from primary data using questioners which were
specifically designed to obtain data respondents on the effectiveness of corporate
governance on profitability. A case study of Toyota Uganda limited. The findings are laid
down in three phases basing on the specific objectives of the study; the effectiveness of
corporate governance practical, establishment of the level of profitability, and the
relationship between corporate governance and profitability. The study was analyzed using
Rank correlation.
4.1 Demographic characteristics of respondents.
4.1.1 Response by sex
The population was selected in such to avoid bias and these were mature enough and
articulated to interpret the findings. The obtained findings by the researcher were tabulated as
follows.
Table 4.1.1 Response on sex distribution.
Sex Frequency Percentage (%)
No of male 20 65
No of female 11 35
Source: primary data.
Results from table 4.1.1 indicate that 65% of the respondents were male, and 35% were
female. This shows that, Toyota Uganda ltd employs more males than the females. The
organization therefore aims mostly at improving at improving the welfare of males.
Table 4.1.2 Response on age distribution among employees.
Age bracket Frequency Percentage (%)
20-35 7 22
36-40 20 65
41-60 4 13 -! ----
Total 31 100
Source: primary data
Results in table 4.1.2 shows that; 65°/0 of the employees are between the age group of 36-
40, while 22% are between the age group of 20-35 and 13% are between the ages of 4160.
This shows that the majorities of the employees are mature and could make effective plans
and right decisions.
Table 4.1.4 showing the level of education
Marital status Frequency Percentage `%
~ Single 8 25
Married 20 65
I Divorced 3 10
Total 31 100
Source: primary data
Table 4.4.4 shows that 65% of employees are married, 25% single, and 10% are
divorced. This shows that majority of Toyota Uganda limited employees were decision
making team.
Table 4. 1.2 Response on age distribution among employees.
Response Frequency Percentage %
Strongly 5 16
Agree 4 13
Not sure 5 16
Disagree 10 32
Strongly disagree 7 23
Total 31 100
Source: primary data
13 100
Results in table 4.1.2 shows that, GS%, of the employees are between the age group of 36-
40, while 221VO are between the age group of 20-35 and 13`%O are between the ages of 4160.
This shows that the majorities of the employees are mature and could make effective plans
and right decisions.
Table 4.1.4 showing the level of education
Marital status Frequency Percentage ̀ %~
Single 8 25
Mar ried 20 65
Divorced 3 10
Total ' 31 1 00
Source: primary data
Table 4.2. 1 above revealed that: 16`%strongly agreed, 13"4) agreed that the company has a
strong commitment to all its stake holders ensuring high level of satisfaction, 16°,o were
not sure, 32% of the respondents disagreed, and 23% strongly agreed. This shows that the
company is has no strong commitment to all its stake holders to ensure high level of
satisfaction.
Table 4.2.2 shoeing a strong board in place that governs Toyota Uganda ltd
Response Frequency Percentage (%) -Yes 23 74
No 5 16
I do not know 3 10
Total 31 100
Source: primary data
The findings established 7q°rb of the respondents agreed that Toyota (U) lid was governed by
strong board, while 16`% answered no, and 10% answered no, and 10 %0 answered none.
This shows that there is a strong board in place that governs the company.
Table 4.2.3 Responses on whether employees are satisfied with the existing
leadership styles.
I Responses Frequency Percentage %
Strongly agree 8 26
32 Agree 10
Uncertain 8 26
Disagree 4 13
Strongly disagree 1
Total 31 100
Source: primary data
The findings in the table 4.2.3 show that 26% strongly agreed and 32% of the
respondents agreed that employees are satisfied with the existing leadership styles, while
26% were not sure, and also 13% disagreed and 3% strongly disagreed. This shows there is
employer choice with happy, skilled and highly motivated employees.
Table 4.2.5 Responses on influence of top management in decision making.
Response frequency percentage `%
Strongly agree 10 32
Agree 15 48
Not sure 5 16
Disagree 1 3 Total 31 100
Source: primary data
The table 4.2.5 indicates that; 48% agreed 32`% strongly agreed, while 16`% were not sure
that decisions were made and influenced by top management. Results show that top
management regulates its top decisions by having a big influence on most of the decisions it
males.
Table 4.2.6. Responses on whether there is a strong working team among top
management and the lower employees.
Response Frequency Percentage
% Strongly agree 10 32
Agree 12 39
Not sure 9 29
Total 31 100
Source: primary data
Results in table 4.2.6 indicate that; 39% of the respondents agreed, 32% strongly agreed,
while 29'% Nvere not sure that there is a strong working team among employees and top
Management. This shoe s there is a strong ream and employees work hard because of good
influence from top management.
Table 2.2.7 Responses on whether managers delegate duties.
Response frequency Percentage %
Strongly 8 26
Agree 4
'~
13
Not sure 29
Disagree 10 32
Total 31 100
Source: primary data
The table 2.2.7 indicates that 32 % of' respondents disagreed, 29% were not sure. 26"'0
strongly agreed, while l3`%O also agreed that managers of Toyota (U) lid delegate
duties. In Toyota Uganda ltd according to these findings, the company does not
have skilled employees that top managers can delegate crucial duties too.
4.3.0 Findings on Profitability
Respondents gave the following comments on the level of profitability of Toyota Uganda
ltd.
4.3.1. Findings on whether Toyota Uganda limited has improved its profitability.
Responses are given in the table below
Table 4.3.1 showing Toyota Uganda limited has improved its profitability.
Responses Frequency Percentage `%
Strongly agree 5 16
Agree 4 12
Not sure
F. Disagree
-
Strongly disagree
1 7 23
I ? 19
I ()
Total 31 100
Source: primary data
Results in table 4.3.1 indicate that 39% disagreed 23% were not sure, 16% strongly a-.;recd,
12% agreed, while 10% strongly disagreed that Toyota Uganda ltd has improved its
pro1itabilit. this is an indicat ion that there has been no improvement in its
profitability.
Table 4.3.2. Responses on whether profitability targets are mainly met by Toyota
Uganda ltd.
Response frequency Percentage `%0
strongly agree 4 13
2 7 Agree
Not sure 16
Disagree 15 48
Total
i
31 100
Source: primary data
From table 4.3.3 above, it was found out that 48%disagreed, 23"0 agreed, 13% were not sure and
13 % strongly agreed that profitability targets are mainly met by Toyota Uganda ltd. This
implies that profitability targets are not met always by Toyota Uganda ltd.
Table 4.3.3. Responses on whether profits mainly banked.
response frequency Percentage `%
Strongly agree 8
-
16
4
26
' 52
13
Agree
Not sure
Disagree 3 9
Total 31 100
Source: primary data
From table 4.3.3 above, finding revealed that 52% agreed23% strongly agreed, 13`%o were
not sure and 9"'o disagreed that pro (its mark are mainly banked. This implies that profits
made are mainly banked.
Table 4.3.4. Responses on whether board of directors has an influence on the
profitability of Toyota Uganda ltd.
response Frequency Percentage % Strongly agree 6 19 Agree , 14 45 Not sure 7 23
Disagree 4 13
Total 31 100
Source: primary data
Results in table 4.3.4 indicate that 45% agreed, 23% were not sure, 19%, strongly agreed and 1
3`%) disagreed that board of directors has an influence on profitability of' Toyota Uganda ltd.
This implies that board of directors has an influence on profitability of
Toyota Uganda ltd.
"Table 4.3.5. Responses on how to rate the performance of Toyota Uganda ltd
between 2007 and 2009.
Frequency Percentage
Very high profits 3 10
Moderate profits 20 65 I High profits 6 19
Very low profits 1 3
Losses 1 3
Total 31 100
Source: primary data
From the table 4.3.5 above, it was found out that 65%0 said moderate profits, 19% said high
profits 10% were arguing of very high profits while 3`%were of very low profits were 3%
arguing losses.
This implies that Toyota Uganda has moderate profits which are a sigh of moderate
performance.
4.3.6 FINDINGS ON THE RELATIONSHIP BETWEEN CORPORATE
GOVRNANCE IN PROFITABILITY OF AN ORGANISATION.
The researcher carried out a study to establish the relationship between the variables,
corporate governance and profitability of an organization. This was done using
spearman's rank correlation and the following were the findings.
Table 4.3.6. Relationship between corporate organization.
Spearman's rank correlation.
governance and profitability of an
Response X Y Rx Ry d=Rx-Ry D 2
Strongly agree 10 11 1 0 0 0
Agree 9 8 2 0 0 0
Not sure 5 4 4 -1 -1 1
Disagree 3 6 3 2 2 4
Strongly disagree 4 3 5 -1 -1 1
Source: primary data
1- 6*6
5^2 (5-1)
1-6*6
25(5-1)
1-0.36
= 0.64
From the summery above, the spearman's correlation coefficient (R2) of 0.04 shows a positive
relationship between corporate governance and profitability of an organization.
The coefficient of determination (R2) of 64% indicates that the two variables are related to
the extent of 73% indicating that when corporate governance is poor, profitability is low-.
From the table, it is right to conclude that since theft is a strong relationship between the two
variables. Results indicate that high profitability in an organization depends on the corporate
governance in place.
CHAPTER FIVE
5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
Like any other organization, Toyota Uganda ltd must ensure good corporate governance.
5.2 SUMMARY OF FINDINGS
The research study was carried out to establish the relationship between corporate governance
and profitability of an organization: this was done in reference to the following three specific
objectives.
Establishment of effectiveness of corporate governance in Toyota Uganda ltd.
Establishment of the level of profitability of Toyota Uganda ltd.
Examination of the relationship between corporate governance and profitability of
Toyota Uganda ltd.
Under the first objective, the study revealed that the organization has weak commitment to all
its stake holders; there is a strong board in place that governs the company.
There is employer of choice with happy, skilled and highly motivated employees. Most
respondents agreed that top management regulates its top decisions by having influence on
most of the decisions it makes.
It was also found out that there is a strong team and employees work hard because of good
influence from top management.
However, the company does not have skilled employees that top managers can delegate
crucial duties.
The study under second objective revealed that there has been no improvement in its
profitability; it also shows that profitability targets are not met always. Findings shows that
profits made are mainly banked.
Board of directors has an influence on profitability of Toyota Uganda Itd. From the study
findings, Toyota Uganda ltd has moderate profits.
Findings on the third objective revealed that there is as a strong positive relation ship
between corporate governance and profitability of an organization as shown by
spearman's correlation co efficiency of 0.64. This indicates that the two variables are
related to the extent of 73`%) indicating that when corporate governance is poor,
profitability is low.
5.3 CONCLUSION
Toyota Uganda ltd like any other company still faces challenges in governance, which some
times result in to a decline in its profitability hence for good governance measures for the
high levels of' profitability.
5.4. RECOMMENDATIONS
To ensure effective ;good governance and high profitability of' an organization in Toyota
Uganda ltd, recommendation given below need to be considered.
a) The company should have skilled employees
b) Top management should allow lower employees to participate in decision making.
Tile company should he committed to all its stakeholders.
5.5 SUGGESTED AREAS FOR FURTHER RESEARCH
Further research studies should be carried out to improve on the efficiency of governance
and profitability of an organization. These include;
1) Comprehensive and well- planned schemes as well as effort of all stakeholders and top
mana1-1ement.
2) Factors that influence the level of profitability among other sectors.
3) Internal controls and corporate governance.
REFERENCES
Andrei & Robert, (2003) a survey of corporate governance, Chicago University press. Bavly
D, (1999) Corporate governance & accountability, New York, Green wood publishing.
CAGG Draft Board Evaluation Guidance, (2004) UK.
CAGG Guide for financial reporting to the board in the Common Wealth, (2003).
Corporate governance in government companies CAGG Guidelines Draft report, 11`n
June (2006).
Cyert & March, (1963), Wartic & wood, (1998) view of social responsibility.
Geoffrey Bowes, Trends & changes in corporate governance, April (2007).
Leonard Awortwe Developing C.G capacity in Ghana state enterprise commission, (1998).
Marks, (2004) Corporate governance, Oxford Black well publishing.
Megginson, 1988 Successful Business management, (5`n edition) Business Publication
Inc. USA.
Nathan OB, (2003) Internal control & corporate governance practices for financial
institutions, Texas.
The Cadbury report, (1992) UK on corporate governance.
Weisbach, M (1998) the linkage between corporate governance and firm performance,
Chicago University.
MAKERERE UNIVERSITY
I Owembabazi Victor a Blom student at Makerere University carrying out a research
under the topic: corporate governance and profitability of an organization. Case study of
Toyota Uganda Limited.
I humbly request you to spare me some of your valuable time and respond to my
questionnaire. The responses given will be treated with at most confidentiality.
Thank you.
A: Demographic characteristics of respondents. (tick where appropriate)
Gender Male
Female
Age 20-35
36-40
41-60
Education Primary
Secondary
Tertiary
University
Others specify
Marital status Married
Single
Divorced
Separated
How long have you been employed here?
Period Tick
Less than a year
1-2 yrs
3-4 yrs
5-10 yrs
Section two: corporate governance
Please tick the appropriate answer responding to the event to which you agree with the
statement.
Key
Strongly agree Agree Not sure Disagree Strongly
disagree
A A S D SD
No Statement SA A NS D SD
I Toyota Uganda Ltd has a strong commitment to all
its stake holders ensuring high levels of satisfaction.
2 There is a strong board in place that governs Toyota
Uganda Ltd.
3 Employees of Toyota Uganda Ltd are satisfied with
kind of leadership styles
4 Decisions are made and influenced by top mgt
5 There is a strong working team among to mgt
and
the lower employees.
6 Managers delegate duties
Section c: PROFITABILITY
No. Statements SA A NS D SD
I . Toyota Uganda Limited has improved
its profitability
2. Profitability targets are mainly met by
Toyota Uganda Ltd
3. Profits made are mainly banked
4. The board of directors has an influence
on profitability of Toyota Uganda Ltd
Section D: RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND
PROFITABILITY.
Please tick the appropriate answer by responding to the extent to which you agree withg
the statement.
Strongly agree agree Not sure disagree Strongly agree
SA A NS D SD
No. Statements SA A NS D SD
1 Good leadership affects profitability
of Toyota Uganda ltd in relation to
good corporate governance.
2 Toyota Uganda ltd is making high
profits as a result of good corporate
governance
3 Shareholders are interested in getting
high dividends compared to the rate at
which the company should improve
on its activities.
