CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

The telecommunications industry is undergoing a critical transformation, creating exciting new opportunities and new challenges for infrastructure and service providers. The established value chain is increasingly being reconstructed, with the entry of powerful new players and radical restructuring of the industry. Rapid technological developments and increasing market competitions have added new dimension to an already complex scenario. Countries and sectors equipped with the requisite telecommunication systems are rapidly moving into post-industrial, information-based economic growth. Telecommunication sector across the globe has been identified as one with generic effect on almost all other sectors of the economy. Its function, in any economy, is described as a strategic one aimed at promoting economic growth and as one that has the linkages with other sectors. For the developing world, a modern telecommunications infrastructure is not only essential for domestic economic growth, but a prerequisite for participation in increasingly competitive world markets and for attracting new investments.

Recently, the role of telecommunication infrastructure in enhancing economic growth has been a subject for discourse in the economic literature. Arguments are that the development of a modern nation to its full potential in contemporary world can never be attained without adequate telecommunications infrastructure. This implies that the development of telecommunication infrastructure will significantly boost economic growth and development.  Report in the Fact sheet of U.S Embassy showed that most of the developed economies such as U.S, Japan and China, having realized this, had deregulated their telecommunication sectors to allow more investment and the results they got were not just improved telecommunication capabilities but also increased foreign investment, boom in private sector development, more employment opportunities and better education and training facilities.

In the global setting, the telecommunications industry has experienced some drastic changes during the last few years; from the fixed telephone lines, to GSM and then the interconnections. The result of these changes has led to a fall in service charges coupled with increased flexibility, functionality and the overall attractiveness of the services. Introduction of new technologies has changed the role of mobile services, leading to a significant increase in mobile penetration, which now exceed fixed line communications.     The annual report of telecommunication Fact sheet shows that the telecommunications market has reached the point of saturation, companies have introduced differentiation strategies by services, which in turn have led to a broadening of the range of new products in the market. Another key characteristic of the industry is the requirement for substantial investment in equipment (exchanges), transmission facilities (wire, optical fibre lines or wireless facilities), and terminals (subscriber equipment).

This high capital investment provides an effective barrier of entry to new players in the market. Furthermore, the high level of required investment has led to a limited number of players within the market with sharp competition among them. Another specific characteristic of the telecommunications industry is also its perceived role within society. For many years it has been viewed as providing essential public services. The increased penetration of telecommunication lines has to benefit society as a whole. Telecommunications have changed from being a discretionary or even luxury service to an essential service that should meet the demands of the majority of consumers. Due to these factors, the telecommunications industry is strongly regulated by governmental authorities in order to ensure that telecommunication services are supplied in accordance with public interest.

Today in Nigeria, there have been large infrastructure investments resulting from liberalization between 1992 and 2011, which have enabled million of people to communicate and transact businesses better. Deregulation attracted new operators from within and outside the country. The new operators have injected competition and provided new employment opportunities and emergence of indigeneous telecommunication companies. This growth has equally profound impact on the job and employment market, enhance efficiency in other productive sectors and increase national output.

In terms of growth, according to Lawyers Chronicle (2014) Nigeria is ranked the largest and fastest growing ICT market in Africa and among the ten fastest telecommunications growth markets in the world. This is as a result of the robustness of its returns on investments. The impact of this on the economic growth has become impressive. The telecommunications sector now contributes significantly to the Gross Domestic Product (GDP), which was hitherto dominated by the oil sector. Also the Nigeria Telecommunications Fact Sheet released by the United States Embassy in Nigeria in October 2011, noted that “the ICT sector is the fastest and most robust sector of the Nigerian economy, contributing more than the manufacturing, banking and solid minerals sectors combined”.

Despite the important place telecommunication industry is playing in nation’s economy both in developed and developing countries corporate governance of the sector as it relates to their financial performance has been ignored by researchers. Even in the developed economies such research has been very scarce in literature. This study therefore aims at opening up such research in this fast growing industry. The critical role of corporate governance in the success or failure of companies is not in doubt.

In recognition of this the issues of corporate governance has been given the front burner status by all sectors of the economy in Nigeria. To do this, regulating bodies had been set up for all public and private sectors to regulate and monitor their corporate governances. In Nigeria, Telecommunication Commission (NCC) was set up to regulate the activities of the telecommunication sector.

In Nigeria we have few studies on corporate governance mechanisms and their impact on firm’s financial performance specifically in banking, manufacturing, stock market and other sectors; among them are the studies of Mukaila and Garba (2005), Ogechie (2006) and Ranti (2013).  Even at that most of the studies have focused on a single or two aspects of governance like the role of directors on stock value, omitting other factors of interactions that may be important within the governance framework.

This study plans to use both external and internal determinant factors in corporate governance mechanism as the proxies. The external factors are the outside directors called independent members, institutional shareholders and external auditors. The internal factors are the board size and the percentage shareholding of the directors. This is by working at the cross-relationship of internal and external aspects of corporate governance structures. It also aims at using all the active firms in the sector to enable it get all the aspects of the firms. Further, in order to address the deficiencies in the various prior studies, the study will use the mean of the summation of Return on Asset and Return on Investment. This is unified measurement tool for operational efficiency as narrated by Lyndsat, (2014). It also aims at using long period of annual report data (10 years) for higher efficacy in research rather than the usual three years in prior studies. Through the study the level of the code compliance by the industry could also be revealed.

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